S-1/A 1 ds1a.htm AMENDMENT NO. 7 TO FORM S-1 Amendment No. 7 to Form S-1
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As filed with the Securities and Exchange Commission on November 5, 2002
Registration No. 333-99051
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
 
 
WELLCHOICE, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
Delaware
  
6324
  
71-0901607
(State or Other Jurisdiction of Incorporation or Organization)
  
(Primary Standard Industrial Classification Code Number)
  
(I.R.S. Employer
Identification Number)
11 West 42nd Street
New York, New York 10036
(212) 476-7800
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)
 
 
Michael A. Stocker, M.D.
Chief Executive Officer
WellChoice, Inc.
11 West 42nd Street
New York, New York 10036
(212) 476-7800
(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)
 
 
Copies to:
 
Ira M. Millstein, Esq.
  
Linda V. Tiano, Esq.
  
Serge Benchetrit, Esq.
Matthew Bloch, Esq.
  
Seth I. Truwit, Esq.
  
Willkie Farr & Gallagher
Weil, Gotshal & Manges LLP
  
WellChoice, Inc.
  
787 Seventh Avenue
767 Fifth Avenue
  
11 West 42nd Street
  
New York, New York 10019
New York, New York 10153
 
New York, New York 10036
  
(212) 728-8000
(212) 310-8000
  
(212) 476-7800
   
 
 
Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED NOVEMBER     , 2002
 
13,861,053 Shares
 
 
LOGO
 
WellChoice, Inc.
 
Common Stock
 
 
Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $21.00 and $24.00 per share. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “WC,” subject to official notice of issuance.
 
The shares of common stock are being sold by The New York Public Asset Fund, or the Fund, and The New York Charitable Asset Foundation, or the Foundation. We will not receive any of the proceeds from the shares of common stock sold by the Fund and the Foundation. The Fund and the Foundation will own 95% and 5%, respectively, of our common stock immediately preceding the completion of the offering and will own approximately 79% and 4.2%, respectively, of our common stock immediately after the offering, including one share of Class B common stock owned by the Fund.
 
Our certificate of incorporation prohibits any institutional investor from owning 10% or more of our outstanding voting securities, any noninstitutional investor from owning 5% or more of our outstanding voting securities and any person or entity from owning equity securities representing a 20% or more ownership interest in our company. These ownership restrictions will apply to the shares sold in this offering but will not apply to the Fund. See “Description of Capital Stock” on page 109 for a more detailed discussion of these restrictions.
 
The New York State Superintendent of Insurance has neither approved nor disapproved of these securities or determined if this prospectus is truthful or complete.
 
The underwriters have an option to purchase a maximum of 2,079,158 additional shares from us and the selling stockholders to cover over-allotments of shares.
 
Investing in our common stock involves risks. See “Risk Factors” on page 9.
 
      
Price to
Public
   
Underwriting
Discounts and Commissions
     
Proceeds to the Selling
Stockholders
Per Share
     
$
            
   
$
               
     
$
            
Total
     
 
$                
   
 
$                      
     
 
$                  
 
Delivery of the shares of common stock will be made on or about            , 2002.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Credit Suisse First Boston
 
UBS Warburg     
  
Bear, Stearns & Co. Inc.
  
Morgan Stanley
Goldman, Sachs & Co.
     
JPMorgan
  
    Salomon Smith Barney
Blaylock & Partners, L.P.
     
    The Williams Capital Group, L.P.
 
The date of this prospectus is             , 2002

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TABLE OF CONTENTS
 
 
 
You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
 
New York and New Jersey insurance laws and New York health regulations require the prior approval of the New York and New Jersey insurance regulators and the New York health regulators for any acquisition of control of WellChoice, where “control” is presumed to exist if a person owns 10% or more of voting common stock. See “Description of Capital Stock—New York and New Jersey Insurance Laws.”
 
In addition, unless otherwise indicated, all financial data presented in this prospectus has been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. You should be aware that the New York State Department of Insurance recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under the New York insurance laws and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the New York State Department of Insurance to financial statements prepared in accordance with GAAP in making such determinations. See note 10 to our consolidated financial statements.
 
Dealer Prospectus Delivery Obligation
 
Until                    , 2002 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and may not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the information set forth in “Risk Factors,” before making an investment decision. In this prospectus, “WellChoice,” “company,” “we,” “us,” and “our” refer to WellChoice, Inc., a Delaware corporation, and, as the context requires, its subsidiaries including Empire HealthChoice, Inc. following that entity’s conversion from a not-for-profit health service corporation to a for-profit accident and health insurer under the New York insurance laws in a series of transactions described in this prospectus under the caption “The Plan of Conversion.”
 
Our Company
 
We are the largest health insurance company in the State of New York based on PPO and HMO membership. We serve over 4.6 million members throughout our service areas which include the New York City metropolitan area, where we hold a leading market position covering over 20% of the population, upstate New York and New Jersey. We have the exclusive right to use the Blue Cross and Blue Shield names and marks throughout the New York City metropolitan area and one or both of these names and marks in selected counties in upstate New York.
 
We have a long tradition of serving health insurance needs in New York, having operated in the state for 68 years. New York is the third most populous state in the United States, with a total population of approximately 19.0 million, according to the most recent U.S. census. We believe we can significantly increase our market share through focused market efforts on a cost effective basis, given the high population density in selected markets, such as the New York City metropolitan area. Moreover, the New York marketplace presents a diverse customer base which requires a broad range of product offerings and which we believe we are well positioned to serve.
 
We have the largest hospital and physician networks of any health insurer or HMO in our New York State service areas. Our provider networks consist of many of the most well recognized provider organizations and include more physicians listed on New York Magazine’s June 2002 list of Best Doctors than any other health benefits provider.
 
We offer a broad range of products and services to our members, including managed care products and traditional indemnity products, positioning us well to respond to shifts in customer needs and marketplace trends. Our managed care product offerings include health maintenance organizations, or HMOs, preferred provider organizations, or PPOs, and exclusive provider organizations, or EPOs. We offer our products to a broad range of customers, including large groups of more than 500 employees; middle-market groups, ranging from 51 to 500 employees; small groups, ranging from two to 50 employees, and individuals. Over one million of our members are employees of national accounts, including Fortune 500 companies.
 
Since 1995, our current management team has helped reverse reductions in membership and profitability that we experienced between 1988 and 1995, and has delivered an extended period of growth and profitability. Since 1998, we have experienced 15 consecutive quarters of underwriting gain (which we define as premiums earned plus administrative service fees, less cost of benefits provided and administrative expenses). As of June 30, 2002, we had total assets of $2.5 billion and total reserves for policyholders’ protection, or GAAP surplus, of $964.9 million. For the six months ended June 30, 2002, our total revenue was $2.6 billion and our net income was $138.7 million. In May 2002, Standard & Poor’s, or S&P, raised the financial strength and counterparty credit rating of Empire HealthChoice, Inc., or HealthChoice, to “A-,” which represents the third highest of nine S&P ratings categories and is within the “strong” category (“A+,” “A,” and “A-”). This rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by S&P at any time.

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The following table illustrates the historical improvement in our operating results and financial condition:
 
    
Year ended December 31,
   
Six months
ended
June 30,
    
1997
   
1998
   
1999
   
2000
   
2001
   
2002
    
(in millions)
Total revenue
   
$
3,424.6
   
$
3,298.0
   
$
3,664.9
   
$
4,233.7
   
$
4,631.2
   
$
2,601.7
Income from continuing operations before income taxes
   
 
48.1
   
 
41.0
   
 
129.3
   
 
120.5
   
 
147.6
   
 
139.8
Net income
   
 
51.9
   
 
42.0
   
 
120.2
   
 
190.4
   
 
131.0
   
 
138.7
Total assets (at end of period)
   
 
1,808.1
   
 
1,837.3
   
 
1,987.4
   
 
2,252.5
   
 
2,449.6
   
 
2,482.3
GAAP surplus (at end of period)
   
 
334.0
   
 
379.5
   
 
502.7
   
 
674.7
   
 
829.3
   
 
964.9
 
Our Strategy
 
Our goal is to be the leading health insurer in the New York marketplace and surrounding areas. During the past several years, we have implemented strategic changes to achieve this goal, including shifting our membership base from purchasers of mainly traditional indemnity products to more innovative managed care products, standardizing our product offerings and consolidating our networks and claims payment systems. We plan to continue to maintain and improve our market position and financial performance by executing the following strategy:
 
 
•
 
Capitalize on Growth Opportunities.
 
 
—
 
Offer a broad spectrum of managed care products in our local markets. We intend to continue to grow our business, particularly in the profitable middle-market group, by maintaining, developing and offering the broad continuum of managed care products that the New York market demands. To accomplish this goal, we will continue to design our products based on freedom in selecting providers, cost sharing, scope of coverage and degree of medical management. We believe that our broad range of products gives us a market advantage that enables us to be the sole managed care provider to many of our customers.
 
 
—
 
Grow our national accounts business. We view national accounts as an attractive growth opportunity as this group represents approximately 38% of employed persons in the United States. We intend to continue to grow this part of our business by capitalizing on our position in the New York City metropolitan area where a significant number of national businesses have offices and through promotion of the BlueCard program. The BlueCard program enables our members to obtain coverage from the networks of other Blue Cross Blue Shield plans across the country, making it possible for us to compete for national accounts business with other non-“Blue” plans with nationwide networks.
 
 
—
 
Expand geographically. We also intend to pursue expansion opportunities, especially those in or adjacent to our current service areas. We believe that we have developed an expertise in systems migration, network development, marketing, underwriting and cost control that is transferable to attractive markets within and outside New York and which positions us to take advantage of opportunities that may arise as the consolidation of the health insurance industry continues.
 
 
•
 
Leverage the Strength of the Blue Cross and Blue Shield Brands. We believe that our license to use the Blue Cross and Blue Shield names and marks gives us a significant competitive advantage in New York, and we intend to continue to promote the value of these brands to attract additional customers and members.

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•
 
Continue to Promote the Use of Medical Information to Offer Innovative Products and Services to Members and Providers. We intend to be a leader in the use of medical information to facilitate and enhance communications and delivery of service among employers, employees and other health care providers. We believe that our members will increasingly desire and demand ready access to a repository of comprehensive, accurate and secure medical and health related information that can be transmitted by the member to physicians and medical institutions. We have implemented a number of programs that position us well to establish a leadership role in this area.
 
 
•
 
Reduce Costs through Operational Excellence. We are seeking to achieve operational excellence by improving delivery of service, customer satisfaction and financial results through zero defects, rapid turnaround times and lower operating costs. We are executing a number of initiatives that we believe will enable us to realize medical and administrative cost savings.
 
Our ability to successfully execute this strategy and achieve our goals, and our business generally, is subject to a number of risks, some of which are beyond our control. These risks include those relating to our business specifically. For example, we could lose our license to use the Blue Cross and Blue Shield names and marks and we are subject to intense competition for customers and providers. Also, our industry is heavily regulated and changes in legislation or regulation may adversely affect us. For a more detailed discussion of these and other risks, see “Risk Factors” beginning on page 9 of this prospectus.
 
The Plan of Conversion
 
In January 2002, the Governor of the State of New York signed into law Chapter One of the New York Laws of 2002, which we refer to as the Conversion Legislation. Under the Conversion Legislation, HealthChoice filed an amended plan of conversion with the New York State Department of Insurance on June 18, 2002 (which was further amended and refiled on September 26, 2002), to convert from a not-for-profit health service corporation to a for-profit accident and health insurer under the New York insurance laws. Under the Conversion Legislation, the plan of conversion must be approved by the New York State Superintendent of Insurance, or Superintendent, on or prior to the effectiveness of this offering. Any such approval by the Superintendent of the plan of conversion will not constitute a recommendation to purchase our common stock. We also have requested approvals from the Superintendent and, where necessary, from the New York State Commissioner of Health, or the Commissioner, the New Jersey Department of Banking and Insurance, the Centers for Medicare and Medicaid Services, or CMS, and the Blue Cross Blue Shield Association, an association of independent Blue Cross and Blue Shield plans (which we have obtained), for certain transactions related to the plan of conversion. On August 6 and 7, 2002, public hearings took place in New York City and Albany, respectively, with respect to the plan of conversion. On October 8, 2002, the Superintendent issued an Opinion and Decision approving the plan of conversion and concluding that the conversion is in compliance with the Conversion Legislation and does not violate any applicable laws or regulations. The approval and conclusions are subject to several conditions, including the approval by the Superintendent, the Commissioner and CMS of certain of the agreements that we will enter into in connection with the conversion. Pursuant to the Conversion Legislation, the Opinion and Decision may be challenged until November 7, 2002, the 30th day following the date of the Opinion and Decision. Judicial review of any challenge to the Opinion and Decision is limited to a finding that the Superintendent acted in an arbitrary or capricious manner in reaching a determination to approve the plan of conversion.
 
In accordance with the plan of conversion, immediately prior to the effectiveness of this offering, HealthChoice will convert from a not-for-profit health services corporation to a for-profit accident and health insurer under the New York insurance laws and the converted HealthChoice will issue all of its authorized capital stock to the Fund and the Foundation. The Fund and the Foundation will then receive their respective shares of our common stock in exchange for the transfer of all of the outstanding shares of HealthChoice to one of our

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direct wholly owned subsidiaries. Empire HealthChoice Assurance, Inc., an existing, for-profit, New York licensed accident and health insurance subsidiary of HealthChoice then will merge with the converted HealthChoice, with HealthChoice surviving under the name “Empire HealthChoice Assurance, Inc.” We refer to the surviving corporation as Empire.
 
The Fund was established under the Conversion Legislation to receive the “public asset,” or the assets representing 95% of the fair market value of HealthChoice and its subsidiaries on the effective date of the conversion. The Foundation is a New York not-for-profit corporation established prior to the effective date of the offering pursuant to the Conversion Legislation for charitable purposes to receive the “charitable asset,” or the assets representing 5% of the fair market value of HealthChoice and its subsidiaries on the effective date of the conversion. See “The Plan of Conversion.”
 
WellChoice was incorporated in Delaware in August 2002. Prior to the completion of the conversion and this offering, WellChoice has not and will not engage in any operations. Our principal executive offices are located at 11 West 42nd Street, New York, New York 10036. Our telephone number is (212) 476-7800.
 
Recent Developments
 
For the nine months ended September 30, 2002, our income from continuing operations before taxes increased 113.9% to $227.0 million, from $106.1 million for the nine months ended September 30, 2001. As of September 30, 2002, total enrollment was approximately 4.6 million and commercial managed care enrollment was 3.8 million (82.6% of total enrollment). Premium revenue increased 8.0%, or $256.0 million, to $3.5 billion for the nine months ended September 30, 2002, from $3.2 billion for the nine months ended September 30, 2001. Administrative service fee revenue increased 24.0%, or $57.8 million, to $298.5 million for the nine months ended September 30, 2002 from $240.7 million for the nine months ended September 30, 2001. See our more detailed discussion of these developments in the section of this prospectus entitled “Recent Developments.”

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The Offering
 
Common stock offered by:
     
The Fund
   
13,168,000 shares
The Foundation
   
     693,053 shares
Total
   
13,861,053 shares
Common stock outstanding after the offering
   
82,300,000 shares of common stock and one share of Class B common stock which will be held by the Fund and will provide the Fund with certain approval rights. See “Description of Capital Stock—Description of Common Stock and Class B Common Stock.”
Use of Proceeds
   
We will not receive any proceeds from the sale of shares by the Fund and the Foundation. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds to us will be $25.1 million, after deducting the underwriting discount. We would use these funds to pay offering and conversion expenses and for general corporate purposes.
Dividend Policy
   
We currently do not intend to pay cash dividends on our common stock. Any future dividends will be subject to our financial condition, declaration by our board of directors, statutory limitations and other factors described under “Dividend Policy.”
Risk Factors
   
For a discussion of factors you should consider before buying the shares, see “Risk Factors.”
New York Stock Exchange Symbol
   
“WC”
 
About this Prospectus
 
Unless otherwise indicated, the information in this prospectus:
 
 
•
 
assumes an initial public offering price of $22.50 per share (the midpoint of the price range set forth on the front cover of this prospectus); and
 
 
•
 
assumes no exercise of the underwriters’ option to purchase a maximum of 2,079,158 additional shares from us and the selling stockholders to cover over-allotments.
 
In addition, in this prospectus:
 
 
•
 
“Blue Cross” and/or “Blue Shield” refers to BlueCross® and/or BlueShield®, registered service marks of the Blue Cross Blue Shield Association;
 
 
•
 
“BlueCard” refers to BlueCard®, a registered service mark of the Blue Cross Blue Shield Association; and
 
 
•
 
“SARA” refers to SARA®, our registered service mark for our Systematic Analysis Review and Assistance Program.

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Summary Consolidated Financial and Additional Data
 
The summary consolidated financial data presented below is derived from our consolidated financial statements included elsewhere in this prospectus. The financial data as of and for the six months ended June 30, 2001 is unaudited. You should read this summary consolidated financial data together with our financial statements and the related notes and the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
    
Six months ended
June 30,
     
Year ended December 31,
    
2002
     
2001
     
2001
     
2000
     
1999
     
1998
   
1997
    
(in millions)
Revenue:
                                                           
Premiums earned
   
$
2,359.8
 
   
$
2,162.2
 
   
$
4,246.2
 
   
$
3,876.9
 
   
$
3,362.3
 
   
$
3,064.4
   
$
3,152.7
Administrative service fees
   
 
194.3
 
   
 
160.2
 
   
 
322.0
 
   
 
264.9
 
   
 
238.9
 
   
 
171.2
   
 
138.2
Investment income, net(1)
   
 
34.4
 
   
 
37.3
 
   
 
69.3
 
   
 
65.5
 
   
 
58.7
 
   
 
55.6
   
 
49.0
Net realized investment gains (losses)
   
 
(0.4
)
   
 
(5.5
)
   
 
(12.4
)
   
 
22.1
 
   
 
0.2
 
   
 
3.8
   
 
1.3
Other income, net(2)(3)
   
 
13.6
 
   
 
2.8
 
   
 
6.1
 
   
 
4.3
 
   
 
4.8
 
   
 
3.0
   
 
83.4
    
  
  
  
  
  
  
Total revenue
   
 
2,601.7
 
   
 
2,357.0
 
   
 
4,631.2
 
   
 
4,233.7
 
   
 
3,664.9
 
   
 
3,298.0
   
 
3,424.6
Expenses:
                                                           
Cost of benefits provided
   
 
2,057.0
 
   
 
1,915.3
 
   
 
3,738.8
 
   
 
3,426.4
 
   
 
2,944.6
 
   
 
2,721.5
   
 
2,808.1
Administrative expenses(4)(5)
   
 
401.3
 
   
 
370.9
 
   
 
742.8
 
   
 
686.2
 
   
 
587.3
 
   
 
533.2
   
 
568.4
Conversion expenses
   
 
3.6
 
   
 
1.3
 
   
 
2.0
 
   
 
0.6
 
   
 
3.7
 
   
 
2.3
   
 
—  
    
  
  
  
  
  
  
Total expenses
   
 
2,461.9
 
   
 
2,287.5
 
   
 
4,483.6
 
   
 
4,113.2
 
   
 
3,535.6
 
   
 
3,257.0