<PAGE> 1
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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----------------- to ---------------------
Commission File Number: 0-19442
OXFORD HEALTH PLANS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1118515
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
800 Connecticut Avenue, Norwalk, Connecticut 06854
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(Address of principal executive offices) (Zip Code)
(203) 852-1442
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of common
stock, par value $.01 per share, outstanding on August 10, 1998 was 80,383,263.
<PAGE> 2
OXFORD HEALTH PLANS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 .................................................... 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1998 and 1997.................................................. 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997............................................ 5
Notes to Condensed Consolidated Financial Statements ...................... 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 10
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk................. 24
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings ......................................................... 25
ITEM 2 Changes in Securities and Use of Proceeds.................................. 31
ITEM 5 Other Information.......................................................... 31
ITEM 6 Exhibits and Reports on Form 8-K........................................... 32
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, Dec. 31,
ASSETS 1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 481,621 4,141
Short-term investments-available-for-sale,
at market value 636,403 635,743
Premiums receivable 207,703 275,646
Other receivables 47,198 45,418
Prepaid expenses and other current assets 11,501 10,097
Refundable income taxes 3,059 120,439
Deferred income taxes 37,530 38,092
- --------------------------------------------------------------------------------
Total current assets 1,425,015 1,129,576
Property and equipment, at cost, net of
accumulated depreciation and amortization
of $143,433 in 1998 and $125,926 in 1997 127,989 147,093
Deferred income taxes 110,398 86,406
Restricted investments-hold-to-maturity, at
amortized cost 47,641 --
Other noncurrent assets 40,158 34,914
- --------------------------------------------------------------------------------
Total assets $1,751,201 1,397,989
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 6,819 --
Medical costs payable 916,327 762,959
Trade accounts payable and accrued expenses 254,518 152,152
Unearned premiums 54,463 124,603
Deferred income taxes -- 9,059
- --------------------------------------------------------------------------------
Total current liabilities 1,232,127 1,048,773
Senior notes payable 200,000 --
Term loan payable 150,000 --
Obligations under capital leases 13,312 --
- --------------------------------------------------------------------------------
Total liabilities 1,595,439 1,048,773
Redeemable preferred stock 276,866 --
Shareholders' equity:
Preferred stock, $.01 par value, authorized
2,000,000 shares -- --
Common stock, $.01 par value, authorized
400,000,000 shares; issued and outstanding
80,354,390 in 1998 and 79,474,439 in 1997 803 795
Additional paid-in capital 525,325 437,663
Accumulated deficit (648,803) (95,498)
Unrealized net appreciation of investments 1,571 6,266
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,751,201 1,397,989
================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------- -----------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $1,155,952 1,044,510 2,369,037 2,014,625
Third-party administration, net 4,311 3,040 9,313 6,116
Investment and other income (expense), net 30,849 14,374 42,385 28,498
- ------------------------------------------------------------------------------------------------
Total revenues 1,191,112 1,061,924 2,420,735 2,049,239
- ------------------------------------------------------------------------------------------------
Expenses:
Health care services 1,188,265 832,790 2,254,702 1,610,526
Marketing, general and administrative 203,659 165,922 404,692 315,706
Interest and other financing charges 20,752 -- 27,601 --
Restructuring charges 174,266 -- 199,266 --
Unusual charges 111,790 111,790
- ------------------------------------------------------------------------------------------------
Total expenses 1,698,732 998,712 2,998,051 1,926,232
- ------------------------------------------------------------------------------------------------
Operating earnings (loss) (507,620) 63,212 (577,316) 123,007
Equity in net loss of affiliate -- (120) -- (1,020)
- ------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (507,620) 63,092 (577,316) 121,987
Income tax expense (benefit) -- 25,917 (24,394) 50,433
- ------------------------------------------------------------------------------------------------
Net earnings (loss) (507,620) 37,175 (552,922) 71,554
Less preferred stock dividends and amortization (5,718) -- (5,718) --
- ------------------------------------------------------------------------------------------------
Net earnings (loss) attributable to common stock $ (513,338) 37,175 (558,640) 71,554
================================================================================================
Earnings (loss) per common share-basic $ (6.41) .48 (7.00) .92
Earnings (loss) per common share-diluted $ (6.41) .45 (7.00) .87
Weighted average common shares outstanding-basic 80,131 78,188 79,817 78,015
Effect of dilutive securities-stock options -- 4,486 -- 4,498
- ------------------------------------------------------------------------------------------------
Weighted average common shares outstanding-diluted 80,131 82,674 79,817 82,513
================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(552,922) 71,554
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 35,362 27,491
Noncash restructuring and unusual charges 205,631 --
Deferred income taxes (29,156) 3,865
Realized loss on partial sale of FPA Medical Management,
Inc. investment 8,183 --
Realized gain on sale of other investments (10,304) (7,477)
Other, net 3,396 1,260
Changes in assets and liabilities:
Premiums receivable 60,734 (106,702)
Other receivables (14,080) 7,020
Prepaid expenses and other current assets (1,404) 738
Medical costs payable 82,368 (92,122)
Trade accounts payable and accrued expenses 75,184 20,235
Income taxes payable/refundable 117,380 17,500
Unearned premiums (70,140) (46,572)
Other, net 4,693 (4,041)
--------- ---------
Net cash used by operating activities (85,075) (107,251)
--------- ---------
Cash flows from investing activities:
Capital expenditures (36,646) (42,730)
Purchases of available-for-sale securities (500,271) (304,867)
Sales and maturities of available-for-sale securities 416,140 416,415
Investment in unconsolidated affiliates (5,405) (20,564)
Other, net 2,087 394
--------- ---------
Net cash used by investing activities (124,095) 48,648
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,323 10,252
Proceeds of preferred stock, net of issuance expenses 338,148 --
Proceeds of notes and loans payable 550,000 --
Redemption of notes and loans payable (200,000) --
Proceeds of sale of common stock 10,000 --
Debt issuance expenses (11,251) --
Payments under capital leases (1,570) --
--------- ---------
Net cash provided by financing activities 686,650 10,252
--------- ---------
Net increase (decrease) in cash and cash equivalents 477,480 (48,351)
Cash and cash equivalents at beginning of period 4,141 72,160
--------- ---------
Cash and cash equivalents at end of period $ 481,621 23,809
========= =========
Supplemental schedule of noncash investing and financing
activities:
Unrealized appreciation (depreciation) of short-term
investments $ (7,773) 2,828
Tax benefit realized on exercise of stock options -- 8,402
Issuance of warrants to purchase common stock 67,000 --
Capital lease obligations incurred $ 21,707 --
</TABLE>
5
<PAGE> 6
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by Oxford Health Plans, Inc. ("Oxford") and Subsidiaries
(collectively, the "Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures, normally included in the financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to SEC rules and regulations;
nevertheless, management of the Company believes that the disclosures herein are
adequate to make the information presented not misleading. The condensed
consolidated financial statements and notes should be read in conjunction with
the audited consolidated financial statements and notes thereto as of and for
each of the years in the three-year period ended December 31, 1997, included in
the Company's 1997 Form 10-K filed with the SEC in March 1998 and amended in
April 1998.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
position of the Company with respect to the interim condensed consolidated
financial statements have been made. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year.
(2) RESTRUCTURING CHARGES
Restructuring charges totaled $174,266,000, or $2.17 per share, for the
three months ended June 30, 1998 and $199,266,000 ($190,516,000 after income
taxes, or $2.39 per share) for the six months ended June 30, 1998. These charges
included the following estimated costs related to the implementation of the
Company's turnaround plan: (i) costs associated with disposition or closure of
noncore business (Florida, Illinois and New Hampshire health plans, specialty
care management business and health centers) and a reduction in the carrying
value of the Company's investment in its Pennsylvania health plan; (ii) costs
for expected losses on government contracts prior to implementation of risk
transfer or exit strategies in certain counties; (iii) severance and other
costs; and (iv) costs associated with administrative cost reductions through
consolidation of operations and real estate.
The restructuring charges are summarized as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Provision for loss on noncore businesses $ 53,182,000 53,182,000
Provision for loss on government contracts 51,000,000 51,000,000
Write-down of property and equipment 29,146,000 29,146,000
Severence and related costs -- 20,200,000
Costs of operations consolidation 15,928,000 20,428,000
Provision for loss on disposal of unconsolidated affiliates 9,075,000 9,075,000
Write-down of accounts receivable 7,209,000 7,209,000
All other 8,726,000 9,026,000
- ------------------------------------------------------------------------------------------------------
Total restructuring charges $174,266,000 199,266,000
======================================================================================================
</TABLE>
6
<PAGE> 7
(3) UNUSUAL CHARGES
Unusual charges totaled $111,790,000, or $1.40 per share, for the three
months and six months ended June 30, 1998. These charges, which are nonrecurring
in nature, relate primarily to the Company's adoption of strategic initiatives
embodied in its turnaround plan, and include strengthening of medical claim
reserves and additional reserves for losses on provider advances and estimated
asset impairment losses. In addition, the Company, as of June 30, 1998, wrote
down to nominal value its remaining investment in the common stock of FPA
Medical Management, Inc., a physician practice management company ("FPA"). The
Company sold a portion of its investment in FPA in June 1998, realizing a loss
of $8,183,000. In July 1998, FPA filed for protection under Chapter 11 of the
U.S. Bankruptcy Code.
The unusual charges are summarized as follows:
<TABLE>
<CAPTION>
Three Months
and Six Months
Ended
June 30, 1998
--------------
<S> <C>
Realized loss and write-down of investment in FPA $ 38,341,000
Reserve for loss on provider advances 20,000,000
Strengthening of medical claims payable reserve 30,000,000
All other 23,449,000
- --------------------------------------------------------------------
Total unusual charges $111,790,000
====================================================================
</TABLE>
(4) INCOME TAXES
The Company has established a valuation allowance related to net operating
losses and the effect of the Company's net tax deductible temporary differences.
Based on the results of operations, management does not believe it is more
likely than not that these benefits relating to the second quarter loss will be
realized. Accordingly, the Company discontinued providing tax benefits beginning
with the second quarter of 1998. The Company will monitor its tax position
throughout the remainder of 1998 to determine whether deferred tax benefits
recorded prior to April 1998 are more likely than not to be recognized or
whether such benefits will require a valuation allowance.
As of June 30, 1998, the Company has Federal net operating loss
carryforwards of approximately $430,000,000, which will begin to expire in 2012.
During the first six months of 1998, the Company received net refunds of
taxes paid aggregating $107,877,000. During the first six months of 1997, the
Company paid taxes, net of refunds received, aggregating $35,000,000.
(5) EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which became
effective in 1997. Under the provisions of SFAS 128, basic earnings per share is
calculated on the weighted average number of common shares outstanding. Diluted
earnings per share is calculated on the weighted average number of common shares
and common share equivalents resulting from options outstanding. All prior year
amounts have been restated to reflect these calculations.
(6) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company has adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of
7
<PAGE> 8
comprehensive income be reported in the financial statements. The statement of
comprehensive earnings for the three months and six months ended June 30, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
----------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Net earnings (loss) per statement of operations $(507,620) 37,175 (552,922) 71,554
Unrealized holding losses on available-for-sale securities,
net of income taxes 38,783 704 36,700 (4,860)
Less reclassification adjustment for gains included in net
earnings (loss), net of income taxes (40,503) 8,047 (41,395) 6,529
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings (loss) $(509,340) 45,926 (557,617) 73,223
==========================================================================================================================
</TABLE>
(7) FINANCIAL AND CAPITAL TRANSACTIONS
On May 13, 1998, the Company consummated an agreement with affiliates of
the investment firm Texas Pacific Group ("Texas Pacific") under which Texas
Pacific Group and others purchased $350 million in redeemable preferred stock
issued as Series A and Series B with dividend rates of 8% and 9%, respectively.
Dividends on the preferred shares may be paid in kind for the first two years.
The preferred shares also come with warrants to acquire 22.5 million shares of
Oxford common stock with an exercise price of $17.75. This price represents a 5%
premium over the average trading price of Oxford shares for 30 trading days
ended February 20, 1998. The exercise price will become 115% of the average
trading price of Oxford common stock for the 20 trading days following the
filing of the Company's annual report on Form 10-K for the year ending December
31, 1998, if such adjustment would reduce the exercise price. The Series A
Preferred Stock carries a dividend of 8% and was issued with warrants to
purchase 15,800,000 shares of common stock, or 19.9% of the present outstanding
voting power of the Company's common stock. The Series A Preferred Stock has
16.6% of the combined voting power of the Company's outstanding common stock and
the Series A shares. The Series B Preferred Stock, which was issued with
warrants to purchase nonvoting junior participating preferred stock, is
nonvoting and carries a dividend of 9%. The Series B Preferred Stock will become
voting, the dividend rate will decrease to 8% and the related warrants will be
exercisable for 6,730,000 shares of common stock at such time as the Company's
shareholders approve the increase in voting rights of Texas Pacific to 22.1%.
The terms of the agreement prohibit the Company from paying cash dividends on
its common stock. The Preferred Stock is redeemable at the option of the Company
after five years and must be redeemed after ten years. The carrying value of the
Preferred Stock has been reduced in the financial statements by the value of the
warrants, estimated to be approximately $67 million. This amount has been added
to additional paid-in capital and will be amortized using the interest method
over five years. The costs incurred in connection with the issuance of the
preferred stock aggregated approximately $11.9 million and have been charged
against the preferred stock in the accompanying balance sheet. Such costs will
be amortized over a period of five years.
Simultaneously with the consummation of the agreement with Texas Pacific,
the Company issued $200 million principal amount of 11% Senior Notes due May 15,
2005. The Senior Notes are senior unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future senior
indebtedness of the Company. The Company's obligations under the Senior Notes
will be effectively subordinated to all existing and future secured indebtedness
of the Company to the extent of the value of the assets securing such
indebtedness and will be structurally subordinated to all existing and future
indebtedness, if any, of the Company's subsidiaries. Interest is payable
semiannually on May 15 and November 15 of each year commencing November 15,
1998. The Senior Notes will not be redeemable at the Company's option prior to
May 15, 2002.
At the same time, the Company entered into a Term Loan Agreement that
provided for a new $150,000,000 senior secured term loan (the "Term Loan") with
a final maturity in 2003 at which time all outstanding amounts will be due and
payable. Prior to the final maturity of the Term Loan there are no scheduled
principal payments. In certain circumstances, the Term Loan provides for
mandatory
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prepayments. The Term Loan bears interest at a rate per annum equal to the
administrative agent's reserve adjusted LIBO rate plus 4.25%.
The costs incurred in connection with the issuance of the Senior Notes and
Term Loan aggregating approximately $6.8 million and $4.5 million, respectively,
have been capitalized and will be amortized over periods of seven years and five
years, respectively.
Also simultaneously with the transactions described above, Norman C.
Payson, M.D., the Company's Chief Executive Officer, purchased 644,330 shares of
Oxford common stock at an aggregate purchase price of $10,000,000.
The aggregate proceeds of the above transactions of $710,000,000 were
utilized, in part, to retire previously outstanding bridge notes of
$200,000,000, make capital contributions to certain regulated subsidiaries and
pay fees and expenses approximating $39,000,000 related to the transactions. A
portion of the proceeds will be used to make capital contributions to certain
regulated subsidiaries and the balance will be used for general corporate
purposes.
During the first six months of 1998, the Company made cash payments for
interest expense aggregating $10,332,000. No payments for interest expense were
made in the first six months of 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table shows membership by product:
<TABLE>
<CAPTION>
As of June 30 Increase (Decrease)
--------------------- ---------------------------
1998 1997 Amount %
--------------------- ---------------------------
<S> <C> <C> <C> <C>
Membership:
Freedom Plan 1,362,300 1,218,300 144,000 11.8%
HMO 276,300 235,900 40,400 17.1%
Medicare 159,500 145,600 13,900 9.5%
Medicaid 140,600 187,600 (47,000) (25.1%)
- ----------------------------------------------------------------------------
Total fully insured 1,938,700 1,787,400 151,300 8.5%
Self-funded 66,000 46,100 19,900 43.2%
- ----------------------------------------------------------------------------
Total membership 2,004,700 1,833,500 171,200 9.3%
============================================================================
</TABLE>
The decrease in Medicaid membership reflects the Company's withdrawal from
the Connecticut Medicaid program effective April 1, 1998. Effective July 1,
1998, the Company withdrew from the New Jersey Medicaid program, which resulted
in the loss of an additional 34,000 Medicaid members on such date.
The following table provides certain statement of operations data expressed
as a percentage of total revenues for the three months and six months ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ---------------------------
1998 1997 1998 1997
---------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned 97.0% 98.4% 97.9% 98.3%
Third-party administration, net 0.4% 0.3% 0.4% 0.3%
Investment and other income
(expense), net 2.6% 1.3% 1.8% 1.4%
- -----------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.1% 100.0%
- -----------------------------------------------------------------------------------------
Expenses:
Health care services 99.8% 78.4% 93.1% 78.5%
Marketing, general and
administrative 17.1% 15.6% 16.7% 15.4%
Interest and other financing
charges 1.7% -- 1.1% --
Restructuring charges 14.6% -- 8.2% --
Unusual charges 9.4% -- 4.6% --
- -----------------------------------------------------------------------------------------
Total expenses 142.6% 94.0% 123.7% 93.9%
- -----------------------------------------------------------------------------------------
Operating earnings (loss) (42.6%) 6.0% (23.6%) 6.1%
Equity in net loss of affiliate -- -- -- --
- -----------------------------------------------------------------------------------------
Earnings (loss) before income
taxes (42.6%) 6.0% (23.6%) 6.1%
Income tax expense (benefit) -- 2.4% (1.0%) 2.5%
- -----------------------------------------------------------------------------------------
Net earnings (loss) (42.6%) 3.6% (22.6%) 3.6%
=========================================================================================
Supplementary information:
Medical-loss ratio 102.8% 79.7% 95.2% 79.9%
Administrative-loss ratio 17.6% 15.8% 17.0% 15.6%
PMPM premium revenue $ 197.00 198.36 198.44 196.96
PMPM medical expense $ 202.51 158.15 188.86 157.45
Fully insured member months
(in thousands) 5,867.7 5,265.7 11,938.3 10,228.5
</TABLE>
The medical-loss ratio for the three and six months periods ended June 30,
1998 reflects additions to the Company's reserves recorded in the second quarter
of 1998. A portion of these reserve additions represent revisions to estimates
for claims incurred in prior periods. Moreover, significant reserve additions
were made in the second half of 1997. Accordingly, period-to-period comparisons
may not be meaningful.
10
<PAGE> 11
RESULTS OF OPERATIONS
Overview
The Company's revenues consist primarily of commercial premiums derived from
its Freedom Plan and Liberty Plan, health maintenance organization ("HMO") and
preferred provider organization ("PPO") products, reimbursements under
government contracts relating to its Medicare and Medicaid programs, third-party
administration fee revenue for its self-funded plan services (which is stated
net of direct expenses such as third-party reinsurance premiums) and investment
income.
Health care services expense primarily comprises payments to physicians,
hospitals and other health care providers under fully insured health care
business and includes an estimated amount for incurred but not reported claims
("IBNR"). The Company estimates IBNR expense based on a number of factors,
including prior claims experience. The actual expense for claims attributable to
any period may be more or less than the amount of IBNR reported. The Company's
results for the year ended December 31, 1997 and the three months ended June 30,
1998 were adversely affected by additions to the Company's reserves for IBNR in
the third and fourth quarters of 1997 and the second quarter of 1998. See
"Liquidity and Capital Resources."
During the first half of 1998, the Company recorded restructuring charges and
unusual charges primarily associated with implementation of the Company's plan
("Turnaround Plan") to restore the Company's profitability by focusing on its
core commercial markets, reducing administrative costs, reducing payments to
physicians and hospitals, reducing unnecessary utilization of hospital and other
services, increasing commercial group premiums and strengthening operations. The
restructuring charge of $199.3 million includes $69.8 million associated with
planned administrative cost reductions from consolidation of operations and real
estate facilities and severance costs, $62.3 million relating to disposition or
write-down of noncore businesses, $51.0 million for losses on Medicare business
to be restructured, and $16.2 for valuation reserves for certain other assets.
The Company also recorded unusual charges of $111.8 million, which are
nonrecurring in nature, including $20.0 million for estimated costs associated
with settlement of provider advances, $38.4 million related to a write-off of
the Company's investment in FPA Medical Management, Inc., which recently filed
for bankruptcy protection, $30.0 million for claim reserves and $23.4 million
for valuation reserves and other one-time charges. As a consequence of these
charges, comparisons of operating results for the first and second quarter of
1998 with other periods may not be meaningful.
The Company experienced substantial growth in membership and revenues since
it began operations in 1986 through 1997. The membership and revenue growth has
been accompanied by increases in the cost of providing health care in New York,
New Jersey, Pennsylvania, Connecticut, Illinois, Florida and New Hampshire. The
Company does not expect its future growth in membership or revenue, if any, to
be similar to its growth in prior years and will likely experience reductions in
membership and revenue in the near term as the Company redirects its strategic
initiatives under the Turnaround Plan to attempt to establish profitability.
Since the Company provides services on a prepaid basis, with premium levels
fixed for one-year periods, unexpected cost increases during the annual contract
period cannot be passed on to employer groups or members.
Software and hardware problems experienced in the conversion of a portion of
the Company's computer system in September 1996 resulted in significant delays
in the Company's billing of group and individual customers and have adversely
affected the Company's premium billing. The Company's revenues have been
adversely affected by adjustments of approximately $174 million in 1997 and $53
million in the second quarter of 1998 related to estimates for terminations of
group and individual members and for non-paying group and individual members.
The Company is taking steps to attempt to improve billing timeliness, reduce
billing errors, lags in recording enrollment and disenrollment notifications,
and the Company's collection processes and is attempting to make requisite
improvements in management information concerning the value and aging of
outstanding accounts receivable. The Company believes it has made adequate
provision in its estimates for group and individual member terminations and for
non-paying group and individual members as of June 30, 1998. Adjustments to the
estimates may be
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<PAGE> 12
necessary, however, and any such adjustments would be included in the results of
operations for the period in which such adjustments are made.
The Company's commercial rates are often higher than those charged by
competitors, in part reflecting the size and quality of the Company's provider
network, additional services provided by the Company and other features of the
Company's products. A significant aspect of the Company's Turnaround Plan is to
increase commercial group rates. The Company's ability to receive requested rate
increases from group customers may be adversely affected by publicity
surrounding the losses announced by the Company for the third and fourth
quarters of 1997 and the first and second quarters of 1998 and claims payment
issues involving the Company's provider network. The Company believes that
commercial premium pricing will continue to be highly competitive and may become
more so in the future. However, the Company does not intend to promote revenue
growth at the level of prior periods and will likely experience reductions in
revenue in the near term as the Company's priority in 1998 is to attempt to
achieve higher premiums and strengthen its service and systems infrastructure.
Revenues will also be adversely affected as a result of the Company's decision
to dispose of its Florida, Illinois and New Hampshire health plans. The Company
has also decided to consider strategic alternatives with respect to its
Pennsylvania health plan. Moreover, the Company expects that revenue will be
adversely affected by customers' concerns regarding recently publicized
operating losses and provider dissatisfaction with timeliness of claims payment.
In March 1998, the Company filed with the New York State Insurance Department
("NYSID") proposed rate increases of 50% and 64%, respectively, for its New York
mandated individual HMO and point-of-service plans (the "New York Mandated
Plans") as a result of rapidly rising medical costs in those plans. The Company
believes it experiences significant selection bias in these plans which are
chosen, on average, by individuals that require more health care services than
the average commercial population. The Company had 36,800 members in the
mandated HMO and 13,500 members in the mandated point-of-service plan as of June
30, 1998. In April 1998, the NYSID denied the Company's rate request, but
directed the Company to apply funds it will be allocated from the Demographic
and Specified Medical Condition pools against rate relief in the individual and
small group market. The Company expects that operating results for the
individual product will continue to be adversely affected by high medical costs
and that losses will continue in the absence of significant rate or regulatory
relief.
On June 10, 1998, the Company voluntarily suspended marketing and most
enrollment of new members under its Medicare programs in New York, New Jersey,
Connecticut and Pennsylvania. This action was taken by the Company to provide it
with an opportunity to strengthen its operations and institute certain
corrective actions required by the Health Care Financing Administration ("HCFA")
as a result of its recent site visit. See "Legal Proceedings". This action,
however, does not apply to potential enrollees of the Company's Medicare group
accounts. The Company believes that the suspension will be temporary, lasting
several months, and service to existing members will not be affected.
The Company has agreed with HCFA to develop and implement a plan of
corrective actions relating to deficiencies in the Company's compliance with
operational standards contained in its contracts with HCFA. Operational
deficiencies noted by HCFA include claims payment turnaround times, interest
payments on delayed claims, enrollment and disenrollment procedures and
documentation, and member appeal procedures and notifications. The Company's
ability to resume marketing and enrollment, and to be granted new
Medicare+Choice contracts for next year, will be subject to HCFA's satisfaction
with the progress made by the Company in implementing the corrective actions
agreed upon.
The Company has worked cooperatively with HCFA to address the concerns
HCFA has raised and believes it will be able to implement corrective actions
satisfactory to HCFA; however, there can be no assurance that the Company will
ultimately succeed in resuming marketing and enrollment or in obtaining new
contracts for 1999. A long-term suspension of marketing and enrollment would
adversely affect revenues since member disenrollment would result in a
continuing reduction in membership. A failure to obtain a new contract for 1999
would mean that the Company would not participate in the Medicare managed care
program, with a corresponding reduction in revenues (the Company experienced
operating losses in Medicare in 1997 and the first half of 1998). In that event,
the Company would need to reduce overall administrative costs proportionately.
Non-participation by the Company in the Medicare managed care program could also
adversely affect the Company's ability to negotiate favorable provider contracts
for
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<PAGE> 13
its commercial business since the Company would represent significantly less
revenue potential for many providers.
The Company's Turnaround Plan contemplates a restructuring of the Company's
Medicare business by initiating risk transfer agreements with health care
providers in service areas covering approximately 90,000 members where the
Company experiences substantial losses. Under these risk transfer arrangements,
providers assume a substantial portion of the risk of increasing health care
costs; however, these arrangements may require regulatory approvals, which may
not be granted or may be granted with burdensome conditions, and, among other
risks and uncertainties involved in the successful implementation of the
contract, the Company bears the risk of nonperformance or default by the
provider. Recently, FPA Medical Management, Inc. ("FPA") filed for bankruptcy
protection. The Company had several risk sharing agreements with entities owned
or managed by FPA, which covered approximately 84,000 members. The Company is
unable to predict the impact of the FPA bankruptcy on its results of operations.
The Company has entered into a definitive agreement with North Shore-Long
Island Jewish Health System, Inc. ("North Shore") pursuant to which North Shore
has assumed the medical cost risk associated with the provision of covered
services to approximately 40,000 of the Company's Medicare beneficiaries
primarily in Nassau, Suffolk and Richmond counties in New York and has agreed to
provide certain administrative services in connection therewith. The Company
intends to finalize Medicare risk transfer arrangements in the remaining
counties in which it is experiencing losses by year-end, but if the Company
cannot conclude satisfactory arrangements for North Shore and others, including
obtaining regulatory approvals and taking the requisite steps for the successful
implementation of such arrangements, it will withdraw from certain of these
counties. Such withdrawal would adversely affect enrollment and revenues.
Medicare enrollment could also be adversely affected, perhaps substantially so,
by customer concern over recently publicized operating losses and provider
dissatisfaction, changes to the Company's Medicare benefits or provider network
in certain counties and medical management policies designed to better control
medical costs, among other factors.
In 1997, the Clinton Administration and Congressional leadership reached an
agreement on legislation aimed at balancing the Federal budget, which includes
provisions for $115 billion in savings from Medicare programs over the next five
years. This agreement was enacted into law as the Balanced Budget Act of 1997
(the "1997 Act"). The legislation changes the way health plans are compensated
for Medicare members by eliminating over five years amounts paid for graduate
medical education and increasing the blend of national cost factors applied in
determining local reimbursement rates over a six-year phase-in period. Both
changes will have the effect of reducing reimbursement in high cost metropolitan
areas with a large number of teaching hospitals, such as the Company's service
areas; however, the legislation includes provision for a minimum increase of 2%
annually in health plan Medicare reimbursement for the next five years. The
legislation also provides for expedited licensure of provider-sponsored Medicare
plans and a repeal in 1999 of the rule requiring health plans to have one
commercial enrollee for each Medicare or Medicaid enrollee. These changes could
have the effect of increasing competition in the Medicare market.
During 1998, the Company received a 2% increase in Medicare premiums, minus
the user fee assessment of .428% of the Company's gross monthly Medicare
premium. The user fee is applied to all Medicare risk contractors by HCFA to
cover HCFA's costs relating to beneficiary enrollment, dissemination of
information and certain counseling and assistance programs. On March 2, 1998
HCFA announced a 2% increase in premiums in 1999 for all plans in the Company's
service areas. However, the user fee for 1999 has not been determined and may
increase since the Clinton Administration is seeking legislation authorizing it
to collect additional funds. Under the authority provided by the 1997 Act, HCFA
has begun to collect hospital encounter data from Medicare risk contractors. The
data will be used to develop and implement a new risk adjustment mechanism by
January 1, 2000. Given the relatively high Medicare risk premium levels in the
Company's market areas, the Company is in significant jeopardy that the new risk
adjustment mechanism to be developed could significantly and adversely affect
the Company's Medicare premium ratio going forward. President Clinton has
proposed expanding Medicare coverage to individuals between the ages of 55 and
64. There is significant opposition to his proposal, and the Company cannot
predict the outcome of the legislative process or the impact of the proposal on
the Company's results of operations. In addition, long-term structural changes
to the Medicare program are currently being
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<PAGE> 14
considered by a newly appointed National Bipartisan Commission on the Future of
Medicare. This Commission is required to submit a report to the President and
Congress by March 1, 1999.
Premium yields in the Company's New York Medicaid program (approximately
41,000 members at June 30, 1998) were increased 4% effective April 1, 1998. The
Company's Turnaround Plan contemplates limiting the Company's New York Medicaid
business primarily to Brooklyn and seeking provider contracts to transfer
medical cost risk for this membership. There can be no assurance that the
Company will be successful in concluding satisfactory provider contracts for
this membership. If the Company cannot conclude such contracts, it will likely
not renew the contracts in April 1999. Premium yields in the Company's
Pennsylvania Medicaid program (approximately 65,500 members at June 30, 1998)
were increased 7% effective January 1, 1998. No assurances can be given
regarding prospective premium yields from these programs.
The Company's approach to addressing the deterioration of operating results
in its Medicaid Plans is to transfer the medical cost risk for this membership
or to withdraw from such programs. Despite these efforts, no assurances can be
given that such risk transfer contracts will be consummated or, if consummated,
will successfully control the Company's ultimate costs. In its Pennsylvania
Medicaid program, the Company has entered into an agreement to transfer a
substantial portion of the medical risk in that program to a third party. The
Company has also withdrawn from the Medicaid programs in New Jersey and
Connecticut, effective July 1, 1998 and April 1, 1998, respectively.
The Company's results of operations are dependent, in part, on its ability to
predict and maintain effective control over health care costs (through, among
other things, stricter underwriting standards, appropriate benefit design,
utilization review and case management programs and its risk-sharing agreements
with providers) while providing members with quality health care. Factors such
as utilization, new technologies and health care practices, hospital costs,
changes in demographics and trends, selection biases, major epidemics, inability
to establish acceptable compensation agreements with providers and numerous
other factors may affect the Company's ability to control such costs. The
Company attempts to use its medical cost containment capabilities, such as claim
auditing systems and utilization review protocols, with a view to reducing the
rate of growth in health care services expense. The Company's Turnaround Plan
also contemplates attempting to implement new medical management policies aimed
at reducing costs in various lines of business, principally through utilization
management of hospital services. There can be no assurance that the Company will
be successful in mitigating the effect of any or all of the above-listed or
other factors. In addition, the Company's relationships with many of its
contracted providers were adversely affected by the Company's computer systems
and related claims payment problems which could impede the Company's efforts to
obtain favorable arrangements with some of these providers going forward.
Accordingly, past financial performance is not necessarily a reliable indicator
of future performance, and investors should not use historical performance to
anticipate results or future period trends. The Company continues to reconcile
delayed claims and claims previously paid or denied in error and pay down
backlogged claims. Information gained as the process continues may result in
future changes to the Company's estimates of its medical costs and expected cost
trends.
The Company expects to continue to report losses in 1998 and 1999 as the
result of high medical costs and high administrative costs. The Company's
Turnaround Plan contemplates steps to better control medical and administrative
spending and increase premium rates and discontinue unprofitable businesses, but
there can be no assurance that it will be successful. Results of operations will
be adversely affected if such steps cannot be successfully implemented or if
there are delays in such implementation.
The three months ended June 30, 1998 compared with the three months ended
June 30, 1997
Total revenues for the quarter ended June 30, 1998 were $1.19 billion, up
12.2% from $1.06 billion during the same period in the prior year. The net loss
for the second quarter of 1998 totaled $507.6 million, or $6.41 per share,
compared to net earnings of $37.2 million, or 45 cents per share, for the second
quarter of 1997. Results of operations for the second quarter of 1998 were
adversely affected by significantly higher medical costs in the Company's
commercial group, Medicare, Medicaid and individual direct pay businesses and
approximately $174.3 million of restructuring charges and $111.8 million of
unusual charges. See "Overview".
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<PAGE> 15
The second quarter of 1998 was also adversely affected by interest and
financing expense of $19.0 million relating to the consummation in May of the
Company's $710 million financing. See "Liquidity and Capital Resources". Future
interest expense under the Company's senior note and term loan borrowings is
expected to total $9.7 million per quarter.
Membership in the Company's fully insured health care programs as of June 30,
1998 increased by approximately 151,300 members (8.5%) over the level of such
membership as of June 30, 1997, while membership in the Medicaid program
decreased by approximately 47,000 members (25.1%) during the same period. This
reduction reflects the Company's withdrawal from the Medicaid program in
Connecticut effective April 1, 1998. Effective July 1, 1998, the Company
withdrew from the New Jersey Medicaid program which resulted in the loss of an
additional 34,000 members on such date. Membership in the Medicare program grew
by only 13,900 members (9.5%) since the second quarter of 1997, reflecting a
slow down in the addition of Medicare members, as the Company has curtailed its
marketing efforts for the Medicare business since late last year and suspended
marketing and most enrollment in June 1998. See "Overview".
Total commercial premiums earned for the three months ended June 30, 1998
increased 14.1% to $830.3 million compared with $746.2 million in the same
period in the prior year. This increase is attributable to a 15.7% increase in
member months in the Company's commercial health care programs, including a
15.0% member months increase in the Freedom Plan. Premium yields of commercial
programs were 3.9% lower on average than in the second quarter of 1997. Premium
yields declined year to year primarily due to adjustments of $53 million related
to estimates for termination of group and individual members and for nonpaying
groups and individual members. Such premium yields increased on average
approximately 2% after removing the effect of such adjustments. The Company's
Turnaround Plan includes seeking premium increases on the Company's small and
large group Freedom Plan and HMO business in the range of 8% to 9% since
healthcare cost increases have outpaced the Company's commercial premium rates
in this line of business. In recent months, the Company has been generally
renewing groups at increased rates of approximately 7% for several months and
these rates have been generally accepted. There can be no assurance the Company
will be successful in obtaining needed rate increases without losing enrollment.
Premiums earned from government programs increased 9.2% to $325.6 million in
the second quarter of 1998 compared with $298.3 million in the second quarter of
1997. Membership growth accounted for most of the change as member months of
Medicare programs increased 13.3% when compared with the prior year second
quarter, which was offset, in part, by a 22.6% decrease in the member months of
Medicaid programs. Premium yields of Medicare programs in the second quarter of
1998 were 3.1% higher than in the prior year quarter and 11.6% higher in
Medicaid programs.
Net investment income for the three months ended June 30, 1998 increased 90%
to $26.9 million from $14.1 million for the same period last year primarily due
to an increase in average invested balances in the second quarter of 1998
primarily resulting from the Company's May 1998 financing. This increase in net
investment income during this period was also due to an increase in net capital
gains in an amount equal to $3.8 million. See "Liquidity and Capital Resources".
The medical-loss ratio (health care services expense stated as a percentage
of premium revenues) was 102.8% for the second quarter of 1998 compared with
79.7% for the second quarter of 1997 and 87.9% for the first quarter of 1998.
Software and hardware problems experienced in the conversion of a portion of the
Company's computer system in September 1996 resulted in significant delays in
the Company's payment of provider claims and adversely affected payment accuracy
during the second quarter of 1997. Medical costs for 1997 reflect additions to
the Company's reserves for IBNR in the third and fourth quarters of 1997
aggregating $327 million. These additions represent revisions to estimates of
the Company's incurred medical costs based on information gained in the process
of reviewing and reconciling previously delayed claims and claims paid or denied
in error. A portion of the reserve additions represented revisions to estimates
for claims incurred in years before 1997. The Company also added $48 million to
its reserves for IBNR in the second quarter of 1998. These reserve additions
represent revisions to estimates for claims incurred in prior periods and an
increase in the Company's margin for adverse development relating
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<PAGE> 16
to reprocessing claims previously paid or denied in error. The Company's paid
and received claims data and revised estimates have shown significant increases
in medical costs in 1996, 1997 and 1998 for the Company's commercial, Medicare,
Medicaid and New York Mandated Plans. These increases resulted primarily from
higher expenses for hospital and specialist physician services and increases in
per member per month pharmacy costs. Reserves for the second quarter for 1998
continued to reflect high costs in these areas. The Company's Turnaround Plan
was designed to address the operating losses incurred in its commercial,
Medicare and Medicaid plans, but there can be no assurance that the Turnaround
Plan will succeed. The Company believes it has made adequate provision for
medical costs as of June 30, 1998. There can be no assurance that additional
reserve additions will not be necessary as the Company continues to review and
reconcile delayed claims and claims paid or denied in error. Additions to
reserves could also result as a consequence of regulatory examinations, and such
additions would also be included in the results of operations for the period in
which such adjustments are made. See "Liquidity and Capital Resources".
Marketing, general and administrative expenses totaled $203.7 million in the
second quarter of 1998 compared with $165.9 million in the second quarter of
1997. The increase over the second quarter of 1997 is primarily attributable to
a $8.5 million rise in payroll and benefits due to increased staffing and a
$16.0 million increase in consulting fees primarily related to enhancements to
management information systems. These expenses as a percent of operating revenue
were 17.6% during the second quarter of 1998 compared with 15.8% during the
second quarter of 1997 and 16.5% for the first quarter of 1998. The Company's
Turnaround Plan calls for significant reductions in administrative costs, but
there can be no assurance the Company will be successful in reducing such costs.
The Company expects that results for 1998 will continue to be adversely affected
by high administrative costs. The Company's restructuring charge includes
charges for estimated defense costs associated with responding to regulatory
inquiries and investigations and defending pending securities class actions and
shareholder derivative litigation, including fees and disbursements of counsel
and other experts, to the extent such costs are not reimbursed under existing
policies of insurance. There can be no assurance that ultimate costs will not
exceed those estimates.
The six months ended June 30, 1998 compared with the six months ended June
30, 1997
Total revenues for the six months ended June 30, 1998 were $2.42 billion, up
18.1% from $2.05 billion during the same period in the prior year. The net loss
for the first half of 1998 totaled $552.9 million, or $7.00 per share, compared
to net earnings of $71.5 million, or .87 cents per share, for the second quarter
of 1997. Results of operations for the first six months of 1998 were adversely
affected by significantly higher medical costs in the Company's commercial group
business, Medicare, Medicaid and individual direct pay businesses and
approximately $199.3 million of restructuring charges and $111.8 million of
unusual charges. See "Overview".
The second quarter of 1998 was also adversely affected by interest and
financing expense of $19.0 million relating to the consummation in May of the
Company's $710 million financing. See "Liquidity and Capital Resources". Future
interest expense under the Company's senior note and term loan borrowings is
expected to total $9.7 million per quarter.
Total commercial premiums earned for the six months ended June 30, 1998
increased 23.6% to $1.76 billion compared with $1.44 billion in the same period
in the prior year. This increase is attributable to a 19.9% increase in member
months in the Company's commercial health care programs, including a 19.2%
member months increase in the Freedom Plan.
Premiums earned from government programs increased 15.5% to $666.1 million in
the first six months of 1998 compared with $576.6 million in the first six
months of 1997. Membership growth accounted for most of the change as member
months of Medicare programs increased 18.0% when compared with the first six
months of 1997, while member months of Medicaid programs decreased by 8.5% over
the level of the prior year six months period as the result, in part, of the
Company's withdrawal from the Medicaid programs in Connecticut effective April
1, 1998. Effective July 1, 1998, the Company withdrew from the New Jersey
Medicaid program which resulted in the loss of an additional 34,000 members on
such date.
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Premium yields of Medicare programs in the first six months of 1998 were 2.9%
higher than in the comparable prior year period and 7.3% higher in Medicaid
programs.
Net investment income for the six months ended June 30, 1998 increased 30% to
$38.0 million from $28.4 million for the same period last year primarily due to
an increase in average invested balances in the first six months of 1998
primarily resulting from the Company's May 1998 financing. This increase in net
investment income during this period was also due to an increase in net capital
gains in an amount equal to $2.8 million. See "Liquidity and Capital Resources".
The medical-loss ratio (health care services expense stated as a percentage
of premium revenues) was 95.2% for the first six months of 1998 compared with
79.9% for the first six months of 1997. Software and hardware problems
experienced in the conversion of a portion of the Company's computer system in
September 1996 resulted in significant delays in the Company's payment of
provider claims and adversely affected payment accuracy during the first half of
1997. Medical costs for 1997 reflect additions to the Company's reserves for
IBNR in the third and fourth quarters of 1997 aggregating $327 million. These
additions represent revisions to estimates of the Company's incurred medical
costs based on information gained in the process of reviewing and reconciling
previously delayed claims and claims paid or denied in error. A portion of the
reserve additions represented revisions to estimates for claims incurred in
years before 1997. The Company also added $48 million to its reserves for IBNR
in the second quarter of 1998. A portion of these reserve additions represent
revisions to estimates for claims incurred in prior periods. The Company's paid
and received claims data and revised estimates showed significant increases in
medical costs in 1996, 1997 and 1998 for the Company's commercial, Medicare,
Medicaid and New York Mandated Plans. These increases resulted primarily from
higher expenses for hospital and specialist physician services and increases in
per member per month pharmacy costs. Reserves for the first six months of 1998
continued to reflect high costs in these areas. The Company's Turnaround Plan
was designed to address the operating losses incurred in these lines of
business, but there can be no assurance that the Turnaround Plan will succeed.
The Company believes it has made adequate provision for medical costs as of June
30, 1998. There can be no assurance that additional reserve additions will not
be necessary as the Company continues to review and reconcile delayed claims and
claims paid or denied in error. Additions to reserves could also result as a
consequence of regulatory examinations, and such additions would also be
included in the results of operations for the period in which such adjustments
are made. See "Liquidity and Capital Resources".
Marketing, general and administrative expenses totaled $404.7 million in the
first six months of 1998 compared with $315.7 million in the first six months of
1997. The increase over the first six months of 1997 is primarily attributable
to a $35.8 million rise in payroll and benefits due to increased staffing and a
$35.0 million increase in consulting fees primarily related to enhancements to
management information systems. These expenses as a percent of operating revenue
were 17.0% during the first six months of 1998 compared with 15.6% during the
first six months of 1997 and 17.6% for the full year 1997. The Company's
Turnaround Plan calls for significant reductions in administrative costs, but
there can be no assurance the Company will be successful in reducing such costs.
The Company expects that results for 1998 will continue to be adversely affected
by high administrative costs. The Company's restructuring charge includes
charges for estimated defense costs associated with responding to regulatory
inquiries and investigations and defending pending securities class actions and
shareholder derivative litigation, including fees and disbursements of counsel
and other experts, to the extent such costs are not reimbursed under existing
policies of insurance. There can be no assurance that ultimate costs will exceed
costs will not exceed those estimates.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during the first six months of 1998 aggregated $85.1
million, compared with $107.3 million for the first six months of 1997. The
Company's cash flow benefited from income tax refunds aggregating $117 million
in the first half of 1998 and $60 million in improved collections of commercial
premiums above revenue recorded. The Company's capital expenditures for the
first six months of 1998 totaled $36.6 million. Such funds were used primarily
for management information systems and leasehold improvements. In addition, the
Company in March 1998 incurred obligations under capital leases for peripheral
computer equipment with an aggregate fair market value approximating $21.7
million. Except for
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<PAGE> 18
anticipated capital expenditures and obligations to provide required levels of
capital to its operating subsidiaries, the Company currently has no definitive
commitments for use of material cash.
The National Association of Insurance Commissioners has an effort underway
that would require new minimum capitalization limits for health care coverage
provided by HMOs and other risk-bearing health care entities. The requirements
would take the form of risk-based capital rules. Depending on the nature and
extent of the new minimum capitalization requirements ultimately adopted, there
could be an increase in the capital required for certain of the Company's
regulated subsidiaries. The Company intends to fund any increase from corporate
usable cash reserves. However, there can be no assurance that such cash reserves
will be sufficient to fund these minimum capitalization requirements. The new
requirements are expected to be effective on or before December 31, 1999.
As of June 30, 1998, consolidated cash and investments aggregated
approximately $1,118 million, of which approximately $889 million was held by
operating subsidiaries and approximately $229 million was held by the parent
company after giving effect to capital contributions by the parent company to
certain subsidiaries as required by the NYSID. As of June 30, 1998, cash and
investments aggregating $47.6 million has been segregated as restricted
investments to comply with federal and state regulatory requirements. An
additional $9.3 million in cash has been similarly restricted and has been
included in other noncurrent assets in the consolidated balance sheet. The
Company's subsidiaries are also subject to certain restrictions on their
abilities to make dividend payments, loans or other transfers of cash to the
parent company, which limit the ability of the Company to use cash generated by
subsidiary operations to pay the obligations of the parent, including debt
service and other financing costs.
As a result of the previously discussed delays in claims payments during the
fourth quarter of 1996 and the first quarter of 1997, the Company experienced a
significant increase in medical claims payable, but such increase was mitigated,
in part, by progress in paying backlogged claims and making advance payments to
providers during the first quarter of 1997 and thereafter. Outstanding net
advances aggregated approximately $157.3 million at June 30, 1998 and have been
netted against medical costs payable in the Company's consolidated balance
sheet. The Company has established a valuation reserve of $30 million against
the advances. The Company believes that it will be able to recover outstanding
advance payments, either through repayment by the provider or application
against future claims, but any failure to recover funds advanced in excess of
the reserve would adversely affect the Company's results of operations.
The Company's medical costs payable was $1.07 billion as of June 30, 1998
(including $851.2 million for IBNR and before netting advance claim payments of
$157.3 million) compared with $965.9 million as of December 31, 1997 (including
$859.0 for IBNR and before netting advance claim payments of $203.3 million).
The increase reflects a strengthening of the Company's reserve for claim
liabilities during the second quarter of 1998. The Company estimates the amount
of its reserves using standard actuarial methodologies based upon historical
data, including the average interval between the date services are rendered and
the date claims are paid and between the date services are rendered and the date
claims are received by the Company, expected medical cost inflation, seasonality
patterns and changes in membership. The liability is also affected by shared
risk arrangements, including Private Practice Partnerships ("Partnership"). In
determining the liability for medical costs payable, the Company accounts for
the financial impact of the experience of risk-sharing Partnership providers
(who may be entitled to credits from Oxford for favorable experience or subject
to deductions for accrued deficits) and, in the case of Partnership providers
subject to deficits, has established reserves to account for delays or other
impediments to recovery of those deficits. The Company has decided to review its
partnership program and may restructure or terminate certain of its partnership
arrangements as a result of difficulties and expense associated with
administering the program as well as other considerations. The Company has
recognized estimated costs in taking these actions in the second quarter. The
Company believes that its reserves for IBNR are adequate to satisfy its ultimate
claim liability. However, the Company's rapid growth, delays in paying claims,
paying or denying claims in error and changing speed of payment may affect the
Company's ability to rely on historical information in making IBNR reserve
estimates.
During the first six months of 1998, the Company made cash contributions to
the capital of its HMO subsidiaries aggregating $296.3 million. The capital
contributions were made to ensure that each subsidiary
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had sufficient surplus under applicable regulations after giving effect to
operating losses and reductions to surplus resulting from the nonadmissibility
of certain assets. Contributions prior to May 13, 1998 were made with the
proceeds of the issuance of $200 million of senior secured notes ("Bridge
Notes") under the Bridge Securities Purchase Agreement, dated as of February 6,
1998, between the Company and an affiliate of Donaldson Lufkin & Jenrette
Securities Corporation, as amended on March 30, 1998. The Bridge Notes were
repaid on May 13, 1998 with a portion of the proceeds of the financings
described below. Contributions made on or after May 13, 1998 were made from the
proceeds of the financings.
The Company expects that additional capital contributions to the subsidiaries
will be required as the result of expected operating losses in 1998. Further,
additional capital contributions will be required if there is an increase in the
nonadmissible assets of the Company's subsidiaries or a need for reserve
strengthening as the result of regulatory action or otherwise. The Company
intends to fund such contributions, if any, with a portion of the proceeds of
the financings. However, there can be no assurance that the proceeds of the
financings will be sufficient to fund such contributions.
Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC (together with
the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350,000,000 in Preferred Stock with Warrants to acquire up to
22,530,000 shares of common stock. Dividends on the Preferred Stock may be paid
in kind for the first two years. The Warrants have an exercise price of $17.75,
which represents a 5% premium over the average trading price of Oxford shares
for the 30 trading days ended February 20, 1998. The exercise price is to become
115% of the average trading price of Oxford common stock for the 20 trading days
following the filing of the Company's annual report on Form 10-K for the year
ending December 31, 1998, if such adjustment would reduce the exercise price.
The Preferred Stock was issued as Series A and Series B. The Series A Preferred
Stock carries a dividend of 8% and was issued with Series A Warrants to purchase
15,800,000 shares of common stock, or 19.9% of the present outstanding voting
power of Oxford's common stock. The Series A Preferred Stock has 16.6% of the
combined voting power of Oxford's outstanding common stock and the Series A
shares. The Series B Preferred stock, which was issued with Series B Warrants to
purchase non-voting junior participating preferred stock, is nonvoting and
carries a dividend of 9%. The Series B Preferred Stock will become voting, the
dividend rate will decrease to 8% and the Series B warrants will be exercisable
for 6,730,000 shares of common stock at such time as Oxford's shareholders
approve the increase in voting rights of TPG to 22.1%. The Preferred Stock is
not redeemable by the Company prior to the fifth anniversary of its original
issuance. Thereafter, subject to certain conditions, the Series A and Series B
Preferred Stock are redeemable at the option of the Company for an aggregate
redemption price of $245,000,000 and $105,000,000, respectively (in each case,
plus accrued and unpaid dividends), and are subject to mandatory redemption at
the same price on the tenth anniversary of their original issuance. The Series A
Warrants and the Series B Warrants expire on the earlier of the tenth
anniversary of their original issuance or redemption of the related series of
Preferred Stock. The Warrants are detachable from the Preferred Stock.
Simultaneously with the consummation of the Investment Agreement, the Company
issued $200,000,000 principal amount of 11% Senior Notes due May 15, 2005. The
Senior Notes are senior unsecured obligations of the Company and rank pari passu
in right of payment with all current and future senior indebtedness of the
Company. The Company's obligations under the Senior Notes will be effectively
subordinated to all existing and future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness and will be
structurally subordinated to all existing and future indebtedness, if any, of
the Company's subsidiaries. Interest is payable semi-annually on May 15 and
November 15 of each year commencing November 15, 1998. The Senior Notes will not
be redeemable at the Company's option prior to May 15, 2002.
At the same time, the Company entered into a Term Loan Agreement pursuant to
which the Company borrowed $150,000,000 in the form of a senior secured term
loan (the "Term Loan") with a final maturity in 2003 at which time all
outstanding amounts will be due and payable. Prior to the final maturity of the
Term Loan there are no scheduled principal payments. In certain circumstances,
the Term Loan provides for mandatory prepayments. The Term Loan bears interest
at a rate per annum equal to the administrative agent's reserve adjusted LIBO
rate plus 4.25%.
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Also simultaneously with the transactions described above, Norman C. Payson,
M.D., the Company's Chief Executive Officer, purchased 644,330 shares of Oxford
Common Stock for an aggregate purchase price of $10,000,000.
The aggregate proceeds of the above financings of $710,000,000 were utilized,
in part, to retire the Bridge Notes of $200,000,000, make capital contributions
to certain regulated subsidiaries and pay transaction fees and expenses
approximating $39,000,000 related to the financings. The remaining proceeds will
be available for capital contributions to regulated subsidiaries and for general
corporate purposes. The Company believes that the above described proceeds will
be sufficient to finance the capital needs referred to previously and to provide
additional capital for losses or contingencies in excess of the Company's
current expectations. However, there can be no assurance that such proceeds will
be sufficient to finance such capital needs and to provide additional capital
for losses or contingencies in excess of the Company's current expectations.
MARKET RISK DISCLOSURES
The Company's consolidated balance sheet as of June 30, 1998 includes a
significant amount of assets whose fair values are subject to market risk. Since
the substantial portion of the Company's investments are in fixed rate debt
securities, interest rate fluctuations represent the largest market risk factor
affecting the Company's consolidated financial position. Interest rate risk is
managed within a tight duration band, and credit risk is managed by investing in
U.S. government obligations and in corporate and municipal debt securities with
high average quality ratings and maintaining a diversified sector exposure
within the debt securities portfolio. A hypothetical immediate increase of 100
basis points in market interest rates would decrease the fair value of the
Company's investments in debt securities as of June 30, 1998 by approximately
$15.6 million, while a 200 basis points increase in rates would decrease the
value of such investments by approximately $31.1 million. A hypothetical
immediate decrease of 100 basis points in market interest rates would increase
the fair value of the Company's investments in debt securities as of June 30,
1998 by approximately $15.4 million, while a 200 basis points decrease in rates
would increase the value of such investments by approximately $31.2 million. The
Company's investment in equity securities as of June 30, 1998 was not
significant. Caution should be used in evaluating the Company's overall market
risk based on the above information since actual results could differ materially
because the information was developed using hypothetical assumptions.
YEAR 2000 DATE CONVERSION
The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and has
developed an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the Year 2000. This could result in system failure or miscalculations. The
Company is utilizing and will utilize both internal and external resources to
identify, correct or reprogram, and test the systems for Year 2000 compliance.
The Company is currently renovating and testing its computer systems and
anticipates being complete with such renovations and testing by the second
quarter of 1999.
The Company is communicating with certain material vendors to determine the
extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting Year 2000 compliance certifications or written
assurances from its material vendors, including certain software vendors,
landlords and suppliers. The effect of such vendors' noncompliance, if any, is
not reasonably estimable at this time.
The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities which regulate its business.
The Company is in compliance with such Year 2000 reporting requirements.
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The Company is in the process of modifying its computer systems to
accommodate the Year 2000. The Company currently expects these modifications to
be completed in a time frame to avoid any material adverse effect on operations.
The Company expects to incur associated expenses of approximately $15 million in
1998 and $5 million in 1999 to complete this effort. As of June 30, 1998, the
Company had incurred approximately $1.3 million of expenses in connection with
its Year 2000 compliance efforts. The Company has deferred other information
technology initiatives to concentrate on its Year 2000 compliance efforts but
the Company believes that such deferral is not reasonably likely to have a
material effect on the Company's financial condition or results of operations.
The Company's inability to complete Year 2000 modifications on a timely basis or
the inability of other companies with which the Company does business to
complete their Year 2000 modifications on a timely basis could adversely affect
the Company's operations. The Company has not developed a contingency plan in
the event compliance is not achieved, but intends to create such a plan during
the first quarter of 1999.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", including statements concerning
future results of operations or financial position, future health care costs and
administrative costs, future premium rates for commercial, Medicare and Medicaid
business, future physician network, future hospital utilization rates, future
medical-loss ratio levels, future claims payment and service performance and
other operations matters, the Company's information systems, proposed efforts to
control health care and administrative costs, future dispositions of certain
businesses and assets, future transfer of certain Medicaid risks, future
Medicare risk-sharing agreements with health care providers, the Company's
belief as to the temporary character and length of the suspension of marketing
and most enrollment of new members in the Company's Medicare plans, the
Company's belief as to its ability to develop and implement corrective actions
satisfactory to HCFA, the Company's belief as to its ability to implement the
Turnaround Plan and achieve its goals, the Company's beliefs as to the
sufficiency of its capital resources for future needs, government regulation and
the future of the health care industry, and the impact on the Company of recent
events, legal proceedings and regulatory investigations and examinations, and
other statements contained herein regarding matters that are not historical
facts, are forward-looking statements (as such term is defined in the Securities
Exchange Act of 1934, as amended). Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
below.
Net Losses; Turnaround Plan
The Company incurred net losses of $291 million in 1997 and $553 million in
the first six months of 1998 and expects to incur additional losses in 1998 and
1999, the extent of which cannot be predicted at this time. As a result of
losses at certain of its HMO and insurance subsidiaries in 1997 and 1998, the
Company has had to make capital contributions to certain of its HMO and
insurance subsidiaries and expects that additional capital contributions will be
required to be made by the Company in 1998 and 1999.
A significant portion of the loss incurred by the Company in the second
quarter of 1998 was associated with restructuring and unusual changes relating
to the Company's Turnaround Plan. These restructuring and unusual changes are
based on estimates of the anticipated costs to the Company of taking the actions
described in the Turnaround Plan, including disposition of certain businesses
and assets. There can be no assurance that these estimates correctly reflect the
ultimate costs which the Company will incur in implementing the Turnaround Plan.
The Company's ability to control net losses depends, to a large extent, on
the success of its Turnaround Plan, which includes focusing on core commercial
markets and disposing or restructuring of noncore businesses, reducing
administrative costs, reducing payments to physicians and hospitals, reducing
unnecessary utilization of hospital and other services, increasing commercial
group premiums and strengthening operations. There can be no assurance that the
Turnaround Plan will be implemented in the manner described herein, or, if
implemented, will be successful or that other efforts by the Company to control
net losses will be successful. Moreover, the Company cannot predict the impact
of adverse
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publicity, legal and regulatory proceedings or other future events on the
Company's operations and financial results, including ongoing financial losses.
Control Over and Predictability of Health Care Costs
Oxford's future results of operations depend, in part, on its ability to
predict and maintain effective control over health care costs (through, among
other things, appropriate benefit design, utilization review and case management
programs and risk-sharing arrangements with providers) while providing members
with quality health care. Factors such as utilization, new technologies and
health care practices, hospital costs, changes in demographics and trends,
selection biases, major epidemics, inability to establish acceptable
compensation arrangements with providers, operational and regulatory issues
which could delay, prevent or impede those arrangements, and numerous other
factors may affect Oxford's ability to control such costs. There can be no
assurance that Oxford will be successful in mitigating the effect of any or all
of the above-listed or other factors.
Medical costs payable in Oxford's financial statements include reserves for
incurred but not reported claims ("IBNR") which are estimated by Oxford. Oxford
estimates the amount of such reserves using standard actuarial methodologies
based upon historical data including the average interval between the date
services are rendered and the date claims are paid and between the date services
are rendered and the date claims are received by the Company, expected medical
cost inflation, seasonality patterns and changes in membership. The estimates
for submitted claims and IBNR are made on an accrual basis and adjusted in
future periods as required. Oxford believes that its reserves for IBNR are
adequate in order to satisfy its ultimate claim liability. However, Oxford's
rapid growth, delays in paying claims, paying or denying claims in error and
changing speed of payment affect the Company's ability to rely on historical
information in making IBNR reserve estimates. There can be no assurances as to
the ultimate accuracy of such estimates. Any adjustments to such estimates could
adversely affect Oxford's results of operations in future periods.
Administrative Costs
A key element of the Company's Turnaround Plan is a reduction in
administrative expenses. In 1998, however, the Company expects that results will
continue to be adversely affected by high administrative costs associated with
the Company's efforts to strengthen its operations. No assurance can be given
that the Company will not continue to experience significant service and systems
infrastructure problems in 1998 and beyond, which would have a significant
impact on administrative costs.
Government Regulation; Reimbursement
The healthcare industry in general, and HMOs and health insurance companies
in particular, are subject to substantial federal and state government
regulation, including, but not limited to, regulation relating to cash reserves,
minimum net worth, licensing requirements, approval of policy language and
benefits, mandatory products and benefits, provider compensation arrangements,
member disclosure, premium rates and periodic examinations by state and federal
agencies. State regulations require the Company's HMO and insurance subsidiaries
to maintain restricted cash or available cash reserves and restrict their
ability to make dividend payments, loans or other transfers of cash to the
Company. In addition, the ability of Oxford's HMO and insurance subsidiaries to
declare and pay dividends to Oxford is limited by state regulations. In recent
years, significant federal and state legislation affecting the Company's
business was enacted. For example, New York State implemented a requirement that
health plans pay interest on delayed payment of claims at a rate of 12% per
annum, effective January 1998, and that managed care members have a right to an
external appeal of certain final adverse determinations, effective July 1, 1999.
In addition, the Quality Health Care Accountability and Protection Act was
enacted in Pennsylvania and is effective January 1, 1999. Most of its
requirements are already law in our core states of New York, Connecticut and New
Jersey. The "Patient Protection Act of 1998" was passed by the U.S. House of
Representatives but not by the Senate. Many of its features are also already in
law in the Company's core states. State and federal government authorities are
continually considering changes to laws and regulations applicable to Oxford and
are currently considering regulations relating to mandatory benefits, provider
compensation, health plan liability to members who fail to receive appropriate
care, disclosure and
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composition of physician networks which would apply to the Company. In addition,
Congress is considering significant changes to Medicare and Medicaid legislation
and has in the past considered, and may in the future consider, proposals
relating to healthcare reform. Changes in federal and state laws or regulations,
if enacted, could increase healthcare costs and administrative expenses and
reductions could be made in Medicare and Medicaid reimbursement rates. Oxford is
unable to predict the ultimate impact on the Company of recently enacted and
future legislation and regulations but such legislation and regulations,
particularly in New York where much of the Company's business is located, could
have a material adverse impact on the Company's operations, financial condition
and prospects.
Premiums for Oxford's Medicare and Medicaid programs are determined through
formulas established by HCFA for Oxford's Medicare contracts and by state
government agencies in the case of Medicaid. Medicaid premiums in New York were
significantly reduced in 1996, and federal legislation enacted in 1997 provides
for future adjustment of Medicare reimbursement by HCFA which could reduce the
reimbursement received by the Company. Premium reductions, or premium rate
increases in a particular region that are lower than the rate of increase in
healthcare service expenses for Oxford's Medicare or Medicaid members in such
region, could adversely affect Oxford's results of operations. Risk transfer
provider agreements entered into by Oxford could be adversely affected by
regulatory actions or by the failure of the providers to comply with the terms
of such agreements. Such agreements could also have an adverse affect on the
Company's membership or its relationship with its other providers. Oxford's
Medicare programs are subject to certain risks relative to commercial programs,
such as higher comparative medical costs and higher levels of utilization.
Oxford's Medicare and Medicaid programs are subject to higher marketing and
advertising costs associated with selling to individuals rather than to groups.
Management of Growth
Over the past five years the Company has experienced rapid growth in its
business and in its staff and the Company will be affected by its ability to
manage such growth effectively, including its ability to continue to develop
processes and systems to support its growing operations. In September 1996 the
Company converted a significant part of its business operations to a new
computer operating system. Unanticipated software and hardware problems arising
in connection with the conversion resulted in significant delays in the
Company's claims payments and group and individual billing and adversely
affected claims payment and billing. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The Company does not intend
to promote growth at the level of prior years because the Company's priority in
1998 will be to strengthen its service and systems infrastructure. However, no
assurance can be given that the Company will not continue to experience
significant service and systems infrastructure problems in 1998 and beyond.
Management of Information Systems
There can be no assurance that the Company will be successful in mitigating
the existing system problems that have resulted in payment delays and claims
processing errors. Moreover, operating and other issues can lead to data
problems that affect performance of important functions, including claims
payment and group and individual billing. There can also be no assurance that
the process of improving existing systems will not be delayed or that additional
systems issues will not arise in the future.
Recent Events and Related Publicity
Recent events at the Company in the last several months have resulted in
adverse publicity. Such events and related publicity may adversely affect the
Company's provider network and future enrollment in the Company's health benefit
plans.
Collectibility of Advances
As part of its attempts to ameliorate delays in processing claims for
payment, as of June 30, 1998, the Company had advanced, net of allowances and
repayments, $157,256,000 to providers pending the Company's disposition of
claims for payment. The NYSID is requiring the Company to obtain written
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acknowledgments of such advances from recipients of advances. If the Company is
unable to receive written acknowledgments there can be no assurance that the
insurance regulators will continue to recognize such advances as admissible
assets for regulatory purposes. If the insurance regulators do not recognize
such advances as admissible assets, the capital of certain of the Company's
regulated subsidiaries could be impaired. The Company may have to make
additional capital contributions to compensate for any impairment. Although the
Company believes that the advances will be repaid in full, there can be no
assurance that the advances will be repaid in full.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk Disclosures."
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Class Action Litigation
As previously reported by the Company, following the October 27, 1997 decline
in the price per share of the Company's common stock, purported securities class
action lawsuits were filed on October 28, 29, and 30, 1997 against the Company
and certain of its officers in the United States District Courts for the Eastern
District of New York, the Southern District of New York and the District of
Connecticut. Since that time, plaintiffs have filed additional securities class
actions (see below) against Oxford and certain of its directors and officers in
the United States District Courts for the Southern District of New York, the
Eastern District of New York, the Eastern District of Arkansas, and the District
of Connecticut.
The complaints in these lawsuits purport to be class actions on behalf of
purchasers of Oxford's securities during varying periods beginning on February
6, 1996 through December 9, 1997. The complaints generally allege that
defendants violated Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") and Rule 10b-5 thereunder by making false and misleading
statements and failing to disclose certain allegedly material information
regarding changes in Oxford's computer system, and the Company's membership
enrollment, revenues, medical expenses, and ability to collect on its accounts
receivable. Certain of the complaints also assert claims against the individual
defendants alleging violations of Section 20(a) of the Exchange Act and claims
against all of the defendants for negligent misrepresentation. The complaints
also allege that certain of the individual defendants disposed of Oxford's
common stock while the price of that stock was artificially inflated by
allegedly false and misleading statements and omissions. The complaints seek
unspecified damages, attorneys' and experts' fees and costs, and such other
relief as the court deems proper.
The complaints filed in the United States District Court for the Southern
District of New York are Metro Services, Inc., et al. v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 08023 (filed Oct. 29, 1997); Worldco, LLC, et al.
v. Oxford Health Plans, Inc., et al., No. 97 Civ. 8494 (filed Nov. 14, 1997);
Jerovsek, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ. 8882
(filed Dec. 2, 1997); North River Trading Co., LLC v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 9372 (filed Dec. 22, 1997); National Industry
Pension Fund v. Oxford Health Plans, Inc., et al., No. 97 Civ. 9566 (filed
Dec. 31, 1997); Scheinfeld v. Oxford Health Plans, Inc., et al., No. 98 Civ.
1399 (originally filed Dec. 31, 1997 in the United States District Court for
the District of Connecticut and transferred); Paskowitz v. Oxford Health
Plans, Inc., et al., No. 98 Civ. 1991 (filed March 19, 1998); and Sapirstein
v. Oxford Health Plans, Inc., et al., No. 98 Civ. 4137 (filed June 11, 1998).
The complaints filed in the United States District Court for the Eastern
District of New York are Koenig v. Oxford Health Plans, et al., No. 97 Civ.
6188 (filed Oct. 29, 1997); Wolper v. Oxford Health Plans, Inc., et al., No.
97 Civ. 6299 (filed Oct. 29, 1997); Tawil v. Oxford Health Plans, Inc., et
al., No. 97 Civ. 7289 (filed Dec. 11, 1997); Winters, et al. v. Oxford Health
Plans, Inc., et al., No. 97 Civ. 7449 (filed Dec. 18, 1997); and Krim v.
Oxford Health Plans, Inc., et al., No. 98 Civ. 4032 (filed June 5, 1998).
The complaints filed in the United States District Court for the District
of Connecticut are Heller v. Oxford Health Plans, Inc., et al., No. 397 CV
02295 (filed Oct. 28, 1997); Fanning v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02300 (filed Oct. 29, 1997); Lowrie, IRA v. Oxford Health Plans,
Inc., et al., No. 397 CV 02299 (filed Oct. 29, 1997); Barton v. Oxford Health
Plans, Inc., et al., No. 397 CV 02306 (filed Oct. 30, 1997); Sager v. Oxford
Health Plans, Inc., et al., No. 397 CV 02310 (filed Oct. 30, 1997); Cohen v.
Oxford Health Plans, Inc., et al., No. 397 CV 02316 (filed Oct. 31, 1997);
Katzman v. Oxford Health Plans, Inc., et al., No. 397 CV 02317 (filed Oct.
31, 1997); Shapiro v. Oxford Health Plans, Inc., et al., No. 397 CV 02324
(filed Oct. 31, 1997); Willis v. Oxford Health Plans, Inc., et al., No. 397
CV 02326 (filed Oct. 31, 1997); Saura v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02329 (filed Nov. 3, 1997); Selig v. Oxford Health Plans, Inc., et
al., No. 397 CV 02337 (filed Nov. 4, 1997); Brandes v. Oxford Health Plans,
Inc., et al., No. 397 CV 02343 (filed Nov. 4, 1997); Ross v. Oxford Health
Plans, Inc., et al., No. 397 CV 02344 (filed Nov. 4, 1997); Sole v. Oxford
Health Plans, Inc., et al., No. 397 CV 02345 (filed Nov. 4, 1997); Henricks
v. Wiggins, et al., No. 397 CV 02346 (filed Nov. 4 1997); Williams v. Oxford
Health Plans, Inc., et al., No. 397
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CV 02348 (filed Nov. 5, 1997); Direct Marketing Day in New York, Inc. v. Oxford
Health Plans, Inc., et al., No. 397 CV 02349 (filed Nov. 5, 1997); Howard Vogel
Retirement Plans, Inc., et al. v. Oxford Health Plans, Inc., et al., No. 397 CV
02325 (filed Oct. 31, 1997 and amended Dec. 17, 1997); Serbin v. Oxford Health
Plans, Inc., et al., No. 397 CV 02426 (filed Nov. 18, 1997); Hoffman v. Oxford
Health Plans, Inc., et al., No. 397 CV 02458 (filed Nov. 24, 1997); Armstrong v.
Oxford Health Plans, Inc., et al., No. 397 CV 02470 (filed Nov. 25, 1997);
Roeder, et al. v. Oxford Health Plans, Inc., et al., No. 397 CV 02496 (filed
Nov. 26, 1997); Braun v. Oxford Health Plans, Inc., et al., No. 397 CV 02510
(filed Dec. 1, 1997); Blauvelt, et al. v. Oxford Health Plans, Inc., et al., No.
397 CV 02512 (filed Dec. 2, 1997); Hobler et al. v. Oxford Health Plans, Inc.,
et al., No. 397 CV 02535 (filed Dec. 3, 1997); Bergman v. Oxford Health Plans,
Inc., et al., No. 397 CV 02564 (filed Dec. 8, 1997); Pasternak v. Oxford Health
Plans, Inc., et al., No. 397 CV 02567 (filed Dec. 8, 1997); Perkins Partners I,
Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02573 (filed Dec. 9,
1997); N.I.D.D., Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02584
(filed Dec. 9, 1997); Burch v. Oxford Health Plans, Inc., et al., No. 397 CV
02585 (filed Dec. 9, 1997); Mark v. Oxford Health Plans, Inc., et al., No. 397
CV 02594 (filed Dec. 11, 1997); Ross, et al. v. Oxford Health Plans, Inc., et
al., No. 397 CV 02613 (filed Dec. 12, 1997); Lerchbacker v. Oxford Health Plans,
Inc., et al., No. 397 CV 02670 (filed Dec. 22, 1997); State Board of
Administration of Florida v. Oxford Health Plans, Inc., et al., No. 397 CV 02709
(filed Dec. 29, 1997) (the complaint, although purportedly not brought on behalf
of a class of shareholders, invites similarly situated persons to join as
plaintiffs); and Ceisler v. Oxford Health Plans, Inc., et al., No. 397 CV 02729
(filed Dec. 31, 1997).
The complaint filed in the United States District Court for the Eastern
District of Arkansas is Rudish v. Oxford Health Plans, Inc., et al., No.
LR-C-97-1053 (filed Dec. 29, 1997).
The Company anticipates that additional class action complaints containing
similar allegations may be filed in the future.
On January 6, 1998, certain plaintiffs filed an application with the Judicial
Panel on Multidistrict Litigation ("JPML") to transfer most of these actions for
consolidated or coordinated pretrial proceedings before Judge Charles L. Brieant
of the United States District Court for the Southern District of New York. The
Oxford defendants subsequently filed a similar application with the JPML seeking
the transfer of all of these actions for consolidated or coordinated pretrial
proceedings, together with the shareholder derivative actions discussed below,
before Judge Brieant. On April 28, 1998, the JPML entered an order transferring
substantially all of these actions for consolidated or coordinated pretrial
proceedings, together with the federal shareholder derivative actions discussed
below, before Judge Brieant.
On July 15, 1998, Judge Brieant appointed the Public Employees Retirement
Associates of Colorado ("ColPERA"), three individual shareholders (the "Vogel
plaintiffs") and The PBHG Funds, Inc. ("PBHG"), as co-lead plaintiffs and
ColPERA's counsel (Grant & Eisenhofer), the Vogel plaintiffs' counsel (Milberg
Weiss Hynes Lerach & Bershad), and PBHG's counsel (Chitwood & Harley), as
co-lead counsel. On July 31, 1998, Judge Brieant entered orders memorializing
the July 15, 1998 memorandum decision and requiring the co-lead plaintiffs to
file a consolidated amended complaint for the purported class actions by
September 18, 1998.
The outcomes of these actions cannot be predicted at this time, although the
Company believes that it and the individual defendants have substantial defenses
to the claims asserted and intends to defend the actions vigorously.
Shareholder Derivative Litigation
As previously reported by the Company, in December 1997, purported
shareholder derivative actions were filed on behalf of the Company in
Connecticut Superior Court against the Company's directors and certain of its
officers (and the Company itself as a nominal defendant). Several additional
purported shareholder derivative actions (see below) subsequently were filed on
behalf of Oxford in Connecticut Superior Court and in the United States District
Courts for the Southern District of New York and the District of Connecticut
against the Company's directors and certain of its officers (and the Company
itself as a nominal defendant).
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These derivative complaints generally allege that defendants breached their
fiduciary obligations to the Company, mismanaged the Company and wasted its
assets in planning and implementing certain changes to Oxford's computer system,
by making misrepresentations concerning the status of those changes in Oxford's
computer system, by failing to design and to implement adequate financial
controls and information systems for the Company, and by making
misrepresentations concerning Oxford's membership enrollment, revenues, profits
and medical costs in Oxford's financial statements and other public
representations. The complaints further allege that certain of the defendants
breached their fiduciary obligations to the Company by disposing of Oxford
common stock while the price of that common stock was artificially inflated by
their alleged misstatements and omissions. The complaints seek unspecified
damages, attorneys' and experts' fees and costs and such other relief as the
court deems proper. None of the plaintiffs has made a demand on the Company's
Board of Directors that Oxford pursue the causes of action alleged in the
complaint. Each complaint alleges that plaintiff's duty to make such a demand
was excused by the directors' alleged conflict of interest with respect to the
matters alleged therein.
The complaints filed in Connecticut Superior Court are Reich v. Wiggins, et
al., No. CV 97-485145 (filed on or about Dec. 12, 1997); Gorelkin v. Wiggins,
et al., No. CV-98-0163665 S (filed on or about Dec. 24, 1997); and Kellmer v.
Wiggins, et al., No. CV 98-0163664 S HAS (filed on or about Jan. 28, 1998).
The complaints filed in the United States District Court for the Southern
District of New York are Roth v. Wiggins, et al., No. 98 Civ. 0153 (filed
Jan. 12, 1998); Plevy v. Wiggins, et al., No. 98 Civ. 0165 (filed Jan. 12,
1998); Mosson v. Wiggins, et al., No. 98 Civ. 0219 (filed Jan. 13, 1998);
Boyd, et al. v. Wiggins, et al., No. 98 Civ. 0277 (filed Jan. 16, 1998); and
Glick v. Wiggins, et al., No. 98 Civ. 0345 (filed Jan. 21, 1998).
The complaints filed in the United States District Court for the District
of Connecticut are Mosson v. Wiggins, et al., No. 397 CV 02651 (filed Dec.
22, 1997), and Fisher, et al. v. Wiggins, et al., No. 397 CV 02742 (filed
Dec. 31, 1997).
The Company anticipates that additional purported shareholder derivative
actions containing similar allegations may be filed. On March 16, 1998, Oxford
and certain of the individual defendants filed a motion to dismiss or,
alternatively, to stay two of the purported derivative actions pending in
Connecticut Superior Court. On March 23, 1998, Oxford and certain of the
individual defendants filed a motion to dismiss or, alternatively, to stay the
third purported derivative action pending in Connecticut Superior Court. Since
then, the parties to the state derivative actions have stipulated, under certain
conditions, to hold all pretrial proceedings in those actions in abeyance during
the pretrial proceedings in the federal derivative actions, and to allow the
state derivative plaintiffs to participate to a limited extent in the pretrial
proceedings in the federal derivative actions. Stipulations memorializing this
agreement have been entered in all three actions pending in Connecticut Superior
Court.
In addition, on January 27, 1998, defendants filed an application with the
JPML to transfer the federal derivative actions for consolidated or coordinated
pretrial proceedings before Judge Charles L. Brieant of the Southern District of
New York. On April 28, 1998, the JPML entered an order transferring all of these
actions for consolidated or coordinated pretrial proceedings, together with the
securities class actions discussed above, before Judge Brieant.
The parties to the federal derivative actions have agreed to suspend
discovery in those actions until the filing of a consolidate amended complaint
in those actions and during the pendency of any motion to dismiss or to stay the
federal derivative actions or the securities class actions. A stipulation
memorializing this agreement, consolidating the federal derivative actions,
appointing lead counsel for the federal derivative plaintiffs, and requiring the
federal derivative plaintiffs to file a consolidated amended complaint on the
date a consolidated amended complaint is filed in the class actions (which will
be by September 18, 1998), was entered and so ordered by Judge Brieant on June
26, 1998.
Although the outcome of the federal and state actions cannot be predicted at
this time, the Company believes that the defendants have substantial defenses to
the claims asserted in the complaints.
27
<PAGE> 28
State Insurance Departments
On August 10, 1998, the New York State Insurance Department ("NYSID")
completed its triennial examination and market conduct examination of Oxford's
New York HMO and insurance subsidiaries. In the Reports on Examination (the
"Reports") issued by the NYSID, the NYSID, based on information available
through July, 1998, determined that certain assets on the Company's New York
subsidiaries' December 31, 1997 balance sheets should not be admitted for
statutory reporting purposes and NYSID actuaries recorded additional reserves
totaling approximately $81.3 million for both subsidiaries on the balance sheet
as determined by the examiners. The Company contributed $152 million to the
capital of its New York HMO and insurance subsidiaries in satisfaction of the
issues raised in the Reports relating to the subsidiaries' financial statements,
and maintaining such subsidiaries' compliance with statutory capital
requirements as of June 30, 1998. The Reports also made certain recommendations
relating to financial record-keeping, settlement of intercompany accounts and
compliance with certain NYSID regulations. The Company has agreed to address the
recommendations in the Reports. As previously reported, in December 1997, the
Company made additions of $164 million to the reserves of its New York
subsidiaries at the direction of the NYSID. The NYSID issued a Market Conduct
Report identifying several alleged violations of state law and NYSID
regulations. On December 22, 1997, the NYSID and Oxford entered into a
stipulation under which Oxford promised to take certain corrective measures and
to pay restitution and paid a $3 million fine. The stipulation provides that the
NYSID will not impose any other fines for Oxford's conduct up to November 1,
1997. The NYSID has directed the Company's New York subsidiaries to obtain notes
or other written evidence of agreements to repay from each provider who has
received an advance. The NYSID has continued to review market conduct issues,
including, among others, those relating to claims processing. The NYSID has also
raised certain issues relating to the Company's methodology for determining
premium rates for the Company's large group business. The Company has agreed to
take corrective action with respect to certain of these market conduct issues,
but additional corrective action may be required and such actions, particularly
if they involve significant changes to rating methodologies, could adversely
affect the Company's results of operations. At this time, the Company cannot
predict the outcome of such continuing review.
The Company is also subject to ongoing examinations with respect to financial
condition and market conduct for its HMO and insurance subsidiaries in other
states where it conducts business. The outcome of these examinations cannot be
predicted at this time.
New York State Attorney General
As previously reported, on November 6, 1997, the New York State Attorney
General served a subpoena duces tecum on the Company requiring the production of
various documents, records and materials "in regard to matters relating to the
practices of the Company and others in the offering, issuance, sale, promotion,
negotiation, advertisement, distribution or purchase of securities in or from
the State of New York." Since then, Oxford has produced a substantial number of
documents in response to the subpoena, and expects to produce additional
documents. In addition, Oxford has provided testimony from some of its present
and former directors and officers.
As previously reported, the Company entered into an Assurance of
Discontinuance, effective July 25, 1997, with the Attorney General under which
the Company agreed to pay interest at 9% per annum on provider clean claims not
paid by Oxford within 30 days on its New York commercial and Medicaid lines of
business until January 22, 1998. Since that time, the Company's obligations to
make prompt payments have been governed by applicable New York law. See "Recent
Regulatory Developments". In addition, contemporaneously, the Company agreed to
pay varying interest rates to providers in Connecticut, New Jersey, New
Hampshire and Pennsylvania.
The Company has subsequently responded to a number of inquiries by the
Attorney General with respect to Oxford's compliance with the Assurance of
Discontinuance. On February 2, 1998, the Attorney General served a subpoena
duces tecum on Oxford seeking production of certain documents relating to
complaints from providers and subscribers regarding nonpayment or untimely
payment of claims, interest paid under the Assurance, accounts payable, provider
claims processing, and suspended accounts
28
<PAGE> 29
payable. Oxford has produced a number of documents in response to the subpoena,
and expects to produce additional documents.
The Company intends to cooperate fully with the Attorney General's inquiries,
the outcome of which cannot be predicted at this time.
Securities and Exchange Commission
As previously reported, the Company received an informal request on December
9, 1997 from the Securities and Exchange Commission's Northeast Regional Office
seeking production of certain documents and information concerning a number of
subjects, including disclosures made in the Company's October 27, 1997 press
release announcing a loss in the third quarter. Oxford has produced documents
and has provided information in response to this informal request.
On January 30, 1998, pursuant to a formal order, the Commission served a
subpoena duces tecum on Oxford for documents concerning a number of subjects,
including internal and external audits, uncollectible premium receivables,
timing of payments to vendors, doctors and hospitals, late payments to medical
providers, computer system problems, agreements with the New York State Attorney
General, and policies and procedures relating to the sale of Oxford securities
by officers and directors. Oxford also has provided testimony from some of its
present and former directors and officers. Oxford has produced documents in
response to this subpoena, and intends to cooperate fully with the Commission.
On April 23, 1998, pursuant to a formal order, the Commission served a second
subpoena duces tecum on Oxford for documents concerning, among other things,
advances to medical providers, additions to reserves for unpaid claims, and
adjustments related to terminations of group and individual members and for
non-paying group and individual members. Oxford intends to cooperate fully with
the Commission and produce documents in response to this subpoena.
Oxford cannot predict the outcome of the Commission's investigation at this
time.
Health Care Financing Administration
From February 9, 1998 through February 13, 1998, the Health Care Financing
Administration ("HCFA") conducted an enhanced site visit at Oxford to assess
Oxford's compliance with federal regulatory requirements for HMO eligibility and
Oxford's compliance with its obligations under its contract with HCFA. During
the visit, HCFA monitored, among other things, Oxford's administrative and
managerial arrangements, Oxford's quality assurance program, Oxford's health
services delivery program, and all aspects of Oxford's implementation of the
Medicare risk program. On May 20, 1998 the Company received a final report from
HCFA and on June 10, 1998, the Company voluntarily suspended marketing and most
enrollment of new members under its Medicare programs in New York, New Jersey,
Connecticut and Pennsylvania. This action was taken by the Company in order to
provide the Company with an opportunity to strengthen its operations and
institute certain corrective actions required by HCFA as a result of its visit.
This action, however, does not apply to potential enrollees of the Company's
Medicare group accounts. The Company believes that the suspension will be
temporary, lasting several months, and service to existing members will not be
affected.
The Company has agreed with HCFA to develop and implement a plan of
corrective actions relating to deficiencies in the Company's compliance with
operational standards contained in its contracts with HCFA. Operational
deficiencies noted by HCFA include claims payment turnaround times, interest
payments on delayed claims, enrollment and disenrollment procedures and
documentation and member appeal procedures and notifications. The Company's
ability to resume marketing and enrollment, and to be granted new
Medicare+Choice contracts for next year, will be subject to HCFA's satisfaction
with the progress made by the Company in implementing the corrective actions
agreed upon.
The Company has worked cooperatively with HCFA to address the concerns it has
raised and believes it will be able to implement corrective actions satisfactory
to HCFA; however, there can be no assurance that the Company will ultimately
succeed in resuming marketing and enrollment or in obtaining new
29
<PAGE> 30
contracts for 1999. A long-term suspension of marketing and enrollment would
adversely affect revenues since member disenrollment would result in a
continuing reduction in membership. A failure to obtain a new contract for 1999
would mean that the Company would not participate in the Medicare managed care
program, with a corresponding reduction in revenues (the Company experienced
operating losses in Medicare in 1997 and the first half of 1998). In that event,
the Company would need to reduce overall administrative costs proportionately.
Non-participation by the Company in the Medicare managed care program could also
adversely affect the Company's ability to negotiate favorable provider contracts
for its commercial business since the Company would represent significantly less
revenue potential for many providers.
Arbitration Proceedings
On February 3, 1998, the New York County Medical Society ("NYCMS") initiated
an arbitration proceeding before the American Arbitration Association ("AAA") in
New York against Oxford alleging breach of the written agreements between Oxford
and some NYCMS physician members and failure to adopt standards and practices
consistent with the intent of those agreements. The notice of intention to
arbitrate was subsequently amended to join thirteen additional New York medical
associations as co-claimants. NYCMS and the other claimants seek declaratory and
injunctive relief requiring various changes to Oxford's internal practices and
policies, including practices in the processing and payment of claims submitted
by physicians. Oxford has petitioned the New York State Supreme Court for a
permanent stay of this proceeding; the outcome of this motion cannot be
predicted at this time. Also, some individual physicians claiming that payments
under their contracts with Oxford were delayed have announced their intention to
seek arbitration. One such arbitration proceeding has been commenced by
individual physicians.
On March 30, 1998, Oxford received a demand for arbitration from two
physicians purporting to commence a class action arbitration before the AAA in
Connecticut against Oxford alleging breach of contract and violation of the
Connecticut Unfair Insurance Practices Act. The outcome of the arbitration
cannot be predicted at this time, although the Company believes that it has
substantial defenses to the claims asserted and intends to defend the
arbitration vigorously.
Jeffrey S. Oppenheim, M.D., et al. v. Oxford Health Plans, Inc., et al.,
Index No. 97/109088
On May 19, 1997, Oxford was served with a purported "Class Action Complaint"
filed in the New York State Supreme Court, New York County by two physicians and
a medical association of five physicians. Plaintiffs alleged that Oxford (i)
failed to make timely payments to plaintiffs for claims submitted for health
care services and (ii) improperly withheld from plaintiffs a portion of
plaintiffs' agreed compensation. Plaintiffs alleged causes of action for common
law fraud and deceit, negligent misrepresentation, breach of fiduciary duty,
breach of implied covenants and breach of contract. The complaint sought an
award of an unspecified amount of compensatory and exemplary damages, an
accounting, and equitable relief.
On July 24, 1997, Oxford and plaintiffs reached a settlement in principle of
the class claims wherein Oxford agreed to pay, from September 1, 1997 to January
1, 2000, interest at certain specified rates to physicians who did not receive
payments from Oxford within certain specified time periods after submitting
"clean claims" (a term that was to be applied in a manner consistent with
certain industry guidelines). Moreover, Oxford agreed to provide to plaintiffs'
counsel, on a confidential basis, certain financial information that Oxford
believed would demonstrate that Oxford acted within its contractual rights in
making decisions on payments withheld from plaintiffs and members of the alleged
class. The settlement in principle provides that, if plaintiffs' counsel
reasonably does not agree with Oxford's belief in this regard, plaintiffs retain
the right to proceed individually (but not as a class) against Oxford by way of
arbitration. Oxford has supplied financial information to plaintiffs' counsel
and has exchanged draft settlement papers with plaintiffs' counsel. The parties
have not yet submitted final settlement papers to the Court.
Other
On May 18, 1998 a purported "Class Action Complaint" was brought against
Oxford and other un-named defendant plan administrators filed in the United
States District Court for the Eastern District of New
30
<PAGE> 31
York by four plaintiffs who claim to be beneficiaries of defendants' health
insurance plans seeking declaratory and other relief from defendants for alleged
wrongful denial of insurance coverage for the drug Viagra.
In the ordinary course of its business, the Company is subject to claims and
legal actions by members in connection with benefit coverage determinations and
alleged acts by network providers and by health care providers and others.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See information contained in note 7 of "Notes to Condensed Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 5. OTHER INFORMATION
STATUS OF INFORMATION SYSTEMS
In September 1996, the Company converted a significant part of its business
operations to a new computer operating system developed at Oxford. From
September 1996, most business functions at the Company were operated on the new
system, with the exception of the processing of claims, which continued to
operate on the previous system. Since the conversion, the Company must operate
both systems and reconcile the two systems on an ongoing basis by a process
known as "backbridging."
Unanticipated software and hardware problems arising in connection with the
conversion resulted in significant delays in the Company's claims payments and
group and individual billing and adversely affected claims payment and billing.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company implemented a number of systems and operational
improvements during 1996 and 1997 which had the effect of improving claims
turnaround times, and reducing claims backlogs and claims and billing errors.
However, the backbridging process continues to create issues relating to
transfer of data, which continues to cause delays for certain claims, and there
have been delays in delivering all needed functionality under the new system.
The Company is continuing to seek improvements in the process referred to above
and to add needed functionality.
The Company has undertaken a thorough review of its information systems needs
and capabilities. As a result of this review, the Company has decided to
continue operations on its current claims processing systems and continue to
work on requisite modifications and enhancements.
With the recent arrival of Marvin P. Rich as Chief Administrative Officer and
Thomas Beauchamp as Vice President of Information Systems, the Company continues
to review its long-term information system strategy. The Company's resources are
currently focused on (i) the Year 2000, (ii) making requisite modifications and
enhancements to the existing information systems and (iii) establishing improved
performance management information.
There can be no assurance that the Company will be successful in mitigating
the existing system problems that have resulted in payment delays and claims
processing errors. Moreover, operating and other issues can lead to data
problems that affect performance of important functions, including claims
payment and group and individual billing. There can also be no assurance that
the process of improving existing systems will not be delayed or that additional
systems issues will not arise in the future.
For information as to the "Year 2000" date conversion, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "- Year 2000 Date Conversion".
31
<PAGE> 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Document
10(a) Amendment, dated June 26, 1998, to Employment
Agreement between the Registrant and William M.
Sullivan
10(b) Amendment, dated June 23, 1998, to Employment
Agreement between the Registrant and Jeffery H. Boyd
10(c) Employment Agreement, dated as of June 9, 1998,
between the Registrant and Yon Y. Jorden
10(d) Employment Agreement, dated as of April 1, 1998,
between the Registrant and Alan Muney, M.D., M.H.A.
(b) Reports on Form 8-K
In a report on Form 8-K dated April 27, 1998, and filed April 27,
1998, the Company reported, under Item 5. "Other Events," additions
to its senior management.
In a report on Form 8-K dated April 30, 1998, and filed April 30,
1998, the Company reported, under Item 5. "Other Events," its first
quarter 1998 earnings press release.
In a report on Form 8-K dated May 18, 1998 and filed May 18, 1998,
the Company reported under Item 5. "Other Events," the restatement
of the Company's March 31, 1998 balance sheet.
In a report filed on Form 8-K dated June 2, 1998 and filed June 9,
1998, the Company reported under Item 4. "Changes in Registrant's
Certifying Accountant," the dismissal of KPMG Peat Marwick LLP as
the independent accountants of the Company and the appointment of
Ernst & Young LLP as the independent accountants of the Company
effective June 2, 1998.
In a report on Form 8-K dated June 9, 1998 and filed June 10, 1998,
the Company reported under Item 5. "Other Events," the appointment
of Yon Y. Jorden as the Company's Chief Financial Officer.
In a report on Form 8-K dated June 10, 1998 and filed June 11, 1998,
the Company reported under Item 5. "Other Events," the Company's
voluntary suspension of marketing and most enrollment of new members
under its Oxford Medicare Advantage Plans in New York, New Jersey,
Connecticut and Pennsylvania.
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 thereunto duly authorized.
OXFORD HEALTH PLANS, INC.
------------------------------------
(REGISTRANT)
August 13, 1998 /s/ NORMAN C. PAYSON, M.D.
- -------------------------------- ------------------------------------
DATE NORMAN C. PAYSON, M.D.,
CHIEF EXECUTIVE OFFICER
August 13, 1998 /s/ YON Y. JORDEN
- -------------------------------- ------------------------------------
DATE YON Y. JORDEN,
CHIEF FINANCIAL OFFICER
32
<PAGE> 33
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
10(a) Amendment, dated June 26, 1998, to Employment Agreement
between the Registrant and William M. Sullivan
10(b) Amendment, dated June 23, 1998, to Employment Agreement
between the Registrant and Jeffery H. Boyd
10(c) Employment Agreement, dated as of June 9, 1998, between the
Registrant and Yon Y. Jorden
10(d) Employment Agreement, dated as of April 1, 1998, between the
Registrant and Alan Muney, M.D., M.H.A.
</TABLE>
33
<PAGE> 1
June 26, 1998
Bill Sullivan
10 Tokeneke Trail
Darien, CT 06820
Dear Bill:
This letter agreement (the "Agreement") will confirm our decision regarding
certain additional compensation arrangements with Oxford Health Plans, Inc. (the
"Corporation") and clarify your roles and responsibilities in connection with
your continued employment with the Corporation.
On March 30, 1998, the Corporation granted you 200,000 options to acquire common
stock of the Corporation ("Options"), and subject to the approval of certain
amendments to the Corporation's 1991 Stock Option Plan (the "Plan") by the
Corporation's stockholders at the Corporation's 1998 Annual Meeting (the
"Meeting"), an additional 100,000 Options to be granted on the date of the
Meeting, in each case under the terms and conditions of the Plan. In the event
that the Corporation's stockholders fail to approve such Amendments, the
Corporation shall make a mutually acceptable alternative compensation
arrangement, providing comparable economic value to you.
Upon your execution of this Agreement, the Corporation will provide you with a
loan of $750,000, bearing the lowest interest permitted by federal law to avoid
the imputation of income; provided, that the principal and interest of such loan
will be forgiven if you remain employed with the Corporation through March 1,
1999; provided, further, that the full amount of the outstanding principal and
interest shall be due and payable in full on your employment termination date,
in the event your employment with the Corporation is terminated by the
Corporation for Cause or by you without Good Reason (each as defined in your
employment agreement with the Corporation, dated as of August 14, 1996, and
amended as of February 23, 1998, (the "Employment Agreement")) anytime prior to
March 1, 1999. However, should your employment be terminated without Cause by
the Corporation, or if you should die prior to March 1, 1999, the repayment of
the $750,000 loan with interest will be waived.
Your annual compensation and bonus under the Employment Agreement will be as
recommended by me and approved by the Compensation Committee of the Board of
Directors. In addition, during the Term of your employment (as defined in the
<PAGE> 2
Bill Sullivan Page 2
Employment Agreement) and thereafter, the Corporation shall continue to provide
you with no less favorable director and officer indemnification and insurance
coverage than such coverage in effect from time to time for the directors and
officers of the Corporation, subject to the availability of such insurance at a
reasonable cost to the Corporation, and provided further that such director and
officer insurance need not be provided for a period longer than 6 years
following your Date of Termination (also as defined in your Employment
Agreement).
In exchange for the above special option grants, and loan, you hereby
acknowledge your understanding (i) of the new organizational structure of the
Corporation, including the fact that you now report to the Chief Executive
Officer of the Corporation and (ii) that you will have new responsibilities
focusing on external constituencies (including but not limited to
Accounts/Sales, Provider Relationships, and the representation of the
Corporation as President to outside parties).
By signing below, you hereby agree and consent to the above changes, and
acknowledge that such changes shall not give you "Good Reason" (as defined in
the Employment Agreement) to terminate your employment with the Corporation.
Sincerely,
Norman C. Payson
Chief Executive Officer
Agreed and accepted:
- --------------------
Bill Sullivan
Date:
<PAGE> 1
June 26, 1998
Jeffery H. Boyd, Esq.
34 Brookridge Drive
Greenwich, CT 06830
Dear Jeff:
This letter will confirm our decision regarding certain additional compensation
arrangements with Oxford Health Plans, Inc. (the "Corporation") and clarify our
interpretation of your Employment Agreement relating to your roles and
responsibilities as General Counsel of the Corporation.
On March 30, 1998, the Corporation granted you an additional 200,000 options to
acquire common stock of the Corporation, under the terms and conditions of the
Corporation's 1991 Stock Option Plan. In addition, the Corporation has hired Jon
Richardson to act as Special Counsel to the Chief Executive Officer and expects
to hire Robert Moses as an officer and health care counsel reporting to you. Mr.
Richardson's duties are described in the chart provided to you.
By this letter, the Corporation and you acknowledge and agree that from and
after January 1, 1999, such changes shall not give you "Good Reason" (as defined
in your employment agreement with the Corporation, dated as of August 14, 1998,
and amended as of February 23, 1998) to terminate your employment with the
Corporation. At any time prior to January 1, 1999, you may exercise your rights
under Section 6 (h) (i) of the Employment Agreement by providing written notice
to the Corporation and Good Reason shall be deemed to exist notwithstanding
anything contained in the proviso to the definition of Good Reason contained in
Section 6 (d) of the Employment Agreement. If there are any changes after
January 1, 1999, in the formal duties of Mr. Richardson or Mr. Moses, or in the
duties in fact performed by them, which constitute a diminution in the duties of
the General Counsel, you shall be entitled to rely on the "Good Reason"
provision of your Employment Agreement at such time in accordance with its
terms.
<PAGE> 2
Jeffery H. Boyd, Esq. Page 2
We also agree that during the Term (as defined in the Employment Agreement) of
the Employment Agreement and thereafter, the Corporation shall continue to
provide you with no less favorable director and officer indemnification and
insurance coverage than such coverage in effect from time to time for the
directors and officers of the Corporation, subject to the availability of such
insurance at a reasonable cost to the Corporation, and provided further that
such director and officer insurance need not be provided for a period longer
than 6 years following your Date of Termination (also as defined in your
Employment Agreement).
Sincerely,
Norman C. Payson
Chief Executive Officer
Agreed and Accepted:
- -------------------
Jeffery H. Boyd
Date:
<PAGE> 1
CONFIDENTIAL
EMPLOYMENT AGREEMENT
AGREEMENT dated as of June 9, 1998, by and between OXFORD HEALTH
PLANS, INC. (the "Corporation"), having a principal office in Norwalk,
Connecticut, and Yon Y. Jorden (the "Employee").
WHEREAS, the Board of Directors of the Corporation (the "Board") has
approved and authorized the Corporation's entry into this Agreement with the
Employee; and
WHEREAS, the parties desire to enter into this Agreement setting
forth the terms and conditions for the continued employment relationship of the
Corporation and the Employee;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Corporation and the Employee agree as follows:
1. Employment. The Employee is employed as Chief Financial Officer of
the Corporation beginning June 22, 1998 (the "Effective Date"). As Chief
Financial Officer the Employee shall render executive, policy and other
management services to the Corporation of the type customarily performed by
persons serving in a similar executive officer capacity, subject to the powers
by law vested in the Board and in the Corporation's stockholders. The Employee
shall report to the Chief Executive Officer of the Corporation, and shall
perform such other related duties as the Chief Executive Officer of the
Corporation may from time to time reasonably direct or request. The Employee
shall be a full time employee of the Corporation.
The Employee shall perform her duties and responsibilities under this
Agreement faithfully, diligently and to the best of the Employee's ability, and
in compliance with all applicable laws and the Corporation's Certificate of
Incorporation and Bylaws, as they may be amended from time to time.
2. Term. The initial term of employment under this Agreement shall be
for a period of four (4) years commencing on the Effective Date (the "Term");
provided however, that the Employee successfully completes a pre-employment drug
test and reference, credit and criminal check. This Agreement shall be extended
automatically for two (2) additional years on the second anniversary date of the
Effective Date and on each second anniversary of the Effective Date thereafter,
unless either the Corporation or the Employee gives contrary written notice to
the other not less than three (3) months in advance of such anniversary of the
Effective Date. References herein to the Term shall refer both to such initial
term and such successive terms. Upon a "Change in Control" (as defined in
Section 7(a)) of the Corporation, the Term shall be extended to two (2) years
from the date of such Change in Control, unless notice to terminate the Term has
been properly provided prior to the date of such Change in Control, and such
Change in Control date shall be treated as the Effective Date for purposes of
renewals of this Agreement. The Term shall end upon the termination of the
Employee's employment under this Agreement.
3. Compensation. (a) Base Salary. The Corporation agrees to pay the
Employee during the Term an annual base salary ("Base Salary") of $400,000. The
<PAGE> 2
Base Salary shall be reviewed at least annually during the Term by the Board,
and the Employee shall receive such increases in Base Salary, if any, as the
Compensation Committee of the Board (the "Committee") in its absolute discretion
may determine, together with such performance or merit increases, if any, as the
Committee in its absolute discretion may determine. Participation with respect
to discretionary bonuses, retirement and other employee benefit plans and fringe
benefits shall not reduce the Base Salary payable to the Employee under this
Section 3. The Base Salary shall be payable to the Employee in equal
installments in conformity with the Corporation's normal payroll periods.
(b) Bonus. During the Term, the Employee shall be eligible to receive
an annual performance bonus (in an amount no greater than 100% of the earned
Base Salary for the year in which such performance is measured) consistent with
the Corporation's management incentive program, as recommended by the Chief
Executive Officer of the Corporation and approved by the Committee and the
Chairman of the Corporation; provided however, that for the years 1998, 1999,
2000 and 2001 such bonus shall be guaranteed in an amount equal to 100% of the
Employee's Base Salary, and shall be payable in a manner consistent with the
payment of bonuses for other senior officers.
(c) Sign-on Bonus. As soon as practical after commencement of
employment, but in no event later than thirty (30) days from the Effective Date,
and subject to the execution by the Employee of this Agreement and the
Corporation's standard Confidentiality and Non-Competition Agreement, the
Corporation shall pay the Employee a sign-on bonus in the amount of $300,000.
(d) Options. Subject to the approval of the Committee and the
execution by the Employee of this Agreement, upon the Effective Date, the
Corporation shall grant the Employee an option to acquire 200,000 shares of the
Corporation's common stock pursuant to the terms and conditions of the
Corporation's 1991 Stock Option Plan (the "Plan"). In addition, upon the date of
the Corporation's 1998 Annual Shareholders Meeting (the "Meeting") and subject
to shareholder approval of amendments to the Plan at the Meeting which will make
this grant permissible under the Plan (the "Amendments"), the Corporation shall
grant the Employee an option to acquire an additional 100,000 shares of the
Corporation's common stock pursuant to the terms and conditions of the Plan as
so amended. In each case, the options shall be granted with an exercise price
equal to the fair market value of such common stock at the close of business on
the date of grant, vesting in four equal annual installments over the four years
from date of grant. In the event that the Corporation's stockholders fail to
approve such Amendments, the Corporation shall make a mutually acceptable
alternative compensation arrangement, providing comparable economic value to the
Employee.
(e) Relocation Expenses. In connection with commencement of
employment with the Corporation, the Corporation shall provide the Employee,
upon the execution
-2-
<PAGE> 3
and delivery by the Employee of a relocation expense reimbursement agreement
that authorizes the Corporation to seek reimbursement of any relocation expenses
or benefits provided to the Employee if the Employee leaves the employment of
the Corporation for any reason (other than due to death, termination by the
Corporation without Cause or termination by you for good reason) within one year
of relocation, with a relocation package to include the following: (1)
reimbursement, up to a maximum of $125,000 for costs associated with the sale of
the Employee's home in California and the purchase of a new home in Connecticut,
(2) a temporary living expense allowance of up to $5,000 per month for a period
ending on the earlier of the date of the purchase of a new home in Connecticut
and the first anniversary of the Effective Date, for which the Employee may seek
reimbursement for various miscellaneous direct expenses associated with
temporary living costs such as a furnished apartment, utilities, phone bill and
food costs, (3) costs incurred in connection with the moving of Employee's
personal property and household goods from the California residence to the new
residence provided that (x) in the case of clause (3) reimbursement shall be
made only if the Employee uses the Corporation's relocation company services,
and (y) in all events reimbursement shall be made only upon presentation of
satisfactory receipts in accordance with the Corporation's normal business
expenses reimbursement practices and procedures, and (4) the Employee shall be
entitled to be reimbursed for round trip business class airline tickets every
two weeks for travel to and from California for a period ending on the
three-month anniversary of the Effective Date, and for one additional trip back
to California to close on the sale of her home. The amount provided and
reimbursed under this paragraph (f) shall be on a grossed-up basis such that
after taking into account federal and state income taxes on such amounts, the
net after tax recovery by the Employee equals the amount of expenses incurred.
Notwithstanding the foregoing, the Employee shall not be entitled to the
benefits provided under this Section 3(d) after the expiration of the first
anniversary of the Effective Date.
(f) Relocation Loan. As soon as practical after commencement of
employment, but in no event later than thirty (30) days from the Effective Date,
the Corporation shall lend to the Employee the sum of $400,000.00 (the "Loan").
The Loan shall be evidenced by a Promissory Note (the "Note") containing terms
and in a form mutually acceptable to the Employee and the Corporation. Among
other things, the Note will provide that: (1) the Loan shall bear the lowest
interest rate permitted by federal law to avoid the imputation of income, (2)
the Loan shall be repaid in four equal annual installments of principal,
together with accrued interest, and (3) the Loan will be forgiven if the
Employee is terminated without Cause following a Change of Control. The Employee
has the option of paying back the principal plus any accrued interest at any
time. In addition, the Employee agrees to pledge/mortgage ____________ to secure
her obligations under the Note and execute any security/mortgage agreements or
other documents which the Corporation requires in connection with said
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pledge/mortgage.
4. Withholding Obligation. The Corporation shall have the ability to
withhold from the compensation otherwise due to the Employee under this
Agreement any federal income tax, Federal Insurance Contribution Act tax,
Federal Unemployment Act tax, or other amounts required to be withheld from
compensation from time to time under the Internal Revenue Code of 1986, as
amended (the "Code"), or under any state or municipal laws or regulations.
5. Fringe Benefits.
(a) Vacations and Leave. During the Term, the Employee shall be
eligible for an annual paid vacation of four (4) weeks per calendar year or such
longer period as the Committee may approve. The Employee shall schedule the
timing of paid vacations in a reasonable manner. The Employee shall also be
eligible for such other leave, with or without compensation, as shall be
mutually agreed upon by the Committee and the Employee.
(b) Participation in Retirement and Employee Benefit Plans.
During the Term, the Employee shall be eligible to participate in the
Corporation's 1991 Stock Option Plan, annual incentive compensation plan, the
Oxford Specialty Holdings, Inc. 1996 Equity Incentive Compensation Plan and any
other plan of the Corporation or its subsidiaries relating to stock options,
stock appreciation, stock purchases, pension, thrift, profit sharing, group life
insurance, AD&D coverage, health coverage (including medical, dental, vision and
prescription drug coverage), education or other retirement or employee benefits
that the Corporation may adopt for the benefit of its executive employees.
(c) Disability. If the Employee shall become disabled or
incapacitated during the Term to the extent that she is unable to perform her
duties and responsibilities hereunder, she shall be eligible to receive
disability benefits of the type currently provided to her, or, if more favorable
to the Employee, benefits of the type provided for other executive employees in
similar positions with the Corporation.
(d) Death. If the Employee shall die during the Term, the
Corporation shall pay to such person as the Employee has designated in a notice
filed with the Corporation, or, if no such notice is filed, to her estate, in
substantially equal monthly installments, from the date of her death for a
period of three (3) months, an amount equal to the Employee's Base Salary as of
her date of death.
(e) Other Benefits. During the Term, the Employee shall be
eligible to participate in any other fringe benefits which are or may become
applicable to the Corporation's executive employees, including a car allowance
of $450.00 per month, a reasonable expense account, reimbursement for reasonable
expenses actually incurred by you for financial planning services, up to a
maximum of $10,000 per year, and any other benefits which are commensurate with
the duties and responsibilities to be performed by the Employee under this
Agreement.
6. Termination of Employment. The Employee's employment hereunder
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may be terminated under the circumstances set forth in paragraphs (a) through
(e) below:
(a) Death. The Employee's employment hereunder shall terminate
upon her death.
(b) Disability. If, as a result of the Employee's incapacity
due to physical or mental
illness, the Employee shall have been absent from her duties hereunder on a
full-time basis for the entire period of six (6) consecutive months, and within
thirty (30) days after written Notice of Termination is given (which may occur
before or after the end of such six (6) month period) shall not have returned to
the performance of her duties hereunder on a full-time basis, the Corporation
may terminate the Employee's employment hereunder for "Disability."
(c) Cause. The Corporation may terminate the Employee's
employment hereunder for Cause or without Cause. Except as provided in Section
7(b) hereof following a Change in Control, termination for Cause shall mean
termination because the Employee (i) engages in the following conduct in
connection with her employment with the Corporation: personal dishonesty
established to the satisfaction of the Board of Directors, willful misconduct
established to the satisfaction of the Board of Directors, breach of fiduciary
duty involving personal profit, breach of a restrictive covenant against
competition, disclosure of confidential information of the Corporation without
the Corporation's consent and that is not otherwise available to the public and
for which disclosure is not otherwise compelled by any law, rule, regulation,
regulatory agency or court of jurisdiction, consistent intentional failure to
perform stated duties after notice and forty-five (45) days to cure after
notice, or (ii) willfully violates any law, rule, or regulation (other than
traffic violations or similar offenses), which willful violation materially
impacts the Employee's performance of her duties to the Corporation.
(d) Good Reason. The Employee may terminate her employment
hereunder with or without Good Reason; provided, however, that the Employee
agrees not to terminate her employment hereunder (other than for Good Reason or
for Retirement) during the ninety-day period following a Change in Control.
Except as provided in Section 7(c) hereof following a Change in Control, for
purposes of this Agreement "Good Reason" shall mean the occurrence of the
following without the Employee's consent: (i) a significant diminution by the
Corporation of the Employee's role with the Corporation, or a significant
detrimental change in the nature and/or scope of the Employee's duties and
responsibilities with the Corporation, in each case other than for Cause or
Disability, (ii) a reduction in the Employee's Base Salary or guaranteed bonus
opportunity, in each case other than for Cause or Disability, or (iii) the
Corporation's requiring the Employee to report to an officer of the Corporation
other than the Corporation's Chief Executive Officer. For purposes of this
Agreement, "Good Reason" shall not exist until after Employee has given the
Company notice of the applicable event within 90 days of such event and which is
not remedied within 30
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days after receipt of written notice from Employee specifically delineating such
claimed event and setting forth Employee's intention to terminate employment if
not remedied; provided, that if the specified event cannot reasonably be
remedied within such 30-day period and the Company commences reasonable steps
within such 30-day period to remedy such event and diligently continues such
steps thereafter until a remedy is effected, such event shall not constitute
"Good Reason" provided that such event is remedied within 60 days after receipt
of such written notice.
(e) Retirement. For purposes of this Agreement, "Retirement"
shall mean termination of the Employee's employment by either the Employee
(other than for Good Reason) or the Corporation (other than for Cause) on or
after the Employee's normal retirement age under the terms of the Corporation's
pension plan (or, any other tax-qualified plan, if no pension plan exists);
provided, that, following a Change in Control such normal retirement age may not
be reduced for purposes of this Agreement without the consent of the Employee.
(f) Date of Termination. For purposes of this Agreement, "Date
of Termination" means (1) the effective date on which the Employee's employment
by the Corporation terminates as specified in a Notice of Termination by the
Corporation or the Employee, as the case may be, or (2) if the Employee's
employment terminates by reason of death, the date of death of the Employee.
Notwithstanding the previous sentence, (i) if the Employee's employment is
terminated for Disability (as defined in Section 6(b)), then such Date of
Termination shall be no earlier than thirty (30) days following the date on
which a Notice of Termination is received, and (ii) if the Employee's employment
is terminated by the Corporation other than for Cause, then such Date of
Termination shall be no earlier than thirty (30) days following the date on
which a Notice of Termination is received.
(g) Payment Upon Termination. Unless otherwise required by law,
upon any termination of employment hereunder, the Corporation shall pay the
Employee, within ten (10) days following her Date of Termination, a lump sum
cash amount equal to the sum of (i) the Employee's unpaid Base Salary through
the Date of Termination, (ii) any bonus payments which have become payable
(other than deferred amounts), to the extent not theretofore paid, and (iii) any
vacation pay owed with respect to accrued, but unused, vacation.
(h) Termination Without Cause, For Good Reason or Upon Failure
to Renew. In addition to the payments set forth in Section 6(g) hereof, in the
event that the Employee's employment with the Corporation terminates either (1)
prior to a Change in Control or (2) following the two-year period immediately
subsequent to a Change in Control (including as a result of a notice of
non-renewal of the Term by the Corporation provided during such two-year
period), in each case as a result of (i) a termination by the Employee for Good
Reason, (ii) a termination by the Corporation without Cause (other than for
Retirement or Disability) or (iii) notice by the Corporation of non-renewal of
the Term (other than for Retirement), then the
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<PAGE> 7
Corporation shall (1) pay to the Employee an amount (the "Severance Amount")
equal to two (2) times the sum of the Base Salary earned by the Employee from
the Corporation and its subsidiaries during the twelve-month period immediately
preceding the Employee's Date of Termination, plus the annual bonus earned by
the Employee from the Corporation and its subsidiaries in respect of the fiscal
year immediately preceding the Employee's Date of Termination (provided that the
Severance Amount shall not be less than $1.6 million). Such Severance Amount
shall be paid in twenty-four (24) equal monthly installments in conformity with
the Corporation's normal payroll periods, and (2) continue to provide, for a
period of one (1) year following the Date of Termination, the Employee (and the
Employee's dependents if applicable) with the same level of medical, dental,
accident, disability and life insurance benefits upon substantially the same
terms and conditions (including cost of coverage to the Employee) as existed
immediately prior to the Employee's Date of Termination (or, if more favorable
to the Employee, as such benefits and terms and conditions existed immediately
prior to the Change in Control); provided, that, if the Employee cannot continue
to participate in the Corporation plans providing such benefits, the Corporation
shall otherwise provide such benefits on the same after-tax basis as if
continued participation had been permitted. Notwithstanding the foregoing, in
the event the Employee becomes reemployed with another employer and becomes
eligible to receive welfare benefits from such employer, the welfare benefits
described herein shall be secondary to such benefits during the period of the
Employee's eligibility, but only to the extent that the Corporation reimburses
the Employee for any increased cost and provides any additional benefits
necessary to give the Employee the benefits hereunder.
7. Termination of Employment Following a Change in Control.
(a) Change in Control Defined. For purposes of this Agreement, a
"Change in Control" shall be deemed to have taken place if:
(i) any "person" (as defined below) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934 (the "Exchange Act")), directly or indirectly, of securities
of the Corporation representing 30% or more of the total voting power
represented by the Corporation's then outstanding voting securities;
(ii) a change in the composition of the Board of Directors of the
Corporation occurs, as a result of which fewer than two-thirds (2/3) of
the incumbent directors are directors who either (A) had been directors of
the Corporation on the "look-back date" (as defined below) or (B) were
elected, or nominated for election, to the Board of Directors of the
Corporation with the affirmative votes of at least a majority of the
directors who had been directors of the Corporation on the "look-back
date" and who were still in office at the time of the election or
nomination;
(iii) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, other than a
merger or consolidation
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<PAGE> 8
which would result in the voting securities of the Corporation outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 80% of the total voting power represented by the voting
securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation; or
(iv) the stockholders of the Corporation approve (A) a plan of
complete liquidation of the Corporation or (B) an agreement for the sale
or disposition by the Corporation of all or substantially all of the
Corporation's assets. For purposes of paragraph (a)(i), the term "person"
shall have the same meaning as when used in sections 13(d) and 14(d) of
the Exchange Act, but shall exclude (1) a trustee or other fiduciary
holding securities under an employee benefit plan of the Corporation or of
a parent or subsidiary of the Corporation or (2) a corporation owned
directly or indirectly by the stockholders of the Corporation in
substantially the same proportions as their ownership of the common stock
of the Corporation. For purposes of paragraph (a)(ii), the term "look-back
date" shall mean the later of (A) the date twenty-four (24) months prior
to the change in the composition of the Board and (B) the Effective Date.
Any other provision of this Section 7(a) notwithstanding, the term "Change
in Control" shall not include either of the following events, if
undertaken at the election of the Corporation:
(x) a transaction, the sole purpose of which is to change the
state of the Corporation's incorporation; or
(y) a transaction, the result of which is to sell all or
substantially all of the assets of the Corporation to another
corporation or entity (the "surviving entity"); provided that
the voting power represented by the surviving entity's
securities (or other equity interests) is owned directly or
indirectly by the stockholders of the Corporation immediately
following such transaction in substantially the same
proportions as their ownership of the voting power represented
by the Corporation's common stock immediately preceding such
transaction; and provided, further, that the surviving entity
expressly assumes this Agreement.
Notwithstanding anything in this Agreement to the contrary, if the
Employee's employment terminates prior to a Change in Control, and the Employee
reasonably demonstrates that such termination was at the request or suggestion
of a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a "Third Party"), then for all
purposes of this Agreement, the date of a Change in Control shall mean the date
immediately prior to the date of such termination of employment.
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<PAGE> 9
(b) Cause. During the two-year period following a Change in
Control, "Cause" shall mean (i) the willful and continued failure of the
Employee to substantially perform her duties with the Corporation (other than
any such failure resulting from the Employee's incapacity due to physical or
mental illness or any such failure subsequent to the Employee being delivered a
notice of termination without Cause by the Corporation or delivering a notice of
termination for Good Reason to the Corporation) after a written demand for
substantial performance is delivered to the Employee by the Board which
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed the Employee's duties, or (ii) the willful
engaging by the Employee in illegal conduct or gross misconduct which is
demonstrably and materially injurious to the Corporation or its subsidiaries.
For purpose of this paragraph (b), no act or failure to act by the Employee
shall be considered "willful" unless done or omitted to be done by the Employee
in bad faith and without reasonable belief that the Employee's action or
omission was in the best interests of the Corporation or its affiliates. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board, based upon the advice of counsel for the Corporation,
shall be conclusively presumed to be done, or omitted to be done, by the
Employee in good faith and in the best interests of the Corporation. Cause shall
not exist unless and until the Corporation has delivered to the Employee a copy
of a resolution duly adopted by two-thirds (2/3) of the entire Board at a
meeting of the Board called and held for such purpose (after reasonable notice
to the Employee and an opportunity for the Employee, together with counsel, to
be heard before the Board), finding that in the good faith opinion of the Board
an event set forth in clause (i) or (ii) has occurred and specifying the
particulars thereof in detail. Following a Change in Control, the Corporation
must notify the Employee of any event constituting Cause within ninety (90) days
following the Corporation's knowledge of its existence or such event shall not
constitute Cause under this Agreement.
(c) Good Reason. During the two-year period following a Change
in Control, "Good Reason" shall mean, without the Employee's express written
consent, the occurrence of any of the following events:
(1) (i) the assignment to the Employee of any duties or
responsibilities (including reporting responsibilities) inconsistent in
any material and adverse respect with the Employee's duties and
responsibilities with the Corporation immediately prior to such Change
in Control (including any diminution of such duties or
responsibilities); provided, however, that Good Reason shall not be
deemed to occur upon a change in duties or responsibilities that is
solely and directly a result of the Corporation no longer being a
publicly traded entity, and does not involve any other event set forth
in this paragraph (c), or (ii) a material and adverse change in the
Employee's reporting responsibilities, titles or offices (other than
membership on the Board) with the Corporation as in effect immediately
prior to such Change in Control;
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<PAGE> 10
(2) a reduction by the Corporation in the Employee's rate of
annual Base Salary or annual bonus opportunity (including any adverse
change in the formula for such annual bonus target) as in effect
immediately prior to such Change in Control or as the same may be
increased from time to time thereafter;
(3) any requirement of the Corporation that the Employee (i)
be based anywhere more than thirty (30) miles from the office where the
Employee is located at the time of the Change in Control or (ii) travel
on the Corporation's business to an extent substantially greater than
the travel obligations of the Employee immediately prior to such Change
in Control;
(4) the failure of the Corporation to (i) continue in effect
any employee benefit plan, compensation plan, welfare benefit plan or
material fringe benefit plan in which the Employee is participating
immediately prior to such Change in Control, or the taking of any
action by the Corporation which would adversely affect the Employee's
participation in or reduce the Employee's benefits under any such plan,
unless the Employee is permitted to participate in other plans
providing the Employee with substantially equivalent aggregate benefits
(at substantially comparable cost with respect to welfare benefit
plans), or (ii) provide the Employee with paid vacation in accordance
with the most favorable plans, policies, programs and practices of the
Corporation and its affiliated companies as in effect for the Employee
immediately prior to such Change in Control; or
(5) the failure of the Corporation to obtain the assumption
agreement from any successor as contemplated in Section 11(a) hereof.
Any event or condition described in Section 7(c)(1) through
(4) which occurs prior to a Change in Control, but with respect to which the
Employee is able to reasonably demonstrate was at the request or suggestion of a
Third Party, shall constitute Good Reason following a Change in Control for
purposes of this Agreement (as if a Change in Control had occurred immediately
prior to the occurrence of such event or condition) notwithstanding that it
occurred prior to the Change in Control. An isolated, insubstantial and
inadvertent action taken in good faith and which is remedied by the Corporation
promptly after receipt of notice thereof given by the Employee shall not
constitute Good Reason. The Employee's right to terminate employment for Good
Reason shall not be affected by the Employee's incapacity due to mental or
physical illness and the Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any event or condition
constituting Good Reason. Following a Change in Control, the Employee must
provide notice of termination of employment within ninety (90) days of the
Employee's knowledge of an event constituting Good Reason or such event shall
not constitute Good Reason under this Agreement.
(d) In addition to the payments set forth in Section 6(g)
above, in the event the Employee's employment with the Corporation terminates
within two (2) years
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following a Change in Control either (i) by the Corporation without Cause (other
than for Retirement or Disability) or (ii) by the Employee for Good Reason, then
the Corporation shall (1) pay to the Employee, within ten (10) days following
the Employee's Date of Termination, a lump sum cash amount equal to two (2)
times the sum of (i) the highest annual rate of Base Salary of the Employee
during the 3-year period immediately preceding the Employee's Date of
Termination and (ii) the highest annual bonus earned by Employee in respect of
the three (3) fiscal years of the Corporation immediately preceding the year in
which the Employee's Date of Termination occurs (provided, that if the Employee
has not been employed by the Corporation for such three-fiscal-year period, the
greater of (x) the annual bonus (without regard to any reduction that would give
rise to Good Reason) for the year in which the Employee's Date of Termination
occurs and (y) the amount otherwise determined under this clause (ii) without
regard to this parenthetical), (2) cause each option to immediately vest and
become exercisable in full, and (3) continue to provide, for a period of two (2)
years following the Date of Termination, the Employee (and the Employee's
dependents if applicable) with the same level of medical, dental, accident,
disability and life insurance benefits upon substantially the same terms and
conditions (including cost of coverage to the Employee) as existed immediately
prior to the Employee's Date of Termination (or, if more favorable to the
Employee, as such benefits and terms and conditions existed immediately prior to
the Change in Control); provided, that, if the Employee cannot continue to
participate in the Corporation plans providing such benefits, the Corporation
shall otherwise provide such benefits on the same after-tax basis as if
continued participation had been permitted. Notwithstanding the foregoing, in
the event the Employee becomes reemployed with another employer and becomes
eligible to receive welfare benefits from such employer, the welfare benefits
described herein shall be secondary to such benefits during the period of the
Employee's eligibility, but only to the extent that the Corporation reimburses
the Employee for any increased cost and provides any additional benefits
necessary to give the Employee the benefits hereunder.
(e)(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution, or any acceleration of vesting of any benefit or award, by the
Corporation or its affiliated companies to or for the benefit of the Employee
(whether paid or payable, distributed or distributable or accelerated or subject
to acceleration pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
7(e)) (a "Payment") would be subject to the excise tax imposed by Section 4999
of the Code, or any interest or penalties are incurred by the Employee with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Employee shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Employee of all taxes
imposed upon the
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Gross-Up Payment and any interest or penalties imposed with respect to such
taxes, the Employee retains an amount of the Gross-Up Payment equal to the sum
of (x) the Excise Tax imposed upon the Payments and (y) the product of any
deductions disallowed because of the inclusion of the Gross-Up Payment in the
Employee's adjusted gross income and the highest applicable marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made. For purposes of determining the amount of the Gross-Up Payment, the
Employee shall be deemed to (A) pay federal income taxes at the highest marginal
rates of federal income taxation for the calendar year in which the Gross-Up
Payment is to be made, (B) pay applicable state and local income taxes at the
highest marginal rate of taxation for the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes and (C)
have otherwise allowable deductions for federal income tax purposes at least
equal to those which could be disallowed because of the inclusion of the
Gross-Up Payment in the Employee's adjusted gross income. The payment of a
Gross-Up Payment under this Section 7(e) shall in no event be conditioned upon
the Employee's termination of employment or the receipt of severance benefits
under this Agreement.
(ii) Subject to the provisions of Section 7(e)(i), all
determinations required to be made under this Section 7(e), including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination, shall be
made by the public accounting firm that is retained by the Corporation as of the
date immediately prior to the Change in Control (the "Accounting Firm") which
shall provide detailed supporting calculations both to the Corporation and the
Employee within fifteen (15) business days of the receipt of notice from the
Corporation or the Employee that there has been a Payment, or such earlier time
as is requested by the Corporation (collectively, the "Determination"). In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, the Employee may
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Corporation and the Corporation shall enter
into any agreement requested by the Accounting Firm in connection with the
performance of its services hereunder. The Gross-Up Payment under this Section
7(e) with respect to any Payment shall be made no later than thirty (30) days
following such Payment. If the Accounting Firm determines that no Excise Tax is
payable by the Employee, it shall furnish the Employee with a written opinion to
such effect, and to the effect that failure to report the Excise Tax, if any, on
the Employee's applicable federal income tax return will not result in the
imposition of a negligence or similar penalty. The Determination by the
Accounting Firm shall be binding upon the Corporation and the Employee. As a
result
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of the uncertainty in the application of Section 4999 of the Code at the time of
the Determination, it is possible that Gross-Up Payments which will not have
been made by the Corporation should have been made ("Underpayment") or Gross-Up
Payments are made by the Corporation which should not have been made
("Overpayment"), consistent with the calculations required to be made hereunder.
In the event that the Employee thereafter is required to make payment of any
additional Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment (together with interest
at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly
paid by the Corporation to or for the benefit of the Employee. In the event the
amount of the Gross-Up Payment exceeds the amount necessary to reimburse the
Employee for her Excise Tax, the Accounting Firm shall determine the amount of
the Overpayment that has been made and any such Overpayment (together with
interest at the rate provided in Section 1274(b)(2) of the Code) shall be
promptly paid by the Employee to or for the benefit of the Corporation. The
Employee shall cooperate, to the extent her expenses are reimbursed by the
Corporation, with any reasonable requests by the Corporation in connection with
any contests or disputes with the Internal Revenue Service in connection with
the Excise Tax.
8. Covenants Not to Compete; Confidentiality.
(a) The Employee covenants that if she voluntarily terminates
her employment with the Corporation prior to the end of the term of this
Agreement, unless such termination either is approved by the Board or is within
the two-year period following a Change in Control, she shall not, for a period
of one (1) year following such Date of Termination:
(1) engage or be interested, whether alone or together with or
on behalf or through any other person, firm, association, trust,
venture, or corporation, whether as sole proprietor, partner,
shareholder, agent, officer, director, employee, adviser, consultant,
trustee, beneficiary or otherwise, in any business principally and
directly engaged in the operation of health maintenance organizations
or the health insurance business or in the management of specialty
medical care through case rate contracting; which business operates in
a geographic area in which, at the time of such termination of
employment, the Corporation is conducting business or plans to conduct
business (a "competing business");
(2) assist others in conducting any competing business;
(3) directly or indirectly recruit or induce or hire any
person who is an employee of the Corporation or any of its
subsidiaries, or solicit any of the Corporation's customers, clients or
providers; or
(4) own any capital stock or any other securities of, or have
any other direct or indirect interest in, any entity which owns or
operates a competing business, other than the ownership of (i) less
than five percent (5%) of any such
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<PAGE> 14
entity whose stock is listed on a national securities exchange or
traded in the over-the-counter market and which is not controlled by
the Employee or any affiliate of the Employee or (ii) any limited
partnership interest in such an entity.
Nothing contained in this section, however, shall prohibit the
Employee from taking any of the actions set forth in clause (1), (2), (3) or (4)
above if (i) the Employee's employment has been terminated other than for Cause,
or (ii) the Employee has terminated employment for Good Reason.
(b) In the event that the Employee breaches or threatens to
breach any of the terms of this Section 8, the Employee acknowledges that the
Corporation's remedy at law would be inadequate and that the Corporation shall
be entitled to an injunction restraining the Employee from committing or
continuing such breach.
(c) Notwithstanding anything in this Agreement to the
contrary, the provisions of the Confidentiality and Non-Competition Agreement
dated as of _____________, 1998 between the Employee and the Company (the
"Non-Competition Agreement") shall be unaffected by the terms of this Agreement.
9. Payment Obligation Absolute. Except with respect to
continued welfare benefits under Section 7(d), the Corporation's obligation to
pay the Employee the compensation and other benefits provided herein shall be
absolute and unconditional and shall not be affected by an circumstances,
including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which the Corporation may have against the Employee. All amounts
payable by the Corporation hereunder shall be paid without notice or demand.
10. Notice.
(a) For purposes of this Agreement, all notices and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered or five (5) days after deposit in
the United States mail, certified and return receipt requested, postage prepaid,
addressed as follows:
If to the Employee:
Yon Y. Jorden
2501 Haggin Oak Boulevard
Bakersfield, CA 93311
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<PAGE> 15
If to the Corporation:
Oxford Health Plans, Inc.
800 Connecticut Avenue
Norwalk, Connecticut 06854
Attention: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice (a "Notice of Termination") of the
Employee's Date of Termination by the Corporation or the Employee, as the case
may be, to the other, shall (i) indicate the specific termination provision in
this Agreement relied upon, (ii) to the extent applicable, set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated and
(iii) specify the Date of Termination. The failure by the Employee or the
Corporation to set forth in such notice any particular fact or circumstance
which contributes to a showing of Good Reason or Cause shall not waive any right
of the Employee or the Corporation hereunder or preclude the Employee or the
Corporation from asserting such fact or circumstance in enforcing the Employee's
or the Corporation's rights hereunder.
11. General Provisions.
(a) No Assignments. This Agreement is personal to each of the
parties hereto. Neither party may assign or delegate any of her or its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Corporation agrees that concurrently with any
merger or sale of assets which would constitute a Change in Control hereunder,
it will cause any successor or transferee unconditionally to assume, by written
instrument delivered to the Employee (or her beneficiary or estate), all of the
obligations of the Corporation hereunder. Failure of the Corporation to obtain
such assumption prior to the effectiveness of any such merger or sale of assets,
shall be a breach of this Agreement and shall constitute Good Reason hereunder
and shall entitle the Employee to compensation and other benefits from the
Corporation in the same amount and on the same terms as the Employee would be
entitled hereunder if the Employee's employment were terminated following a
Change in Control under Section 7(d) hereof. For purposes of implementing the
foregoing, the date on which any such merger or sale of assets becomes effective
shall be deemed the date Good Reason occurs, and shall be the Date of
Termination if requested by the Employee. Notwithstanding the foregoing, this
Agreement shall inure to the benefit of and be enforceable by the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee shall die while any amounts
would be payable to the Employee hereunder had the Employee continued to live,
all such amounts, unless
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<PAGE> 16
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to such person or persons appointed in writing by the Employee to
receive such amounts or, if no person is so appointed, to the Employee's estate.
(b) Indemnification of Employee. The By-Laws of the
Corporation provide for indemnification of its officers and directors under the
circumstances and conditions specified therein. The Employee is eligible for
this coverage and any other indemnification coverage normally provided to
similarly situated executives of the Corporation. Moreover, in the event the
employment of the Employee is terminated by the Corporation without Cause or by
the Employee for Good Reason hereof and the Corporation fails to make timely
payment of the amounts then owed to the Employee under this Agreement, the
Employee shall be entitled to indemnification for all reasonable costs (as such
costs are incurred), including attorneys' fees and disbursements, incurred by
the Employee in taking action to collect such amounts or otherwise to enforce
this Agreement, plus interest on all such amounts at the annual rate of one
percent above the prime rate (defined as the base rate on corporate loans at
large U.S. money center commercial banks as published by the Wall Street
Journal), compounded monthly, for the period from the time payment is due until
payment is made to the Employee. The Employee shall also be entitled to interest
(at the rate described in the immediately preceding sentence) on such reasonable
costs incurred from the date the Employee delivers a receipt to the Corporation
for such costs until the date they are reimbursed to the Employee. Such
indemnification and interest shall be in addition to all rights to which the
Employee is otherwise entitled under this Agreement.
(c) Entire Agreement; Amendments or Additions; Action by
Board. This Agreement contains the entire agreement between the parties hereto
with respect to the transactions contemplated hereby and supersedes all prior
oral and written agreements, memoranda, understandings and undertakings between
the parties hereto relating to the subject matter hereof, except that the terms
and conditions of the Confidentiality and Non-Competition Agreement shall be
unaffected by the provisions of this Agreement. No amendments or additions to
this Agreement shall be binding unless in writing and signed by both parties.
The prior approval by a two-thirds (2/3) affirmative vote of the full Board
shall be required in order for the Corporation to authorize any amendments or
additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
termination of the employment of the Employee with or without Cause. For
purposes of Board approval with respect hereto, if the Employee is also a
director of the Corporation, she shall abstain from acting on matters pertaining
to this Agreement and shall not be counted as a Board member for purposes of the
two-thirds (2/3) requirement.
(d) Governing Law. This Agreement shall be governed by the
laws of the State of Connecticut as to all matters, including, but not limited
to, matters of validity, construction, effect and practice.
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<PAGE> 17
(e) Arbitration. Except with respect to injunctive relief
under Section 8(b) hereof, any dispute or controversy under this Agreement shall
be settled exclusively by arbitration in Norwalk, Connecticut by three (3)
arbitrators in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitration award in any court
having jurisdiction. The Corporation shall bear all costs and expenses arising
in connection with any arbitration proceeding pursuant to this Section 11(e).
(f) Employment with Subsidiaries. Employment with the
Corporation for purposes of this Agreement shall include employment with any
subsidiary of the Corporation.
(g) Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
(h) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
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<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
OXFORD HEALTH PLANS, INC.
By: ___________________________
Dr. Norman Payson, CEO
Dated: _________________________
_______________________________ Dated: ________________________
Yon Y. Jorden
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<PAGE> 1
CONFIDENTIAL
April 1, 1998
EMPLOYMENT AGREEMENT
AGREEMENT dated as of April 1, 1998 (the "Effective Date"), by and
between OXFORD HEALTH PLANS, INC. (the "Corporation"), having a principal office
in Norwalk, Connecticut, and Alan Muney, MD. ("the Employee").
WHEREAS, the Board of Directors of the Corporation (the "Board") has
approved and authorized the Corporation's entry into this Agreement with the
Employee; and
WHEREAS, the parties desire to enter into this Agreement setting
forth the terms and conditions for the continued employment relationship of the
Corporation and the Employee;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Corporation and the Employee agree as follows:
1. Employment. The Employee is employed as Executive Vice
President/Chief Medical Officer of the Corporation. As Executive Vice
President/Chief Medical Officer ( "CMO") the Employee shall render executive,
policy and other management services to the Corporation of the type customarily
performed by persons serving in a similar executive officer capacity, subject to
the powers by law vested in the Board and in the Corporation's stockholders. The
Employee shall report to President of the Corporation, and shall perform such
other related duties as the President reasonably direct or request. The Employee
shall be a full time employee of the Corporation.
<PAGE> 2
The Employee shall perform his duties and responsibilities under this
Agreement faithfully, diligently and to the best of the Employee's ability, and
in compliance with all applicable laws and the Corporation's Certificate of
Incorporation and Bylaws, as they may be amended from time to time.
2. Term. The initial term of employment under this Agreement shall be
for a period of two (2) years commencing on the Effective Date (the "Term").
This Agreement shall be extended automatically for two (2) additional years on
the second anniversary date of the Effective Date and on each second anniversary
of the Effective Date thereafter, unless either the Corporation or the Employee
gives contrary written notice to the other not less than three (3) months in
advance of such anniversary of the Effective Date. References herein to the Term
shall refer both to such initial term and such successive terms. Upon a "Change
in Control" (as defined in Section 7(a) of the Corporation, the Term shall be
extended to two (2) years from the date of such Change in Control, unless notice
to terminate the Term has been properly provided prior to the date of such
Change in Control, and such Change in Control date shall be treated as the
Effective Date for purposes of renewals of this Agreement. The Term shall end
upon the termination of the Employee's employment under this Agreement.
3. Compensation. (a) Base Salary. The Corporation agrees to pay the
Employee during the Term an annual base salary ("Base Salary") of $350,000. The
Base Salary shall be reviewed at least annually during the Term by the Board,
and the
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<PAGE> 3
Employee shall receive such increases in Base Salary, if any, as the
Compensation Committee of the Board (the "Committee") in its absolute discretion
may determine, together with such performance or merit increases, if any, as the
Committee in its absolute discretion may determine. Participation with respect
to discretionary bonuses, retirement and other employee benefit plans and fringe
benefits shall not reduce the Base Salary payable to the Employee under this
Section 3. The Base Salary shall be payable to the Employee in equal
installments in conformity with the Corporation's normal payroll periods.
(b) Bonus. During the Term, the Employee shall be eligible to receive
an annual performance bonus in an amount at least equal to 50% of the Base
Salary for the year in which such performance is measured consistent with the
Corporation's management incentive program, as recommended by the Chief
Executive Officer, & President of the Corporation and approved by the Committee,
paid at such time the bonuses are paid to other executives at his level.
(c) Sign-on Bonus. Upon the execution and delivery of this Agreement,
and subject to the execution by the Employee of the Corporation's standard
non-disclosure and non-competition agreement, the Corporation shall pay the
Employee a sign-on bonus in the amount of $60,000.
(d) Options Upon the execution and delivery of this Agreement, the
Corporation shall grant the Employee options to acquire 100,000 shares of the
Corporation's common stock pursuant to the terms and conditions of the
Corporation's 1991 Stock Option Plan, such options to vest in four equal annual
installments over the four years from the date of grant.
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<PAGE> 4
4. Withholding Obligation. The Corporation shall have the ability to
withhold from the compensation otherwise due to the Employee under this
Agreement any federal income tax, Federal Insurance Contribution Act tax,
Federal Unemployment Act tax, or other amounts required to be withheld from
compensation from time to time under the Internal Revenue Code of 1986, as
amended (the "Code"), or under any state or municipal laws or regulations.
5. Fringe Benefits.
(a) Vacations and Leave. During the Term, the Employee shall be
entitled to an annual paid vacation of four (4) weeks per year or such longer
period as the Committee may approve. The Employee shall schedule the timing of
paid vacations in a reasonable manner. The Employee shall also be entitled to
such other leave, with or without compensation, as shall be mutually agreed upon
by the Committee and the Employee.
(b) Participation in Retirement and Employee Benefit Plans. During
the Term, the Employee shall be entitled to participate in the Corporation's
1991 Stock Option Plan, annual incentive compensation plan, the Oxford Specialty
Holdings, Inc. 1996 Equity Incentive Compensation Plan and any other plan of the
Corporation or its subsidiaries relating to stock options, stock appreciation,
stock purchases, pension, thrift, deferred compensation, profit sharing, group
life insurance, medical coverage, education or other retirement or employee
benefits that the Corporation may have in
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<PAGE> 5
effect for the benefit of its executive employees in similar positions with the
Corporation.
(c) Disability. If the Employee shall become disabled or
incapacitated during the Term to the extent that he is unable to perform his
duties and responsibilities hereunder, he shall be entitled to receive
disability benefits of the type currently provided to other executives in
similar positions in the Corporation.
(d) Death. If the Employee shall die during the Term, the Corporation
shall pay to such person as the Employee has designated in a notice filed with
the Corporation, or, if no such notice is filed, to his estate, in substantially
equal monthly installments, from the date of his death for a period of three (3)
months, an amount equal to the Employee's Base Salary as of his date of death.
In addition, the employee's estate shall have the right to exercise the stock
options referenced in paragraph 3 (b) to the extent they have vested and have
not been exercised , and to the extent that this does not conflict with the
terms of the stock option plan.
(e) Other Benefits. During the Term, the Employee shall be entitled
to participate in any other fringe benefits which are or may become applicable
to the Corporation's executive employees, including a $450.00 month car
allowance, a reasonable expense account, and or shall be entitled to
reimbursement of all necessary
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<PAGE> 6
expenses incurred on behalf of the corporation, and the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Employee under this Agreement.
6. Termination of Employment. The Employee's employment hereunder may
be terminated under the circumstances set forth in paragraphs (a) through (e)
below:
(a) Death. The Employee's employment hereunder shall terminate upon
his death.
(b) Disability. If, as a result of the Employee's incapacity due to
physical or mental illness, the Employee shall have been absent from his duties
hereunder on a full-time basis for the entire period of six (6) consecutive
months, and within thirty (30) days after written Notice of Termination is given
(which may occur before or after the end of such six (6) month period) shall not
have returned to the performance of his duties hereunder on a full-time basis,
the Corporation may terminate the Employee's employment hereunder for
"Disability."
(c) Cause. The Corporation may terminate the Employee's employment
hereunder for Cause or without Cause. Except as provided in Section 7(b) hereof
following a Change in Control, termination for Cause shall mean termination
because the Employee (i) engages in the following conduct in connection with his
employment with the Corporation: personal dishonesty, willful misconduct, breach
of fiduciary duty
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<PAGE> 7
involving personal profit, breach of a restrictive covenant against competition,
disclosure of confidential information of the Corporation, consistent
intentional failure to perform stated duties after notice, or (ii) willfully
violates any law, rule, or regulation (other than traffic violations or similar
offenses), which willful violation materially impacts the Employee's performance
of his duties to the Corporation.
(d) Good Reason. The Employee may terminate his employment
hereunder with or without Good Reason; provided, however, that the Employee
agrees not to terminate his employment hereunder (other than for Good Reason or
for Retirement) during the ninety-day period following a Change in Control.
Except as provided in Section 7(c) hereof following a Change in Control, for
purposes of this Agreement "Good Reason" shall mean any (i) removal of the
Employee from, or failure to re-appoint the Employee to, his position as
Executive Vice President/CMO, except in connection with termination of the
Employee for Cause, or (ii) failure by the Corporation to comply with Section 3
hereof in any material respect. For purposes of this Agreement, "Good Reason"
shall not exist until after Employee has given the Company notice of the
applicable event within 90 days of such event and which is not remedied within
30 days after receipt of written notice from Employee specifically delineating
such claimed event and setting forth Employee's intention to terminate
employment if not remedied; provided, that if the specified event cannot
reasonably be remedied within such 30-day period and the Company commences
reasonable steps within such 30-day period to remedy such event and diligently
continues such steps thereafter until a remedy is effected, such event shall not
constitute "Good Reason" provided that such event is remedied within 60 days
after receipt of such written notice.
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<PAGE> 8
(e) Retirement. For purposes of this Agreement, "Retirement"
shall mean termination of the Employee's employment by either the Employee
(other than for Good Reason) or the Corporation (other than for Cause) on or
after the Employee's normal retirement age under the terms of the Corporation's
pension plan (or, any other tax-qualified plan, if no pension plan exists);
provided, that, following a Change in Control such normal retirement age may not
be reduced for purposes of this Agreement without the consent of the Employee.
(f) Date of Termination. For purposes of this Agreement, "Date
of Termination" means (1) the effective date on which the Employee's employment
by the Corporation terminates as specified in a Notice of Termination by the
Corporation or the Employee, as the case may be, or (2) if the Employee's
employment terminates by reason of death, the date of death of the Employee.
Notwithstanding the previous sentence, (i) if the Employee's employment is
terminated for Disability (as defined in Section 6(b)), then such Date of
Termination shall be no earlier than thirty (30) days following the date on
which a Notice of Termination is received, and (ii) if the Employee's employment
is terminated by the Corporation other than for Cause, then such Date of
Termination shall be no earlier than thirty (30) days following the date on
which a Notice of Termination is received.
(g) Payment Upon Termination. Upon any termination of employment
hereunder, the Corporation shall pay the Employee, within ten (10) days
following his Date of Termination, a lump sum cash amount equal to the sum of
(i) the Employee's
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<PAGE> 9
unpaid Base Salary through the Date of Termination, (ii) any bonus payments
which have become payable (other than deferred amounts), to the extent not
theretofore paid, and (iii) any vacation pay owed with respect to accrued, but
unused, vacation. In addition, the employee shall have the right to exercise the
stock options referenced in paragraph 3(b) to the extent they have vested and
have not been exercised, and to the extent that this does not conflict with the
terms of the stock option plan.
(h) Termination Without Cause, For Good Reason or Upon Failure
to Renew. In addition to the payments set forth in Section 6(g) hereof, in the
event that the Employee's employment with the Corporation terminates either (1)
prior to a Change in Control or (2) following the two-year period immediately
subsequent to a Change in Control (including as a result of a notice of
non-renewal of the Term by the Corporation provided during such two-year
period), in each case as a result of (i) a termination by the Employee for Good
Reason, (ii) a termination by the Corporation without Cause (other than for
Retirement or Disability) or (iii) notice by the Corporation of non-renewal of
the Term (other than for Retirement), then the Corporation shall pay to the
Employee, in twelve (12) equal monthly installments in conformity with the
Corporation's normal payroll periods, an amount equal to (x) the sum of the Base
Salary earned by the Employee from the Corporation and its subsidiaries during
the twelve-month period immediately preceding the Employee's Date of
Termination, plus the annual bonus earned by the Employee from the Corporation
and its subsidiaries in respect of the fiscal year immediately preceding the
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<PAGE> 10
Employee's Date of Termination, divided by (y) twelve (12). In addition, the
employee shall have the right to exercise stock options referenced in 3d
consistent with the terms of the 1991 stock option plan.
7. Termination of Employment Following a Change in Control.
(a) Change in Control Defined. For purposes of this Agreement, a
"Change in Control" shall be deemed to have taken place if:
(i) any "person" (as defined below) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934 (the "Exchange Act"), directly or indirectly, of securities of
the Corporation representing 30% or more of the total voting power
represented by the Corporation's then outstanding voting securities;
(ii) a change in the composition of the Board of Directors of the
Corporation occurs, as a result of which fewer than two-thirds (2/3) of
the incumbent directors are directors who either (A) had been directors of
the Corporation on the "look-back date" (as defined below) or (B) were
elected, or nominated for election, to the Board of Directors of the
Corporation with the affirmative votes of at least a majority of the
directors who had been directors of the Corporation on the "look-back
date" and who were still in office at the time of the election or
nomination;
(iii) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, other than a
merger or consolidation
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<PAGE> 11
which would result in the voting securities of the Corporation outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 80% of the total voting power represented by the voting
securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation; or
(iv) the stockholders of the Corporation approve (A) a plan of
complete liquidation of the Corporation or (B) an agreement for the sale
or disposition by the Corporation of all or substantially all of the
Corporation's assets.For purposes of paragraph (a)(i), the term "person"
shall have the same meaning as when used in sections 13(d) and 14(d) of
the Exchange Act, but shall exclude (1) a trustee or other fiduciary
holding securities under an employee benefit plan of the Corporation or of
a parent or subsidiary of the Corporation or (2) a corporation owned
directly or indirectly by the stockholders of the Corporation in
substantially the same proportions as their ownership of the common stock
of the Corporation. For purposes of paragraph (a)(ii), the term "look-back
date" shall mean the later of (A) the date twenty-four (24) months prior
to the change in the composition of the Board and (B) the Effective Date.
Any other provision of this Section 7(a) notwithstanding, the term "Change
in Control" shall not include either of the following events, if
undertaken at the election of the Corporation:
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<PAGE> 12
(x) a transaction, the sole purpose of which is to
change the state of the Corporation's
incorporation; or
(y) a transaction, the result of which is to sell all
or substantially all of the assets of the
Corporation to another corporation or entity (the
"surviving entity"); provided that the voting
power represented by the surviving entity's
securities (or other equity interests) is owned
directly or indirectly by the stockholders of the
Corporation immediately following such transaction
in substantially the same proportions as their
ownership of the voting power represented by the
Corporation's common stock immediately preceding
such transaction; and provided, further, that the
surviving entity expressly assumes this Agreement.
Notwithstanding anything in this Agreement to the contrary, if the
Employee's employment terminates prior to a Change in Control, and the Employee
reasonably demonstrates that such termination was at the request or suggestion
of a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a "Third Party"), then for all
purposes of this Agreement, the date of a Change in Control shall mean the date
immediately prior to the date of such termination of employment.
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<PAGE> 13
(b) Cause. During the two-year period following a Change in
Control, "Cause" shall mean (i) the willful and continued failure of the
Employee to substantially perform his duties with the Corporation (other than
any such failure resulting from the Employee's incapacity due to physical or
mental illness or any such failure subsequent to the Employee being delivered a
notice of termination without Cause by the Corporation or delivering a notice of
termination for Good Reason to the Corporation) after a written demand for
substantial performance is delivered to the Employee by the Board which
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed the Employee's duties, or (ii) the willful
engaging by the Employee in illegal conduct or gross misconduct which is
demonstrably and materially injurious to the Corporation or its subsidiaries.
For purpose of this paragraph (b), no act or failure to act by the Employee
shall be considered "willful" unless done or omitted to be done by the Employee
in bad faith and without reasonable belief that the Employee's action or
omission was in the best interests of the Corporation or its affiliates. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board, based upon the advice of counsel for the Corporation,
shall be conclusively presumed to be done, or omitted to be done, by the
Employee in good faith and in the best interests of the Corporation. Cause shall
not exist unless and until the Corporation has delivered to the Employee a copy
of a resolution duly adopted by two-thirds (2/3_) of the entire Board at a
meeting of the Board called and held for such purpose (after reasonable notice
to
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<PAGE> 14
the Employee and an opportunity for the Employee, together with counsel, to
be heard before the Board), finding that in the good faith opinion of the Board
an event set forth in clause (i) or (ii) has occurred and specifying the
particulars thereof in detail. Following a Change in Control, the Corporation
must notify the Employee of any event constituting Cause within ninety (90) days
following the Corporation's knowledge of its existence or such event shall not
constitute Cause under this Agreement.
(c) Good Reason. During the two-year period following a Change
in Control, "Good Reason" shall mean, without the Employee's express written
consent, the occurrence of any of the following events:
(1) (i) the assignment to the Employee of any duties or
responsibilities (including reporting responsibilities) inconsistent in
any material and adverse respect with the Employee's duties and
responsibilities with the Corporation immediately prior to such Change
in Control (including any diminution of such duties or
responsibilities); provided, however, that Good Reason shall not be
deemed to occur upon a change in duties or responsibilities that is
solely and directly a result of the Corporation no longer being a
publicly traded entity, and does not involve any other event set forth
in this paragraph (c), or (ii) a material and adverse change in the
Employee's reporting responsibilities, titles or offices (other than
membership on the Board) with the Corporation as in effect immediately
prior to such Change in Control;
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<PAGE> 15
(2) a reduction by the Corporation in the Employee's rate of
annual Base Salary or annual target bonus opportunity (including any
adverse change in the formula for such annual bonus target) as in
effect immediately prior to such Change in Control or as the same may
be increased from time to time thereafter;
(3) any requirement of the Corporation that the Employee (i)
be based anywhere more than thirty (30) miles from the office where the
Employee is located at the time of the Change in Control or (ii) travel
on the Corporation's business to an extent substantially greater than
the travel obligations of the Employee immediately prior to such Change
in Control;
(4) the failure of the Corporation to (i) continue in effect
any employee benefit plan, compensation plan, welfare benefit plan or
material fringe benefit plan in which the Employee is participating
immediately prior to such Change in Control, or the taking of any
action by the Corporation which would adversely affect the Employee's
participation in or reduce the Employee's benefits under any such plan,
unless the Employee is permitted to participate in other plans
providing the Employee with substantially equivalent aggregate benefits
(at substantially comparable cost with respect to welfare benefit
plans), or (ii) provide the Employee with paid vacation in accordance
with the most favorable plans, policies, programs and practices of the
Corporation and its affiliated companies as in effect for the Employee
immediately prior to such Change in Control; or
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<PAGE> 16
(5) the failure of the Corporation to obtain the assumption
agreement from any successor as contemplated in Section 11(a) hereof.
Any event or condition described in Section 7(c)(1) through
(4) which occurs prior to a Change in Control, but with respect to which the
Employee is able to reasonably demonstrate was at the request or suggestion of a
Third Party, shall constitute Good Reason following a Change in Control for
purposes of this Agreement (as if a Change in Control had occurred immediately
prior to the occurrence of such event or condition) notwithstanding that it
occurred prior to the Change in Control. An isolated, insubstantial and
inadvertent action taken in good faith and which is remedied by the Corporation
promptly after receipt of notice thereof given by the Employee shall not
constitute Good Reason. The Employee's right to terminate employment for Good
Reason shall not be affected by the Employee's incapacity due to mental or
physical illness and the Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any event or condition
constituting Good Reason. Following a Change in Control, the Employee must
provide notice of termination of employment within ninety (90) days of the
Employee's knowledge of an event constituting Good Reason or such event shall
not constitute Good Reason under this Agreement.
(d) In addition to the payments set forth in Section 6(g)
above, in the event the Employee's employment with the Corporation terminates
within two (2) years following a Change in Control either (i) by the Corporation
without Cause (other than
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<PAGE> 17
for Retirement or Disability) or (ii) by the Employee for Good Reason, then the
Corporation shall (1) pay to the Employee, within ten (10) days following the
Employee's Date of Termination, a lump sum cash amount equal to two (2) times
the sum of (i) the highest annual rate of Base Salary of the Employee during the
3-year period immediately preceding the Employee's Date of Termination and (ii)
the highest annual bonus earned by Employee in respect of the three (3) fiscal
years of the Corporation immediately preceding the year in which the Employee's
Date of Termination occurs (provided, that if the Employee has not been employed
by the Corporation for such three-fiscal-year period, the greater of (x) the
target annual bonus (without regard to any reduction that would give rise to
Good Reason) for the year in which the Employee's Date of Termination occurs and
(y) the amount otherwise determined under this clause (ii) without regard to
this parenthetical) and (2) continue to provide, for a period of two (2) years
following the Date of Termination, the Employee (and the Employee's dependents
if applicable) with the same level of medical, dental, accident, disability and
life insurance benefits upon substantially the same terms and conditions
(including cost of coverage to the Employee) as existed immediately prior to the
Employee's Date of Termination (or, if more favorable to the Employee, as such
benefits and terms and conditions existed immediately prior to the Change in
Control); provided, that, if the Employee cannot continue to participate in the
Corporation plans providing such benefits, the Corporation shall otherwise
provide such benefits on the same after-tax basis as if continued participation
had been
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<PAGE> 18
permitted. Notwithstanding the foregoing, in the event the Employee becomes
reemployed with another employer and becomes eligible to receive welfare
benefits from such employer, the welfare benefits described herein shall be
secondary to such benefits during the period of the Employee's eligibility, but
only to the extent that the Corporation reimburses the Employee for any
increased cost and provides any additional benefits necessary to give the
Employee the benefits hereunder.
(e)(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution, or any acceleration of vesting of any benefit or award, by the
Corporation or its affiliated companies to or for the benefit of the Employee
(whether paid or payable, distributed or distributable or accelerated or subject
to acceleration pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
7(e)) (a "Payment") would be subject to the excise tax imposed by Section 4999
of the Code, or any interest or penalties are incurred by the Employee with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Employee shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Employee of all taxes
imposed upon the Gross-Up Payment and any interest or penalties imposed with
respect to such taxes, the Employee retains an amount of the Gross-Up Payment
equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the
product of any deductions
-18-
<PAGE> 19
disallowed because of the inclusion of the Gross-Up Payment in the Employee's
adjusted gross income and the highest applicable marginal rate of federal income
taxation for the calendar year in which the Gross-Up Payment is to be made. For
purposes of determining the amount of the Gross-Up Payment, the Employee shall
be deemed to (A) pay federal income taxes at the highest marginal rates of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made, (B) pay applicable state and local income taxes at the highest
marginal rate of taxation for the calendar year in which the Gross-Up Payment is
to be made, net of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes and (C) have otherwise
allowable deductions for federal income tax purposes at least equal to those
which could be disallowed because of the inclusion of the Gross-Up Payment in
the Employee's adjusted gross income. The payment of a Gross-Up Payment under
this Section 7(e) shall in no event be conditioned upon the Employee's
termination of employment or the receipt of severance benefits under this
Agreement.
(ii) Subject to the provisions of Section 7(e)(i), all
determinations required to be made under this Section 7(e), including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination, shall be
made by the public accounting firm that is retained by the Corporation as of the
date immediately prior to the Change in Control (the "Accounting Firm") which
shall provide detailed supporting
-19-
<PAGE> 20
calculations both to the Corporation and the Employee within fifteen (15)
business days of the receipt of notice from the Corporation or the Employee that
there has been a Payment, or such earlier time as is requested by the
Corporation (collectively, the "Determination"). In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change in Control, the Employee may appoint another
nationally recognized public accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Corporation and the Corporation shall enter into any agreement
requested by the Accounting Firm in connection with the performance of its
services hereunder. The Gross-Up Payment under this Section 7(e) with respect to
any Payment shall be made no later than thirty (30) days following such Payment.
If the Accounting Firm determines that no Excise Tax is payable by the Employee,
it shall furnish the Employee with a written opinion to such effect, and to the
effect that failure to report the Excise Tax, if any, on the Employee's
applicable federal income tax return will not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Corporation and the Employee. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the Determination, it
is possible that Gross-Up Payments which will not have been made by the
Corporation should have been made ("Underpayment") or Gross-Up Payments are made
by the Corporation which should not have been made ("Overpayment"),
-20-
<PAGE> 21
consistent with the calculations required to be made hereunder. In the event
that the Employee thereafter is required to make payment of any additional
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the
Corporation to or for the benefit of the Employee. In the event the amount of
the Gross-Up Payment exceeds the amount necessary to reimburse the Employee for
his Excise Tax, the Accounting Firm shall determine the amount of the
Overpayment that has been made and any such Overpayment (together with interest
at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid
by the Employee to or for the benefit of the Corporation. The Employee shall
cooperate, to the extent his expenses are reimbursed by the Corporation, with
any reasonable requests by the Corporation in connection with any contests or
disputes with the Internal Revenue Service in connection with the Excise Tax.
8. Covenants Not to Compete; Confidentiality.
(a) The Employee covenants that if he voluntarily terminates
his employment with the Corporation prior to the end of the term of this
Agreement, unless such termination either is approved by the Board or is within
the two-year period following a Change in Control, he shall not, for a period of
one (1) year following such Date of Termination:
-21-
<PAGE> 22
(1) engage or be interested, whether alone or together with or
on behalf or through any other person, firm, association, trust,
venture, or corporation, whether as sole proprietor, partner,
shareholder, agent, officer, director, employee, adviser, consultant,
trustee, beneficiary or otherwise, in any business principally and
directly engaged in the operation of health maintenance organizations
or the health insurance business or in the management of specialty
medical care through case rate contracting; which business operates in
a geographic area in which, at the time of such termination of
employment, the Corporation is conducting business or plans to conduct
business (a "competing business");
(2) assist others in conducting any competing business;
(3) directly or indirectly recruit or induce or hire any
person who is an employee of the Corporation or any of its
subsidiaries, or solicit any of the Corporation's customers, clients or
providers; or
(4) own any capital stock or any other securities of, or have
any other direct or indirect interest in, any entity which owns or
operates a competing business, other than the ownership of (i) less
than five percent (5%) of any such entity whose stock is listed on a
national securities exchange or traded in the over-the-counter market
and which is not controlled by the Employee or any affiliate of the
Employee or (ii) any limited partnership interest in such an entity.
-22-
<PAGE> 23
Nothing contained in this section, however, shall prohibit the
Employee from taking any of the actions set forth in clause (1), (2), (3) or (4)
above if (i) the Employee's employment has been terminated other than for Cause,
or (ii) the Employee has terminated employment for Good Reason.
(b) In the event that the Employee breaches or threatens to
breach any of the terms of this Section 8, the Employee acknowledges that the
Corporation's remedy at law would be inadequate and that the Corporation shall
be entitled to an injunction restraining the Employee from committing or
continuing such breach.
9. Payment Obligation Absolute. Except with respect to
continued welfare benefits under Section 7(d), the Corporation's obligation to
pay the Employee the compensation and other benefits provided herein shall be
absolute and unconditional and shall not be affected by an circumstances,
including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which the Corporation may have against the Employee. All amounts
payable by the Corporation hereunder shall be paid without notice or demand.
10. Notice.
(a) For purposes of this Agreement, all notices and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered or five (5) days after deposit in
the United States mail, certified and return receipt requested, postage prepaid,
addressed as follows:
-23-
<PAGE> 24
If to the Employee:
Dr. Alan Muney
70 Leeuwarden Road
Darien, CT 06820
If to the Corporation:
Oxford Health Plans, Inc.
800 Connecticut Avenue
Norwalk, Connecticut 06854
Attention: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice (a "Notice of Termination") of the
Employee's Date of Termination by the Corporation or the Employee, as the
case may be, to the other, shall (i) indicate the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Employee's employment under the provision so
indicated and (iii) specify the Date of Termination. The failure by the
Employee or the Corporation to set forth in such notice any particular fact
or circumstance which contributes to a showing of Good Reason or Cause shall
not waive any right of the Employee or the Corporation hereunder or preclude
the Employee or the Corporation from asserting such fact or circumstance in
enforcing the Employee's or the Corporation's rights hereunder.
-24-
<PAGE> 25
11. General Provisions.
(a) No Assignments. This Agreement is personal to each of the
parties hereto. Neither party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Corporation agrees that concurrently with any
merger or sale of assets which would constitute a Change in Control hereunder,
it will cause any successor or transferee unconditionally to assume, by written
instrument delivered to the Employee (or his beneficiary or estate), all of the
obligations of the Corporation hereunder. Failure of the Corporation to obtain
such assumption prior to the effectiveness of any such merger or sale of assets,
shall be a breach of this Agreement and shall constitute Good Reason hereunder
and shall entitle the Employee to compensation and other benefits from the
Corporation in the same amount and on the same terms as the Employee would be
entitled hereunder if the Employee's employment were terminated following a
Change in Control under Section 7(d) hereof. For purposes of implementing the
foregoing, the date on which any such merger or sale of assets becomes effective
shall be deemed the date Good Reason occurs, and shall be the Date of
Termination if requested by the Employee. Notwithstanding the foregoing, this
Agreement shall inure to the benefit of and be enforceable by the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee shall die while any amounts
would be payable to
-25-
<PAGE> 26
the Employee hereunder had the Employee continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to such person or persons appointed in writing by the Employee to
receive such amounts or, if no person is so appointed, to the Employee's estate.
(b) Indemnification of Employee. In the event the employment
of the Employee is terminated by the Corporation without Cause or by the
Employee for Good Reason hereof and the Corporation fails to make timely payment
of the amounts then owed to the Employee under this Agreement, the Employee
shall be entitled to indemnification for all reasonable costs (as such costs are
incurred), including attorneys' fees and disbursements, incurred by the Employee
in taking action to collect such amounts or otherwise to enforce this Agreement,
plus interest on all such amounts at the annual rate of one percent above the
prime rate (defined as the base rate on corporate loans at large U.S. money
center commercial banks as published by the Wall Street Journal), compounded
monthly, for the period from the time payment is due until payment is made to
the Employee. The Employee shall also be entitled to interest (at the rate
described in the immediately preceding sentence) on such reasonable costs
incurred from the date the Employee delivers a receipt to the Corporation for
such costs until the date they are reimbursed to the Employee. Such
indemnification and interest shall be in addition to all rights to which the
Employee is otherwise entitled under this Agreement.
-26-
<PAGE> 27
(c) Entire Agreement; Amendments or Additions; Action by
Board. This Agreement contains the entire agreement between the parties hereto
with respect to the transactions contemplated hereby and supersedes all prior
oral and written agreements, memoranda, understandings and undertakings between
the parties hereto relating to the subject matter hereof. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties. The prior approval by a two-thirds (_2/3) affirmative vote of the
full Board shall be required in order for the Corporation to authorize any
amendments or additions to this Agreement, to give any consents or waivers of
provisions of this Agreement, or to take any other action under this Agreement
including any termination of the employment of the Employee with or without
Cause. For purposes of Board approval with respect hereto, if the Employee is
also a director of the Corporation, he shall abstain from acting on matters
pertaining to this Agreement and shall not be counted as a Board member for
purposes of the two-thirds (2/3_) requirement.
(d) Governing Law. This Agreement shall be governed by the
laws of the State of Connecticut as to all matters, including, but not limited
to, matters of validity, construction, effect and practice.
(e) Arbitration. Except with respect to injunctive relief
under Section 8(b) hereof, any dispute or controversy under this Agreement shall
be settled exclusively by arbitration in Norwalk, Connecticut by three (3)
arbitrators in accordance with the rules of the American Arbitration Association
then in effect.
-27-
<PAGE> 28
Judgment may be entered on the arbitration award in any court having
jurisdiction. The Corporation shall bear all costs and expenses arising in
connection with any arbitration proceeding pursuant to this Section 11(e).
(f) Employment with Subsidiaries. Employment with the
Corporation for purposes of this Agreement shall include employment with any
subsidiary of the Corporation.
(g) Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
(h) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
-28-
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
OXFORD HEALTH PLANS, INC.
By: ___________________________
Dated: ________________ ___________________________
[Employee' name]
-29-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) the
Consolidated Balance Sheet at June 30, 1998 (Unaudited) and the Consolidated
Statement of Earnings for the Six Months Ending June 30, 1998 (Unaudited) and
is qualified in its entirety by reference to such (B) financial statements.
</LEGEND>
<CIK> 0000865084
<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 481,621
<SECURITIES> 636,403
<RECEIVABLES> 207,703
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,425,015
<PP&E> 271,422
<DEPRECIATION> 143,433
<TOTAL-ASSETS> 1,751,201
<CURRENT-LIABILITIES> 1,232,127
<BONDS> 363,312
276,865
0
<COMMON> 803
<OTHER-SE> (121,907)
<TOTAL-LIABILITY-AND-EQUITY> 1,751,201
<SALES> 2,378,350
<TOTAL-REVENUES> 2,420,735
<CGS> 0
<TOTAL-COSTS> 2,254,702
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,601
<INCOME-PRETAX> (577,316)
<INCOME-TAX> (24,384)
<INCOME-CONTINUING> (6,603)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (552,922)
<EPS-PRIMARY> (7.00)
<EPS-DILUTED> (7.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) the
Consolidated Balance Sheet at June 30, 1998 (Unaudited) and the Consolidated
Statement of Earnings for the Six Months Ending June 30, 1998 (Unaudited) and
is qualified in its entirety by reference to such (B) financial statements.
</LEGEND>
<CIK> 0000865084
<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 23,809
<SECURITIES> 664,846
<RECEIVABLES> 421,828
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,142,000
<PP&E> 217,117
<DEPRECIATION> 95,838
<TOTAL-ASSETS> 1,329,255
<CURRENT-LIABILITIES> 639,208
<BONDS> 0
0
0
<COMMON> 783
<OTHER-SE> 589,264
<TOTAL-LIABILITY-AND-EQUITY> 1,329,255
<SALES> 2,020,741
<TOTAL-REVENUES> 2,049,239
<CGS> 0
<TOTAL-COSTS> 1,610,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 121,987
<INCOME-TAX> 50,433
<INCOME-CONTINUING> 71,554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,554
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.87
</TABLE>
