<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 September 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
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
800 Connecticut Avenue, Norwalk, Connecticut 06854
(Address of principal executive offices) (Zip Code)
(203) 852-1442
(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 November 9, 1998 was 80,392,470
1
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OXFORD HEALTH PLANS, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 Financial Statements
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997....................................................3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1998 and 1997 ...................................4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997....................................5
Notes to 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.............25
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings ............................................26
ITEM 2 Changes in Securities and Use of Proceeds.....................34
ITEM 4 Submission of Matters to a Vote of Security Holders...........34
ITEM 5 Other Information.............................................35
ITEM 6 Exhibits and Reports on Form 8-K..............................36
SIGNATURES
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Sep. 30, Dec. 31,
ASSETS 1998 1997
----------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 228,577 $ 4,141
Short-term investments - available-for-sale, at market value 892,872 635,743
Premiums receivable 169,586 275,648
Other receivables 40,682 45,418
Prepaid expenses and other current assets 10,178 10,097
Refundable income taxes 3,059 120,439
Deferred income taxes 43,385 38,092
- ----------------------------------------------------------------------------------------------------
Total current assets 1,388,339 1,129,576
Property and equipment, at cost, net of accumulated depreciation and
amortization of $152,650 in 1998 and $125,926 in 1997 127,246 147,093
Deferred income taxes 103,267 86,406
Restricted investments - hold-to-maturity, at amortized cost 44,114 --
Other noncurrent assets 46,121 34,914
- ----------------------------------------------------------------------------------------------------
Total assets $1,709,087 $1,397,989
====================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Medical costs payable $ 894,501 $ 762,959
Trade accounts payable and accrued expenses 271,344 152,152
Income taxes payable 2,004 --
Unearned premiums 36,022 124,603
Current portion of capital lease obligations 7,207 --
Deferred income taxes 6,096 9,059
- ----------------------------------------------------------------------------------------------------
Total current liabilities 1,217,174 1,048,773
Senior notes payable 200,000 --
Term loan payable 150,000 --
Obligations under capital leases 11,109 --
- ----------------------------------------------------------------------------------------------------
Total liabilities 1,578,283 1,048,773
Redeemable preferred stock 287,933 --
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 80,384,642 in 1998
and 79,474,439 in 1997 804 795
Additional paid-in capital 516,063 437,653
Accumulated deficit (685,316) (95,498)
Unrealized net appreciation of investments 11,320 6,266
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,709,087 $1,397,989
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $1,143,064 $1,045,185 $3,512,101 $3,059,810
Third-party administration, net 4,070 3,975 13,383 10,091
Investment and other income, net 23,857 14,854 66,242 43,352
---------- ---------- ---------- ----------
Total revenues 1,170,991 1,064,014 3,591,726 3,113,253
---------- ---------- ---------- ----------
Expenses:
Health care services 1,015,934 1,019,557 3,270,636 2,630,083
Marketing, general and administrative 172,914 176,641 577,606 492,347
Interest and other financing charges 16,160 -- 43,761 --
Restructuring charges -- -- 199,266 --
Unusual charges -- -- 111,790 --
---------- ---------- ---------- ----------
Total expenses 1,205,008 1,196,198 4,203,059 3,122,430
---------- ---------- ---------- ----------
Operating loss (34,017) (132,184) (611,333) (9,177)
Equity in net loss of affiliate -- (120) -- (1,140)
---------- ---------- ---------- ----------
Loss before income taxes (34,017) (132,304) (611,233) (10,317)
Income tax expense (benefit) 1,905 (54,147) (22,489) (3,714)
---------- ---------- ---------- ----------
Net loss (35,922) (78,157) (588,844) (6,603)
Less - preferred stock dividends and amortization (11,067) -- (16,785) --
---------- ---------- ---------- ----------
Net loss attributable to common stock $ (46,989) $ (78,157) $ (605,629) $ (6,603)
========== ========== ========== ==========
Loss per common share -- basic and diluted $ (.58) $ (.99) $ (7.57) $ (.08)
Weighted average common shares outstanding -- basic
and diluted 80,384 79,059 80,006 78,363
</TABLE>
See accompanying notes to consolidated financial statements.
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OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(588,844) $(6,603)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 50,553 42,997
Noncash restructuring and unusual charges 205,631 --
Deferred income taxes (30,596) 1,417
Realized gain on sale of investments (5,144) (11,137)
Other, net 4,453 1,385
Changes in assets and liabilities:
Premiums receivable 98,851 (38,723)
Other receivables (7,564) (10,704)
Prepaid expenses and other current assets (81) (2,553)
Medical costs payable 60,542 (63,489)
Trade accounts payable and accrued expenses 77,910 35,739
Income taxes payable/refundable 122,839 (64,834)
Unearned premiums (88,581) (26,740)
Other, net 5,437 (7,251)
- ---------------------------------------------------------------------------------
Net cash used by operating activities (94,594) (150,496)
- ---------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (38,736) (58,730)
Purchases of available-for-sale securities (988,218) (417,241)
Sales and maturities of available securities 669,006 552,821
Investment in unconsolidated affiliates (5,410) (13,815)
Other, net (2,259) 3,405
- ---------------------------------------------------------------------------------
Net cash (used) provided by
investing activities (365,617) 65,440
- ---------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,577 18,968
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 (11,693) --
Payments under capital leases (3,385) --
- ---------------------------------------------------------------------------------
Net cash provided by financing activities 684,647 18,968
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 224,436 (65,088)
Cash and cash equivalents at beginning of period 4,141 72,160
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of period $228,577 $7,072
=================================================================================
Supplemental schedule of noncash investing and
financing activities:
Unrealized appreciation of short-term investments $7,603 $11,539
Tax benefit realized on exercise of stock options -- $28,249
Issuance of warrants to purchase common stock $67,000 --
Capital lease obligations incurred $21,707 --
</TABLE>
See accompanying notes to consolidated financial statements.
5
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OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The interim 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 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 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 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 $199,266,000 ($190,516,000 after income
taxes, or $2.39 per share) for the nine months ended September 30, 1998. These
charges included the following estimated costs related to the implementation of
the Company's turnaround plan: (i) a reduction in the carrying value of the
Company's investment in certain of its health plans and costs associated with
disposition or closure of noncore businesses (Florida, Illinois, Pennsylvania
and New Hampshire health plans, specialty care management business and health
centers); (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 primarily through consolidation of operations and real estate.
The restructuring charges for the nine months ended September 30, 1998 are
summarized as follows:
<TABLE>
<S> <C>
Provision for loss on noncore businesses $53,182,000
Provision for loss on government contracts 51,000,000
Write-down of property and equipment 29,146,000
Severence and related costs 20,200,000
Costs of operations consolidation 20,428,000
Provision for loss on disposal of unconsolidated affiliates 9,075,000
Write-down of accounts receivable 7,209,000
All other 9,026,000
- -----------------------------------------------------------------------------
Total restructuring charges $199,266,000
=============================================================================
</TABLE>
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(3) UNUSUAL CHARGES
Unusual charges totaled $111,790,000, or $1.40 per share, for the nine
months ended September 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, additional reserves for losses on provider advances and estimated
asset impairment losses. In addition, the Company, as of September 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 1998, realizing a loss of
$8.1 million. In July 1998, FPA filed for protection under Chapter 11 of the
U.S. Bankruptcy Code.
The unusual charges for the nine months ended September 30, 1998 are summarized
as follows:
<TABLE>
<CAPTION>
<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 certain
net operating losses and the effect of the Company's net tax deductible
temporary differences. Based on the results of operations, management does not
currently believe that such tax benefits relating to losses incurred subsequent
to the first quarter of 1998 will be realized. Accordingly, the Company
discontinued providing tax benefits beginning in the second quarter of 1998.
Based on management's assessment of the progress to date in its turnaround plan,
together with projections of future performance, management currently believes
that deferred benefits recorded prior to April 1998 are realizable. However, the
Company will continue to monitor its tax position throughout the implementation
of its turnaround plan to determine whether such deferred tax benefits will
require an additional valuation allowance. The amounts of future taxable income
necessary during the carryforward period to utilize the unreserved net deferred
tax assets is approximately $400 million.
As of September 30, 1998, the Company has Federal net operating loss
carryforwards of approximately $512 million, which will begin to expire in 2012.
During the first nine months of 1998, the Company received net refunds
of taxes paid aggregating $107.7 million. During the first nine months of 1997,
the Company paid taxes, net of refunds received, aggregating $66.4 million.
(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.
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(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 comprehensive income be
reported in the financial statements. The statement of comprehensive earnings
(loss) for the three months and nine months ended September 30, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C>
Net loss per statement of operations $(46,989) $(78,157) $(605,629) $(6,603)
Unrealized holding gains (losses) on available-for-sale
securities, net of income taxes 12,733 7,518 (19,613) 14,047
Less - reclassification adjustment for losses (gains) included
in net loss, net of income taxes (2,984) (2,379) 24,667 (7,239)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive earnings (loss) $(37,240) $(73,018) $(600,575) $ 205
=====================================================================================================================
</TABLE>
(7) FINANCIAL AND CAPITAL TRANSACTIONS
On May 13, 1998, the Company consummated an agreement with affiliates
of the investment firm Texas Pacific Group ("TPG") under which TPG 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 came 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 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 was originally issued with Series B Warrants to
purchase nonvoting junior participating preferred stock, was nonvoting and
carried a dividend of 9%. 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. On August 28, 1998, the Company held its annual shareholders meeting at
which its shareholders approved the vesting of voting rights in respect of the
Series B Preferred Stock and the issuance, subject to adjustment, of up to
6,730,000 shares of common stock upon exercise of the Series B Warrants. This
approval resulted in the reduction of the dividend on the Series B Preferred
Stock to 8% and an increase in the voting rights of TPG to 22.1% of the combined
voting power of the Company's outstanding common stock and Series A and Series B
Preferred Stock.
Simultaneously with the consummation of the agreement with TPG, 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 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 are effectively
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<PAGE> 9
subordinated to all existing and future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness and are
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 are not
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 million 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. The Term Loan provides for mandatory prepayments in certain
circumstances. 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 $7.1 million and $4.6 million,
respectively, have been capitalized and are being amortized over periods of
seven years and five years, respectively.
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 million.
The aggregate proceeds of the above transactions of $710 million were
utilized, in part, to retire previously outstanding bridge notes of $200
million, make capital contributions to certain regulated subsidiaries and pay
fees and expenses approximating $39 million related to the transactions. The
balance will be used for future subsidiary capital contributions, as necessary,
and for general corporate purposes.
During the first nine months of 1998, the Company made cash payments
for interest expense aggregating approximately $20.1 million. No payments for
interest expense were made in the first nine 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 September 30 Increase (Decrease)
---------------------- -------------------
1998 1997 Amount %
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Freedom Plan 1,331,600 1,286,600 45,000 3.5%
HMO 271,500 256,600 14,900 5.8%
Medicare 156,900 154,800 2,100 1.4%
Medicaid 102,900 187,900 (85,000) (45.2%)
- ------------------------------------------------------------------
Total fully insured 1,862,900 1,885,900 (23,000) (1.2%)
Self-funded 62,000 56,700 5,300 9.3%
- ------------------------------------------------------------------
Total membership 1,924,900 1,942,600 (17,700) (0.9%)
==================================================================
</TABLE>
The decrease in Medicaid membership reflects the Company's withdrawal from
the Connecticut Medicaid program effective April 1, 1998, which resulted in the
loss of 33,000 members; and from the New Jersey Medicaid program effective July
1, 1998, which resulted in the loss of an additional 34,000 Medicaid members.
The following table provides certain statement of operations data expressed
as a percentage of total revenues for the three months and nine months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------------
1998 1997 1998 1997
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned 97.6% 98.2% 97.8% 98.3%
Third-party administration, net 0.3% 0.4% 0.4% 0.3%
Investment and other income, net 2.1% 1.4% 1.8% 1.4%
- ----------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------
Expenses:
Health care services 86.8% 95.8% 91.1% 84.4%
Marketing, general and administrative 14.8% 16.6% 16.1% 15.8%
Interest and other financing charges 1.4% -- 1.2% --
Restructuring charges -- -- 5.5% --
Unusual charges -- -- 3.1% --
- ----------------------------------------------------------------------------------------------
Total expenses 103.0% 112.4% 117.0% 100.2%
- ----------------------------------------------------------------------------------------------
Operating loss (3.0%) (12.4%) (17.0%) (0.2%)
Equity in net loss of affiliate -- -- -- --
- ----------------------------------------------------------------------------------------------
Loss before income taxes (3.0%) (12.4%) (17.0%) (0.2%)
Income tax expense (benefit) 0.2% (5.1%) (0.6%) (0.1%)
- ----------------------------------------------------------------------------------------------
Net loss (3.2%) (7.3%) (16.4%) (0.1%)
==============================================================================================
Supplementary information:
Medical-loss ratio 88.9% 97.5% 93.1% 86.0%
Administrative-loss ratio 15.1% 16.8% 16.4% 16.0%
PMPM premium revenue $ 202.64 $ 188.32 $ 199.79 $ 193.92
PMPM medical expense $ 180.10 $ 183.70 $ 186.05 $ 166.69
Fully insured member months 5,640.9 5,550.1 17,579.2 15,778.6
</TABLE>
The medical-loss ratios for the nine months periods ended September 30,
1998 and 1997 reflect additions to the Company's reserves recorded in the second
quarter of 1998 and third quarter of 1997, respectively. A portion of these
reserve additions represent revisions to estimates for claims incurred in prior
periods. 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 Company's results for the year
ended December 31, 1997 and the nine months ended September 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 and second quarters of 1998, the Company recorded
restructuring charges and unusual charges primarily associated with
implementation of the Company's plan ("Turnaround Plan") to attempt to restore
the Company's profitability by focusing on its core commercial markets and
disposing or restructuring of noncore businesses, reducing administrative costs,
reducing payments to physicians, hospitals and other providers, completing and
operationalizing risk transfer and other provider agreements, reducing
unnecessary utilization of hospital and other services, increasing commercial
group premiums, improving service levels and strengthening operations. The
restructuring charge of $199.3 million included $69.8 million associated with
planned administrative cost reductions primarily 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 and Medicaid contracts and $16.2 million 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. ("FPA"), which recently filed for bankruptcy protection, $30.0 million for
claim reserves and $23.4 million for valuation reserves and other one-time
charges.
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 were adversely affected by adjustments of approximately $72 million and
$102 million in third and fourth quarters of 1997, respectively, and $53 million
in the second quarter of 1998 related to estimates for terminations of group and
individual members and for nonpaying group and individual members. The Company
has taken steps to attempt to improve billing timeliness, reduce billing errors,
reduce lags in recording enrollment and disenrollment notifications, and improve
the Company's collection processes and is attempting to make requisite
improvements in management information systems concerning the value and aging of
outstanding accounts receivable. The Company continues to experience significant
levels of retroactive member and group terminations impacting revenue and
believes it has made adequate provision in its estimates for group and
individual member terminations and for nonpaying group and individual members as
of September 30, 1998. Adjustments to the estimates may be necessary, however,
and any such adjustments would be included in the results of operations for the
period in which such adjustments are made.
As a consequence of the charges described in the previous paragraphs,
comparisons of operating results for the first, second and third quarters 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
11
<PAGE> 12
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.
The Company's commercial rates are often higher than those charged by
competitors, in part reflecting the size 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 second half of 1997 and
the first nine months 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 for the remaining quarter of 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, Pennsylvania and New Hampshire health plans. 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.
The Company is attempting to reduce its future expected costs
associated with payment for laboratory services and pharmacy benefits through
the negotiation of new contracts with outside vendors. The Company has recently
entered into definitive agreements for laboratory services and pharmacy benefit
management that are structured to provide significant savings compared to
current estimates of cost increases for laboratory services and pharmacy
benefits in 1999. However, implementing such contracts may involve operational
difficulties, and there can be no assurance that these contracts will be
successful in reducing the Company's future costs associated with such services
and benefits.
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 who require more health care services
than the average commercial population. The Company had approximately 34,800
members in the mandated HMO and approximately 13,100 members in the mandated
point-of-service plan as of September 30, 1998. In April 1998, the NYSID denied
the Company's rate increase request, but directed the Company to apply funds
allocated to the Company from the New York State Market Stabilization Pools
against rate relief in the individual and small group market. In August 1998,
the Company received approximately $6.4 million from these pools. Although the
Company anticipates that it will receive a similar amount in the fourth quarter
of 1998 or the first quarter of 1999, there can be no assurance that such
payments will be received, or if received, will not be less than the payment
received in August 1998. The Company expects that operating results for the New
York Mandated Plans 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 more 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
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<PAGE> 13
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. On
October 2, 1998, after a follow-up site visit, HCFA accepted the Company's
corrective action plans and indicated that the company would likely be granted
new Medicare contracts for next year. HCFA will continue to monitor the
Company's operations to ensure that the Company complies with its corrective
action plans and improves its operating performance in key areas, including
claims payment. Moreover, the Company's ability to resume marketing and
enrollment, will be subject to HCFA's satisfaction with the progress made by the
Company during the remainder of 1998 in improving its operations and
implementing the corrective actions agreed upon. A follow-up site visit by HCFA
is scheduled for December 1998.
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 where the Company experiences substantial losses
and withdrawing from such areas where agreements cannot be completed. Under
these risk transfer arrangements, providers assume a substantial portion of the
risk of increasing health care costs; however, these arrangements may give rise
to regulatory issues and, among other risks and uncertainties involved in the
successful implementation of these contracts, the Company bears the risk of
nonperformance or default by the providers. 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 finalized agreements pursuant to which it has
transferred the medical cost risk associated with the provision of covered
services to approximately 40,000 Medicare beneficiaries primarily in Nassau,
Suffolk and Richmond counties in New York and approximately 21,000 Medicare
beneficiaries in New Jersey on terms which are intended to improve operating
results for these programs, commencing September 15, 1998. On October 2, 1998,
the Company announced its withdrawal from the Medicare market in four counties
in New York, eight counties in New Jersey, six counties in Connecticut and five
counties in Pennsylvania. The withdrawal will be effective January 1, 1999. The
Company's October 2, 1998 withdrawals will adversely affect enrollment and
revenues. Medicare enrollment could also be adversely affected, perhaps
substantially so, by a long-term continuation of the Company's suspension of
marketing and enrollment and by customer concern over the Company's 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. Further, effective January 1, 1999, the Company will be
required to implement new Medicare regulations including, but not limited to,
regulations relating to discharge notices, additional provider contract language
and plan determinations by peer physicians. These new regulations are likely to
increase the burden of administering the Company's Medicare plans and may
adversely impact the Company's operations.
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. Although the Company
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<PAGE> 14
anticipates that the user fee for 1999 will be approximately the same as it was
in 1998, HCFA has not yet informed the Company of what the 1999 user fee will be
and there can be no assurance that the 1999 user fee will not be greater than
the 1998 user fee. 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. In addition, long-term
structural changes to the Medicare program are currently being 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.
The Company's Turnaround Plan contemplates attempting to eliminate
underwriting losses in the Company's Medicaid programs through disposition of,
or withdrawal from, its Medicaid business or transfer of Medical cost risk for
these businesses to third parties. The Company entered into an agreement with
Health Risk Management, Inc. ("HRM"), effective April 1998, pursuant to which
HRM assumed the medical cost risk for the Company's approximately 64,000
Pennsylvania Medicaid members. In October 1998, the Company entered into an
agreement to sell the capital stock of its Pennsylvania HMO subsidiary to HRM
for $10.4 million, subject to regulatory approval. Effective December 31, 1998,
the Company will withdraw from the Medicaid business in three New York counties.
On November 13, 1998, the Company completed an agreement to assign its New York
Medicaid contract for its remaining service area, as well as the Medicaid
portion of its New York City physician contracts, to a subsidiary of
AmeriChoice Corporation for approximately $14 million. The assignments have
been approved by the New York State Department of Health and the New York City
Department of Health and are expected to be effective January 1, 1999.
The Company withdrew from the Medicaid programs in New Jersey and Connecticut,
effective July 1, 1998 and April 1, 1998, respectively. There can be no
assurance that the transactions referred to above will be completed or that all
required regulatory approvals will be obtained on a timely basis.
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 coverage
for the health care benefits provided under their contracts. 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. In addition, the Company may decide to
increase certain administrative costs to attempt to improve service levels. The
Company's ability to control administrative costs could be adversely affected by
a continuation of the high level of employee attrition which the Company has
experienced over the last several quarters.
14
<PAGE> 15
The three months ended September 30, 1998 compared with the three months ended
September 30, 1997
Total revenues for the quarter ended September 30, 1998 were $1.17
billion, up 10.1% from $1.06 billion during the same period in the prior year.
The net loss for the third quarter of 1998 totaled $47.0 million, or 58 cents
per share, compared with a net loss of $78.2 million, or 99 cents per share, for
the third quarter of 1997.
Results of operations for the third quarter of 1998 were adversely
affected by high medical costs in the Company's commercial group, Medicare,
Medicaid and New York Mandated Plans. Health care services cost in the third
quarter of 1998 also reflects the application of $25.5 million of loss contract
reserves established in the second quarter of 1998 in anticipation of third
quarter losses in the Company's noncore Medicare and Medicaid businesses.
Results in the third quarter of 1997 were adversely affected by an after-tax
charge of $42.2 million relating to accounts receivable write-offs, additions to
accounts receivable reserves and an after-tax charge of $51.9 million relating
to increased reserves for medical costs payable.
The third quarter of 1998 was also adversely affected by interest and
financing expense of $16.2 million, consisting of $10.4 million in interest and
financing expense in respect of outstanding indebtedness and $5.8 million of
interest paid on claims for medical services under various State prompt payment
law, which was partially offset by certain one-time items resulting in an
aggregate $12.8 million benefit.
Membership in the Company's fully insured health care programs as of
September 30, 1998 decreased by approximately 23,000 members (1.2%) compared
with the level of such membership as of September 30, 1997, primarily as the
result of decreases in membership in the Medicaid program by approximately
85,000 members (45.2%) during this period. In addition, the Company experienced
a decrease in membership in the tri-state Freedom Plan and noncore markets by
approximately 75,000 members (5.3%) during the second and third quarters of
1998. This reduction reflects the Company's withdrawal from the Medicaid program
in Connecticut effective April 1, 1998, which resulted in the loss of
approximately 33,000 members, and from the New Jersey Medicaid program effective
July 1, 1998, which resulted in the loss of approximately 34,000 members.
Membership in the Medicare program grew by only 2,100 members (1.4%) since the
third quarter of 1997, reflecting a slow down in the addition of Medicare
members. The Company has curtailed its marketing efforts for the Medicare
business since late last year and suspended marketing and most enrollment in
June 1998. Furthermore, the Company has withdrawn from the Medicare market in
four counties in New York, eight counties in New Jersey, six counties in
Connecticut and five counties in Pennsylvania. These withdrawals will be
effective January 1, 1999 and will result in the loss of approximately 26,600
members and approximately $150 million in annualized revenue. See "Overview".
Total commercial premiums earned for the three months ended September
30, 1998 increased 16.5% to $839.0 million compared with $719.9 million in the
same period in the prior year. This increase is attributable to a 7.2% increase
in member months in the Company's commercial health care programs, including a
6.4% member months increase in the Freedom Plan. Premium yields of commercial
programs were 8.7% higher on average than in the third quarter of 1997,
primarily due to adjustments of $71.5 million in the third quarter of 1997
related to accounts receivable write-offs resulting from clean-ups of delayed
group bills and terminations of nonpaying individual and group customers and
additions to accounts receivable reserves. The Company's Turnaround Plan
includes, beginning in the first quarter of 1999, seeking premium increases on
the Company's small and large group Freedom Plan and HMO businesses which are
expected to average approximately 9%. These increases are necessary since
healthcare cost increases have outpaced the Company's commercial premium rates
in these lines of businesses. In recent months, the Company has been generally
renewing groups at average rate increases of above 7.5% and these rates have
been generally accepted. A significant portion of the Company's commercial group
business renews effective January 1, 1999 and there can be no assurance the
Company will be successful in obtaining needed rate increases without losing
enrollment.
Premiums earned from government programs decreased 6.5% to $304.1
million in the third quarter of 1998 compared with $325.3 million in the third
quarter of 1997. Reductions in Medicaid membership resulting from the withdrawal
in Connecticut and New Jersey accounted for substantially all of the change
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<PAGE> 16
as member months of Medicaid programs decreased by 44.7% when compared with the
prior year third quarter. Premium yields of Medicaid programs in the third
quarter of 1998 were 2.3% lower than in the prior year period. Premium yields
and member months of Medicare programs were higher by 3.9% and 3.8%,
respectively, when compared to the third quarter of 1997. The increase in
premium yields was partially attributable to a 2% increase in the Medicare
reimbursement amount.
Net investment income for the three months ended September 30, 1998
increased 39.3% to $22.0 million from $15.8 million for the same period last
year primarily due to an increase in average invested balances in the third
quarter of 1998 resulting from the Company's May 1998 financing. Investment
income also benefited from the movement from low yield municipal bonds and
equity securities to high quality government and corporate fixed income
investments. See "Liquidity and Capital Resources".
The medical-loss ratio (health care services expense stated as a
percentage of premium revenues) was 88.9% for the third quarter of 1998 compared
with 97.5% for the third quarter 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 third quarter
of 1997. Medical costs for 1997 reflect additions to the Company's reserves for
IBNR in the third quarter of 1997 aggregating $88 million and in the fourth
quarter of 1997 aggregating $239 million. These additions represented 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 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
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 third 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 September 30, 1998. There can be no assurance that further
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 $172.9 million
in the third quarter of 1998 compared with $176.6 million in the third quarter
of 1997. The decrease compared with the third quarter of 1997 is partially
attributable to a $5.3 million decline in payroll and benefits due to staffing
reductions during the current year's second and third quarters. These expenses
as a percent of operating revenue were 15.1% during the third quarter of 1998
compared with 16.8% during the third quarter of 1997 and 17.6% for the second
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. In addition, the Company may decide to
increase certain administrative costs to attempt to improve service levels. The
Company expects that results for 1998 will continue to be adversely affected by
high administrative costs. Administrative costs in future periods may also be
adversely affected by costs associated with responding to regulatory inquiries
and investigations and defending pending securities class actions, shareholder
derivative and other litigation, including fees and disbursement of counsel and
other experts, to the extent that such costs are not reimbursed under existing
policies of insurance and exceed reserves established as part of the
restructuring and unusual charges recorded in the second quarter of 1998.
16
<PAGE> 17
The nine months ended September 30, 1998 compared with the nine months ended
September 30, 1997
Total revenues for the nine months ended September 30, 1998 were $3.59
billion, up 15.4% from $3.11 billion during the same period in the prior year.
The net loss for the first nine months of 1998 totaled $605.6 million, or $7.57
per share, compared with a net loss of $6.6 million, or eight cents per share,
for the first nine months of 1997. Results of operations for the first nine
months of 1998 were adversely affected by significantly higher medical costs in
the Company's commercial group business, Medicare, Medicaid and New York
Mandated Plans together with approximately $199.3 million of restructuring
charges and $111.8 million of unusual charges. Results for first nine months of
1998 were also adversely affected by interest and financing expense of $43.8
million relating primarily to issuance cost and interest on claims for medical
services. Results of operations for the first nine months of 1997 were adversely
affected by an after-tax charge of $42.2 million relating to accounts receivable
write-offs, additions to accounts receivable reserves and an after-tax charge of
$51.9 million relating to increased reserves for medical costs payable. See
"Liquidity and Capital Resources" and "Overview."
Total commercial premiums earned for the nine months ended September
30, 1998 increased 17.8% to $2.54 billion compared with $2.16 billion in the
same period in the prior year. This increase is attributable, in part, to a
15.4% increase in member months in the Company's commercial health care
programs, including a 14.7% member months increase in the Freedom Plan.
Premiums earned from government programs increased 7.6% to $970.2
million in the first nine months of 1998 compared with $901.9 million in the
first nine months of 1997. The overall increase was attributable to a 13.0%
increase in member months of Medicare programs, and a 3.3% increase in average
premium yield of both the Medicare and Medicaid programs offset in part by a
20.9% decline in member months of Medicaid programs due to the previously
described withdrawal from the Connecticut and New Jersey Medicaid markets.
Net investment income for the nine months ended September 30, 1998
increased 29.4% to $57.3 million from $44.3 million for the same period in the
prior year primarily due to an increase in average invested balances in the
first nine months of 1998 primarily resulting from the Company's May 1998
financing. Investment income also benefited from the movement from low yield
municipal bonds and equity securities to high quality government and corporate
fixed income investments. This increase in net investment income during this
period was also due to a $2.3 million increase in net capital gains in an amount
equal to $2.3 million. See "Liquidity and Capital Resources".
The medical-loss ratio (health care services expense stated as a
percentage of premium revenues) was 93.1% for the first nine months of 1998
compared with 86.0% for the first nine 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 nine
months of 1997. Medical costs for 1997 reflect additions to the Company's
reserves for IBNR in the third quarter of 1997 aggregating $88 million and in
the fourth quarter of 1997 aggregating $239 million. These reserve 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 nine 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 September 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
17
<PAGE> 18
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 $577.6 million
in the first nine months of 1998 compared with $492.3 million in the first nine
months of 1997. The increase in the first nine months of 1998, as compared to
the equivalent prior year period, is primarily attributable to a $31.9 million
rise in payroll and benefits due to increased staffing and a $29.7 million
increase in consulting fees primarily related to enhancements to management
information systems. In addition, depreciation of property and equipment was
$8.1 million higher during the nine months ended September 30, 1998 than in the
first nine months of 1997 as a result of approximately $100 million of capital
expenditures since September 30, 1997. Marketing, general and administrative
expenses as a percent of operating revenue were 16.4% during the first nine
months of 1998 compared with 16.0% during the first nine months of 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. In addition, the Company may
decide to increase certain administrative costs to attempt to improve service
levels. Administrative costs in future periods may also be adversely affected by
costs associated with responding to regulatory inquiries and investigations and
defending pending securities class actions, shareholder derivative and other
litigation, including fees and disbursements of counsel and other experts, to
the extent such costs are not reimbursed under existing policies of insurance
and exceed reserves established as part of the restructuring and unusual charges
recorded in the second quarter of 1998. There can be no assurance that ultimate
costs will not exceed those estimates.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during the first nine months of 1998 aggregated
$94.6 million, compared with $150.5 million for the first nine months of 1997.
The Company's cash flow benefited from income tax refunds aggregating $117
million in the first nine months of 1998 and $97 million in the timing of
collections of commercial premiums above revenue recorded. The Company's capital
expenditures for the first nine months of 1998 totaled $38.7 million. Such funds
were used primarily for management information systems and leasehold
improvements. In addition, in March 1998, the Company incurred obligations under
capital leases for peripheral computer equipment with an aggregate fair market
value approximating $21.7 million. Except for 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 adopted new
minimum capitalization requirements for health care coverage provided by HMOs
and other risk-bearing health care entities known as risk-based capital rules.
Depending on the nature and extent of the new minimum capitalization
requirements ultimately adopted by each state, 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 available parent company 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 upon
enactment by each state.
As of September 30, 1998, consolidated current cash and investments
aggregated approximately $1.12 billion, of which approximately $900 million was
held by operating subsidiaries and approximately $200 million was held by the
parent company after giving pro forma effect to capital contributions by the
parent company to certain subsidiaries to comply with state regulatory capital
requirements after giving effect to third quarter results. As of September 30,
1998, investments in U.S. government securities aggregating $44.1 million have
been segregated as restricted investments to comply with federal and state
regulatory requirements. An additional $13.1 million in current maturities of
such investments 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.
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As a result of the previously discussed software and hardware problems
commencing in the fourth quarter of 1996, 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 $148.1 million at September 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 $35 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 $1.04 billion as of September
30, 1998 (including $871.2 million for IBNR and before netting advance claim
payments of $148.1 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 reserves for
claim liabilities during 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 arrangements relating to the Company's Medicare business
in certain counties and Private Practice Partnerships ("Partnerships"). In
determining the liability for medical costs payable, the Company accounts for
the financial impact of the transfer of risk for certain Medicare members and
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). In the case of the Medicare risk arrangements, the Company no
longer records a reserve for claims liability since the payment obligation has
been transferred to third parties, but the Company maintains a reserve to cover
costs associated with potential nonperformance by the third parties and to meet
regulatory requirements. In the case of Partnership providers subject to
deficits, the Company 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
recognized estimated costs in taking these actions in the second quarter of
1998. The Company believes that its reserves for IBNR are adequate to satisfy
its ultimate claim liabilities. However, the Company's prior 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 nine months of 1998, the Company made cash
contributions to the capital of its HMO subsidiaries aggregating $492.5 million.
The capital contributions were made to ensure that each subsidiary 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 the
remaining quarter of 1998 and in 1999. 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
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Investors, on May 13, 1998, purchased $350 million 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 approximately 19.9% of the outstanding voting power of Oxford's common stock.
The Series A Preferred Stock has approximately 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 originally issued with Series B Warrants to purchase
nonvoting junior participating preferred stock, was nonvoting and carried a
dividend of 9%. 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 million and $105
million, 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. On August 28, 1998, the Company held its annual
shareholders meeting at which its shareholders approved the vesting of voting
rights in respect of the Series B Preferred Stock and the issuance, subject to
adjustment, of up to 6,730,000 shares of common stock upon exercise of the
Series B Warrants. This approval resulted in the reduction of the dividend on
the Series B Preferred Stock to 8% and an increase in the voting rights of TPG
to 22.1% of the combined voting power of the Company's outstanding common stock
and Series A and Series B Preferred Stock.
Simultaneously with the consummation of the Investment Agreement, 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 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 are 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 are
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 are not
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 million 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. The Term Loan provides
for mandatory prepayments in certain circumstances. The Term Loan bears interest
at a rate per annum equal to the administrative agent's reserve adjusted LIBO
rate plus 4.25%.
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 million.
The aggregate proceeds of the above financings of $710 million were
utilized, in part, to retire the Bridge Notes of $200 million, make capital
contributions to certain regulated subsidiaries and pay fees and expenses
approximating $39 million related to the transactions. The balance will be used
for future subsidiary capital contributions, as necessary, 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.
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MARKET RISK DISCLOSURES
The Company's consolidated balance sheet as of September 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 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 September 30, 1998 by
approximately $21.0 million, while a 200 basis points increase in rates would
decrease the value of such investments by approximately $41.8 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 September 30, 1998 by approximately $21.6 million, while a 200 basis points
decrease in rates would increase the value of such investments by approximately
$44.0 million. The Company's investment in equity securities as of September 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 READINESS
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 has divided its Year 2000 compliance program into the following
phases: assessment, planning, remediation and testing. The Company is currently
55% complete with its Year 2000 compliance program and anticipates being
complete with all phases of the program by the second quarter of 1999. The
Company's Year 2000 compliance program requires remediation of certain programs
within particular time frames in order to avoid disruption of the Company's
operations. These time frames include the end of 1998 and certain dates
throughout 1999. Although the Company believes it will complete the remediation
of these programs within the applicable time frames, there can be no assurance
that such remediation will be completed or that the Company's operations will
not be disrupted to some degree.
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.
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 affect on operations.
The Company expects to incur associated expenses of approximately $10 million in
1998 and $5 million in 1999 to complete this effort. As of September 30, 1998,
the Company had incurred approximately $5.1 million of expenses in connection
with its Year 2000 compliance efforts. The Company has deferred certain 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
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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 contracted with an external consulting firm to assist
in the generation of a Year 2000 contingency plan in the event compliance is not
achieved. In connection therewith, the Company has begun to identify reasonably
likely scenarios which could arise in the event of the Company's Year 2000
noncompliance. Once these scenarios are identified, the Company will develop
plans in an attempt to reduce the impact of these noncompliance scenarios on the
Company and its core functions. The Company expects to be substantially complete
with this contingency plan by the first quarter of 1999. However, there can be
no assurance that this contingency plan will be completed on a timely basis or
that such a plan will protect the Company from experiencing a material adverse
effect on its financial condition or results of operations.
Potential consequences of the Company's failure to timely resolve its
Year 2000 issues could include, among others, (i) the inability to accurately
and timely process claims, enroll and bill groups and members, pay providers,
record and disclose accurate data and perform other core functions, (ii)
increased scrutiny by regulators and breach of contractual obligations and (iii)
litigation in connection therewith.
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 liquidity
at the parent company, future health care costs and administrative costs, future
premium rates for commercial, Medicare and Medicaid business, the employer
renewal process, 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 and readiness
for Year 2000, proposed efforts to control health care and administrative costs,
future dispositions of certain businesses and assets, future elimination of
underwriting losses in the Company's Medicaid business, 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 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 $606
million in the first nine 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 the fourth quarter of 1998 and in
1999.
A significant portion of the loss incurred by the Company in the first
nine months of 1998 was associated with restructuring and unusual charges
relating to the Company's Turnaround Plan. These restructuring and unusual
charges 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.
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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, hospitals and
other providers, completing and operationalizing risk transfer and other
provider arrangements, reducing unnecessary utilization of hospital and other
services, increasing commercial group premiums, improving service levels 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
publicity, legal and regulatory proceedings or other future events on the
Company's membership, 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 coverage for the health care benefits provided under their contracts.
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, higher utilization of medical services, including higher
out-of-network utilization under point of service plans, 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 prior 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 and service levels, operating
its core business and the impact on service of changing technologies. 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. Further, the
Company has been adversely affected by high administrative costs in connection
with increased levels of employee attrition over the last several quarters and
there can be no assurance that the Company will not continue to experience such
attrition in the remaining quarter of 1998 and beyond.
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
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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. The graduate medical education and bad debt and charity
care assessments authorized by the New York Health Care Reform Act expire on
December 31, 1998. The New York legislature may reauthorize these assessments
during the 1999 legislative session. However, if such assessments are
reauthorized, the Company cannot predict whether these assessments will increase
or decrease from their current levels. 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 and products, defining medical necessity,
provider compensation, health plan liability to members who fail to receive
appropriate care, disclosure and 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 effect 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.
Further, there can be no assurance that the Company will be successful in
completing or operationalizing such risk transfer and other provider
arrangements.
Management of Growth
Over the past five years the Company has experienced rapid growth in
its business and in its staff and the Company has and will continue to be
affected by its ability to manage such growth effectively, including its ability
to continue to develop processes and systems to support its 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 has been and continues to 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 the remaining quarter of 1998 and beyond.
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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, in developing processes and systems to support its
operations and in improving its service levels. Moreover, operating and other
issues can lead to data problems that affect performance of important functions,
including, but not limited to, claims payment and group and individual billing.
There can also be no assurance that the process of improving existing systems,
developing processes and systems to support the Company's operations and
improving service levels will not be delayed or that additional systems issues
will not arise in the future.
Year 2000 Readiness
The Company's failure to timely resolve its own Year 2000 issues or the
failure of the Company's external vendors to resolve their Year 2000 issues
could have a material adverse effect on the Company's results of operations,
liquidity or financial condition. Further, the Company's estimates for the
future costs and timely and successful completion of its Year 2000 program are
subject to uncertainties that could cause actual results to differ from those
currently projected by the Company. See "Year 2000 Readiness".
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, the employer renewal process 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 September 30, 1998, the Company had advanced, net of allowances
and repayments, approximately $148.1 million to providers pending the Company's
disposition of claims for payment. The NYSID is requiring the Company to obtain
written 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, there can be no assurance
that this will occur.
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 purported class actions commenced 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 September 11, 1998).
The purported class actions commenced 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 September 5,
1998).
The purported class actions commenced 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.,
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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 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 purported class actions commenced 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. ColPERA appealed this decision. On October 15, 1998
the United States Court of Appeals for the Second Circuit dismissed the appeal.
On October 2, 1998, the co-lead plaintiffs filed a consolidated amended
complaint ("Amended Complaint") in the securities class actions. The Amended
Complaint names as defendants Oxford, Oxford Health Plans (NY), Inc., KPMG Peat
Marwick LLP (which was Oxford's outside independent auditor during 1996 and
1997) and several current or former Oxford directors and officers (Stephen F.
Wiggins, William M. Sullivan, Andrew B. Cassidy, Brendan R. Shanahan, Benjamin
H. Safirstein, Robert M. Smoler, Robert B. Milligan, David A. Finkel, Jeffery H.
Boyd, and Thomas A. Travers). The Amended Complaint purports to be brought on
behalf of purchasers of Oxford's common stock, purchasers of Oxford call options
or sellers of Oxford put options during the period from November 6, 1996 through
December 9, 1997 ("Class Period") and on behalf of persons who, during the Class
Period, purchased Oxford's securities contemporaneously with sales of Oxford's
securities by one or more of the individual defendants. The Amended Complaint
alleges that defendants violated Section 10(b) of the Securities Exchange Act of
1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder by making false and
misleading statements and failing to disclose certain allegedly material
information regarding changes in
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Oxford's computer system and the Company's membership, enrollment, revenues,
medical expenses and ability to collect on its accounts receivable. The Amended
Complaint also asserts claims against the individual defendants alleging
violations of Sections 20(a) and 20A of the Exchange Act by virtue of the
individual defendants' sales of shares of Oxford's common stock while the price
of that common stock was allegedly artificially inflated by allegedly false and
misleading statements and omissions. The Amended Complaint seeks unspecified
damages, attorneys' and experts' fees and costs, and such other relief as the
court deems proper.
Defendants must respond to the Amended Complaint on or before December
18, 1998. Defendants intend to move to dismiss the Amended Complaint.
In addition, the State Board of Administration of Florida has indicated
that it intends to file on or before November 30, 1998 an amended complaint
("Amended State Board Complaint") in the action that it commenced (see above)
("State Board Action"). The Amended State Board Complaint likely will assert
claims similar to those asserted in the Amended Complaint in the purported class
actions (see above). The Amended State Board Complaint may also assert claims
against all of the defendants alleging: (i) violations of Section 18(a) of the
Exchange Act, by virtue of alleged false and misleading information disseminated
in the 10-K report Oxford filed for the year ended December 31, 1996; (ii)
violations of the Florida Blue Sky laws; and (iii) common law fraud and
negligent misrepresentation. The Amended State Board Complaint likely will seek
unspecified damages, attorneys' and experts' fees and costs, and such other
relief as the court deems proper.
Defendants must respond to the Amended State Board Complaint on or
before January 18, 1998. Defendants intend to move to dismiss the State Board
Action.
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).
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 purported shareholder derivative actions commenced 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).
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The purported shareholder derivative actions commenced 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 purported shareholder derivative actions commenced 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, and
appointing lead counsel for the federal derivative plaintiffs, was entered and
so ordered by Judge Brieant on September 26, 1998.
On October 2, 1998, the federal derivative plaintiffs filed an amended
complaint ("Amended Derivative Complaint"). The Amended Derivative Complaint
names as defendants certain of Oxford's directors and a former director (Stephen
F. Wiggins, James B. Adamson, Robert B. Milligan, Fred F. Nazem, Marcia J.
Radosevich, Benjamin H. Safirstein and Thomas A. Scully), together with the
Company itself as a nominal defendant. The Amended Derivative Complaint alleges
that the individual 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 to Oxford's computer
system, by failing to design and 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 Amended Derivative
Complaint further alleges that certain of the individual defendants breached
their fiduciary obligations to the Company by selling shares of Oxford common
stock while the price of the common stock was allegedly artificially inflated by
their alleged misstatements and omissions. The Amended Derivative Complaint
seeks declaratory relief, unspecified damages, attorneys' and experts' fees and
costs and such other relief as the court deems proper. No demand has been made
upon the Company's Board of Directors that Oxford pursue the causes of action
alleged in the Amended Derivative Complaint. The Amended Derivative Complaint
alleges that the federal derivative plaintiffs' duty to make such a demand was
excused by the individual defendants' alleged conflict of interest with respect
to the matters alleged therein.
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Pursuant to a stipulation entered into and filed by the parties on
November 2, 1998, and expected to be so ordered by Judge Brieant, defendants
must answer, move or otherwise respond to the Amended Derivative Complaint on or
before February 1, 1999. This stipulation provides that proceedings in the
Federal Derivative Actions are stayed in all respects until February 1, 1999,
unless any of the parties provides written notice of their desire to terminate
this stay, in which case defendants shall have sixty (60) days from such notice
to answer, move or otherwise respond to the Amended Derivative Complaint.
Defendants intend to move to dismiss the Amended Derivative Complaint or, in the
alternative, to stay the Federal Derivative Actions pending resolution of the
securities class actions.
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.
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") 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 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 and continues to express concern with the Company's claims turnaround
and performance. 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 certain other corrective actions
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, some of Oxford's present and former
directors and officers have provided testimony.
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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. 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 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.
The Commission has served the Company with several subpoenae duces
tecum requesting documents concerning a number of subjects, including, but not
limited to, internal and external audits, uncollectible premium receivables,
timing of and reserves with respect to payments to vendors, doctors and
hospitals, payments and advances to medical providers, adjustments related to
terminations of group and individual members and for nonpaying group and
individual members, computer system problems, agreements with the New York State
Attorney General, employment records of former employees and policies and
procedures relating to the sale of Oxford securities by officers and directors.
Oxford has produced and is continuing to produce documents in response to these
subpoenae. Oxford also has provided testimony from some of its present and
former directors and officers.
Oxford intends to cooperate fully with the Commission and 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 more months, and service to
existing members will not be affected.
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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. On October 2,
1998, after a follow-up site visit, HCFA accepted the Company's corrective
action plans and indicated that the Company would likely be granted new Medicare
contracts for next year. At the October site visit, HCFA recognized the progress
made by the Company in improving its Medicare operations. HCFA will continue to
monitor the Company's operations to ensure that the Company complies with its
corrective action plans and improves its operating performance in key areas,
including claims payment. Moreover, the Company's ability to resume marketing
and enrollment will be subject to HCFA's satisfaction with the progress made by
the Company in improving its operations and implementing the corrective actions
agreed upon during the remainder of 1998. A follow-up site visit by HCFA is
scheduled for December 1998.
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
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 nine months 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.
On October 2, 1998, the Company announced its withdrawal from the
Medicare market in four counties in New York, eight counties in New Jersey, six
counties in Connecticut and five counties in Pennsylvania. The withdrawal will
be effective January 1, 1999.
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. At least four arbitration proceedings have 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.
On or about September 9, 1998, the NYCMS announced that it was breaking
off settlement negotiations with Oxford, and would resume its litigation against
Oxford. Since that date, Oxford has been served with additional notices of
intent to arbitrate, filed on behalf of more than twenty individual physicians.
The outcome and settlement prospects of the various arbitration
proceedings 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.
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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 provided 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.
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 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. On September 8, 1998, Oxford moved to
dismiss the complaint based on plaintiffs' failure to exhaust their
administrative remedies; the outcome of this motion cannot be predicted this
time.
On October 26, 1998, Complete Medical Care, P.C. ("CMC"), United
Medical Care, P.C. ("UMC"), Comprehensive Health Care Corp. ("CHC") and Oscar
Fukilman, M.D. commenced actions in the Supreme Court of the State of New York
for New York County against Oxford and certain of its officers. The complaints
in United Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No.
605176/98, and Complete Medical Care, P.C. v. Oxford Health Plans, Inc. et al.,
Index No. 605178/98, generally allege that Oxford and the individual defendants:
(i) breached, and have announced their intention to breach, certain agreements
with CMC and UMC for the delivery of health care services to certain of Oxford's
members; (ii) breached an implied covenant of good faith and fair dealing with
UMC and CMC; (iii) fraudulently induced CMC and UMC to enter into their
respective agreements with Oxford; (iv) tortiously interfered with CMC's and
UMC's current and prospective contractual relations with certain physicians; and
(v) defamed CMC and UMC. The complaints each seek at least $165 million in
damages, at least $500 million in punitive damages, unspecified interest, costs
and disbursements, and such other relief as the court deems proper. The
complaint in the Complete Medical Care action also alleges that Oxford has
unjustly enriched itself by withholding from CMC certain funds to which CMC
claims it is entitled, and seeks the imposition of a constructive trust with
respect to those funds. The complaint in Oscar Fukilman, M.D. et al v. Oxford
Health Plans, Inc. et al., Index No. 604177/98, alleges that Oxford and certain
officers defamed, and conspired to defame, Dr. Fukilman and CHC, and seeks at
least $25 million in damages and unspecified costs and disbursements and such
other relief as the court deems proper.
Although the outcome of these actions cannot be predicted at this time,
the Company believes that it and the individual defendants have substantial
defenses to the claims asserted and intends to defend the actions vigorously.
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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 Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on August
28, 1998 (the "Meeting") in connection with which proxies were solicited
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
At the meeting, stockholders were asked to consider and vote upon the following
proposals: (a) election of three directors ("Proposal Number One"); (b) the
vesting of voting rights with respect of the Company's Series B Cumulative
Preferred Stock, and the issuance, subject to adjustment, of up to 6,730,000
shares of the Company's common stock, upon exercise of the Company's Series B
Warrants ("Proposal Number Two"); (c) amendment of the Oxford Health Plans, Inc.
1991 Stock Option Plan, as amended (the "1991 Stock Option Plan"), to increase
the number of shares of common stock that can be issued under the 1991 Stock
Option Plan from 21,580,000 shares to 25,580,000 shares ("Proposal Number
Three"); (d) amendment of the 1991 Stock Option Plan to, among other things,
increase the annual individual optionee limit from 200,000 to 2,000,000 shares
("Proposal Number Four"); (e) request that the Board of Directors take the
necessary steps to declassify the Board of Directors so that directors are
elected annually ("Proposal Number Five"); and (f) prohibit the Company from
investing in certain tobacco producing companies ("Proposal Number Six").
At the Meeting, David Bonderman, Jonathan J. Coslet and Benjamin H.
Safirstein, M.D. were each elected a director of the Company for a term to
expire in 2001. Continuing directors whose terms expire in 1999 are Fred F.
Nazem, James G. Coulter and Thomas A. Scully. Continuing directors whose terms
expire in 2000 are Norman C. Payson, M.D., Robert B. Milligan, Jr., Marcia J.
Radosevich, Ph.D. and Stephen F. Wiggins. A total of 88,349,521 votes were cast
in favor of, and 1,769,699 votes were cast to withhold authority for Mr.
Bonderman's election. A total of 88,309,396 votes were cast in favor of, and
1,809,823 votes were cast to withhold authority for Mr. Coslet's election. A
total of 88,242,594 votes were cast in favor of, and 1,876,626 votes were cast
to withhold authority for Dr. Safirstein's election. Proposal Number Two was
adopted with 34,77,063 common stock votes cast for, and 5,598,858 common stock
votes cast against the proposal. In addition, there were 851,419 common stock
votes abstaining and 33,091,880 broker nonvotes related to the proposal.
Proposal Number Three was adopted with 69,889,414 votes cast for, and 17,656,784
votes cast against the proposal. In addition, there were 1,516,496 votes
abstaining and 1,056,526 broker non-votes related to Proposal Number Three.
Proposal Number Four was adopted with 70,540,459 votes cast for, and 16,994,881
votes cast against the proposal. In addition, there were 1,527,354 votes
abstaining and 1,056,526 broker non-votes related to Proposal Number Four.
Proposal Number Five was not adopted with 28,489,459 votes cast against, and
27,493,304 votes cast for the proposal. In addition, there were 1,046,577 votes
abstaining and 33,091,880 broker non-votes related to Proposal Number Five.
Proposal Number Six was not adopted with 25,217,432 votes cast against, and
11,456,223 votes cast for the proposal. In addition, there were 20,353,685 votes
abstaining and 33,091,880 broker non-votes related to Proposal Number Six.
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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.
Although the Company made certain modifications and enhancements to
attempt to improve systems controls and processing efficiencies during the third
quarter of 1998, 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 Company's "Year 2000" readiness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and " - Year 2000 Readiness".
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Document
3(a) Amended and Restated Bylaws of the Registrant
10(a) Letter Agreement, dated September 28, 1998, between
the Registrant and Fred F. Nazem
10(b) Letter Agreement, dated July 24, 1998, between the
Registrant and Benjamin Safirstein, M.D.
(b) Reports on Form 8-K
In a report on Form 8-K dated August 11, 1998, and filed August 11,
1998, the Company reported, under Item 5. "Other Events," its second
quarter 1998 earnings press release.
In a report on Form 8-K dated September 1, 1998, and filed September 4,
1998, the Company reported, under Item 5. "Other Events," changes to
its information systems management team.
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)
November 16, 1998 /s/ NORMAN C. PAYSON, M.D.
Date NORMAN C. PAYSON, M.D.,
CHIEF EXECUTIVE OFFICER
November 16, 1998 /s/ YON Y. JORDEN
Date YON Y. JORDEN,
CHIEF FINANCIAL OFFICER
36
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OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description of Document
3(a) Amended and Restated Bylaws of the Registrant
10(a) Letter Agreement, dated September 28, 1998, between the Registrant and
Fred F. Nazem
10(b) Letter Agreement, dated July 24, 1998, between the Registrant and
Benjamin Safirstein, M.D.
37
<PAGE> 1
EXHIBIT 3(a)
AMENDED AND RESTATED BY-LAWS
OF
OXFORD HEALTH PLANS, INC.
ARTICLE I
Stockholders
Section 1.1. Annual Meeting. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place either within or
without the State of Delaware as may be designated by the Board of Directors
from time to time. Any other proper business may be transacted at the annual
meeting.
Section 1.2. Special Meeting. Special meetings of stockholders may be
called at any time by the Chairman of the Board, if any, the Vice Chairman of
the Board, if any, the Chief Executive Officer or the Board of Directors, to be
held at such date, time and place either within or without the State of Delaware
as may be stated in the notice of the meeting. Any action required or permitted
to be taken by the stockholders of the Corporation must be effected at a duly
called annual or special meeting of stockholders of the Corporation and may not
be effected by any consent in writing by such holders.
Section 1.3. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at such stockholder's address as it
appears on the records of the Corporation.
Section 1.4. Adjournments. Any meeting of stockholders, annual or special,
may adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 1.5. Quorum. At each meeting of stockholders, except where
otherwise provided by law or the certificate of incorporation or these by-laws,
the holders of a majority of the votes of the outstanding shares of each class
of stock entitled to vote at the meeting, present in person or represented by
proxy, shall constitute a
<PAGE> 2
quorum. For purposes of the foregoing, two or more classes or series of stock
shall be considered a single class if the holders thereof are entitled to vote
together as a single class at the meeting. In the absence of a quorum the
stockholders so present may, by majority vote, adjourn the meeting from time to
time in the manner provided by Section 1.4 of these by-laws until a quorum shall
attend. Shares of its own capital stock belonging on the record date for the
meeting to the Corporation or to another corporation, if a majority of shares
entitled to vote in the election of directors of such other corporation is held,
directly or indirectly, by the Corporation, shall neither be entitled to vote
nor be counted for quorum purposes; provided, however, that the foregoing shall
not limit the right of the Corporation to vote stock, including but not limited
to its own stock, held by it in a fiduciary capacity.
Section 1.6. Organization. Meetings of stockholders shall be presided over
by the Chairman of the Board, if any, or in the absence of the Chairman of the
Board by the Vice Chairman of the Board, if any, or in the absence of the Vice
Chairman of the Board by the Chief Executive Officer, or in the absence of the
Chief Executive Officer by the President, or in the absence of the President by
a Vice President, or in the absence of the foregoing persons by a chairman
designated by the Board of Directors, or in the absence of such designation by a
chairman chosen at the meeting. The Secretary, or in the absence of the
Secretary an Assistant Secretary, shall act as Secretary of the meeting, but in
the absence of the Secretary and any Assistant Secretary, the chairman of the
meeting may appoint any person to act as secretary of the meeting.
Section 1.7. Voting; Proxies. Unless otherwise provided in the certificate
of incorporation, each stockholder entitled to vote at any meeting of
stockholders shall be entitled to one vote for each share of stock held by such
stockholder which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for such stockholder by proxy, but no such proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed proxy shall be irrevocable if it states that it
is irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A stockholder may revoke any
proxy which is not irrevocable by attending the meeting and voting in person or
by filing an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date with the Secretary of the Corporation. Voting at
meetings of stockholders need not be by written ballot and need not be conducted
by inspectors unless the holders of a majority of the outstanding shares of all
classes of stock entitled to vote thereon present in person or by proxy at such
meeting shall so determine. At all meetings of stockholders for the election of
directors a plurality of the votes cast shall be sufficient to elect. With
respect to other matters, unless otherwise provided by law or by the certificate
of incorporation or these by-laws, the affirmative vote of a majority of the
votes cast by the shares of all classes of stock present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the stockholders, provided that (except as otherwise
required by law or by the certificate of incorporation) the Board of Directors
may require a larger vote upon any such matter. Where a separate vote by class
is required, the affirmative vote of the holders of a majority of the shares of
each class present in person or represented by proxy at the meeting and entitled
to vote shall be the act of such class, except as otherwise provided by law or
by the certificate of incorporation or these by-laws.
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<PAGE> 3
Section 1.8. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. If no record date is fixed: (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board is necessary, shall
be the day on which the first written consent is expressed; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at the
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board may fix a new record date for the adjourned meeting.
Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 1.10. Advance Notice of Stockholder-Proposed Business at any
Meeting of Stockholders. To be properly brought before any meeting of the
stockholders, business must be either (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(b) otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before the meeting by a
stockholder. In addition to any other applicable requirements, including
(without limitation) requirements imposed by federal securities laws pertaining
to proxies, for business to be properly brought before any meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, at least seventy-five (75) days prior to the meeting provided,
however, that in the event that less than ninety (90) days' notice or prior
public disclosure of the date of annual meeting of stockholders is given or made
to stockholders by the Corporation, notice by the Stockholder to be timely must
be so received not later than the close of
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<PAGE> 4
business on the 15th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made, whichever
first occurs. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before any meeting of the stockholders
(i) a brief description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting, (ii) the name and
record address of the stockholder proposing such business, (iii) the class and
number of shares of the Corporation which are beneficially owned by the
stockholder, and (iv) any material interest of the stockholder in such business.
Notwithstanding anything in these by-laws to the contrary, no business
shall be conducted at any meeting of the stockholders except in accordance with
the procedures set forth in this Section 1.10, provided, however, that nothing
in this Section 1.10 shall be deemed to preclude discussion by any stockholder
as to any business properly brought before any meeting.
The chairman of the stockholders' meeting shall, if the facts warrant,
determine and declare at any meeting of the stockholders that business was not
properly brought before the meeting in accordance with the provisions of this
Section 1.10, and if he should determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
ARTICLE II
Board of Directors
Section 2.1. Powers; Numbers; Qualifications. (a) The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise provided by law or in the certificate of
incorporation. (b) Except as otherwise fixed by or pursuant to the provisions or
Article FOURTH of the certificate of incorporation (as it may be duly amended
from time to time) relating to the rights of the holders of any class or series
of stock having a preference over the common stock as to dividends or upon
liquidation to elect, by separate class vote, additional directors, the number
of directors of the Corporation shall be the number fixed from time to time by
the affirmative vote of a majority of the total number of directors which the
Corporation would have, prior to any increase or decrease, if there were no
vacancies. Until otherwise fixed by the directors, the number of directors
constituting the entire Board shall be twelve (12). The persons receiving the
votes of a plurality in amount of holders of the shares of capital stock of the
Corporation, considered as a single class, entitled to vote generally in the
election of directors present at the meeting in person or by proxy shall be
directors for the term prescribed by Article TWELFTH of the certificate of
incorporation or until their successors shall be elected and qualified.
Section 2.2. Vacancies. Unless otherwise provided in the certificate of
incorporation or in the by-laws, vacancies and newly created directorships
resulting from any increase in the authorized number of directors or from any
other cause may be filled by a majority of the directors, although less than a
quorum, then remaining in office and
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elected by the holders of the capital stock of the Corporation entitled to vote
generally in the election of directors or, in the event that there is only one
such director, by such sole remaining director, and the directors so chosen
shall hold office for a term that shall coincide with the term of the class to
which such director shall have been elected.
Section 2.3. Regular Meetings. Regular meetings of the Board of Directors,
or any committee thereof, may be held at such places within or without the State
of Delaware and at such times as the Board or such committee thereof may from
time to time determine, and, if so determined, notice thereof need not be given.
Section 2.4 Special Meetings. Special meetings of the Board of Directors,
or any committee thereof, may be held at such places within or without the State
of Delaware whenever called, in the case of a Board Meeting, by the Chairman of
the Board, if any, by the Vice Chairman of the Board, if any, or by the Chief
Executive Officer or by any two or more Directors or, in the case of a committee
meeting, by the Chairman of such committee, if any, or by any two or more
committee members. At least 24 hours notice of any such meeting, which may, but
need not, state the purpose thereof, shall be given by the person or persons
calling the meeting or a representative or agent thereof.
Section 2.5. Participation in Meetings by Conference Telephone Permitted.
Unless otherwise restricted by the certificate of incorporation or these
by-laws, members of the Board of Directors, or any committee designated by the
Board, may participate in a meeting of the Board or of such committee, as the
case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this by-law shall
constitute presence in person at such meeting.
Section 2.6. Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the entire Board shall constitute a quorum for
the transaction of business. The vote of a majority of the directors present at
a meeting at which a quorum is present shall be the act of the Board unless the
certificate of incorporation or these by-laws shall require a vote of a greater
number. In case at any meeting of the Board a quorum shall not be present, the
members of the Board present may adjourn the meeting from time to time until a
quorum shall attend.
Section 2.7. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or in the absence of the
Chairman of the Board by the Vice Chairman of the Board, if any, or in the
absence of the Vice Chairman of the Board by the Chief Executive Officer, or in
their absence by a chairman chosen at the meeting. The Secretary, or in the
absence of the Secretary an Assistant Secretary, shall act as secretary of the
meeting, but in the absence of the Secretary and any Assistant Secretary, the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.8. Action by Directors Without a Meeting. Unless otherwise
restricted by the certificate of incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such
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committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 2.9. Compensation of Directors. The Board of Directors shall have
the authority to fix the compensation of directors.
ARTICLE III
Committees
Section 3.1. Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in place
of any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board, shall have and may exercise all the
powers and authority of the Board in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of dissolution, removing or indemnifying directors or amending these
by-laws; and, unless the resolution expressly so provides, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock.
Section 3.2. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may adopt, amend and repeal
rules for the conduct of its business. In the absence of a provision by the
Board or a provision in the rules of such committee to the contrary, a majority
of the entire authorized number of members of such committee shall constitute a
quorum for the transaction of business, the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is then present shall
be the act of such committee, and in other respects each committee shall conduct
its business in the same manner as the Board conducts its business pursuant to
Article II of these by-laws.
ARTICLE IV
Officers
Section 4.1. Officers; Elections. As soon as practicable after the annual
meeting of stockholders in each year, the Board of Directors shall elect a Chief
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Executive Officer, a President and a Secretary, and it may, if it so determines,
elect from among its members a Chairman of the Board and a Vice Chairman of the
Board. The Board may also elect one or more Vice Presidents, one or more
Assistant Vice Presidents, one or more Assistant Secretaries, a Treasurer and
one or more Assistant Treasurers and such other officers as the Board may deem
desirable or appropriate and may give any of them such further designations or
alternate titles as it considers desirable. Any number of offices may be held by
the same person.
Section 4.2. Term of Office; Resignation; Removal; Vacancies. Except as
otherwise provided in the resolution of the Board of Directors electing any
officer, each officer shall hold office until the first meeting of the Board
after the annual meeting of stockholders next succeeding his or her election,
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Board or to the Chief Executive Officer or the Secretary of the
Corporation. Such resignation shall take effect at the time specified therein,
and unless otherwise specified therein no acceptance of such resignation shall
be necessary to make it effective. The Board may remove any officer, except for
the Chief Executive Officer, with or without cause at any time. The Board may
remove the Chief Executive Officer only with an affirmative vote of at least
three-quarters (3/4) of the Directors of the Corporation. Any such removal shall
be without prejudice to the contractual rights of such officer, if any, with the
Corporation, but the election of an officer shall not of itself create
contractual rights. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise may be filled for the unexpired portion
of the term by the Board at any regular or special meeting.
Section 4.3. Powers and Duties. The officers of the Corporation shall have
such powers and duties in the management of the Corporation as shall be stated
in these by-laws or in a resolution of the Board of Directors which is not
inconsistent with these by-laws and, to the extent not so stated, as generally
pertain to their respective offices, subject to the control of the Board. The
Secretary shall have the duty to record the proceedings of the meeting of the
stockholders, the Board of Directors and any committees in a book to be kept for
the purpose. The Board may require any officer, agent or employee to give
security for the faithful performance of his or her duties.
ARTICLE V
Stock
Section 5.1 Certificates. Every holder of stock in the Corporation shall
be entitled to have a certificate signed by or in the name of the Corporation by
the Chairman or Vice Chairman of the Board of Directors, if any, or the Chief
Executive Officer, the President or a Vice President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
Corporation, certifying the number of shares owned by such holders in the
Corporation. If such certificate is manually signed by one officer or manually
countersigned by a transfer agent or by a registrar, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or
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registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate of stock in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction or any such
certificate or the issuance of such new certificate.
ARTICLE VI
Miscellaneous
Section 6.1 Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 6.2. Seal. The Corporation may have a corporate seal which shall
have the name of the Corporation inscribed thereon and shall be in such form as
may be approved from time to time by the Board of Directors. The corporate seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
in any other manner reproduced.
Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors and
Committees. Whenever notice is required to be given by law or under any
provision of the certificate of incorporation or these by-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
Section 6.4. Indemnification of Directors, Officers and Employees. The
Corporation shall indemnify to the fullest extent permitted by law any person
made or threatened to be made a party to any action, suit or proceeding, whether
criminal, civil, administrative or investigative, including any action
instituted by or on behalf of the Corporation, by reason of the fact that such
person or such person's testator or intestate is or was a director or officer of
the Corporation or serves or served at the request of the Corporation any other
enterprise as a director or officer. Expenses incurred by any such person in
defending any such actions, suit or proceeding shall be paid or reimbursed by
the Corporation promptly upon receipt by it or an undertaking of such person to
repay such expense if it shall ultimately be determined that such person is not
entitled to be
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indemnified by the Corporation. The rights provided to any person by this by-law
shall be enforceable against the Corporation by such person who shall be
presumed to have relied upon it in serving or continuing to serve as a director
or officer as provided above. No amendment of this by-law shall impair the
rights of any person arising at any time with respect to events occurring prior
to such amendment. To the extent permitted by Delaware law, the Board may cause
the Corporation to indemnify and reimburse other employees of the Corporation as
it deems appropriate. For purposes of this by-law, the term "Corporation" shall
include any predecessor of the Corporation and any constituent corporation
(including any constituent of a constituent) absorbed by the Corporation in a
consolidation or merger; the term "other enterprise" shall include any
corporation, partnership, joint venture, trust or employee benefit plan; service
"at the request of the Corporation" shall include service as a director or
officer of the Corporation, which imposes duties on, or involves services by,
such director or officer with respect to any other enterprise or any employee
benefit plan, its participants or beneficiaries; any excise taxes assessed on a
person with respect to an employee benefit plan, shall be deemed to be
indemnifiable expenses; and action by a person with respect to any employee
benefit plan which such person reasonably believes to be in the interest of the
participants and beneficiaries of such plan shall be deemed to be action not
opposed to the best interests of the Corporation.
Section 6.5. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or her or their
votes are counted for such purpose, if: (1) the material facts as to his or her
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (2) the material facts as to his or her relationship
or interest and as to the contract or transaction are disclosed or are known to
the stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (3) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board, a committee thereof or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at the meeting of the Board or of a committee which
authorizes the contract or transaction.
Section 6.6. Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of account
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs or any other information storage device,
provided that the records so kept can be converted into clearly legible form
within a reasonable time. The Corporation shall so convert any records so kept
upon the request of any person entitled to inspect the same.
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Section 6.7. Amendment of By-Laws. These by-laws may be amended or
repealed, and new by-laws adopted, by the Board of Directors, but the
stockholders, by the affirmative vote of 80% of the voting power of all the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purposes of this
Section as a single class may adopt additional by-laws and may amend or repeal
any by-law whether or not adopted by them.
As adopted August 28, 1998
10
<PAGE> 1
EXHIBIT 10(a)
September 28, 1998
Mr. Fred F. Nazem
Nazem & Company
645 Madison Avenue
New York, NY 10022-1010
Dear Fred:
This letter agreement ("Agreement") is intended to formalize the
understanding between Oxford Health Plans, Inc. (the "Company") and you
regarding the compensation that has been and will be provided to you in
consideration of your service as a member of the Executive Committee and as
Chairman of the Board of Directors of the Company.
A. Executive Committee. In consideration of your service as a member of the
Executive Committee of the Board of Directors, the Company has paid you cash
compensation of $125,000 and, on January 6, 1998, granted you options to
acquire 75,000 shares of the Company's Common Stock pursuant to the terms of
the Oxford Health Plans, Inc. 1991 Stock Option Plan (the "1991 Plan"). The
options became fully vested on May 13, 1998.
B. Chairman of the Board. In consideration of your service as the Chairman of
the Board of Directors, the Company has paid you an annual retainer of
$250,000 and has granted you options to acquire 250,000 shares of the
Company's Common Stock pursuant to the terms of the 1991 Plan. 125,000 of
these options were granted on March 30, 1998, 100,000 of which vested on May
13, 1998 and 25,000 of which will vest upon the earlier of (i) the date on
which the average closing price of the Company's Common Stock for any
consecutive 20 day period preceding March 30, 2000 is equal to or greater
than $30.75 or (ii) May 13, 2003. The remaining 125,000 of these options were
granted on August 28, 1998 and will vest upon the earlier of (i) the date on
which the average closing price of the Company's Common Stock for any
consecutive 20 day period preceding August 28, 2000 is equal to or greater
than $12.125 or (ii) August 28, 2003.
C. Consultant. Unless otherwise determined by mutual consent, following the
termination of your service as a member of the Company's Board of Directors,
the Company will agree to retain your services as a consultant to the Company
from the time you cease to act as director until the earlier to occur of (1)
such time as you have no unexercised options to purchase shares of the
Company's Common Stock or (2) August 28, 2005 (the "Consulting Period").
During the Consulting Period, you shall be available for consultation with
the Company by telephone or in
<PAGE> 2
person at the Company's principal executive offices at such times as you and
the Company shall reasonably agree. In addition, during the Consulting
Period, the Company shall pay you a per diem rate for your consulting
services equal to $1,500 for any days on which consulting services are
performed by you and all of your options shall continue to vest and remain or
become exercisable in accordance with their terms during the Consulting
Period.
If you are in agreement with the terms of this Agreement, please sign the
enclosed copy of this letter and return it to the attention of Karen Mulroe
using the envelope provided for that purpose.
Yours truly,
/s/ NORMAN C. PAYSON, M.D.
Norman C. Payson, M.D
Agreed and accepted this 19th day of October, 1998.
/s/ FRED F. NAZEM
Fred F. Nazem
2
<PAGE> 1
EXHIBIT 10(b)
July 24, 1998
Dr. Benjamin Safirstein
237 South Mountain Avenue
Montclair, NJ 07042
Dear Ben:
This letter agreement (the "Agreement") will confirm the discussions
that we have had with you in connection with the termination of your employment
with Oxford Health Plans, Inc. (the "Company") and your continuing role as a
consultant to the Company.
1. For purposes of this Agreement, references to the "Company"
include both Oxford Health Plans and all of its affiliates. On this basis, the
Company warrants and represents the following to you that there are no written
or oral agreements in effect (x) pertaining to compensation the Company will
pay to you as an employee, officer and/or director or (y) by which you are
bound which impose any obligations on you with respect to disclosing Company
confidential information, competing with the Company, soliciting business from
the Company or the hiring of Company employees other than:
(a) A two page letter from Oxford Health Plans, dated October 5,
1995, signed by Jeanne Wisniewski, Vice President of Human
Resources, extending you an offer of employment;
(b) A one page letter from Oxford Health Plans to you, dated October
16, 1995, signed by William M. Sullivan, Executive Vice President amending
the October 5, 1995 letter;
(c) A five page agreement titled "Confidentiality and
Non-Competition Agreement" between Oxford Health Plans, Inc., a Delaware
Corporation, and you which was signed and dated by Jeanne D. Wisniewski on
May 21, 1996 on behalf of the Company and on January 31,
1996 by you;
(d) The Company's 1991 Stock Option Plan, as amended from time to
time and any successor thereto, as well as any stock option agreements
signed by you;
(e) The Company's benefits programs and procedures;
(f) The Company's Employee Handbook, as amended from
<PAGE> 2
time to time; and
(g) General Company policies which may apply to you.
2. There are no extant written or oral agreements, promises or
representations from the Company to indemnify you and hold you harmless other
than Section 6.4 of the Amended and re-stated by-laws of the Company and
Article Eight of the Company's Amended and Restated Certificate of
Incorporation, copies of which are annexed to this Agreement as Exhibit A.1.
3. Your active employment as Medical Affairs Vice President of the
Company will terminate effective as of July 31, 1998(the "Employment
Termination Date"). Such termination will be treated as a termination "without
cause" under the terms of paragraph 3 of that certain letter (referenced in
Section 1(b)) from William M. Sullivan, on behalf of the Company to you.
4. Subject to your execution of this Agreement and in consideration
of the release of claims set forth below, and your agreement to reasonably
cooperate without personal expense with any litigation or regulatory
investigations or similar proceedings involving the Company with respect to any
period during which you were employed with the Company, as also set forth below:
(a) The Company will pay you, in twelve (12) equal monthly
installments in conformity with the Company's normal payroll periods, an
amount equal to the sum of your base salary earned during the 12-month
period immediately preceding the Employment Termination Date; and
(b) The Company will pay you a bonus, in an amount equal to 50% of
your base salary on December 31, 1997. Such an amount shall be paid out in
lump sum payment following the Employment Termination Date; and
(c) The Company hereby hires you as a Consultant to the Company
during the period (the "Consulting Period") commencing on your Employment
Termination Date and ending on the first anniversary thereof. During the
Consulting Period, you agree to be reasonably available for consultation
with the Company by telephone or in person at the Company's principal
executive offices in New York City or other offices in New York City as
necessary. The performance of your consulting services shall be scheduled
on reasonable notice and in such a manner so as not to interfere with your
other business activities, and so as not to present any conflict of
interest with your other business activities, it being expressly
understood that you are permitted, notwithstanding these consulting
obligations, to secure full-time employment elsewhere. During the
Consulting Period, the Company shall pay you a consulting fee (the
"Fee")of $100,000 in respect of consulting services performed by you. This
fee shall be paid out in four quarterly installments (i.e., October 1998,
January 1999, April 1999 and July 1999)over the course of the Consulting
Period; and
<PAGE> 3
(d) During the Consulting Period, the Company shall continue to
provide you with the same level of basic life insurance, medical coverage,
dental coverage and Manulife coverage in which you participated as of your
Employment Termination Date, provided that you continue to pay, during the
Consulting Period, the applicable employee cost of such coverage as in
effect at the date hereof, subject to any changes applicable to employees
generally during the Consulting Period. A letter regarding the impact of
your termination on other Company provided benefits will be sent under
separate cover; and
(e) The Company will cause to be taken such action necessary to
cause your outstanding options to acquire Company stock ("Options") that
are unvested as of the Employment Termination Date to continue to vest and
remain fully exercisable during the Consulting Period. Subsequent to the
termination of the Consulting Period, any vested Options will remain
exercisable for a period of 90 days. The provisions of this paragraph 4(e)
shall not be effective with respect to Options that are designated as
incentive stock options ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, until the expiration of three
months following the Employment Termination Date. Any ISOs that are not
exercised prior to the expiration of three months following your
Employment Termination Date will no longer be treated as ISOs (and will
automatically be treated as non-qualified stock options). Notwithstanding
anything to the contrary in this paragraph 4(e), no Option may be
exercised after, or extended beyond, the expiration of the initial term of
the Option; and
(f) During the Consulting Period, the Company shall provide for you
a senior executive outplacement package that will begin on the date that
you initiate such outplacement services (but no later than the expiration
of the Consulting Period).
5. You hereby acknowledge and agree that the terms and conditions of
the Oxford Health Plans, Inc. Confidentiality and Non-Competition Agreement,
dated January 31, 1996 (as referenced in Section 1(c)), continue to apply
following your termination of employment with the Company.
6. You agree that for a period of five (5) years, except as may be
required by applicable law or court order, you will not make or publish any
statement (orally or in writing) that is or reasonably could be expected to
become publicly known, which libels, slanders or disparages (whether or not such
disparagement legally constitutes libel or slander) the Company, or any of its
affairs or operations, or the reputations of any of its past or present officers
or directors.
7. Following the Employment Termination Date, the Company shall
continue to indemnify you and hold you harmless on terms no less favorable than
those provided by the Company to its Directors and Officers in accordance with
the provisions of the Company's By-Laws. The Company shall also continue to
provide you, for a period of six (6) years from the date that you cease to act
as a Director of the Company, with Directors and Officers insurance coverage
which is no less favorable than that in effect from time to time for the
Directors and Officers of the Company.
8. The Company shall have the ability to
-3-
<PAGE> 4
withhold from the compensation otherwise due to you 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.
9. As you are aware, while you were employed by the Company, you
were granted shares of Oxford Specialty Holdings, Inc. Restricted Stock. As a
result of your separation from the Company, you have certain rights with regard
to that Restricted Stock. You will continue to vest in such shares during the
Consulting Period. In accordance with the Oxford Specialty Holdings 1996 Equity
Incentive Compensation Plan (the "Plan") under which the Restricted Stock was
granted, a check will be forwarded to you which represents the purchase price of
$.01 per share for your unvested shares. In accordance with Section IV, 3 of the
Plan, you have full ownership rights in shares which you are vested in. Until
such shares are no longer subject to the restrictions imposed by the securities
laws, the shares shall be held by the Company.
10. If at the end of the Consulting period, you are still a member
of the Board then you will be eligible for other compensation afforded to Board
members.
Your signature below will constitute your agreement that, in
consideration of the foregoing arrangements, you knowingly and voluntarily waive
and release forever whatever claims you may have or may yet have against the
Company, its parents, subsidiaries and affiliates, and any of its or their
present and former employees, agents, directors and officers, which are known to
you or which reasonably should be known to you, based upon or relating to your
employment by the Company or to the termination of your employment (other than
claims (i)arising out of or related to this Agreement, including, but not
limited to paragraph 7 hereof, (ii) arising after the date hereof, (iii) for
contribution among joint defendants, or (iv)that are based upon your rights, if
any, as a former employee under any employee benefit plan in which you were a
participant while employed or remain a participant pursuant to this Agreement).
This release and waiver includes but is not limited to any rights or
claims under United States federal, state or local law and the national or local
law of any foreign country (statutory or decisional), for wrongful or abusive
discharge, for breach of any contract, or for discrimination based upon race,
color, ethnicity, sex, age, national origin, religion, disability, or any other
unlawful criterion or circumstance (including rights or claims under Title VII
of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1866; the
Civil Rights Act of 1991, as amended; the Older Workers Benefits Protection Act
of 1990; the Americans with Disabilities Act of 1990; the Employer Retirement
Income Security Act of 1974, as amended; the Family and Medical Leave Act of
1993; and the Age Discrimination in Employment Act of 1967 ("ADEA") except that
you do not waive ADEA rights or claims that may arise after the date of this
agreement).
In the event that you breach or threaten to breach any of the
Provisions of this Agreement, you acknowledge that the Company's remedy at law
would be inadequate and that the
-4-
<PAGE> 5
Company shall be entitled to an injunction restraining you from committing or
continuing such breach.
Your signature below will also constitute confirmation that you have
been given at least 21 days within which to consider this release and its
consequences, that you have been advised prior to signing this agreement to
consult with any attorney or personal or financial advisor you choose and that
you have knowingly and voluntarily accepted the agreement's terms. For a period
of seven days following the execution of this agreement, you may revoke the
agreement, and the agreement shall not become effective or enforceable until the
revocation period has expired. You agree that this release will be binding upon
you and your heirs, administrators and representatives, executors, successors
and assigns.
You agree that you will not disclose, directly or indirectly, to
anyone other than your immediate family or your counsel, or personal or
financial advisor, the terms of this agreement, except as may be required by
law.
This Agreement shall be binding on the Company and its successors
and assigns. Please confirm by returning to me the enclosed copy of this letter,
signed where indicated, that you knowingly and voluntarily decided to accept and
agree to this Agreement.
Very truly yours,
OXFORD HEALTH PLANS, INC.
/s/ WILLIAM M. SULLIVAN
By: William M. Sullivan
President
Accepted and Agreed:
/s/ DR. BENJAMIN SAFIRSTEIN
Dr. Benjamin Safirstein
7/28/98
Date
-5-
<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>
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<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
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<S> <C>
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<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 228,577
<SECURITIES> 892,872
<RECEIVABLES> 169,586
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,388,339
<PP&E> 279,896
<DEPRECIATION> 152,850
<TOTAL-ASSETS> 1,709,087
<CURRENT-LIABILITIES> 1,217,174
<BONDS> 361,109
287,933
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<COMMON> 804
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<TOTAL-LIABILITY-AND-EQUITY> 1,709,087
<SALES> 3,525,484
<TOTAL-REVENUES> 3,591,726
<CGS> 0
<TOTAL-COSTS> 3,270,636
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 43,761
<INCOME-PRETAX> (611,333)
<INCOME-TAX> (22,489)
<INCOME-CONTINUING> (588,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (588,844)
<EPS-PRIMARY> (7.57)
<EPS-DILUTED> (7.57)
</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>
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<NAME> OXFORD HEALTH PLANS, INC.
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<CURRENCY> U.S. DOLLARS
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