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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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.
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(Exact name of registrant as specified in its charter)
Delaware 06-1118515
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
800 Connecticut Avenue, Norwalk, Connecticut 06854
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(Address of principal executive offices) (Zip Code)
(203) 852-1442
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Par Value $.01
Per Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
As of March 24, 1998, there were 79,507,439 shares of common stock issued and
outstanding. The aggregate market value of such stock held by nonaffiliates, as
of that date, was $1,228,350,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be
filed pursuant to Regulation 14A (Part III)
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PART I
Item 1. BUSINESS
General
Oxford Health Plans, Inc. ("Oxford" or the "Company"), incorporated under
the laws of the State of Delaware on September 17, 1984, is a health care
company providing health benefit plans in New York, New Jersey, Pennsylvania,
Connecticut, New Hampshire, Florida and Illinois. The Company's product line
includes its point-of-service plans, the Freedom Plan and the Liberty Plan,
traditional health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), Medicare and Medicaid plans, third-party administration
of employer-funded benefit plans ("self-funded health plans") and dental plans.
The Company's principal executive offices are located at 800 Connecticut Avenue,
Norwalk, Connecticut 06854, and its telephone number is (203) 852-1442. Unless
the context otherwise requires, references to Oxford or the Company include its
subsidiaries.
In July 1995, a wholly-owned subsidiary of the Company merged with OakTree
Health Plan, Inc. ("OakTree"), a Philadelphia-based HMO. The merger was
accounted for as a pooling of interests, and accordingly, all data in the
paragraphs that follow have been restated to include the operations and accounts
of OakTree for all periods prior to the merger.
The Company offers its products through its HMO subsidiaries, Oxford
Health Plans (NY), Inc. ("Oxford NY"), Oxford Health Plans (NJ), Inc. ("Oxford
NJ"), Oxford Health Plans (CT), Inc. ("Oxford CT"), Oxford Health Plans (NH),
Inc. ("Oxford NH"), Oxford Health Plans (PA), Inc. ("Oxford PA"), Oxford Health
Plans (FL), Inc. ("Oxford FL"), and through Oxford Health Insurance, Inc.
("OHI") and Oxford Health Plans (IL), Inc. ("Oxford IL"), the Company's health
insurance subsidiaries. OHI has been granted a license to operate as an accident
and health insurance company by the Departments of Insurance of New York, New
Jersey, Connecticut, New Hampshire, Florida and Pennsylvania. Oxford IL is
licensed by the Illinois Department of Insurance as an accident and health
insurance company with authority to offer HMO products. The Company is not
dependent on any single employer or group of employers, as the largest employer
group contributed less than 1% of total premiums earned during 1997 and the ten
largest employer groups contributed 4.4% of total premiums earned during 1997.
The Company's business is managed through regional management structures in New
York, New Jersey, Connecticut, New Hampshire, Florida, Illinois and Pennsylvania
(including southern New Jersey counties in the Philadelphia metropolitan area).
Recent Developments
Net Losses
As more fully discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Company incurred a net loss
of $291 million in 1997 and expects to incur additional losses in 1998, the
extent of which cannot be predicted at this time. As a result of its losses in
1997, 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 in 1998.
Financings
On February 6, 1998, the Company issued a $100 million senior secured
increasing rate note due February 6, 1999 ("Bridge Note") and on March 30, 1998,
issued an additional $100 million Bridge Note, pursuant to a Bridge Securities
Purchase Agreement, dated as of February 6, 1998, between the Company and an
affiliate of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as
amended on March 30, 1998 (the "Bridge Agreement"). The Company used the
proceeds of the Bridge Notes to make capital contributions to certain of its HMO
subsidiaries, to pay expenses in connection with the issuance and for general
corporate purposes. For a description of terms of the Bridge Notes, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". The Company intends to retire
the Bridge Notes with a portion of the proceeds of the Proposed Financing
referred to below.
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The Company and TPG Oxford LLC ("TPG"), an affiliate of Texas Pacific
Group, have entered into an Investment Agreement, dated as of February 23, 1998
(the "Investment Agreement"), pursuant to which TPG is to make a $350 million
investment in Oxford. Such investment will consist of ten-year Preferred Stock
and Warrants to purchase up to 22,530,000 shares of the Company's common stock.
For additional information regarding the Preferred Stock and the Warrants, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". This financing is subject to
various conditions, including receipt of regulatory approvals, absence of a
Material Adverse Effect (as defined) and completion of debt financing in the
amount of $350 million.
In connection with the debt financing required as a condition to the
investment under the Investment Agreement, the Company has engaged DLJ to act
as arranger for a senior secured term loan and as placement agent for a senior
unsecured financing, in the aggregate amount of $350 million. These
transactions are subject to the negotiation and execution of definitive
agreements, which are expected to contain various conditions, including, among
others, receipt of regulatory approvals and absence of material adverse change,
and the senior unsecured financing is also subject to placement of the
financing with investors. The terms of these transactions will depend on market
conditions and other factors beyond the Company's control. There can be no
assurance that definitive agreements will be executed or, if such agreements
are executed, that the conditions specified therein will be satisfied.
The investment under the Investment Agreement and the debt financings
described in the preceding paragraph are herein collectively called the
"Proposed Financing". See "Cautionary Statement Regarding Forward-Looking
Statements-Proposed Financing".
Management Changes
Dr. Norman C. Payson has agreed to become Chief Executive Officer of the
Company upon consummation of the Proposed Financing. Prior to closing, Dr.
Payson is working as a consultant to the Company. At the closing, Dr. Payson
will purchase 644,330 shares of the Company's common stock for an aggregate
purchase price of $10 million. Dr. Payson was formerly a founder and the
President and Chief Executive Officer of Healthsource, Inc. Upon consummation of
the Proposed Financing, William M. Sullivan will serve as President of the
Company.
In February 1998, Fred F. Nazem, a director and formerly Chairman of the
Executive Committee of the Company's Board of Directors, was elected
non-executive Chairman of the Board, and the Executive Committee was disbanded.
Stephen F. Wiggins, founder and formerly Chairman of the Board, continues to
serve as a director.
On March 30, 1998, Marvin P. Rich agreed to become Chief Administrative
Officer of the Company. Mr. Rich was previously an Executive Vice President at
K-Mart, Inc. and was an Executive Vice President at Wellpoint Health Networks,
Inc. in charge of specialty companies and financial and information services.
Upon consummation of the Proposed Financing, the number of directors will
be increased to twelve, Dr. Payson will become a director, and TPG will be
entitled to nominate four directors.
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 over
several years. Unanticipated software and hardware problems arising from the
conversion created significant delays in the Company's claims payment, delayed
billing functions and telephone service and adversely affected the Company's
claims payment and billing. For information regarding the Company's plans with
respect to its information systems, see "Business - Status of Information
Systems".
Turnaround Plan
The Company intends to focus its resources on employer group products in
the Northeast and particularly the New York Metropolitan Tri-State area. The
Company intends to attempt to improve operating margins for these products over
the next few years by, among other things, strengthening commercial
underwriting, reducing administrative and medical costs and, where appropriate,
refining benefit plans and increasing premiums.
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The Company further intends to attempt to reduce losses in its Medicare
and Medicaid lines of business and in the New York mandated individual HMO and
point-of-service plans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company has withdrawn from the
Connecticut and New Jersey Medicaid programs effective April 1, 1998 and July 1,
1998, respectively. In its Pennsylvania Medicaid program, the Company has
entered into an agreement to transfer the medical risk in that program to a
third party. The Company has filed with the New York State Insurance Department
proposed rate increases of 50% and 64% for its New York mandated individual HMO
and point-of-service plans, respectively, as a result of rapidly rising medical
costs in those plans. In the Medicare line of business, the Company does not
intend to promote growth at the level of prior years as a consequence of
significant operating losses in those programs in certain geographic areas. The
Company is also actively pursuing certain provider contracts pursuant to which a
significant portion of the medical cost risk of some of the Company's Medicare
enrollment will be transferred to network providers.
In 1997, the Company entered new markets in Florida and Illinois with the
acquisitions of Riscorp Health Plans, Inc. and Compass PPA, Incorporated,
respectively. The Company is evaluating its expansion efforts in all markets and
intends to reduce the level of its future investment in the Florida and Illinois
subsidiaries. The Company has scaled back its plans to offer dental HMO and life
insurance products and is evaluating its financial commitment to certain ongoing
initiatives.
The Company may, in certain cases, attempt to improve its contracts with
some of its largest vendors and providers and may implement certain medical
management programs in an effort to reduce medical costs. The Company is also
studying its administrative cost structure and currently intends to attempt to
reduce administrative costs as a percentage of operating revenue over the long
term through operating efficiencies and reduction in employment levels
associated with scaled-back initiatives and operations. The Company expects,
however, that administrative costs will remain high during the foreseeable
future as the result of consulting and other expenses associated with
strengthening the Company's operations.
There can be no assurance that the Company will be successful in
implementing the foregoing measures, in receiving the New York State Insurance
Department's approval for premium increases for the mandated individual
products, in implementing medical cost control measures and provider contracting
initiatives, or in reducing administrative costs. Moreover, the Company cannot
predict the impact of adverse publicity, legal and regulatory proceedings or
other future events on the Company's operations and financial results, including
ongoing financial losses. See "Management's Discussion and Analysis and Results
of Operations-Liquidity and Capital Resources."
Legal Proceedings
See "Legal Proceedings" for a description of litigation and regulatory
investigations and examinations involving the Company and certain of its
directors and officers.
Products
Freedom Plan
Oxford's Freedom Plan is a point-of-service health care plan that combines
the benefits of Oxford's HMOs with some of those of conventional indemnity
health insurance. Oxford's Freedom Plan gives members the option at any time of
using Oxford's HMO plan or exercising their freedom to choose physicians not
affiliated with Oxford. The Freedom Plan, first offered in January 1988 in New
York, has grown to approximately 1,333,500 members at December 31, 1997 compared
with 1,015,100 at the end of 1996. As a percentage of total premiums earned,
Freedom Plan premiums were 59.2% in 1997, 61.2% in 1996 and 64.2% in 1995. The
flexibility of this program has enabled Oxford to market successfully health
care coverage to employer groups who have not previously offered HMO products.
The largest employer group offering the Freedom Plan accounted for approximately
1.4% of Freedom Plan premiums earned during 1997, and the ten largest employer
groups offering the Freedom Plan accounted for 6.5% of Freedom Plan premiums
earned in 1997.
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Oxford has targeted small to medium-size employers (10 to 1,500 employees)
for this product. New York Freedom Plan enrollment accounts for almost 80% of
all Freedom Plan enrollment. In New York and Pennsylvania, each Freedom Plan
member receives two forms of coverage - HMO coverage through the appropriate
Oxford HMO and conventional insurance through OHI. In New Jersey and
Connecticut, each member receives Freedom Plan coverage through one contract.
For Freedom Plan coverage, employers receive one monthly bill and have both the
in-network and out-of-network coverage centrally administered by Oxford.
The New Jersey Freedom Plan was introduced in New Jersey in January 1991.
During 1992, the Company introduced the Connecticut Freedom Plan which, until
1993, was underwritten by an independent insurer and marketed and administered
by Oxford, with Oxford retaining substantially all of the profits or losses
arising from the product. In 1993, the Company received a license to directly
offer its Freedom Plan and HMO products in Connecticut and now fully markets its
products in such state. The Company commenced offering its Freedom Plan in
Pennsylvania in December 1995 and in Florida in 1997.
HMOs
Oxford offers HMO plans in each of the states in which it operates. The
largest HMO commercial employer group accounted for 4.6% of total HMO premiums
earned during 1997, while the ten largest HMO groups accounted for 22.0% of
total HMO premiums earned in 1997. Commercial HMO membership approximated
270,400 members at December 31, 1997 compared with 192,300 members at the end of
1996. As a percentage of total premiums earned, HMO revenues were 11.1% in
1997, 10.7% in 1996 and 11.2% in 1995.
Liberty Plan
In response to demand for more economical health plans, the Company
introduced the Liberty Plan, a point-of-service plan, in late 1993. This plan
offers savings of up to 17% over the standard Freedom Plan and HMO plans by
allowing member groups to choose from a smaller network of highly qualified
providers. The Liberty Plan provider network, while smaller than the Freedom
Plan network, is competitive in size and quality with networks of certain other
health plans in the New York metropolitan area.
Other Products
The Company currently offers preferred provider organization products in
Pennsylvania, New Jersey, and New Hampshire and anticipates offering similar
products in New York and Illinois in the coming year.
Medicare and Medicaid
The Company offers the Oxford Medicare Advantage plan to Medicare eligible
individuals through its New York, New Jersey and Connecticut HMO subsidiaries.
Under risk contracts with the federal Health Care Financing Administration
("HCFA"), Oxford is paid a fixed per member per month capitation amount by HCFA
based upon a formula of the projected medical expense of each Medicare member.
The Company bears the risk that the actual costs of health care services may
exceed the per member per month capitation amount received by the Company.
Medicare risk contracts provide revenues which are generally higher per
member than those for non-Medicare members, and thus provide an opportunity for
increased profits and cash flow. Such risk contracts, however, also carry
certain risks such as higher comparative medical costs, government regulatory
and reporting requirements, the possibility of reduced or insufficient
government reimbursement in the future, and higher marketing and advertising
costs per member as the result of marketing to individuals rather than to
groups. The Company has developed a network of physicians and other providers to
serve its Medicare enrollees. At December 31, 1997, the Company had
approximately 161,000 members enrolled in its Medicare plans compared with
125,000 members at the end of 1996. Medicare premiums accounted for
approximately 22.0% of total premiums earned for the year ended December 31,
1997 compared with 19.8% in 1996 and 14.2% in 1995. See "Management's Discussion
and Analysis of Financial Conditions and Results of
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Operations" for a description of operating losses incurred in the Company's
Medicare program and "Legal Proceedings" for a description of a recent site
visit by HCFA.
Oxford also offers a Medicaid Healthy Start plan to individuals eligible
for Medicaid benefits in New York, New Jersey, Metropolitan Philadelphia, and
Connecticut. The Company receives fixed monthly premiums per member under a risk
contract with the respective state agencies administering the Medicaid program.
The Company bears the risk that the actual costs of health care exceed the per
member per month capitation amounts received by the Company. Medicaid plans also
involve the risk of reduced or insufficient government reimbursement and higher
marketing and advertising costs per member as a result of marketing to
individuals rather than to groups. At December 31, 1997, approximately 189,600
members were enrolled in the Company's Medicaid plans compared with 162,000
members at the end of 1996. Medicaid premiums accounted for approximately 7.7%
of total premiums earned for the year ended December 31, 1997 compared with 8.3%
in 1996 and 10.4% in 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of operating
losses incurred in the Company's Medicaid programs. The Company has withdrawn
from the Medicaid program in New Jersey and Connecticut, effective July 1, 1998
and April 1, 1998, respectively. In its Pennsylvania Medicaid program, the
Company has entered into an agreement to transfer a substantial portion of the
medical risk in that program to a third party.
See "Cautionary Statement Regarding Forward-Looking Statements."
Self-Funded Health Plans
Oxford's self-funded health plans have the same flexible plan designs as
the Company's fully-insured programs, yet retain the cash flow advantage of
self-funding for the employer. The employer self-insures health care expenses
and pays for health claims only as they are incurred. In exchange for
administration fees, Oxford provides claims processing and health care cost
containment services through its provider network and utilization management
programs. Unlike most third-party administrators, the Company's self-funded
health plans enable employers to access Oxford's provider network and to realize
savings through certain of Oxford's discounted fee arrangements and medical cost
containment capabilities, while allowing employers to design custom health
benefit plans in accordance with their own requirements and objectives.
Specialty Care Management
In 1996, the Company formed Oxford Specialty Holdings, Inc. as a
majority-owned subsidiary (taken together with its subsidiaries, "Specialty
Holdings") which was established to manage specialty medical costs in distinct
specialties, such as cardiology, oncology and orthopedics. Specialty Holdings
provides the Company with advisory services from panels of expert specialists,
case rate reimbursement contracts for diseases and cases in particular medical
specialties, and services related to the management of individual diseases and
conditions. Expert panels provide advice as to appropriate diagnoses and
treatment at the disease or specialty level and also provide certain case
management services. With the assistance of each expert panel, Specialty
Holdings develops case rate contracts with physicians and other providers, which
cover the full spectrum of treatment for a specific case or disease for a fixed
"case rate." The Company has contracted with Specialty Holdings for advisory
services and procures care for its members at case rates from Specialty Holdings
in an effort to reduce the medical costs associated with each specialty.
Other Investments
In October 1997, the Company disposed of its interest in Health Partners,
Inc., a company established to provide management and administrative services to
physicians, medical groups and other providers of health care, recognizing a
pretax gain of approximately $25,168,000 ($20,463,000 after taxes, or $.26 per
share).
On November 7, 1995, Oxford completed the acquisition of a 19% equity
interest in St. Augustine Health Care, Inc. ("St. Augustine"), a health
maintenance organization offering health benefit plans to Medicaid beneficiaries
in eleven counties in Florida. During 1996, St. Augustine received approval of
its application to offer commercial programs and began offering such programs in
1997. Under the terms of the securities purchase agreement, Oxford has provided
$14.3 million in equity and debt financing to St. Augustine and has
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the right to make future equity investments in St. Augustine. As part of the
Company's decision to reduce the level of its future investment in expansion
markets, the Company reduced by $14.3 million the carrying value of its
investment in St. Augustine as of December 31, 1997.
Marketing and Sales
Oxford distributes its products through its direct sales force and its
telemarketing representatives and through its network of independent insurance
brokers and agents.
Direct Sales Force; Telemarketing
The Company maintains a direct sales staff of account executives and group
service representatives. Account executives sell traditional HMO programs, the
Company's Freedom and Liberty Plans, the PPO plans and self-funded medical
plans. The direct sales force is organized into units in each of the Company's
regions. Separate regional sales executives are responsible for each direct
sales unit. The Company's marketing department develops television advertising,
as well as direct mail advertising, targeted print advertisements and
internally generated marketing publications for use by the direct sales
force and by independent brokers and agents.
Group service representatives are also organized on a regional basis and
are responsible for servicing accounts. Group service representatives become the
principal administrative contact for employers and their benefit managers by
conducting on-site employee meetings and by providing reporting and
troubleshooting services.
The Company also employs a staff of telemarketing representatives who
generate leads for the direct sales force and who sell directly to small group,
individual and government program customers.
Independent Insurance Agents and Brokers
The primary distribution system for the group health insurance industry in
the Company's service areas has been independent insurance agents and brokers.
Oxford markets its commercial products through approximately 7,300 independent
insurance agents and brokers (compared with 4,500 at the end of 1996) who are
paid a commission on sales. Independent insurance agents and brokers have been
responsible for a significant portion of Oxford's Freedom Plan enrollment growth
over the past four years, and the Company expects to continue using independent
insurance agents and brokers in its marketing system over the next several
years. The Company believes that the New York metropolitan market, in
particular, is influenced significantly by independent agents and brokers, and
that utilization of this distribution system is an integral part of a successful
marketing strategy in the region.
Physician Network
The Company's HMO and point of service health care programs are designed
around "primary care" physicians, who assume overall responsibility for the care
of members, and determine or recommend the nature and extent of services
provided to any given member. Primary care physicians provide preventive and
routine medical care and are also responsible for making referrals to contracted
specialist physicians, hospitals and other providers. Medical care provided
directly by primary care physicians includes the treatment of illnesses not
requiring referrals, as well as periodic physical examinations, routine
immunizations, maternity and well child care and other preventive health
services. Oxford also offers products which do not require referrals from
primary care physicians.
Oxford maintains a network of approximately 65,000 individual physicians,
with approximately 23,100 in New York, 10,700 in New Jersey, 6,500 in
Pennsylvania, 6,300 in Connecticut, 9,000 in Illinois, 7,500 in Florida and
1,900 in New Hampshire. The majority of Oxford's physicians have contracted
individually and directly with Oxford, although Oxford also has contracts with
management service organizations, individual practice associations and physician
groups.
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Private Practice Partnerships; Risk Sharing Groups
The Company's Private Practice Partnership program (the "Partnerships"),
was first introduced in 1993 to organize physicians into groups which promote
efficient, quality care. The Partnerships initiative organizes private practice
physicians within a community into small medical groups, in an effort to promote
the efficiencies and quality control of much larger medical groups, while
remaining in their own private offices. These groups also allow the Company to
introduce new forms of payment to physicians that encourage more efficient
patient care. These forms of payment vary among the Partnerships and include
risk sharing and incentive payments which reward the provision of quality, cost
effective care. Each Partnership is responsible for establishing a management
committee to oversee the operation of the group. The Company attempts to provide
utilization information to the Partnerships in order to promote cost-effective,
quality care and allow the Partnerships to measure performance. The Company's
goal in developing the Partnerships is to enable physicians to achieve optimal
cost and quality performance, while giving them greater authority and
responsibility for a patient's full range of health care needs. By the end of
1997, a total of 225 Partnerships with approximately 4,700 primary care
physicians and 4,800 specialists had been established. Effective January 1,
1997, the Company reduced the number of risk sharing Partnerships from 30 to
15, primarily as a consequence of adverse experience for certain partnerships,
difficulties experienced by the Company in providing timely utilization and
other data to risk sharing Partnerships and new government regulations. These
operational challenges, as well as limitations on certain Partnerships' ability
to manage medical cost risk, will limit the Company's ability to expand the
number of risk sharing Partnerships.
In an effort to control increasing medical costs in its Medicare and
Medicaid lines of business, the Company is actively pursuing provider contracts
pursuant to which a significant portion of the medical cost risk of some of the
Company's Medicare and Medicaid enrollment will be transferred to network
providers or other risk sharing groups. The Company has entered into a contract
transferring a substantial portion of the medical cost risk for its Pennsylvania
Medicaid program to a third party. There can be no assurance that the Company
will be successful in procuring such contracts and the operational difficulties
experienced with risk sharing Partnerships described above could limit or delay
the implementation of these contracts. There are also risks inherent in risk
transfer arrangements, including the risk of nonperformance or insolvency of the
party assuming risk and the risk that member satisfaction is negatively
impacted. Further, the implementation of these contracts may require regulatory
approval, and there can be no assurance such approval will be received without
delay or the imposition of burdensome conditions.
Physician Compensation
Exclusive of the Partnerships and risk sharing groups and case rate
reimbursement for specialty care, Oxford currently compensates its participating
physicians based upon a fixed, discounted fee schedule, under which physicians
receive payment for specific procedures and services. The Company's discounted,
fee-for-service reimbursement program for participating physicians was designed
to achieve delivery of cost-effective, quality health care by its physician
network. Prior to March 1, 1996, the Company generally withheld 20% of agreed
compensation to primary care physicians, and 15% of agreed compensation to
specialist physicians. The Company returned to the physicians a portion of such
withhold, at its discretion, based upon system-wide and individual physician
medical costs compared to actuarially budgeted expenditures. In March 1996,
Oxford shifted to a modified fee schedule under which withholds were eliminated
for most participating physicians.
Certain of Oxford's Partnerships and risk sharing groups are compensated
based on global budgeting and risk sharing for serving enrollees in Oxford's
commercial, Medicare and Medicaid plans receiving care through Partnerships or
risk sharing groups. For Partnerships that meet the Company's requirements for
risk sharing and for risk sharing groups, these agreements allocate a fixed,
periodic sum on a per member per month basis, adjusted for certain demographics,
or percentage of the premium received by the Company without regard to the
amount or scope of the services rendered. Such agreements shift a portion of the
Company's health cost risks to these Partnerships and risk sharing groups,
recognizing the providers' role and capabilities in the area of cost
containment. These arrangements are subject to compliance with new risk sharing
regulations adopted by HCFA, which require disclosure and reinsurance for
specified levels of risk sharing, and proposed state regulation which could
affect physician risk sharing. The Company has also developed an
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incentive program for non-risk sharing Partnerships based on quality and
efficiency measures, and a large number of Partnerships are currently operating
under this program.
The Company, through Specialty Holdings, is also working with specialists
who provide comprehensive treatment for specific diseases or cases at a
predetermined case rate. These providers will be responsible for care from the
initial diagnosis through post-treatment procedures and will establish contracts
with hospitals, specialists, and ancillary providers involved in each case.
Delays in payment of provider claims and claims payment errors by the
Company have created a significant number of provider complaints and a backlog
in responding to such complaints. In addition, several medical societies have
filed or stated that they intend to file purported "mass arbitrations" against
the Company to resolve claims related issues of members physicians. See "Legal
Proceedings". The Company is presently pursuing resolution of these issues but
is unable to predict whether these developments or adverse publicity concerning
the Company will have an adverse effect on its relations with its network
providers, or cause provider disenrollment. For a description of advances made
by the Company to certain network providers, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources".
Control of Health Care Costs
Oxford's medical review program attempts to measure and, in some cases,
influence utilization of certain out-patient services, elective surgeries and
hospitalizations provided to Oxford members. Under the medical review program,
for most of Oxford's plans, physicians and members are obligated to contact
Oxford prior to providing or receiving specified treatments. Utilizing
standardized protocols on a procedure-specific basis, Oxford's staff of
registered nurses and physicians may review the proposed treatment for
consistency with established norms and standards.
Oxford's out-patient cost control program is based on the primary care
system of health care coordination, which promotes consistency and continuity in
the delivery of health care. For most plans sold, each person who enrolls in an
Oxford plan must select a participating primary care physician who serves as
the manager of the member's total health care needs. Members generally see
their primary care physician for routine and preventive medical services. The
primary care physician either provides necessary services directly or
authorizes referrals for specialist physicians, diagnostic tests and
hospitalizations. Except in life-threatening situations, all elective
hospitalizations and surgical procedures must be authorized in advance by a
member's primary care physician and, in order to receive the highest level of
benefits, must be delivered by providers who have contracted with Oxford. For
out-of-network services, the member must obtain approval directly from Oxford.
In connection with its review of certain claims, the Company may compare
the services rendered by its participating physicians to an independently
developed pattern of treatment standards. This pattern of treatment analysis
may allow the Company to identify procedures that were not consistent with a
patient's diagnoses, as well as billing abuses. Separate claims auditing
systems are utilized for certain hospital diagnosis related group payments and
other surgical payments. Oxford utilizes a hospital bill audit program which
has yielded savings with respect to hospital claims, through pricing reviews,
medical chart audits and on-site hospital reviews. Oxford's claim auditing
program includes a computer program that also seeks to identify aberrant
physician billing practices, and helps isolate specific physicians who are not
practicing and billing in a manner consistent with Oxford's health care
philosophy. In addition, the Company maintains management information systems
which help identify aberrant medical care costs. Not all cost control
procedures are applied to all claims, depending on the size and type of claim,
existing claim backlogs and other factors.
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 known
as "Pulse". From September 1996, most business functions at the Company were
operated on the Pulse system, with the exception of the processing of claims,
which continued to operate on the previous system, known as "Pick". Since the
conversion, the Company must
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transmit claims, provider, membership and other data from Pulse to Pick in order
to process claims, and processed claims data is transmitted from Pick to Pulse
where checks are prepared. This transmission of data between systems is 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 Pulse
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 with the assistance of independent experts. As a result
of this review, the Company has decided not to continue the development of
claims processing functionality in Pulse because of the risks associated with
the development, integration and support of this functionality. The Company has
also determined that significant risks would be involved in integrating other
claims processing systems available from third parties with the existing Pulse
system.
Accordingly, the Company has decided to pursue a strategy of evaluating
alternative information system approaches, including an outsourcing of certain
system functions to a third party or a complete replacement of the Pulse and
Pick operating systems with a system or systems available on the market from
third party vendors. The Company currently believes that it will take between
12 and 18 months to identify and implement alternative systems solutions.
Accordingly, the Company's resources are currently focused on making
improvements to the Pulse and Pick systems to improve performance and provide
additional needed functionality during this time period.
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 identifying information systems alternatives and improving
existing systems will not be delayed or that additional systems issues will not
arise in the future.
For information as to the "Year 2000" date conversion, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Year 2000 Date Conversion".
Quality Management
The majority of Oxford's physicians in its commercial and Medicare rosters
are board certified in his or her specialty (by passing certifying examinations
in his or her specialty as recognized by the American Board of Specialties) or
become board certified within five years of becoming eligible. Board
certification is one of the few objective measures of a physician's expertise.
Additionally, Oxford has a credentialing procedure that consists of: primary
verification of all credentials; query of the National Practitioner Data Bank,
state medical boards and admitting hospitals for malpractice history,
disciplinary actions and/or restrictions of hospital privileges; and on-site
office evaluation to determine compliance with Oxford standards. Oxford also
biennially recredentials all providers. The recredentialing review consists of
repeating the initial credentialing process as well as a review of the
provider's practice history with Oxford. This process also includes evaluating
the results of quality assurance reviews, complaints from members concerning the
provider, utilization patterns and the provider's compliance with Oxford's
administrative protocols.
The Company's physician contracts require adherence to Oxford's Quality
Assurance and Medical Review Programs. Oxford's Quality Management Committees,
which are composed of distinguished physicians from within Oxford's network of
providers, advise the Company's Vice President of Medical Affairs concerning the
development of credentialing and other medical criteria. The committees also
provide oversight of Oxford's Quality Management and Utilization Management
Programs through peer review and ongoing review of performance indicators.
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The Company seeks to evaluate the quality and appropriateness of medical
services provided to its members by performing member and physician
satisfaction studies. The Company conducts on-site review of medical records at
physician offices facilitating retrieval of statistical information which
allows for problem resolution in the event of member or physician complaints
and for retrieval of data when conducting focused studies.
Risk Management
The Company limits in part the risk of catastrophic losses by maintaining
reinsurance coverage. Current reinsurance arrangements cover 50% to 90% of
annual medical expenses beyond an annual deductible of $150,000 for each member,
up to a lifetime maximum of $2,000,000 per member.
The Company also maintains general liability, property, employee fidelity,
directors and officers, and professional liability insurance coverage in amounts
the Company deems prudent. The Company requires contracting physicians,
physician groups and hospitals to maintain professional liability and
malpractice insurance in an amount at least equal to industry standards.
Government Regulation
The Company's HMO subsidiaries in New York, New Jersey, Pennsylvania,
Connecticut, Florida and New Hampshire are each subject to substantial federal
and state government regulation. The Company's New York domiciled insurance
subsidiary, OHI, is subject to regulation by the New York State Insurance
Department. In addition, OHI is subject to regulation as a foreign
insurer by New Jersey, Pennsylvania, Connecticut, Florida and New Hampshire. The
Company's Illinois domiciled insurance subsidiary, Oxford IL, is subject to
regulation by the Illinois Department of Insurance.
Federal Regulation
One of the most significant applicable federal laws is the Health
Maintenance Organization Act of 1973, as amended (the "HMO Act"), and the rules
and regulations promulgated thereunder. The HMO Act governs federally qualified
HMOs and competitive medical plans ("CMPs"), and prescribes the manner in which
such HMOs and CMPs must be organized and operated in order to maintain federal
qualification and/or to be eligible to enter into Medicare contracts with the
federal government. Oxford NY, Oxford NJ and Oxford CT are qualified CMPs under
the HMO Act. In order to maintain this status, Oxford NY, Oxford NJ and Oxford
CT must remain in compliance with certain financial, reporting and
organizational requirements under applicable federal statutes and regulations in
addition to meeting the requirements established pursuant to applicable state
law.
The Company's health plans that have Medicare risk contracts, Oxford NY,
Oxford NJ and Oxford CT, are subject to regulation by HCFA, a branch of the
United States Department of Health and Human Services. HCFA has the right to
audit health plans operating under Medicare risk contracts to determine each
health plan's compliance with HCFA's contracts and regulations and the quality
of care being rendered to the health plan's Medicare members. Health plans that
offer a Medicare risk product must also comply with requirements established by
peer review organizations ("PROs"), which are organizations under contract with
HCFA to monitor the quality of health care received by Medicare members. PRO
requirements relate to quality assurance and utilization review procedures. For
a description of a recent site examination by HCFA, see "Legal Proceedings".
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The Company's health plans that have Medicaid contracts, Oxford NY,
Oxford NJ, Oxford PA and Oxford CT, are subject to both federal and state
regulation regarding services to be provided to Medicaid enrollees, payment for
those services and other aspects of the Medicaid program.
State Regulation
Oxford's HMO subsidiaries are licensed to operate as HMOs by the insurance
departments, and, in some cases, health departments, in the states in which
they operate. Applicable state statutes and regulations require Oxford's HMO
subsidiaries to file periodic reports with the relevant state agencies and
contain requirements relating to the operation of their HMOs, the rates and
benefits applicable to their products and their financial condition and
practices. In addition, state regulations require the subsidiaries to maintain
restricted cash or available cash reserves and restrict their abilities to make
dividend payments, loans or other transfers of cash to the Company. For a
description of regulatory capital requirements, see "Management's Discussion and
Analysis of Financial Conditions and Results of Operations-Liquidity and
Capital Resources." State regulatory authorities exercise oversight regarding
the Company's HMOs' provider networks, medical care delivery and quality
assurance programs, form contracts and financial condition. The Company's HMOs
are also subject to periodic examination by the relevant state regulatory
authorities. For a description of recent examinations, see "Legal Proceedings".
OHI is an accident and health insurance company licensed by the New York
State Insurance Department and licensed as a foreign insurer by the insurance
departments of New Jersey, Pennsylvania, Connecticut, Florida, and New
Hampshire. Oxford IL is an accident and health insurance company licensed by
the Illinois Department of Insurance with authority to offer HMO products.
Applicable state laws and regulations contain requirements relating to OHI's
and Oxford IL's financial condition, reserve requirements, premium rates, form
contracts, and the periodic filing of reports with the applicable insurance
departments. OHI's and Oxford IL's affairs and operations are also subject to
periodic examination by the applicable departments. For a description of recent
examinations, see "Legal Proceedings".
State regulations generally require that HMOs utilize standard "community
rates" in determining HMO premiums. Such community rates are generally revised
annually by the HMO, and, in most cases, must be approved in advance by the
applicable state insurance department. The methodology employed in determining
premiums for the Company's Freedom Plan products utilizing an HMO must also be
approved in advance by the applicable state insurance department and must
combine the relevant community rate with traditional indemnity insurance rating
criteria.
Applicable federal and state regulations also contain licensing and other
requirements relating to the offering of the Company's products in new markets
and offerings by the Company of new products, which may restrict the Company's
ability to expand its business. The failure of the Company's subsidiaries to
comply with existing laws and regulations or a significant change in such laws
or regulations could materially and adversely affect the operations, financial
condition and prospects of the Company.
Applicable New York statutes and regulations require the prior approval of
the New York State Commissioner of Health and the New York State Superintendent
of Insurance for any change of control of Oxford NY or the Company and the
prior approval of the New York State Superintendent of Insurance for any change
of control of OHI or the Company. Similar laws in New Jersey, Pennsylvania,
Connecticut, Florida, Illinois and New Hampshire require insurance department
approval of any change in control of the Company or the relevant subsidiary.
For purposes of these statutes and regulations, generally "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of an entity. Control is presumed to
exist when a person, group of persons or entity acquires the power to vote 10%
or more of the voting securities of another entity. Therefore, prior approval
is required for any person to acquire the power to vote 10% or more of the
voting securities of the Company. Applications for approval of TPG's investment
in the Company have been filed with the appropriate regulatory authorities in
New York, New Jersey, Connecticut, Pennsylvania, New Hampshire, Florida and
Illinois, which may approve or disapprove, or impose conditions on,
consummation of the investment.
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Recent Regulatory Developments
State and federal government authorities are continually considering
changes to laws and regulations applicable to Oxford's HMO subsidiaries, OHI
and Oxford IL. The Federal Health Insurance Portability and Accountability Act
of 1996: (i) insures portability of health insurance to individuals changing
jobs or moving to individual coverage by limiting application of preexisting
condition exclusions, (ii) guarantees availability of health insurance to
employees in the small group market and (iii) prevents exclusion of individuals
from coverage under group plans based on health status. The act also permits
offering Medical Savings Account plans on a pilot basis and includes programs
targeting fraud and abuse. The provisions were effective beginning July 1,
1997. Similar state law provisions in New York limit preexisting condition
exclusions for new group and individual enrollees who had continuous prior
coverage and require issuance of group coverage to small group employers.
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. This legislation also requires that health plans serving Medicare
beneficiaries make medically necessary care available 24 hours a day, provide
emergency coverage a "prudent lay person" would deem necessary and provide
grievance and appeal procedures and prohibits such plans from restricting
providers' advice concerning medical care. These changes could have the effect
of increasing competition in the Medicare market.
In 1998, the Company will receive a 2% increase in Medicare premiums,
minus the user fee assessment of .428% of the Company's gross monthly Medicare
premium. The user fee is applied to all Medicare risk contractors by HCFA to
cover HCFA's costs relating to beneficiary enrollment, dissemination of
information and certain counseling and assistance programs. On March 2, 1998,
HCFA announced a 2% increase in premiums in 1999 for all plans in the Company's
service areas. However, the user fee for 1999 has not been determined and may
increase since the Clinton Administration is seeking legislation authorizing it
to collect additional funds. Under the authority provided by the 1997 Act, HCFA
has begun to collect hospital encounter data from Medicare risk contractors.
The data will be used to develop and implement a new risk adjustment mechanism
by January 1, 2000. Given the relatively high Medicare risk premium levels in
the Company's market areas, the Company is in significant jeopardy that the new
risk adjustment mechanism to be developed could significantly and adversely
affect the Company's Medicare premium rate going forward.
President Clinton has proposed expanding Medicare coverage to individuals
between the ages of 55 and 64. There is significant opposition to his proposal,
and the Company cannot predict the outcome of the legislative process or the
impact of the proposal on the Company's results of operations. In addition,
long-term structural changes to the Medicare program are currently being
considered by a 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 Newborns' and Mothers' Health Protection Act of 1996 ("NMHPA") was
signed into law on September 26, 1996. This law applies to group health plans
and health insurance issuers and becomes effective for plan years beginning on
or after January 1, 1998. Consistent with many state law requirements, NMHPA
prohibits group health plans and health insurance issuers from restricting
benefits for a mother's or newborn child's hospital stay in connection with
childbirth to less than 48 hours for a vaginal delivery and for less than 96
hours for a cesarean section. Authorization and precertification requirements
cannot be imposed for these mandatory minimum hospital stays. Federal
regulations implementing NMHPA have not yet been promulgated.
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The Mental Health Parity Act of 1996 ("MHPA") was signed into law on
September 26, 1996. This law applies to group health plans and health insurance
issuers and becomes effective for plan years beginning on or after January 1,
1998. MHPA prohibits group health plans and health insurance issuers providing
mental health benefits from imposing lower aggregate annual or lifetime
dollar-limits on mental health benefits than any such limits for medical or
surgical benefits. MHPA's requirements do not apply to small employers who have
between 2 and 50 employees or to any group health plan whose costs increase one
percent or more due to the application of these requirements.
In 1996, HCFA promulgated regulations which prohibit HMOs with Medicare or
Medicaid contracts from including any direct or indirect payment to physicians
or groups as an inducement to reduce or limit medically necessary services to
Medicare beneficiaries and Medicaid recipients. These regulations impose
reinsurance, disclosure and other requirements relating to physician incentive
plans that place physicians participating in a Medicare or Medicaid HMO plan at
substantial financial risk.
Effective January 22, 1998, New York implemented prompt payment
requirements which require health plans to pay interest on delayed claims at a
rate of 12% per annum commencing on the forty-sixth day after a clean claim is
received by the plan. Effective January 1, 1998, New York passed legislation
mandating coverage of chiropractic benefits. The New York legislature also
recently passed legislation related to operation of managed care plans, which
contains provisions relating to, among other things, utilization review,
consumer disclosure and right of hearing on termination of physicians from
health plan networks.
In 1997, New Jersey updated its HMO regulations and passed the Health Care
Quality Act which, among other things, require health plans to make certain
disclosures to members, to establish certain policies governing removal of
providers from the network and appeals processes for both providers and members
and to offer a point of service plans in commercial group markets.
In 1997, Connecticut passed an Act Concerning Managed Care which, among
other things, established legislation concerning consumer disclosure,
utilization review, provider contract requirements and certain mandated coverage
for biologically based mental health conditions.
Many states in which Oxford operates are currently considering regulations
or legislation relating to mandatory benefits, provider compensation
arrangements, health plan liability to members who do not receive appropriate
care, disclosure and composition of physician networks, and Congress is
considering significant changes to both the Medicare and Medicaid programs,
including changes which would significantly reduce reimbursement to HMOs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Over the past year, bills have been introduced in the legislature
in New York, New Jersey, Connecticut, Illinois, Florida and Pennsylvania
including some form of the so-called "Any Willing Provider" initiative which
would require HMOs such as the Company's HMO subsidiaries to allow any physician
meeting their credentialing criteria to join their physician network regardless
of geographic need, hospital admitting privileges and other important factors.
Certain of these bills have also included provisions relating to mandatory
disclosure of medical management policies and physician reimbursement
methodologies. Numerous other health care proposals have been introduced in the
U.S. Congress and in state legislatures. These include provisions which place
limitations on premium levels, impose health plan liability to members who do
not receive appropriate care, increase minimum capital and reserves and other
financial viability requirements, prohibit or limit capitated arrangements or
provider financial incentives, mandate benefits (including mandatory length of
stay with surgery or emergency room coverage) and limit the ability to manage
care. If enacted, certain of these proposals could have an adverse effect on the
Company.
Recently enacted legislation and the proposed regulatory changes described
above, if enacted, could increase health care costs and administrative expenses,
and reductions could be made in Medicare and Medicaid reimbursement rates. See
"Cautionary Statement Regarding Forward-Looking Statements-Government
Regulation; Reimbursement".
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Competition
HMOs and health insurance companies operate in a highly competitive
environment. The Company has numerous competitors, including for-profit and
not-for-profit HMOs, preferred provider organizations ("PPOs"), and indemnity
insurance carriers, some of which have substantially larger enrollments and
greater financial resources than the Company. The Company competes with
independent HMOs, such as Health Insurance Plan of New York and United Health
Care, each of which has significant enrollment in the New York metropolitan area
and, in the case of the latter, greater financial resources than the Company.
The Company also competes with HMOs and managed care plans sponsored by large
health insurance companies, such as The Prudential Insurance Company, The New
York Life Insurance Company, Aetna U.S. Healthcare Inc. and Blue Cross/Blue
Shield. Aetna U.S. Healthcare, Inc. has announced an agreement to acquire the
health plan business of The New York Life Insurance Company, and additional
consolidation of competitors is likely. Additional competitors may enter the
Company's markets in the future. The Company believes the size and quality of
its physician network are an important competitive factor. However, the cost of
providing benefits is in many instances the controlling factor in obtaining and
retaining employer groups, and certain of Oxford's competitors have set premium
rates at levels below Oxford's rates for comparable products. Oxford anticipates
that premium pricing will continue to be highly competitive. Recent developments
concerning the Company may also adversely affect the Company's ability to
compete for commercial group business.
To address rising health care costs, some large employer groups have
consolidated their health benefits programs and have considered a variety of
health care options to encourage employees to use the most cost-effective form
of health care services. These options, which include traditional indemnity
insurance plans, HMOs, point-of-service plans, and PPO plans, may be provided
by third parties or may be self-funded by the employer. Point-of-service plans
have gained favor with some employer groups because they allow for the
consolidation of health benefit programs. The Company believes that employers
will seek to offer health plans, similar to the Company's Freedom and Liberty
Plans, that provide for "in plan" and "out-of-plan" options while encouraging
members to use the most cost-effective form of health care services through
increased copayments, deductibles and coinsurance. Although the Company's
point-of-service products, the Freedom Plan and Liberty Plan, offer this
alternative to employers, there is no assurance that the Company will be able
to continue to compete effectively for the business of employer groups.
The Company also competes with other health plans to contract with
physicians and other providers. Recent developments concerning the Company may
adversly affect its ability to compete for such contracts.
Employees
At December 31, 1997, the Company had approximately 7,200 employees, none
of whom is represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in "Business" or "Management's Discussion
and Analysis of Financial Condition and Results of Operations", including
statements concerning future premium rates for commercial, Medicare and
Medicaid business, future medical-loss ratio levels, the Company's ability to
control health care costs, the Proposed Financing, the Turnaround Plan, the
Company's information systems, proposed efforts to control health care and
administrative costs, 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.
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<PAGE> 16
Proposed Financing
Implementation of the Company's Turnaround Plan depends on its ability to
complete the Proposed Financing or an alternative financing, or to implement
measures to reduce its medical and administrative costs below existing levels.
The Company currently believes that, in the event such financing could not be
completed on a timely basis, it has the ability and intent to reduce certain
costs, including those specified in the Turnaround Plan and others, and
otherwise to generate funds to enable it to support its operations through 1998.
Although the Company currently expects to complete the Proposed Financing, there
can be no assurance that all relevant conditions will be satisfied. If the
Proposed Financing cannot be completed, the Company's ability to obtain other
financing, and the timing, form and terms thereof, would depend on a number of
factors beyond the Company's control, including, among others, general economic
and market conditions and the possible need for regulatory approvals.
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 its case rate and risk-sharing arrangements with providers) while
providing members with quality health care. Factors such as utilization, new
technologies and health care practices, hospital costs, changes in demographics
and trends, selection biases, major epidemics, inability to establish acceptable
compensation arrangements with providers, operational and regulatory issues
which could delay, prevent or impede those arrangements, and numerous other
factors may affect Oxford's ability to control such costs. There can be no
assurance that Oxford will be successful in mitigating the effect of any or all
of the above-listed or other factors.
Medical costs payable in Oxford's financial statements include reserves
for incurred but not reported claims ("IBNR") which are estimated by Oxford.
Oxford estimates the amount of such reserves using standard actuarial
methodologies based upon historical data including the average interval between
the date services are rendered and the date claims are paid and between the date
services are rendered and the date claims are received by the Company, expected
medical cost inflation, seasonality patterns and increases in membership. The
estimates for submitted claims and IBNR are made on an accrual basis and
adjusted in future periods as required. Oxford believes that its reserves for
IBNR are adequate in order to satisfy its ultimate claim liability. However,
Oxford's rapid growth, delays in paying claims, paying or denying claims in
error and changing speed of payment affect the Company's ability to rely on
historical information in making IBNR reserve estimates. There can be no
assurances as to the ultimate accuracy of such estimates. Any adjustments to
such estimates could adversely affect Oxford's results of operations in future
periods.
Administrative Costs
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. However, no assurance can be given that the Company
will not continue to experience significant service and systems infrastructure
problems in 1998 and beyond.
Government Regulation; Reimbursement
The health care 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. Oxford's ability to declare and pay dividends is limited by state
regulations (although Oxford has not paid cash dividends in the past and does
not anticipate paying cash dividends in the foreseeable future). In 1996, and
1997 significant federal and state legislation affecting the Company's business
was enacted. See "Business-Government Regulation-Recent Regulatory
Developments." Moreover, state and federal government authorities are
continually considering changes to laws and regulations applicable to Oxford
and are currently considering regulation relating to mandatory benefits,
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 health care reform. Changes in
federal and state laws or regulations, if enacted, could increase health care
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, could have a
material
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adverse impact on the Company's operations, financial condition and prospects.
See "Business-Government Regulation."
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 which are lower than the rate of increase
in health care service expenses for Oxford's Medicare or Medicaid members in
such region, could adversely affect Oxford's results of operations. 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.
Competition
HMOs and health insurance companies operate in a highly competitive
environment. Oxford has numerous competitors, including for-profit and
not-for-profit HMOs, PPOs and indemnity insurance carriers, some of which have
substantially larger enrollments and greater financial resources than Oxford.
Oxford also competes with HMOs and managed care plans sponsored by large health
insurance companies. Many of these competitors offer flexible plans that permit
employers to self-fund the medical risk of their plans. Additional competitors
may enter Oxford's markets in the future. The cost of providing benefits is in
many instances the controlling factor in obtaining and retaining employer groups
and certain of Oxford's competitors have set premium rates at levels below
Oxford's rates for comparable products. Oxford anticipates that premium pricing
will continue to be highly competitive. See "Business-Competition."
Recent Events and Related Publicity
Recent events at the Company in the last several months have resulted in
adverse publicity. Such events and related publicity may adversely affect the
Company's provider network and future enrollment in the Company's health benefit
plans.
Litigation and Governmental Proceedings
The Company is a defendant in a large number of purported securities
class action lawsuits and shareholder derivative lawsuits which have been filed
after the substantial decline in the price of the Company's common stock on
October 27, 1997. Such lawsuits may adversely affect the Company's results of
operations. The Company is also the subject of examinations, investigations and
inquiries by several governmental agencies, including the New York State
Insurance Department, the New York State Attorney General, the federal Health
Care Financing Administration and the Securities and Exchange Commission, and
other state departments of insurance. These governmental inquiries could
adversely affect the Company's result of operations. For additional
information, see "Legal Proceedings".
As a result of the investigations of the Company by various regulators,
the National Committee for Quality Assurance ("NCQA") has advised that it will
conduct a discretionary review of the Company.
Management of Growth
Over the past five years the Company has experienced rapid growth in its
business and in its staff and the Company will be affected by its ability to
manage growth effectively, including its ability to continue to develop
processes and systems to support its growing operations. See "Business-Status of
Information Systems." The Company does not intend to promote growth at the level
of prior years because the Company's priority in 1998 will be to strengthen its
service and systems infrastructure. However, no assurance can be given that
the Company will not continue to experience significant service and systems
infrastructure problems in 1998 and beyond.
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Item 2. PROPERTIES
Oxford occupies as its principal executive offices approximately 210,000
square feet of office space at 800 Connecticut Avenue, Norwalk, Connecticut
under two long-term leases expiring February 28, 1999 through February 28, 2001.
Additionally, the Company has long-term leases to occupy (a) approximately
115,000 square feet of sales and administrative office space at 1133 Avenue of
the Americas in New York City expiring July 31, 2009; (b) approximately 39,000
square feet of sales office space in Melville, Long Island, New York expiring
June 30, 2002; (c) approximately 127,000 square feet of sales office space in
Edison, New Jersey expiring December 1, 1999 through March 31, 2002; (d)
approximately 180,000 square feet of administrative office space in two
locations in Nashua, New Hampshire expiring May 31, 2003 through June 30, 2004;
(e) approximately 58,000 square feet of sales and administrative office space in
Philadelphia, Pennsylvania expiring April 30, 2009; (f) approximately 363,000
square feet of sales and administrative office space in White Plains, New York
expiring November 30, 2004; (g) approximately 352,000 square feet of
administrative office space in two locations in Trumbull, Connecticut expiring
February 28, 2003 through May 31, 2003; (h) approximately 121,000 square feet of
administrative office space in Hooksett, New Hampshire expiring November 30,
2002; (i) approximately 183,000 square feet of administrative office space in
Milford, Connecticut expiring January 31, 2006; (j) approximately 22,000 square
feet of office space in Mullingar, Ireland expiring September 30, 2006; (k)
approximately 76,000 square feet of office space in Hidden River, Florida
expiring January 12, 2008; (l) approximately 31,000 square feet of office space
in Rosemont, Illinois, expiring April 30, 2004; (m) approximately 43,000 square
feet of office space in Woodbridge, New Jersey, expiring March 31, 2006; (n)
approximately 46,000 square feet of office and warehouse space in Edison, New
Jersey, expiring April 30, 2005; and (o) approximately 13,000 square feet of
sales and administrative office space in Chicago, Illinois, expiring December
31, 2000.
Item 3. LEGAL PROCEEDINGS
Securities Class Action Litigation
As previously reported by the Company, following the October 27, 1997
decline in the price per share of the Company's common stock, purported
securities class action lawsuits were filed on October 28, 29, and 30, 1997
against the Company and certain of its officers in the United States District
Courts for the Eastern District of New York, the Southern District of New York
and the District of Connecticut. Since that time, plaintiffs have filed
additional securities class actions (see below) against Oxford and certain of
its directors and officers in the United States District Courts for the Southern
District of New York, the Eastern District of New York, the Eastern District of
Arkansas, and the District of Connecticut.
The complaints in these lawsuits purport to be class actions on behalf of
purchasers of Oxford's securities during varying periods beginning on February
6, 1996 through December 9, 1997. The complaints generally allege that
defendants violated Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") and Rule 10b-5 thereunder by making false and misleading
statements and failing to disclose certain allegedly material information
regarding changes in Oxford's computer system, and the Company's membership
enrollment, revenues, medical expenses, and ability to collect on its accounts
receivable. Certain of the complaints also assert claims against the individual
defendants alleging violations of Section 20(a) of the Exchange Act and claims
against all of the defendants for negligent misrepresentation. The complaints
also allege that certain of the individual defendants disposed of Oxford's
common stock while the price of that stock was artificially inflated by
allegedly false and misleading statements and omissions. The complaints seek
unspecified damages, attorneys' and experts' fees and costs, and such other
relief as the court deems proper.
The complaints filed in the United States District Court for the Southern
District of New York are Metro Services, Inc., et al. v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 08023 (filed Oct. 29, 1997); Worldco, LLC, et al. v.
Oxford Health Plans, Inc., et al., No. 97 Civ. 8494 (filed Nov. 14, 1997);
Jerovsek, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ. 8882 (filed
Dec. 2, 1997); North River Trading Co., LLC v. Oxford Health Plans, Inc., et
al., No. 97 Civ. 9372 (filed Dec. 22, 1997); National Industry Pension Fund v.
Oxford Health Plans, Inc., et al., No. 97 Civ. 9566 (filed Dec. 31, 1997);
Scheinfeld v. Oxford Health Plans, Inc., et al., No. 98 Civ. 1399 (originally
filed Dec. 31, 1997 in the United States District Court for the District of
Connecticut and transferred); and Paskowitz v. Oxford Health Plans, Inc., et
al., No. 98 Civ. 1991 (filed March 19, 1998).
18
<PAGE> 19
The complaints filed in the United States District Court for the Eastern
District of New York are Koenig v. Oxford Health Plans, et al., No. 97 Civ. 6188
(filed Oct. 29, 1997); Wolper v. Oxford Health Plans, Inc., et al., No. 97 Civ.
6299 (filed Oct. 29, 1997); Tawil v. Oxford Health Plans, Inc., et al., No. 97
Civ. 7289 (filed Dec. 11, 1997); and Winters, et al. v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 7449 (filed Dec. 18, 1997).
The complaints filed in the United States District Court for the District
of Connecticut are Heller v. Oxford Health Plans, Inc., et al., No. 397 CV 02295
(filed Oct. 28, 1997); Fanning v. Oxford Health Plans, Inc., et al., No. 397 CV
02300 (filed Oct. 29, 1997); Lowrie, IRA v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02299 (filed Oct. 29, 1997); Barton v. Oxford Health Plans, Inc., et
al., No. 397 CV 02306 (filed Oct. 30, 1997); Sager v. Oxford Health Plans, Inc.,
et al., No. 397 CV 02310 (filed Oct. 30, 1997); Cohen v. Oxford Health Plans,
Inc., et al., No. 397 CV 02316 (filed Oct. 31, 1997); Katzman v. Oxford Health
Plans, Inc., et al., No. 397 CV 02317 (filed Oct. 31, 1997); Shapiro v. Oxford
Health Plans, Inc., et al., No. 397 CV 02324 (filed Oct. 31, 1997); Willis v.
Oxford Health Plans, Inc., et al., No. 397 CV 02326 (filed Oct. 31, 1997); Saura
v. Oxford Health Plans, Inc., et al., No. 397 CV 02329 (filed Nov. 3, 1997);
Selig v. Oxford Health Plans, Inc., et al., No. 397 CV 02337 (filed Nov. 4,
1997); Brandes v. Oxford Health Plans, Inc., et al., No. 397 CV 02343 (filed
Nov. 4, 1997); Ross v. Oxford Health Plans, Inc., et al., No. 397 CV 02344
(filed Nov. 4, 1997); Sole v. Oxford Health Plans, Inc., et al., No. 397 CV
02345 (filed Nov. 4, 1997); Henricks v. Wiggins, et al., No. 397 CV 02346 (filed
Nov. 4 1997); Williams v. Oxford Health Plans, Inc., et al., No. 397 CV 02348
(filed Nov. 5, 1997); Direct Marketing Day in New York, Inc. v. Oxford Health
Plans, Inc., et al., No. 397 CV 02349 (filed Nov. 5, 1997); Howard Vogel
Retirement Plans, Inc., et al. v. Oxford Health Plans, Inc., et al., No. 397 CV
02325 (filed Oct. 31, 1997 and amended Dec. 17, 1997); Serbin v. Oxford Health
Plans, Inc., et al., No. 397 CV 02426 (filed Nov. 18, 1997); Hoffman v. Oxford
Health Plans, Inc., et al., No. 397 CV 02458 (filed Nov. 24, 1997); Armstrong v.
Oxford Health Plans, Inc., et al., No. 397 CV 02470 (filed Nov. 25, 1997);
Roeder, et al. v. Oxford Health Plans, Inc., et al., No. 397 CV 02496 (filed
Nov. 26, 1997); Braun v. Oxford Health Plans, Inc., et al., No. 397 CV 02510
(filed Dec. 1, 1997); Blauvelt, et al. v. Oxford Health Plans, Inc., et al., No.
397 CV 02512 (filed Dec. 2, 1997); Hobler et al. v. Oxford Health Plans, Inc.,
et al., No. 397 CV 02535 (filed Dec. 3, 1997); Bergman v. Oxford Health Plans,
Inc., et al., No. 397 CV 02564 (filed Dec. 8, 1997); Pasternak v. Oxford Health
Plans, Inc., et al., No. 397 CV 02567 (filed Dec. 8, 1997); Perkins Partners I,
Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02573 (filed Dec. 9,
1997); N.I.D.D., Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02584
(filed Dec. 9, 1997); Burch v. Oxford Health Plans, Inc., et al., No. 397 CV
02585 (filed Dec. 9, 1997); Mark v. Oxford Health Plans, Inc., et al., No. 397
CV 02594 (filed Dec. 11, 1997); Ross, et al. v. Oxford Health Plans, Inc., et
al., No. 397 CV 02613 (filed Dec. 12, 1997); Lerchbacker v. Oxford Health Plans,
Inc., et al., No. 397 CV 02670 (filed Dec. 22, 1997); State Board of
Administration of Florida v. Oxford Health Plans, Inc., et al., No. 397 CV 02709
(filed Dec. 29, 1997) (the complaint, although purportedly not brought on behalf
of a class of shareholders, invites similarly situated persons to join as
plaintiffs); and Ceisler v. Oxford Health Plans, Inc., et al., No. 397 CV 02729
(filed Dec. 31, 1997).
The complaint filed in the United States District Court for the Eastern
District of Arkansas is Rudish v. Oxford Health Plans, Inc., et al., No.
LR-C-97-1053 (filed Dec. 29, 1997).
The Company anticipates that additional class action complaints containing
similar allegations may be filed in the future.
On January 6, 1998, certain plaintiffs filed an application with the
Judicial Panel on Multidistrict Litigation ("JPML") to transfer most of these
actions for consolidated or coordinated pretrial proceedings before Judge
Charles L. Brieant of the United States District Court for the Southern District
of New York. The Oxford defendants subsequently filed a similar application with
the JPML seeking the transfer of all of these actions for consolidated or
coordinated pretrial proceedings, together with the shareholder derivative
actions discussed below, before Judge Brieant. The JPML heard argument on the
applications on March 27, 1998. As these applications are not opposed in any
material respect, the Company anticipates that these actions will be transferred
for consolidated or coordinated pretrial proceedings before Judge Brieant.
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.
19
<PAGE> 20
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 complaints filed in Connecticut Superior Court are Reich v. Wiggins,
et al., No. CV 97-485145 (filed on or about Dec. 12, 1997); Gorelkin v. Wiggins,
et al., No. CV-98-0163665 S (filed on or about Dec. 24, 1997); and Kellmer v.
Wiggins, et al., No. CV 98-0163664 S HAS (filed on or about Jan. 28, 1998).
The complaints filed in the United States District Court for the Southern
District of New York are Roth v. Wiggins, et al., No. 98 Civ. 0153 (filed Jan.
12, 1998); Plevy v. Wiggins, et al., No. 98 Civ. 0165 (filed Jan. 12, 1998);
Mosson v. Wiggins, et al., No. 98 Civ. 0219 (filed Jan. 13, 1998); Boyd, et al.
v. Wiggins, et al., No. 98 Civ. 0277 (filed Jan. 16, 1998); and Glick v.
Wiggins, et al., No. 98 Civ. 0345 (filed Jan. 21, 1998).
The complaints filed in the United States District Court for the District
of Connecticut are Mosson v. Wiggins, et al., No. 397 CV 02651 (filed Dec. 22,
1997), and Fisher, et al. v. Wiggins, et al., No. 397 CV 02742 (filed Dec. 31,
1997).
The Company anticipates that additional purported shareholder derivative
actions containing similar allegations may be filed. Although the outcome of
these actions cannot be predicted at this time, the Company believes that the
defendants have substantial defenses to the claims asserted in the complaints.
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. 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. The JPML heard argument on the application on March 27,
1998. As these applications are not opposed in any material respect, the Company
anticipates that the federal purported derivative actions will be transferred
for consolidated or coordinated pretrial proceedings before Judge Brieant.
State Insurance Departments
As previously reported by the Company, the New York State Insurance
Department ("NYSID") is presently conducting its triennial examination and
market conduct examination of Oxford's New York HMO and insurance subsidiaries.
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 also issued a Market Conduct Report identifying several alleged
violations of state law and NYSID regulations. The NYSID
20
<PAGE> 21
and Oxford entered into a stipulation under which Oxford promised to take
certain corrective measures and to pay restitution and paid a $3 million fine.
The stipulation provides that the NYSID will not impose any other fines for
Oxford's conduct up to November 1, 1997. The NYSID has continued to review
market conduct issues, including, among others, those relating to claims
processing. At this time, the Company cannot predict the outcome of such
continuing review. 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 is presently conducting an
examination of Oxford's finances and will focus on adequacy of reserves for
medical costs payable, premiums receivable and provider advances. The NYSID is
expected to issue a report in the coming months.
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 5, 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.
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. Thereafter, the Company's obligations to make
prompt payments are governed by applicable New York law. See "Recent
Regulatory Developments". In addition, contemporaneously, the Company agreed to
pay varying interest rates to providers in Connecticut, New Jersey, New
Hampshire and Pennsylvania.
The Company has subsequently responded to a number of inquiries by the
Attorney General with respect to Oxford's compliance with the Assurance of
Discontinuance. On February 2, 1998, the Attorney General served a subpoena
duces tecum on Oxford seeking production of certain documents relating to
complaints from providers and subscribers regarding nonpayment or untimely
payment of claims, interest paid under the Assurance, accounts payable, provider
claims processing, and suspended accounts 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 in response to this informal request.
On January 30, 1998, pursuant to a formal order, the Commission served a
subpoena duces tecum on Oxford for documents concerning a number of subjects,
including internal and external audits, uncollectible premium receivables,
timing of payments to vendors, doctors and hospitals, late payments to medical
providers, computer system problems, agreements with the New York State Attorney
General, and policies and procedures relating to the sale of Oxford securities
by officers and directors. Oxford has produced documents in response to this
subpoena, and intends to cooperate fully with the Commission. Oxford cannot
predict the outcome of the Commission's investigation at this time.
21
<PAGE> 22
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. In its exit interview with the Company, HCFA expressed
concern over claims payment delays and various other regulatory issues,
including HCFA requirements regarding enrollment and disenrollment documentation
and provider contracts. To the extent that alleged violations of regulatory
requirements or contractual obligations are identified, HCFA may seek corrective
action, impose fines, limit enrollment in the Company's Medicare plans and
impose other sanctions. The Company has not received a final report from HCFA
and cannot predict at this time any action HCFA might take as a result of its
site visit.
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 on February 23 and 27, 1998 to
join eleven 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. The NYCMS and other
claimants also announced their intention to seek arbitration on behalf of
physicians having particular claim disputes or seeking payment of delayed claims
from Oxford.
The Company has been informed that on March 9, 1998, a purported class
action arbitration was brought by two physicians before the AAA in Connecticut
against Oxford alleging breach of contract and violation of the Connecticut
Unfair Insurance Practices Act. The Company has not yet received a copy of the
Demand for Arbitration.
Jeffrey S. Oppenheim, M.D., et al. v. Oxford Health Plans, Inc., et al.,
Index No. 97/109088
On May 19, 1997, Oxford was served with a purported "Class Action
Complaint" filed in the New York State Supreme Court, New York County by two
physicians and a medical association of five physicians. Plaintiffs alleged that
Oxford (i) failed to make timely payments to plaintiffs for claims submitted for
health care services and (ii) improperly withheld from plaintiffs a portion of
plaintiffs' agreed compensation. Plaintiffs alleged causes of action for common
law fraud and deceit, negligent misrepresentation, breach of fiduciary duty,
breach of implied covenants and breach of contract. The complaint sought an
award of an unspecified amount of compensatory and exemplary damages, an
accounting, and equitable relief.
On July 24, 1997, Oxford and plaintiffs reached a settlement in
principle of the class claims wherein Oxford agreed to pay, from September 1,
1997 to January 1, 2000, interest at certain specified rates to physicians who
did not receive payments from Oxford within certain specified time periods
after submitting "clean claims" (a term that was to be applied in a manner
consistent with certain industry guidelines). Moreover, Oxford agreed to
provide to plaintiffs' counsel, on a confidential basis, certain financial
information that Oxford believed would demonstrate that Oxford acted within its
contractual rights in making decisions on payments withheld from plaintiffs and
members of the alleged class. The settlement in principle provides that, if
plaintiffs' counsel reasonably does not agree with Oxford's belief in this
regard, plaintiffs retain the right to proceed individually (but not as a
class) against Oxford by way of arbitration. Oxford has supplied financial
information to plaintiffs' counsel and has exchanged draft settlement papers
with plaintiffs' counsel. The parties have not yet submitted final settlement
papers to the Court.
22
<PAGE> 23
Other
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol "OXHP." The following table sets forth
the range of high and low sale prices for the common stock for the periods
indicated as reported on the Nasdaq National Market. Prices have been adjusted
to reflect the two-for-one stock split in 1996 effectuated by the distribution
of a dividend of one share of common stock for each share of common stock
outstanding. See note 5 to consolidated financial statements.
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter........................................... $67.13 $48.88 $44.88 $31.13
Second Quarter.......................................... 75.75 55.25 55.25 37.38
Third Quarter .......................................... 89.00 71.50 50.38 27.69
Fourth Quarter.......................................... 79.00 13.75 62.25 41.00
</TABLE>
As of March 24, 1998, there were 1,879 shareholders of record of the
Company's common stock.
The Company has not paid any cash dividends on its common stock since its
formation and does not intend to pay any cash dividends in the foreseeable
future. Additionally, the Company's ability to declare and pay dividends to its
shareholders may be dependent on its ability to obtain cash distributions from
its operating subsidiaries. The ability to pay dividends is also restricted by
insurance and health regulations applicable to its subsidiaries. See
"Business-Government Regulation." Pursuant to the Bridge Agreement between the
Company and DLJ, the Company is prohibited from paying cash dividends on its
common stock so long as any Bridge Notes are outstanding. In addition, the
Investment Agreement between the Company and TPG, and the other agreements and
instruments to be entered into in connection with the Proposed Financing, will
prohibit the Company from paying cash dividends on its common stock.
23
<PAGE> 24
Item 6 SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data and balance sheet data set forth below for each
year in the five-year period ended December 31, 1997 have been derived from the
audited consolidated financial statements of the Company. The information below
has been restated to reflect the merger in July 1995 with OakTree Health Plan,
Inc. in a pooling of interests transaction (see note 8 to consolidated financial
statements) and is qualified by reference to and should be read in conjunction
with the consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts and operating statistics)
<S> <C> <C> <C> <C> <C>
Revenues and Earnings:
Operating revenues ........................ $ 4,179,816 3,032,569 1,745,975 752,832 307,622
Investment and other income, net .......... 60,330 42,620 19,711 7,479 6,215
Net earnings (loss) ....................... $ (291,288) 99,623 52,398 28,231 12,347
Financial Position:
Working capital ........................... $ 80,803 451,957 103,448 71,731 63,192
Total assets .............................. 1,397,989 1,356,397 611,149 331,084 170,579
Common shareholders' equity ............... $ 349,216 598,170 220,033 132,394 94,655
Net Earnings (Loss) Per Common Share (1):
Basic ..................................... $ (3.70) 1.34 .78 .43 .19
Diluted ................................... $ (3.70) 1.25 .71 .40 .18
Weighted average number of
common shares outstanding:
Basic ................................. 78,635 74,285 67,450 65,410 63,542
Diluted ............................... 78,635 79,662 73,344 70,554 67,804
Operating Statistics:
Enrollment ................................ 2,008,100 1,535,500 1,007,700 513,000 221,330
Fully insured member months ............... 21,584,700 15,604,400 9,338,610 4,101,863 1,715,761
Self-funded member months ................. 602,900 474,200 514,200 524,000 401,000
Number of contracted physicians ........... 65,000 37,700 29,900 21,000 11,500
Medical-loss ratio (2) .................... 94.0% 80.1% 77.5% 74.1% 73.2%
</TABLE>
(1) Per share amounts and weighted average number of common share amounts have
been restated to reflect the two-for-one stock splits in 1996, 1995 and
1993.
(2) Defined as health care services expense as a percentage of premiums earned.
- --------------------------------------------------------------------------------
24
<PAGE> 25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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"),
preferred provider organizations ("PPOs") and dental plan products,
reimbursements under government contracts relating to its Medicare and Medicaid
programs, third-party administration fee revenue for its self-funded plan
services (which is stated net of direct expenses such as third-party reinsurance
premiums) and investment income.
Health care services expense primarily comprises payments to physicians,
hospitals and other health care providers under fully insured health care
business and includes an estimated amount for incurred but not reported claims
("IBNR"). The Company estimates IBNR expense based on a number of factors,
including prior claims experience. The actual expense for claims attributable to
any period may be more or less than the amount of IBNR reported. The Company's
results for the year ended December 31, 1997 were adversely affected by
additions to the Company's reserves for IBNR in the third and fourth quarters.
See "Liquidity and Capital Resources."
The Company has experienced substantial growth in membership and revenues
since it began operations in 1986. The membership and revenue growth has been
accompanied by increases in the cost of providing health care in New York, New
Jersey, Pennsylvania, Connecticut, Illinois, Florida and New Hampshire. The
Company does not expect its future growth in membership or revenue, if any, to
be similar to its growth in prior years as the Company has to redirect its
strategic initiatives to attempt to establish profitability. See
"Business-Recent Developments-Turnaround Plan". 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 following table provides certain statement of operations data
expressed as a percentage of total revenues and the medical-loss ratio for the
years indicated:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Revenues: 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Premiums earned .............................. 98.3% 98.3% 98.2%
Third-party administration, net .............. .3 .3 .7
Investment and other income, net ............. 1.4 1.4 1.1
----- ----- -----
Total revenues ............................... 100.0 100.0 100.0
----- ----- -----
Expenses:
Health care services ......................... 92.4 78.7 76.2
Marketing, general and administrative ........ 17.4 15.5 18.4
Unusual charges - write-down of assets ....... 1.0 -- --
----- ----- -----
Total expenses ............................... 110.8 94.2 94.6
----- ----- -----
Operating earnings (loss) .................... (10.8) 5.8 5.4
Income (loss) from affiliate ................. .6 (.1) (.2)
----- ----- -----
Earnings (loss) before income taxes .......... (10.2) 5.7 5.2
Income tax expense (benefit) ................. (3.3) 2.4 2.2
----- ----- -----
Net earnings (loss) .......................... (6.9)% 3.3% 3.0%
===== ===== =====
Medical-loss ratio ............................... 94.0% 80.1% 77.5%
===== ===== =====
</TABLE>
The medical-loss ratio for 1997 reflects significant additions to the
Company's reserves recorded in 1997. A portion of the reserve additions in 1997
represents revisions to estimates for claims incurred in prior years.
Accordingly, the medical-loss ratios on an incurred basis would be different
from those shown above.
25
<PAGE> 26
Results of Operations
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The following tables show plan revenues earned and membership by product:
<TABLE>
<CAPTION>
Years Ended
December 31
----------------------- Percent
1997 1996 Increase
---------- --------- --------
Plan Revenues: (In thousands)
<S> <C> <C> <C>
Freedom Plan ................................ $2,468,259 1,849,167 33.5%
HMOs ........................................ 463,428 322,288 43.8
Medicare .................................... 916,126 599,824 52.7
Medicaid .................................... 319,411 250,889 27.3
---------- ---------
Total premium revenues .................... 4,167,224 3,022,168 37.9
Third-party administration, net ............. 12,592 10,401 21.1
---------- ---------
Total plan revenues ....................... $4,179,816 3,032,569 37.8%
========== ========== ====
<CAPTION>
As of
December 31
-----------------------
Membership: 1997 1996
---------- ---------
<S> <C> <C> <C>
Freedom Plan ................................ 1,333,500 1,015,100 31.4%
HMOs ........................................ 270,400 192,300 40.6
Medicare .................................... 161,000 125,000 28.8
Medicaid .................................... 189,600 162,000 17.0
---------- ---------
Total fully insured ....................... 1,954,500 1,494,400 30.8
Self-funded .................................. 53,600 41,100 30.4
---------- ---------
Total membership .......................... 2,008,100 1,535,500 30.8%
========== ========== ====
</TABLE>
Total premiums earned for the year ended December 31, 1997 increased 37.9%
to $4.2 billion from $3.0 billion in 1996. This overall increase was primarily
attributable to a 38.4% increase in member months for commercial and government
programs. The substantial growth in membership reflected continued consumer
acceptance of health care plans in the Company's markets in general, and the
popularity of the products offered by the Company in particular.
Commercial premium revenues increased $760.2 million to $2.9 billion in
1997 from $2.2 billion in 1996. Membership growth accounted for substantially
all of the change as member months of the Freedom Plan increased 37.2% when
compared with 1996, and member months of Oxford's traditional HMOs increased
43.2% over the prior year. Premium rates of commercial programs were about the
same in 1997 as in 1996. 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 in 1997 adversely affected the Company's premium billing. The
Company's revenues in 1997 were adversely affected by adjustments of
approximately $174 million related to estimates for terminations of group and
individual members and for non-paying group and individual members. The Company
is taking steps to attempt to improve billing timeliness, reduce billing errors,
lags in recording enrollment and disenrollment notifications, and the Company's
collection processes and is attempting to make requisite improvements in
management information concerning the value and aging of outstanding accounts
receivable. The Company believes it has made adequate provision in its estimates
for group and individual member terminations and for non-paying group and
individual members as of December 31, 1997. 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.
Premium revenues of government programs increased $384.8 million to $1.2
billion in 1997 from $850.7 million in 1996. Membership growth accounted for
most of the change in Medicare as member months increased 46.4% when compared
with the prior year. The increase in Medicaid revenues was attributable to a
34.4% increase in member months compared with 1996, offset in part by a 5.2%
decrease in average
26
<PAGE> 27
premium rates during 1997. Average premium rates of Medicare programs in 1997
were 4.3% higher than in 1996.
The Company expects that premium rates for commercial business in 1998
will be higher on average than in 1997. The Company's commercial rates are
often higher than those charged by competitors, in part reflecting the size and
quality of the Company's provider network, additional services provided by the
Company and other features of the Company's products. The Company's ability to
receive requested rate increases from group customers may be adversely affected
by publicity surrounding the losses announced by the Company for the third and
fourth quarters 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 be more so. However, the Company does not intend
to promote revenue growth at the level of prior years because the Company's
priority in 1998 will be to attempt to strengthen its service and systems
infrastructure. Revenues may also be adversely affected as a result of the
Company's decision to reduce its future investment in developing the Florida,
Illinois and New Hampshire markets. Moreover, the Company expects that revenue
growth will be adversely affected by customers' concern regarding recently
publicized operating losses and provider dissatisfaction with timeliness of
claims payment.
In March 1998, the Company filed with the New York State Insurance
Department ("NYSID") proposed rate increases of 50% and 64%, respectively for
its New York mandated individual HMO and point of service plans (the "New York
Mandated Plans") as a result of rapidly rising medical costs in those plans. The
Company believes it experiences significant selection bias in these plans which
are chosen, on average, by individuals that require more health care services
than the average commercial population. The Company had 40,700 members in the
mandated HMO and 15,300 members in the mandated point of service plan as of
December 31, 1997. Revenues and operating results for 1998 would be adversely
affected if the NYSID does not approve the rates requested or approves lesser
increases. In addition, the Company expects that, if granted, significant rate
increases in these plans will result in membership attrition, which would reduce
revenues and could increase adverse selection bias. The Company is working
cooperatively with the NYSID with respect to the requested rate increases and
other measures to provide affordable health plans in the individual market.
However, no assurances can be given that the NYSID will approve these rate
increases.
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.
In 1998, the Company will receive a 2% increase in Medicare premiums,
minus the user fee assessment of .428% of the Company's gross monthly Medicare
premium. The user fee is applied to all Medicare risk contractors by HCFA to
cover HCFA's costs relating to beneficiary enrollment, dissemination of
information and certain counseling and assistance programs. On March 2, 1998
HCFA announced a 2% increase in premiums in 1999 for all plans in the Company's
service areas. However, the user fee for 1999 has not been determined and may
increase since the Clinton Administration is seeking legislation authorizing it
to collect additional funds. Under the authority provided by the 1997 Act, HCFA
has begun to collect hospital encounter data from Medicare risk contractors. The
data will be used to develop and implement a new risk adjustment mechanism by
January 1, 2000. Given the relatively high Medicare risk premium levels in the
Company's market areas, the Company is in significant jeopardy that the new risk
adjustment mechanism to be developed
27
<PAGE> 28
could significantly and adversely affect the Company's Medicare premium ratio
going forward. President Clinton has proposed expanding Medicare coverage to
individuals between the ages of 55 and 64. There is significant opposition to
his proposal, and the Company cannot predict the outcome of the legislative
process or the impact of the proposal on the Company's results of operations. In
addition, long-term structural changes to the Medicare program are currently
being 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 does not anticipate revenue growth at the level of prior years
in its Medicare programs because the Company's priority in 1998 will be to
attempt to strengthen its service and systems infrastructure and mitigate
operating losses. Medicare enrollment could also be adversely affected, perhaps
substantially so, by customer concern over recently publicized operating losses
and provider dissatisfaction, changes to the Company's Medicare provider
network in certain counties and medical management policies designed to better
control medical costs and HCFA's recent site examination of the Company, among
other factors. See "Business-Government Regulation".
Premium yields in the Company's Medicaid business in New Jersey and
Connecticut will be unchanged in 1998. The Company has notified the relevant
regulatory authorities that it will not renew its Medicaid risk contracts in
Connecticut and New Jersey due to unfavorable premium and medical expense
trends. The Company will, therefore, be withdrawing from those programs
effective April 1, 1998 for Connecticut and July 1, 1998 for New Jersey. At
December 31, 1997, the Company had approximately 33,000 Connecticut Medicaid
members and 46,100 New Jersey Medicaid members. The Company expects that
premium yields in the Company's New York Medicaid program (approximately 43,500
members at December 31, 1997) will be increased 4% effective April 1, 1998. The
Company expects that premium yields in the Company's Pennsylvania Medicaid
program (approximately 67,000 members at December 31, 1997) were increased 7%
effective January 1, 1998. No assurances can be given regarding prospective
premium yields from these programs.
Third-party administration revenues for the year ended December 31, 1997
increased to $12.6 million from $10.4 million in 1996, attributable to a 27.1%
increase in member months due to the acquisition of Compass PPA, Incorporated,
partially offset by a 4.7% decrease in per member per month revenue.
Net investment income for the year ended December 31, 1997 increased to
$61.2 million from $42.4 million in 1996. This was principally due to
significantly greater realized capital gains in 1997 when compared with 1996.
The Company incurred interest expense of approximately $11.1 million during 1997
(which reduces net investment and other income) for payment of interest on
delayed claims in accordance with the Company's interest payment policy and
applicable law. Final reconciliation with providers may result in higher levels
of interest expense. The Company's future results will continue to reflect
interest payments by the Company on delayed claims as well as interest expense
on outstanding indebtedness incurred in 1998. See "Business - Recent
Developments-Financings".
Health care services expense stated as a percentage of premiums earned
(the "medical-loss ratio") was 94.0% for the year ended December 31, 1997
compared with 80.1% for the year ended December 31, 1996. Overall per member per
month revenue in 1997 was substantially unchanged from 1996, however, overall
per member per month health care services expenses increased 16.9% to $181.38 in
1997 from $155.16 in 1996. 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. Medical costs for 1997 reflect additions
to the Company's reserves for IBNR in the third and fourth quarters aggregating
$327 million. These additions represent revisions to estimates of the Company's
incurred medical costs based on information gained in the process of reviewing
and reconciling previously delayed claims and claims paid or denied in error. A
portion of the reserve additions represent revisions to estimates for claims
incurred in prior years. The Company's paid and received claims data and
revised estimates show significant increases in medical costs in 1996 and 1997
in the Company's Medicare, Medicaid and New York Mandated Plans. The Company
estimates that its per member per month medical costs increased 13.1% in 1996
and 21.4% in 1997 in its Medicare programs. In its New York Mandated
28
<PAGE> 29
Plans and its Medicaid programs the Company's per member per month medical
costs increased 49.1% and 17.3%, respectively, in 1997. These increases
resulted primarily from higher expenses for hospital and specialist physician
services and increases in per member per month pharmacy costs of 20.7% and
18.5% in 1996 and 1997, respectively. The Company reviews its ultimate claims
liability in light of its claims payment history and other factors, and any
resulting adjustments are included in the results of operations for the period
in which such adjustments are made. The Company believes it has made adequate
provision for medical costs as of December 31, 1997. There can be no assurance
that additional reserve additions will not be necessary as the Company
continues to review and reconcile delayed claims and claims paid or denied in
error. Additions to reserves could also result as a consequence of regulatory
examinations and such additions would also be included in the results of
operations for the period in which such adjustments are made. See "Business -
Government Regulation" and "Legal Proceedings".
The Company is taking a number of steps to address the deterioration of
operating results in Medicare, Medicaid and the New York Mandated Plans. The
Company is pursuing certain provider contracts for its Medicare programs
pursuant to which a significant portion of the medical cost risk of some of
the Company's Medicare enrollment may be transferred to network providers.
Despite these efforts, no assurances can be given that such contracts will be
consummated or, if consummated, will successfully control the Company's
ultimate costs. In its Pennsylvania Medicaid program, the Company has entered
into an agreement to transfer a substantial portion of the medical risk in that
program to a third party. The Company is also attempting to implement new
medical management policies aimed at reducing costs in various lines of
business. The Company has also withdrawn from the Medicaid programs in New
Jersey and Connecticut, effective July 1, 1998 and April 1, 1998, respectively.
Finally, the Company has filed for significant rate increases in the New York
Mandated Plans to reflect rising medical costs in those plans.
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, appropriate benefit design, utilization review and case management
programs and its case rate and risk-sharing agreements with providers) while
providing members with quality health care. Factors such as utilization, new
technologies and health care practices, hospital costs, major epidemics,
inability to establish acceptable compensation agreements with providers and
numerous other factors may affect Oxford's ability to control such costs. The
Company attempts to use its medical cost containment capabilities, such as claim
auditing systems, physician tracking systems and utilization review protocols,
and improved channeling to cost-effective providers with a view to reducing the
rate of growth in health care services expense. 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. 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.
Effective January 1, 1997, the New York Health Care Reform Act of 1996
(the "Act") requires that the Company make payments to state funding pools to
finance hospital bad debt and charity care, graduate medical education and other
state programs under the Act. Previously, hospital bad debt and charity care and
graduate medical education were financed by surcharges on payments to hospitals
for inpatient services. As contemplated by the Act, the Company has
substantially completed the negotiation of adjustments to rates paid to network
hospitals in New York to reflect elimination of these surcharges. These
adjustments were generally effective as of January 1, 1997, but they are not
expected to result in savings equal to the cost of the surcharges. Accordingly,
the Company has filed for increases of between 2% and 3.2% in certain of its
commercial premium rates in New York in addition to normal trend increases in
view of the increases in costs attributable to the Act. See "Government
Regulation".
Marketing, general and administrative expenses increased 54.5% to $737.4
million in 1997 from $477.4 million in 1996 which, as a percentage of operating
revenues, was 17.6% in 1997 compared with 15.7% in 1996. The increase in
marketing, general and administrative expenses was attributable to the Company's
membership growth, costs associated with expansion into new markets in Florida
and Illinois and expenses attributable to strengthening the Company's
operations, including costs for independent consultants, additional staff and
information system enhancements. Principal areas of increased expense were
payroll and benefits
29
<PAGE> 30
expense, broker commissions, marketing expenses and depreciation. Payroll and
benefits expense increased $87.5 million in 1997 primarily due to an increase in
the size of the Company's work force to approximately 7,200 employees at the end
of 1997 from approximately 5,000 employees at the end of 1996. The additional
employees were hired primarily in the areas of health services, member services,
management information systems and marketing. Broker commissions increased by
$47.8 million in 1997 due to the increase in premiums. Marketing expenses
other than payroll and benefits increased by $15.7 million in 1997 as the
Company implemented programs to market its products in a highly competitive
environment in several markets. Depreciation expense was $17.1 million higher
than in 1996 as a result of $101.9 million of capital expenditures during 1997.
The Company expects that results for 1998 will continue to be adversely affected
by high administrative costs, including substantial consulting and other costs
associated with strengthening its operations. The Company also currently expects
to record a nonrecurring charge of between $20 million and $25 million in the
first quarter of 1998 to account for severance and other costs which the Company
expects to incur in connection with restructuring certain administrative and
management functions. Administrative costs in future periods will also be
affected by the costs associated with responding to regulatory inquiries and
investigations and defending pending securities class action and shareholder
derivative litigation, including fees and disbursements of counsel and other
experts, to the extent such costs are not reimbursed under existing policies of
insurance. See "Legal Proceedings".
In October 1997, the Company disposed of its 47% interest in Health
Partners, Inc. ("Health Partners"). The Company received 2,090,109 shares of
common stock of FPA Medical Management, Inc. ("FPAM") stock with a market value
as of closing of approximately $76.4 million, resulting in a pretax gain at the
time of closing of approximately $63.1 million. As of December 31, 1997, the
market value of the FPAM stock had been reduced to approximately $38.4 million.
Because management believes that the decline is other than temporary, the
Company as of December 31, 1997, wrote down its investment in FPAM by $38.0
million. As a result, the Company ultimately recognized a pretax gain of
approximately $25.2 million ($20.5 million after taxes, or $.26 per share) on
the sale of Health Partners. The Company's equity in Health Partners net loss
for 1997 prior to the sale was $1.1 million compared with a loss of $4.6 million
in 1996. The Company contracts with provider groups managed by Health Partners
in the Company's service areas. The Company cannot currently predict if the
costs of using such provider groups will increase with the change in ownership.
The Company acquired all of the outstanding stock of Compass PPA,
Incorporated, a Chicago-based HMO, as of August 1, 1997 for approximately $8.2
million in cash (resulting in goodwill of $24.1 million) and acquired all of the
outstanding stock of Riscorp Health Plans, Inc., a Florida-based HMO, as of
November 3, 1997, for approximately $5.3 million in cash (resulting in goodwill
of $3.9 million). Since the dates of acquisition, the Company made investments
in such companies pursuant to a plan to aggressively develop and market the
Company's products in the Florida and Chicago markets. As of December 31, 1997,
the Company has determined to focus available administrative resources in its
core markets in the Northeast and to reduce significantly the level of
investment planned for these expansion markets. The Company believes that such
reduction in future investments will impact the value of these companies and,
accordingly, the Company has reduced the value of its investment in these
companies by writing off $27.3 million in goodwill arising from the acquisitions
and subsequent investment. The Company also reduced by $14.3 million the
carrying value of its investment in the capital stock and subordinated surplus
notes of St. Augustine Health Care, Inc., a Florida-based HMO. The Company holds
19.9% of the outstanding voting stock of St. Augustine Health Care, Inc.
The income tax benefit for 1997 was $140.3 million, or approximately
32.5% of the Company's pretax loss in 1997. This is lower than the 42.1%
effective tax rate for 1996 since, due to the Company's significant net loss,
the Company established a valuation allowance related to state net operating
loss carryforwards. Management believes that it is more likely than not
that future operations will generate sufficient taxable income (estimated to be
$330 million) to utilize the unreserved net deferred tax assets.
The Company expects to report losses in 1998 as the result of high medical
costs and high administrative costs as described above. The Company intends to
take the steps referred to above and under "Business - Recent
Developments-Turnaround Plan" in an effort to better control medical and
administrative spending, 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.
30
<PAGE> 31
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
The following tables show plan revenues earned and membership by
product:
<TABLE>
<CAPTION>
Years Ended
December 31
------------------------- Percent
1996 1995 Increase
---------- -------- --------
Plan Revenues: (In thousands)
<S> <C> <C> <C>
Freedom Plan ......................... $1,849,167 1,113,432 66.1%
HMOs ................................. 322,288 193,404 66.6
Medicare ............................. 599,824 247,090 142.8
Medicaid ............................. 250,889 180,172 39.2
---------- ---------
Total premium revenues ............. 3,022,168 1,734,098 74.3
Third-party administration, net ...... 10,401 11,877 (12.4)
---------- ---------
Total plan revenues ................ $3,032,569 1,745,975 73.7%
========== ========== =====
<CAPTION>
As of
December 31
-------------------------
Membership: 1996 1995
---------- ---------
<S> <C> <C> <C>
Freedom Plan ......................... 1,015,100 680,400 49.2%
HMOs ................................. 192,300 112,000 71.7
Medicare ............................. 125,000 67,100 86.3
Medicaid ............................. 162,000 105,600 53.4
---------- ---------
Total fully insured ................ 1,494,400 965,100 54.8
Self-funded .......................... 41,100 42,600 (3.5)
---------- ---------
Total membership ................... 1,535,500 1,007,700 52.4%
========== ========== =====
</TABLE>
Total premiums earned for the year ended December 31, 1996 increased 74.3%
to $3.02 billion from $1.73 billion in 1995. This overall increase was primarily
attributable to a 67.1% increase in member months for commercial and government
programs. The substantial growth in membership reflected continued consumer
acceptance of health care plans in the Company's markets in general, and the
popularity of the products offered by the Company in particular.
Commercial premium revenues increased $864.6 million to $2.17 billion in
1996 from $1.31 billion in 1995. Membership growth accounted for substantially
all of the change as member months of the Freedom Plan increased 63.5% when
compared with 1995, and member months of Oxford's traditional HMOs increased
65.9% over the prior year. Premium rates of commercial programs were slightly
higher in 1996 than in 1995.
Premium revenues of government programs increased $423.5 million to $850.7
million in 1996 from $427.3 million in 1995. Membership growth accounted for
most of the change in Medicare as member months increased 123.7% when compared
with the prior year. The increase in Medicaid revenues was attributable to a
61.6% increase in member months compared with 1995, offset in part by a 13.8%
decrease in average premium rates during 1996. Premium rates of Medicare
programs in 1996 were 8.5% higher than in 1995.
Third-party administration revenues for the year ended December 31, 1996
declined to $10.4 million from $11.9 million in 1995, attributable to a 5.1%
decrease in per member per month revenue and a 7.8% decrease in member months.
Net investment income for the year ended December 31, 1996 increased to
$42.4 million from $19.4 million in 1995. This was principally due to the
increase in invested cash resulting from increased cash flow from operations
during 1996 and approximately $220 million of net proceeds from the Company's
public offering in April 1996.
Health care services expense stated as a percentage of premiums earned
(the "medical-loss ratio") was 80.1% for the year ended December 31, 1996
compared with 77.5% for the year ended December 31, 1995. The increase in the
medical-loss ratio was attributable to a higher percent of membership in the
Company's Medicare programs, greater than expected pharmacy costs, and decreased
per member per month premium
31
<PAGE> 32
revenue in the Company's Medicaid programs. Overall per member per month revenue
increased 4.3% to $193.67 in 1996 from $185.69 in 1995 while overall per member
per month health care services expenses increased 7.8% to $155.16 in 1996 from
$143.99 in 1995. As stated above, additions to reserves for IBNR recorded in the
third and fourth quarter of 1997 represent, in part, revisions to estimated
costs for 1996. Based on the revised estimates, medical costs for 1996 would be
higher than those shown.
Marketing, general and administrative expenses increased 46.6% to $477.4
million in 1996 from $325.6 million in 1995 which, as a percentage of operating
revenues, was 15.7% in 1996 compared with 18.7% in 1995. The increase in
marketing, general and administrative expenses was attributable to the Company's
rapid membership growth and the costs associated with continuing development and
expansion into new markets and the expansion of the Medicaid Healthy Start and
Oxford Medicare Advantage programs. The other areas of increased expense were
payroll and benefits expense, broker commissions, marketing expenses and
depreciation. Payroll and benefits expense increased $74.4 million in 1996
primarily due to an increase in the size of the Company's work force to over
5,000 employees at the end of 1996 from approximately 4,000 employees at the end
of 1995. The additional employees were hired primarily in the areas of
marketing, management information systems, health services and member services.
Broker commissions increased by $23.8 million in 1996 due to the increase in
premiums earned. Marketing expenses other than payroll and benefits increased by
$5.4 million in 1996 reflecting the Company's continuing commitment to
aggressively market its products in a highly competitive environment.
Depreciation expense was $18.5 million higher than in 1995 as a result of $48.3
million of capital expenditures during 1996.
The Company's equity in the net loss of Health Partners, for 1996 was $4.6
million compared with a loss of $3.9 million in 1995. The increased losses for
Health Partners related primarily to lower per member per month premium revenue
in Health Partners' Medicaid programs.
The provision for income taxes for 1996 was $72.4 million, or
approximately 42.1% of the Company's pretax income in 1996, approximately the
same as the 1995 tax rate.
Inflation
Although the rate of inflation has remained relatively stable in recent
years, health care costs have been rising at a higher rate than the consumer
price index. In particular, the Company has experienced significant increases in
medical costs in its Medicare, Medicaid, and New York Mandated Plans. The
Company employs various means to reduce the negative effects of inflation. The
Company has in prior years increased overall commercial premium rates when
practicable in order attempt to maintain margins; nevertheless, these rate
increases have tended to be below those of traditional indemnity health plans
and comparable to competing health plans, thereby maintaining the Company's
competitive position. The Company's cost control measures and risk-sharing
arrangements with various health care providers may mitigate the effects of
inflation on its operations. There is no assurance that the Company's efforts
to reduce the impact of inflation will be successful or that the Company will
be able to increase premiums to offset cost increases associated with providing
health care.
Liquidity and Capital Resources
Cash used by operations during 1997 aggregated $152.6 million,
contributing to a reduction in cash and cash equivalents and short-term
investments to $639.9 million at December 31, 1997 from $839.5 million at
December 31, 1996. In addition, cash used for capital expenditures totaled
$101.9 million during 1997. This amount was used primarily for computer
equipment and software, reflecting the Company's ongoing need to upgrade and
maintain its information systems to support its rapid growth. In addition,
significant expenditures were incurred for leasehold improvements related to the
Company's headquarters in Norwalk, Connecticut, and existing regional offices,
and to expansion of regional offices in Hooksett, New Hampshire and Hidden
River, Florida. The Company currently anticipates that capital expenditures for
1998, a significant portion of which will be devoted to management information
systems and leasehold improvements, will be less than the amount incurred
in 1997.
Cash amounts aggregating $24.0 million have been segregated as restricted
investments to comply with federal and state regulatory requirements. In
addition, the Company's subsidiaries are subject to certain restrictions on
their
32
<PAGE> 33
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.
Premiums receivable at December 31, 1997 decreased to $275.6 million from
$315.1 million at December 31, 1996 primarily due to adjustments relating to
group and individual member terminations and non-paying group and individual
members previously discussed.
As a result of the previously discussed delays in claims payments, the
Company experienced a significant increase in medical claims payable during the
fourth quarter of 1996 and the first quarter of 1997, but the increase in
medical costs payable was mitigated by progress in paying backlogged claims and
by making advance payments to providers during the first quarter of 1997 and
thereafter. Outstanding advances aggregated approximately $203 million at
December 31, 1997 and have been netted against medical costs payable in the
Company's consolidated balance sheet. The Company has established a valuation
reserve of $10 million against the advances. The Company believes that it will
be able to recover outstanding advances 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 results of
the Company's operations.
The Company's medical costs payable, before netting advance claim
payments of $203 million, was $965.9 million as of December 31, 1997 (including
$859.0 million for IBNR) compared with $624.4 million as of December 31, 1996
(including $551.1 million for IBNR). The increase in medical costs payable
reflects additions to the Company's medical claim reserves during the third and
fourth quarters of 1997 totaling $327 million.
The Company estimates the amount of its IBNR reserves using standard
actuarial methodologies based upon historical data, including the average
intervals 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 increases
in membership. The liability is also affected by shared risk arrangements under
Private Practice Partnerships ("Partnership"). In determining the liability for
medical costs payable, the Company accounts for the financial impact of the
experience of risk-sharing Partnership providers (who may be entitled to credits
from Oxford for favorable experience or subject to deductions for accrued
deficits) and, in the case of Partnership providers subject to deficits, has
established reserves to account for delays or other impediments to recovery of
those deficits. The Company believes that its reserves for medical costs payable
are adequate to satisfy its ultimate claim liability. However, the Company's
rapid growth, delays in paying claims, paying or denying claims in error and
changing speed of payment may affect the Company's ability to rely on
historical information in making medical costs payable reserve estimates.
During the fourth quarter of 1997, the Company made cash contributions to
the capital of its HMO subsidiaries aggregating $65.7 million and contributed
the outstanding capital stock of Oxford Health Insurance, Inc. to Oxford Health
Plans (NY), Inc. to increase Oxford NY's surplus. Since December 31, 1997, the
Company has funded additional contributions of cash and marketable securities
(recorded at fair market value on the date of contribution) totaling $243.4
million. The capital contributions were made to ensure that each subsidiary had
sufficient surplus as of December 31, 1997 under applicable regulations after
giving effect to operating losses and reductions to surplus resulting from the
nonadmissibility of certain assets. The contributions in 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 ("DLJ"), as amended on March 30, 1998 (the "Bridge
Agreement"). The Bridge Notes mature on February 6, 1999 and bear interest at
prime plus 2.5% per annum during the first three months, and thereafter the
spread over prime will increase by 0.5% every three months; provided, however,
that the per annum interest rate will not be less than 10.5%, nor more than
17%. In connection with the issuance of the Bridge Notes, the Company has paid
and will pay commitment and other fees to DLJ and has granted a security
interest in the stock of certain subsidiaries and certain other assets of the
Company. The Bridge Agreement contains various covenants, financial maintenance
requirements and other restrictions, including, among others, a covenant
prohibiting the payment of dividends on the Company's common stock and a
33
<PAGE> 34
covenant with respect to steps to be taken to refinance the Bridge Notes under
certain circumstances. If the Investment Agreement referred to below is
terminated or amended or the transactions thereunder are not consummated by
June 30, 1998 (subject to extension), and in certain other circumstances, DLJ
would be entitled to elect 33% of the total number of directors and the
Company would be required to deliver a resolution of the Company's Board of
Directors adopting a plan or proposal for refinancing the borrowings under the
Bridge Notes, through the issuance of debt or equity securities or the entering
into a strategic transaction acceptable to DLJ, and retain DLJ to effect the
implementation of such plan or proposal.
The Company expects that additional capital contributions to the
subsidiaries will be required as the result of expected operating losses in
1998. Further, additional capital contributions will be required if there is an
increase in the nonadmissible assets of the Company's subsidiaries or a need for
reserve strengthening as the result of regulatory action or otherwise. See
"Business--Government Regulation". Additional capital will also be required to
fund capital expenditures and repay the Bridge Notes, which mature on February
6, 1999.
Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC (together with
the investors thereunder, the "Investors"), the Investors have agreed to
purchase $350,000,000 in Preferred Stock with Warrants to acquire up to
22,530,000 shares of common stock. 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 will be issued as Series A and Series B.
The Series A Preferred Stock will carry a dividend of 8% and will be issued
with Series A Warrants to purchase 15,800,000 shares of common stock, or 19.9%
of the present outstanding voting power of Oxford's common stock. The Series A
Preferred Stock will have 16.6% of the combined voting power of Oxford's
outstanding common stock and the Series A shares. The Series B Preferred stock,
which will be issued with Series B Warrants to purchase non-voting junior
participating preferred stock, is non-voting and will carry a dividend of 9%.
The Series B Preferred Stock will become voting, the dividend rate will
decrease to 8% and the Series B warrants will be exercisable for 6,730,000
shares of common stock at such time as Oxford's shareholders approve the
increase in voting rights of TPG to 22.1%. The Preferred Stock will not be
redeemable by the Company prior to the fifth anniversary of their original
issuance. Thereafter, subject to certain conditions, the Series A and Series B
Preferred Stock will be 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 will be 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 will expire on the
earlier of the tenth anniversary of their original issuance or redemption of
the related series of Preferred Stock. The Warrants will be detachable from the
Preferred Stock. The investment is subject to various conditions, which include
receipt of regulatory approvals, absence of a Material Adverse Effect (as
defined) and completion of debt financing in the amount of $350 million.
Application for approval of TPG's investment in the Company have been filed
with the departments of insurance and/or health, as appropriate, of New York,
New Jersey, Connecticut, Pennsylvania, New Hampshire, Florida and Illinois.
These regulatory agencies have the authority to approve or disapprove, or
impose conditions on, consummation of the transaction. Closing is not subject
to shareholder approval.
In connection with the debt financing required as a condition to the
investment under the Investment Agreement, the Company has engaged DLJ to act
as arranger for a senior secured term loan and as placement agent for a senior
unsecured financing, in the aggregate amount of $350 million. These
transactions are subject to the negotiation and execution of definitive
agreements, which are expected to contain various conditions, including, among
others, receipt of regulatory approvals and absence of material adverse change,
and the senior unsecured financing is also subject to placement of the
financing with investors. The terms of these transactions will depend on market
conditions and other factors beyond the Company's control. There can be no
assurance that definitive agreements will be executed or, if such agreements
are executed, that the conditions specified therein will be satisfied.
34
<PAGE> 35
The investment under the Investment Agreement and the debt financings
described in the proceeding paragraph are herein collectively called the
"Proposed Financing".
The Company believes that the proceeds of the Proposed Financing will be
sufficient to finance the capital needs referred to above and to provide
additional capital for losses or contingencies in excess of the Company's
current expectations. Although the Company currently expects to complete the
Proposed Financing, there can be no assurance that all relevant conditions will
be satisfied. If the Proposed Financing cannot be completed, the Company
believes that other sources of equity and/or debt financing could be arranged to
finance the Company's immediate capital needs, based on discussions with its
financial advisors and expressions of interest received from qualified investors
in the course of the Company's efforts to negotiate the Investment Agreement and
related agreements. The Company currently believes that, in the event such a
financing could not be completed on a timely basis, it has the ability and
intent to reduce certain costs, including those specified in the Turnaround Plan
and others, and otherwise to generate funds to enable it to support its
operations through 1998. The Company's ability to obtain other financing, and
the timing, form and terms thereof, would depend on a number of factors beyond
the Company's control, including, among others, general economic and market
conditions and the possible need for regulatory approvals.
Year 2000 Date Conversion
The Company is currently conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" date
conversion and is developing 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 not completed its assessment of the Year
2000 date conversion. Accordingly, the Company cannot estimate its Year 2000
compliance expense and the related potential effect on the Company's results
of operations.
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 will attempt to mitigate its
risk with respect to the failure of such vendors to be "Year 2000" compliant.
The effect, if any, is not reasonably estimable at this time.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page 38.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10 through 13 is incorporated by
reference to Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120
days after December 31, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules
1. All financial statements - see index to financial statements and
schedules on page 38.
35
<PAGE> 36
2. Financial statement schedules - see index to financial statements
and schedules on page 38.
3. Exhibits - see exhibit index on page 57.
(b) Reports on Form 8-K
In a report on Form 8-K dated and filed on October 27, 1997, the Company
reported under Item 5 "Other Events" its revised estimated third quarter 1997
earnings results.
In a report on Form 8-K dated and filed on October 30, 1997, the Company
reported under Item 5 "Other Events" that purported class action lawsuits had
been filed against the Company and certain of its officers alleging violation of
federal securities laws.
In a report on Form 8-K dated November 4, 1997 and filed on November 6,
1997, the Company reported under Item 5 "Other Events" that the Company received
from the Office of the Attorney General of the State of New York a subpoena
duces tecum requiring the production of various documents, records and
materials; its third quarter earnings press release; and the resignation of its
chief financial officer.
In a report on Form 8-K dated November 6, 1997 and filed on November 10,
1997, the Company reported under Item 5 "Other Events" the examination of its
New York HMO and insurance subsidiaries by the New York State Insurance
Department and its press release announcing steps to strengthen operations.
In a report on Form 8-K dated December 9, 1997 and filed on December 29,
1997, the Company reported under Item 5 "Other Events" its press release
announcing further strengthening of medical claim reserves during the fourth
quarter of 1997.
In a report on Form 8-K dated December 9, 1997 and filed on December 10,
1997, the Company reported under Item 5 "Other Events" a Stipulation entered
into with the New York State Insurance Department.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 2nd day of
April, 1998.
OXFORD HEALTH PLANS, INC.
By: /s/ WILLIAM M. SULLIVAN
----------------------------
William M. Sullivan
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and,
in the capacities indicated on April 2, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ WILLIAM M. SULLIVAN Principal Executive Officer
- -------------------------------------------
William M. Sullivan
/s/ ALBERT A. KOCH Principal Financial Officer
- -------------------------------------------
Albert A. Koch
/s/ BRENDAN R. SHANAHAN Principal Accounting Officer
- -------------------------------------------
Brendan R. Shanahan
/s/ JAMES B. ADAMSON Director
- -------------------------------------------
James B. Adamson
/s/ ROBERT B. MILLIGAN, JR Director
- -------------------------------------------
Robert B. Milligan, Jr.
/s/ FRED F. NAZEM Director
- -------------------------------------------
Fred F. Nazem
/s/ MARCIA J. RADOSEVICH Director
- -------------------------------------------
Marcia J. Radosevich, Ph.D.
/s/ BENJAMIN H. SAFIRSTEIN Director
- -------------------------------------------
Benjamin H. Safirstein
/s/ THOMAS A. SCULLY Director
- -------------------------------------------
Thomas A. Scully
/s/ STEPHEN F. WIGGINS Director
- -------------------------------------------
Stephen F. Wiggins
</TABLE>
37
<PAGE> 38
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................................................. 39
Consolidated Balance Sheets as of December 31, 1997 and 1996.............................................. 40
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and
1995.................................................................................................. 41
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997,
1996 and 1995......................................................................................... 42
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995.................................................................................................. 43
Notes to Consolidated Financial Statements................................................................ 44
</TABLE>
38
<PAGE> 39
Independent Auditors' Report
The Board of Directors and Shareholders
Oxford Health Plans, Inc.:
We have audited the accompanying consolidated balance sheets of Oxford
Health Plans, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oxford
Health Plans, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Stamford, Connecticut
February 23, 1998, except
as to the last paragraph of
note 15, which is as of March 30, 1998
39
<PAGE> 40
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 4,141 72,160
Short-term investments - available-for-sale, at market value 635,743 767,312
Premiums receivable, net ................................... 275,646 315,126
Other receivables .......................................... 45,418 26,343
Prepaid expenses and other current assets .................. 10,097 5,814
Refundable income taxes .................................... 120,439 --
Deferred income taxes ...................................... 38,092 23,429
----------- -----------
Total current assets ................................... 1,129,576 1,210,184
----------- -----------
Property and equipment, at cost:
Land and buildings ......................................... 2,313 226
Furniture and fixtures ..................................... 32,298 24,472
Equipment .................................................. 176,803 104,902
Leasehold improvements ..................................... 61,605 45,093
----------- -----------
273,019 174,693
Less accumulated depreciation and amortization ............. 125,926 69,739
----------- -----------
Net property and equipment ............................. 147,093 104,954
----------- -----------
Deferred income taxes ......................................... 86,406 5,700
Other noncurrent assets ....................................... 34,914 35,559
----------- -----------
Total assets ........................................... $ 1,397,989 1,356,397
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Medical costs payable ...................................... $ 762,959 624,359
Trade accounts payable and accrued expenses ................. 152,152 51,256
Income taxes payable ....................................... -- 9,902
Unearned premiums .......................................... 124,603 63,052
Deferred income taxes ...................................... 9,059 9,658
----------- -----------
Total current liabilities .............................. 1,048,773 758,227
----------- -----------
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 79,474,439 in 1997
and 77,376,282 in 1996 ................................... 795 774
Additional paid-in capital ................................. 437,653 391,602
Retained earnings (deficit) ................................ (95,498) 195,790
Unrealized net appreciation of investments ................. 6,266 10,004
----------- -----------
Total shareholders' equity ............................. 349,216 598,170
----------- -----------
Total liabilities and shareholders' equity ............. $ 1,397,989 1,356,397
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premiums earned ............................ $ 4,167,224 3,022,168 1,734,098
Third-party administration, net ............ 12,592 10,401 11,877
Investment and other income, net ........... 60,330 42,620 19,711
----------- ----------- -----------
Total revenues ........................... 4,240,146 3,075,189 1,765,686
----------- ----------- -----------
Expenses:
Health care services ....................... 3,916,742 2,421,167 1,344,669
Marketing, general and administrative ...... 737,425 477,373 325,643
Unusual charges - write-down of assets ..... 41,618 -- --
----------- ----------- -----------
Total expenses ........................... 4,695,785 2,898,540 1,670,312
----------- ----------- -----------
Operating earnings (loss) ..................... (455,639) 176,649 95,374
Equity in net loss of affiliate ............... (1,140) (4,600) (3,873)
Gain on sale of affiliate ..................... 25,168 -- --
----------- ----------- -----------
Earnings (loss) before income taxes ........... (431,611) 172,049 91,501
Income tax expense (benefit) .................. (140,323) 72,426 39,103
----------- ----------- -----------
Net earnings (loss) ........................... $ (291,288) 99,623 52,398
=========== =========== ===========
Earnings (loss) per common and common
equivalent share:
Basic .................................... $ (3.70) 1.34 .78
Diluted .................................. $ (3.70) 1.25 .71
Weighted average common stock and
common stock equivalents outstanding:
Basic .................................... 78,635 74,285 67,450
Effect of dilutive securities-stock opions -- 5,377 5,894
----------- ----------- -----------
Diluted .................................. 78,635 79,662 73,344
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Common Stock Equity
------------------- Additional Retained Adjustment-
Number Par Paid-In Earnings Short-term
of Shares Value Capital (Deficit) Investments
- -------------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ............................ 16,512 $ 165 90,084 43,769 (1,624)
Exercise of stock options ............................. 1,240 12 10,529 -- --
Two-for-one stock split ............................... 16,638 166 (166) -- --
Tax benefit realized upon exercise of stock options ... -- -- 16,192 -- --
Net earnings .......................................... -- -- -- 52,398 --
Appreciation in value of available-for-sale securities,
net of deferred income taxes ....................... -- -- -- -- 8,508
-------- -------- -------- -------- --------
Balance at December 31, 1995 .......................... 34,390 343 116,639 96,167 6,884
Exercise of stock options ............................. 2,965 30 21,200 -- --
Proceeds from public offering, net .................... 5,227 53 220,487 -- --
Tax benefit realized upon exercise of stock options ... -- -- 33,624 -- --
Two-for-one stock split ............................... 34,794 348 (348) -- --
Net earnings .......................................... -- -- -- 99,623 --
Appreciation in value of available-for-sale securities,
net of deferred income taxes ....................... -- -- -- -- 3,120
-------- -------- -------- -------- --------
Balance at December 31, 1996 .......................... 77,376 774 391,602 195,790 10,004
Exercise of stock options ............................. 2,098 21 21,243 -- --
Tax benefit realized upon exercise of stock options ... -- -- 24,808 -- --
Net loss .............................................. -- -- -- (291,288) --
Depreciation in value of available-for-sale securities,
net of deferred income taxes ....................... -- -- -- -- (3,738)
-------- -------- -------- -------- --------
Balance at December 31, 1997 .......................... 79,474 $ 795 437,653 (95,498) 6,266
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................................. $(291,288) 99,623 52,398
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................... 61,045 42,886 23,014
Write-down of assets ............................................ 41,618 -- --
Deferred income taxes ........................................... (75,279) (13,196) (6,123)
Provision for doubtful accounts ................................. 25,000 4,505 2,682
Equity in net loss of affiliate ................................. 1,140 4,600 3,873
Realized gain on sale of investments ............................ (28,736) (4,734) (3,365)
Gain on sale of affiliate ....................................... (25,168) -- --
Other, net ...................................................... 245 480 274
Changes in assets and liabilities, net of effect of acquisitions:
Premiums receivable .......................................... 25,942 (223,353) (49,938)
Other receivables ............................................ (18,320) (11,083) (9,894)
Prepaid expenses and other current assets .................... (3,928) (2,251) (2,157)
Other noncurrent assets ...................................... (3,959) (3,747) (3,610)
Medical costs payable ........................................ 116,387 323,851 134,854
Trade accounts payable and accrued expenses .................. 84,967 14,764 19,325
Income taxes payable/refundable .............................. (123,624) 42,098 14,216
Unearned premiums ............................................ 61,378 12,753 38,894
--------- --------- ---------
Net cash provided (used) by operating activities ........... (152,580) 287,196 214,443
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ................................................ (101,946) (48,348) (83,946)
Purchases of available-for-sale securities .......................... (589,690) (794,099) (255,841)
Sales of available-for-sale securities .............................. 756,174 311,783 96,182
Maturities of available-for-sale securities ......................... 34,621 33,298 36,340
Maturity of long-term investment .................................... -- -- 13,505
Acquisitions, net of cash acquired .................................. (14,034) -- --
Investments in and advances to unconsolidated affiliates ............ (19,842) (18,597) (8,243)
Other, net .......................................................... (1,986) 723 175
--------- --------- ---------
Net cash provided (used) by investing activities ........... 63,297 (515,240) (201,828)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock .............................. -- 220,539 --
Proceeds from exercise of stock options ............................. 21,264 21,215 10,491
--------- --------- ---------
Net cash provided by financing activities .................. 21,264 241,754 10,491
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................... (68,019) 13,710 23,106
Cash and cash equivalents at beginning of period ....................... 72,160 58,450 35,344
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 4,141 72,160 58,450
========= ========= =========
Supplemental schedule of noncash investing and financing activities:
Unrealized appreciation (depreciation) of short-term investments .... $ 6,336 5,288 16,192
Tax benefit realized on exercise of stock options ................... 24,808 33,624 14,547
Sale of affiliate in a pooling-of-interests transaction ............. 38,442 -- --
One-for-one stock dividend .......................................... $ -- 348 166
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 44
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization
Oxford Health Plans, Inc. ("Oxford") is a regional health care company
providing health care services in New York, New Jersey, Connecticut, New
Hampshire, Florida, Illinois, and Pennsylvania. Oxford was incorporated on
September 17, 1984 and began operations in 1986. Oxford owns and operates seven
health maintenance organizations ("HMOs"), three of which are federally
qualified as Competitive Medical Plans, and two accident and health insurance
companies, one of which is also authorized to offer HMO products, and offers a
health benefits administrative service.
Oxford's HMOs, Oxford Health Plans (NY), Inc. ("Oxford NY"), Oxford Health
Plans (NJ), Inc. ("Oxford NJ"), Oxford Health Plans (CT), Inc. ("Oxford CT"),
Oxford Health Plans (NH), Inc. ("Oxford NH"), Oxford Health Plans (PA), Inc.
("Oxford PA"), and Oxford Health Plans, (FL), Inc. ("Oxford FL"), have each been
granted a certificate of authority to operate as a health maintenance
organization by the appropriate regulatory agency of the state in which it
operates. Oxford Health Insurance, Inc. ("OHI") has been granted a license to
operate as an accident and health insurance company by the Department of
Insurance in the states of New York, New Jersey, Connecticut, Florida and New
Hampshire and in the Commonwealth of Pennsylvania. Oxford Health Plans (IL),
Inc. ("Oxford IL") is licensed by the Illinois Department of Insurance as an
accident and health insurance company with authority to offer HMO products.
Oxford maintains a health care network of physicians and ancillary health
care providers who have entered into formal contracts with Oxford. These
contracts set reimbursement at fixed levels or under certain risk-sharing
agreements and require adherence to Oxford's policies and procedures for quality
and cost-effective treatment.
(2) Summary of Significant Accounting Policies
(a) Principles of consolidation. The consolidated financial statements
include the accounts of Oxford Health Plans, Inc. and all majority-owned
subsidiaries ("the Company"). All intercompany balances have been eliminated in
consolidation. In July 1995, the Company completed a merger with OakTree Health
Plan, Inc. ("OakTree") whereby OakTree was merged into a subsidiary of the
Company. The merger was accounted for as a pooling of interests and,
accordingly, all prior period consolidated financial statements have been
restated as if the merger took place at the beginning of such periods (see note
8). The Company's investment in Health Partners, Inc. was accounted for using
the equity method until its disposal in October 1997 (see note 9).
(b) Premium revenue. Membership contracts are generally on a yearly basis
subject to cancelation by the employer group or Oxford upon 30 days written
notice. Premiums are due monthly and are recognized as revenue during the period
in which Oxford is obligated to provide services to members, and are net of
amounts estimated for termination of members and groups. Premiums receivable are
presented net of valuation allowances for estimated uncollectible amounts.
Unearned premiums represent the portion of premiums received for which Oxford
is not obligated to provide services until a future date.
(c) Health care services cost recognition. The Company contracts with
various health care providers for the provision of certain medical care services
to its members and generally compensates those providers on a fee-for-service
basis or pursuant to certain risk-sharing agreements. As part of a cost control
incentive program, the Company, until March 1, 1996, retained up to 20 percent
of the fee-for-service reimbursement as a risk-sharing fund. Amounts retained
under this arrangement were payable to the physicians at the discretion of the
Company and were included in medical costs payable in the accompanying
consolidated balance sheets. Effective March 1, 1996, the Company shifted to a
modified fee schedule under which withholds were eliminated for most
participating physicians.
Costs of health care and medical costs payable for health care services
provided to enrollees are estimated by management based on evaluations of
providers' claims submitted and provisions for incurred but not reported claims.
The Company estimates the amount of the provision for incurred but not reported
claims
44
<PAGE> 45
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
using standard actuarial methodologies based upon historical data including the
period between the date services are rendered and the date claims are received
and paid, expected medical cost inflation, seasonality patterns and increases
in membership. The estimates for submitted claims and incurred but not reported
claims are made on an accrual basis and adjusted in future periods as required.
Medical costs payable also reflects surplus or deficit experience for
physicians participating in risk-sharing arrangements through Private Practice
Partnerships. Amounts advanced to providers for delayed claims, which are net
of a valuation reserve of $10,000,000, have been applied against medical claims
payable in the accompanying balance sheet and aggregated $203,355,000 at
December 31, 1997. Management believes that the Company's reserves for medical
costs payable are adequate to satisfy its ultimate claim liability.
Losses, if any, are recognized when it is probable that the expected
future health care cost of a group of existing contracts (and the costs
necessary to maintain those contracts) will exceed the anticipated future
premiums, investment income and reinsurance recoveries on those contracts.
Groups of contracts are defined in a manner consistent with the method of
establishing premium rates.
(d) Reinsurance. Reinsurance premiums are reported as health care services
expense, while related reinsurance recoveries are reported as deductions from
health care services expense.
(e) Cash equivalents. The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
(f) Financial instruments. The Company has determined that the marketable
equity and fixed income securities included in short-term investments might be
sold prior to maturity to support its investment strategies. Accordingly, such
investments have been classified as available-for-sale and are carried at fair
market value based on quotations obtained from brokers for those or similar
instruments, and the unrealized appreciation or depreciation, net of deferred
income taxes, has been charged to a separate component of shareholders' equity.
The carrying amount of other financial instruments approximates fair value
generally due to the short-term nature of these instruments.
(g) Property and equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
which range from three to five years. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease terms or the estimated
useful lives of the assets.
(h) Intangible assets. Intangible assets resulting from business
acquisitions are carried at cost and currently amortized over a period of five
years. At each balance sheet date, the Company evaluates the recoverability of
acquisition-related intangible assets based on expectations of nondiscounted
cash flows of the acquired entity (see note 8).
(i) Income taxes. The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Accordingly, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
A valuation allowance is recorded to reduce the deferred tax assets to the
amount that is expected to more likely than not be realized.
(j) Impairment of long-lived assets and assets to be disposed of. The
Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"), on January 1, 1996. SFAS 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future net nondiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
45
<PAGE> 46
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. (See note 8).
(k) 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 period amounts have been restated to reflect these
calculations. Both basic and diluted earnings per share give retroactive effect
to the two-for-one stock splits in 1995 and 1996 (see note 5) and to the merger
with OakTree in July 1995 (see note 8).
(l) Stock option plans. Prior to January 1, 1996, the Company accounted
for its stock option plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS 123 had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123 (see
note 6).
(m) Marketing costs. Marketing and other costs associated with the
acquisition of plan member contracts are expensed as incurred.
(n) Use of estimates. Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(o) Reclassifications. Certain reclassifications have been made to prior
years' financial statement amounts to conform to the 1997 presentation.
46
<PAGE> 47
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Financial Instruments
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt and equity securities have been classified as available-for-sale and
recorded at fair value, with unrealized gains and losses, net of deferred income
taxes, reported in a separate component of shareholders' equity. The cost of
securities sold is determined on a specific identification basis. Realized gains
and losses are included in results of operations.
The methods and assumptions used to estimate the fair value of each class
of financial instruments are described in note 2. The following is a summary of
available-for-sale securities as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. government obligations .. $252,817 1,863 256 254,424
Corporate obligations ........ 140,434 1,276 307 141,403
Municipal tax-exempt bonds ... 171,037 2,425 35 173,427
-------- -------- -------- --------
Total debt securities ...... 564,288 5,564 598 569,254
Equity securities ............ 60,834 6,027 372 66,489
-------- -------- -------- --------
Total short-term investments $625,122 11,591 970 635,743
======== ======== ======== ========
December 31, 1996:
U.S. government obligations .. $357,944 1,739 741 358,942
Corporate obligations ........ 150,662 782 574 150,870
Municipal tax-exempt bonds ... 188,441 1,561 115 189,887
-------- -------- -------- --------
Total debt securities ...... 697,047 4,082 1,430 699,699
Equity securities ............ 53,309 15,360 1,056 67,613
-------- -------- -------- --------
Total short-term investments $750,356 19,442 2,486 767,312
======== ======== ======== ========
</TABLE>
The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 1997, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because the issuers of
securities may have the right to prepay such obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
(In thousands)
<S> <C> <C>
Due in one year or less .................... $ 64,833 64,982
Due after one year through five years ...... 491,049 495,767
Due after five years through ten years ..... 8,406 8,505
-------- --------
$564,288 569,254
======== ========
</TABLE>
Included in investment income are net recognized gains on disposals of
available-for-sale securities of $28,736,000 in 1997, $4,734,000 in 1996 and
$3,365,000 in 1995. Proceeds from the sale or maturity of available-for-sale
securities aggregated $790,795,000 in 1997, resulting in gross recognized gains
of $36,615,000 and gross recognized losses of $7,879,000. Proceeds from the sale
or maturity of available-for-sale securities aggregated $345,081,000 in 1996,
resulting in gross recognized gains of $9,036,000 and gross recognized losses of
$4,302,000. Proceeds from the sale or maturity of available-for-sale securities
aggregated $132,522,000 in 1995, resulting in gross realized gains of $5,654,000
and gross unrealized losses of $2,289,000. The change in the net unrealized
gains (losses) on available-for-sale securities included in the separate
component of shareholders' equity during 1997 totaled $(6,336,000) before
deferred income taxes of
47
<PAGE> 48
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$(2,598,000); during 1996 totaled $5,288,000 before deferred income taxes of
$2,168,000; and during 1995 totaled $14,547,000 before deferred income taxes of
$6,039,000.
(4) Income Taxes
<TABLE>
<CAPTION>
Income tax expense (benefit) consists of: Current Deferred Total
------- -------- -----
(In thousands)
<S> <C> <C> <C>
Year ended December 31,1997:
Federal ................. $(68,604) (78,577) (147,181)
State and local ......... 3,560 3,298 6,858
-------- -------- --------
Total ................. $(65,044) (75,279) (140,323)
======== ======== ========
Year ended December 31, 1996:
Federal ................. $ 64,358 (10,093) 54,265
State and local ......... 21,264 (3,103) 18,161
-------- -------- --------
Total ................. $ 85,622 (13,196) 72,426
======== ======== ========
Year ended December 31, 1995:
Federal ................. $ 34,672 (4,743) 29,929
State and local ......... 10,554 (1,380) 9,174
-------- -------- --------
Total ................. $ 45,226 (6,123) 39,103
======== ======== ========
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, cash payments for
income taxes, net of refunds received were $66,927,000, $51,931,000 and
$35,132,000, repectively.
Income tax expense differed from the amounts computed by applying the
federal income tax rate of 35% to earnings (loss) before income taxes as a
result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at statutory tax rate $(151,064) 60,217 32,025
Write-off of goodwill ............................ 9,895 -- --
State and local income taxes, net
of federal income tax benefit ................. 4,458 11,805 5,963
Nontaxable gain on sale of affiliate ............. (4,104) -- --
Equity in net loss of affiliate .................. 399 1,610 1,356
Tax-exempt interest on municipal bonds ........... (2,484) (1,630) (726)
Other, net ....................................... 2,577 424 485
--------- --------- ---------
Actual income tax expense (benefit)............... $(140,323) 72,426 39,103
========= ========= =========
</TABLE>
48
<PAGE> 49
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .......... $ 99,895 --
Medical costs payable ..................... 16,440 11,467
Allowance for doubtful accounts ........... 11,799 --
Unearned premiums ......................... 10,509 5,790
Trade accounts payable and accrued expenses 8,361 5,073
Write-down of investment in affiliate ..... 5,618 --
Losses of unconsolidated affiliate ........ -- 4,837
Property and equipment .................... 3,404 3,593
Other ..................................... 5,368 3,206
--------- ---------
Total gross deferred tax assets ....... 161,394 33,966
Valuation allowance ....................... (36,896) (4,837)
--------- ---------
Total deferred tax assets ............. 124,498 29,129
--------- ---------
Deferred tax liabilities:
Unrealized appreciation of short-term
investments .......................... 4,354 6,952
Gain on sale of affiliate ................. 4,705 --
Other ..................................... -- 2,706
--------- ---------
Total deferred tax liabilities ........ 9,059 9,658
--------- ---------
Net deferred tax assets ............... $ 115,439 19,471
========= =========
</TABLE>
The Company has federal net operating loss carryfowards of
approximately $205 million which will be available to offset future taxable
income and expire in the year 2012. The Company's state net operating loss
carryfowards expire in various periods from 1998 to 2012.
The valuation allowance as of December 31,1997 relates to state
net operating losses and the state tax effect of the Company's net deductible
temporary differences. Due to the limited net operating loss carryforward
period in some of the states in which the Company operates, management does not
believe it is more likely than not that these benefits will be realized. At
December 31, 1996, the valuation allowance related to the Company's equity in
the cumulative losses of Health Partners, Inc., which was disposed of in the
fourth quarter of 1997.
At December 31, 1997 and 1996, there were no other valuation allowances
associated with the deferred tax assets as management believes that it is more
likely than not that future operations will generate sufficient taxable income
to utilize the unreserved net deferred tax assets. The amount of future taxable
income necessary during the carryfoward period to utilize the unreserved net
deferred tax assets is approximately $330,000,000.
(5) Capital Stock
On March 17, 1997, Oxford's Board of Directors unanimously adopted a
resolution authorizing an amendment to Oxford's certificate of incorporation to
increase the number of authorized shares of common stock from 200,000,000 shares
to 400,000,000 shares, subject to shareholder approval. On April 22, 1997, the
Company's shareholders approved such amendment.
On March 15, 1996, Oxford's Board of Directors approved a two-for-one
split of the Company's common stock to be effected by distribution of a dividend
of one share of common stock for each share of common stock outstanding, payable
to shareholders of record on March 25, 1996. A total of 34,793,720 shares of
common stock were issued in connection with the split. The stated par value of
$0.01 was not changed and the amount of $347,937 was reclassified from
additional paid-in capital to common stock.
On October 28, 1994, Oxford's Board of Directors unanimously adopted a
resolution authorizing an amendment to Oxford's certificate of incorporation to
increase the number of authorized shares of common stock from 25,000,000 shares
to 200,000,000 shares, subject to shareholder approval. On March 3, 1995, the
49
<PAGE> 50
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's shareholders approved such amendment. On the same date, the Board of
Directors approved a two-for-one split of the Company's common stock effected by
distribution of a dividend of one share of common stock for each share of common
stock outstanding on March 6, 1995. The two-for-one split was effectuated on
March 27, 1995. A total of 16,638,339 shares of common stock were issued in
connection with the split. The stated par value of $0.01 was not changed and the
amount of $166,383 was reclassified from additional paid-in capital to common
stock.
All appropriate share, weighted average share and earnings per share
amounts in the consolidated financial statements were restated to retroactively
reflect the stock splits.
(6) Stock Option Plans
The Company grants fixed stock options under its 1991 Stock Option Plan, as
amended (the "Employee Plan"), to certain key employees and consultants, under
its 1997 Independent Contractor Stock Option Plan (the "Independent Contractor
Plan") to certain independent contractors who materially contribute to the
long-term success of the Company and under its Nonemployee Directors' Stock
Option Plan, as amended (the "Nonemployee Plan"), to outside directors to
purchase common stock at a price not less than 100% of quoted market value at
date of grant.
The Employee Plan provides for granting of nonqualified stock options and
incentive stock options which vest as determined by the Company and expire over
varying terms, but not more than seven years from date of grant. The Employee
Plan is administered by a committee consisting of three members of the Board of
Directors, selected by the Board. The committee determines the individuals to
whom awards shall be granted as well as the terms and conditions of each award,
the grant date and the duration of each award. All options are granted at fair
market value on date of grant. The Company's previous nonqualified employee
stock option plan terminated in 1991, except as to options theretofore granted.
The Independent Contractor Plan provides for granting of nonqualified
stock options which vest as determined by the Company and expire over varying
times, but not more than seven years from the date of grant. The Employee Plan
is administered by a committee consisting of three members of the Board of
Directors, selected by the Board. The committee determines the individuals to
whom awards shall be granted as well as the terms and conditions of each award,
the grant date and the duration of each award. All options are granted at fair
market value on date of grant.
The Nonemployee Plan provides for granting of nonqualified stock options
to eligible nonemployee directors of the Company. The plan provides that each
year on the first Friday following the Company's annual meeting of stockholders,
each individual elected, reelected or continuing as a nonemployee director will
automatically receive a nonqualified stock option for 5,000 shares of common
stock. The plan further provides that one-fourth of the options granted under
the plan vest on each of the date of grant and the Friday prior to the second,
third and fourth annual meeting of stockholders following the date of such
grant.
50
<PAGE> 51
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity for all fixed option plans, adjusted for all stock
splits, is summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Prices
------ ---------------
<S> <C> <C>
Outstanding at January 1, 1995 . 11,896,360 $ 7.25
Granted .................... 2,521,104 23.84
Exercised .................. (2,734,050) 3.84
Canceled ................... (133,978) 9.82
-----------
Outstanding at December 31, 1995 11,549,436 11.65
Granted .................... 1,518,176 42.58
Exercised .................. (3,368,208) 6.30
Canceled ................... (407,592) 20.51
-----------
Outstanding at December 31, 1996 9,291,812 18.25
Granted .................... 3,332,186 72.58
Exercised .................. (2,098,157) 10.14
Canceled ................... (319,012) 37.35
-----------
Outstanding at December 31, 1997 10,206,829 $ 37.06
=========== ===========
</TABLE>
On August 8, 1997, the Company granted a total of 3,162,436 options under
the plan to employees and certain independent contractors of the Company with an
exercise price of $74.00. As a consequence of the significant decrease in the
market price of the Company's common stock in the fourth quarter, in order to
ensure that options granted in 1997 provide a meaningful incentive to the
grantees, the Board of Directors, on December 13, 1997, approved an option
reissuance grant for employees and certain independent contractors. All of the
Directors, the Chairman, the President and Chief Executive Officer and Executive
Vice Presidents (other than one Executive Vice President, who commenced
employment in October 1997) were excluded from the reissuance grant. Under the
reissuance grant, the grantees were offered the right to cancel options granted
during 1997 and receive options to purchase the same number of shares so
canceled with a grant date of January 2, 1998 and an exercise price of $17.125.
A total of 2,754,194 options are subject to this grant.
Information about fixed stock options outstanding at December 31, 1997, is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Range of Number Average Remaining
Exercise Prices Outstanding Exercise Price Contractual Life
--------------- ----------- -------------- ----------------
<S> <C> <C> <C>
$ 0.32 - 13.75 2,023,928 $ 6.33 1.3 Years
14.19 - 23.94 3,567,071 20.03 2.4 Years
24.13 - 44.00 941,043 38.68 3.6 Years
46.13 - 84.38 3,674,787 70.10 4.6 Years
----------
$ 0.32 - 84.38 10,206,829 $37.06 3.1 Years
========== =====
</TABLE>
Information about fixed stock options exercisable at December 31, 1997, is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Range of Number Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- --------------
<S> <C> <C>
$ 0.32 - 13.75 1,921,854 $ 6.37
14.19 - 23.94 1,952,956 19.17
24.13 - 44.00 194,722 39.55
46.13 - 84.38 160,450 47.05
---------
$ 0.32 - 84.38 4,229,982 $15.35
========= ======
</TABLE>
51
<PAGE> 52
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion 25 and related interpretations in
accounting for the plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant dates for
grants under this plan consistent with the methodology of SFAS 123, the
Company's net earnings and earnings per share for the years ended December 31,
1997, 1996 and 1995, would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ -----
<S> <C> <C> <C> <C>
Net earnings (loss) (000) As reported.......................$(291,288) 99,623 52,398
Pro forma.........................$(315,188) 90,011 49,416
Basic earnings (loss) per share As reported.......................$ (3.70) 1.34 .78
Pro forma.........................$ (4.01) 1.21 .73
Diluted earnings (loss) per share As reported.......................$ (3.70) 1.25 .71
Pro forma.........................$ (4.01) 1.13 .67
</TABLE>
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $40.03, $19.58 and $10.70, respectively, estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants: no dividend yield for
any year; expected volatility of 69.56% in 1997, 48.99% in 1996 and 50.25% in
1995, risk-free interest rates of 6.15% in 1997, 6.5% in 1996 and 6.3% in 1995;
and expected lives of four years for all years.
Pro forma net income reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
four years and compensation cost for options granted prior to January 1, 1995 is
not considered.
As of December 31, 1997, there were 12,661,263 shares reserved for
issuance under the plans, including 2,454,434 shares reserved for future grant.
(7) Leases
Oxford leases office space and equipment under operating leases. Rent
expense for the years ended December 31, 1997, 1996 and 1995 was $22,646,000,
$18,546,000 and $13,792,000, respectively. Future minimum lease payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1998................................................................... $ 27,264
1999................................................................... 24,406
2000................................................................... 22,778
2001................................................................... 13,486
2002................................................................... 8,139
Thereafter............................................................. 12,068
----------
Total minimum future rental payments................................... $ 108,141
==========
</TABLE>
(8) Acquisitions
As of August 1, 1997, the Company acquired all of the outstanding stock
of Compass PPA, Incorporated, the holding company for a Chicago-based HMO for
approximately $8,200,000 in cash. The acquisition was recorded as a purchase
and goodwill of approximately $24,100,000 resulted. Subsequent to the
acquisition, the Company decided to reduce the level of its future investment
in expansion markets and, therefore,
52
<PAGE> 53
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
determined the carrying amount of its investment is not recoverable.
Accordingly, the Company, as of December 31, 1997 wrote off the remaining
unamortized goodwill of $23,427,000.
On November 3, 1997, the Company acquired all of the outstanding stock of
Riscorp Health Plans, Inc., a Florida-based HMO, for approximately $5,300,000 in
cash. The acquisition was recorded as a purchase and resulted in goodwill of
approximately $3,894,000. Subsequent to the acquisition, the Company decided to
reduce the level of its future investment in expansion markets and, therefore,
determined that the carrying amount of its investment is not recoverable.
Accordingly, the Company, as of December 31,1997, wrote off the goodwill of
$3,894,000.
Results of operations of the companies acquired by the purchase method
have been included from the date of acquisition. The proforma effects of the
acquisitions on the consolidated results of operations for the years ended
December 31, 1997, 1996 and 1995, assuming these acquisitions had occurred as of
January 1, 1995, are not material and have not been presented.
On July 3, 1995, the Company issued 1,177,047 shares of its common stock
in connection with the merger of a wholly-owned subsidiary of the Company with
OakTree Health Plan, Inc., the holding company for a Philadelphia-based HMO.
The merger has been accounted for as a pooling of interests and, accordingly,
the Company's consolidated financial statements have been restated to include
the accounts and operations of OakTree for all periods prior to the merger.
Separate operating revenues, net earnings and other changes in shareholders'
equity for all periods presented prior to the merger are not material and have
not been presented.
(9) Related Party Transactions
In October 1997, the Company disposed of its 47% interest in Health
Partners, Inc. ("Health Partners") in a pooling of interests transaction. Health
Partners was established to provide management and administrative services to
physicians, medical groups and other providers of health care. The investment
had been accounted for using the equity method since April 1995. Under this
method, the Company recognized losses of $1,140,000 in 1997, $4,600,000 in 1996
and $3,873,000 in 1995. The Company received 2,090,109 shares of common stock of
FPA Medical Management, Inc. ("FPAM") with a market value as of the closing of
approximately $76,420,000, resulting in a pretax gain at the time of closing of
approximately $63,146,000. As of December 31, 1997, the market value of the FPAM
stock had been reduced to approximately $38,442,000. Because management believes
that the decline is other than temporary, the Company as of December 31, 1997
wrote down its investment in FPAM by $37,978,000, in accordance with SFAS 115.
As a result, the Company ultimately recognized a pretax gain of approximately
$25,168,000 ($20,463,000 after taxes, or $.26 per share) on the sale of Health
Partners. The Company contracts with provider groups managed by Health Partners
in the Company's service areas.
In 1995, Oxford acquired a 19.9% interest in St. Augustine Health Care,
Inc. ("St. Augustine"), a health maintenance organization offering health
benefit plans in eleven counties in the State of Florida. Under the terms of the
transaction, Oxford has provided $14,297,000 in equity and debt financing to St.
Augustine and has the right to make future equity investments. As of December
31, 1997, the Company decided to reduce the level of its future investment in
expansion markets and, therefore, wrote off the $14,297,000 carrying value of
its investment in the capital stock and subordinated surplus notes of St.
Augustine.
53
<PAGE> 54
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Unusual Charges
As previously described, the Company reduced the level of its future
investment in expansion markets and, accordingly, wrote down its investment in
two subsidiaries (see note 8) and one affiliate (see note 9). These write downs
have been shown as unusual charges in the accompanying financial statements and
are summarized as follows:
<TABLE>
<S> <C>
Compass PPA, Incorporated $23,427,000
Riscorp Health Plans, Inc. 3,894,000
St. Augustine Health Care, Inc. 14,297,000
-----------
Total $41,618,000
===========
</TABLE>
(11) Defined Contribution Plan
Effective October 1, 1990, the Company adopted a qualified defined
contribution plan ("the Savings Plan"). The Savings Plan covers all employees
with six months of service and at least a part-time employment status as
defined. The Savings Plan also provides that the Company make matching
contributions, up to certain limits, of the salary contributions made by the
participants. The Company's contributions to the Savings Plan were approximately
$3,241,000 in 1997, $1,798,000 in 1996 and $901,000 in 1995.
(12) Regulatory and Contractual Capital Requirements
Certain restricted investments at December 31, 1997 and 1996 are held on
deposit with various financial institutions to comply with federal and state
regulatory requirements. As of December 31, 1997, a total of $24,006,000 in cash
was so restricted. With respect to Oxford NY, the amount of cash required to
be available in addition to restricted investments is based on a formula
established by the State of New York. These additional cash requirements
amounted to approximately $155,612,000 and $106,200,000 at December 31, 1997
and 1996, respectively, and are included in short-term investments.
In addition to the foregoing requirements, Oxford NY, Oxford NJ, Oxford
CT, Oxford NH, Oxford PA, Oxford FL, Oxford IL and OHI are subject to certain
restrictions on their abilities to make dividend payments, loans or other
transfers of cash to Oxford. Such restrictions limit the use of any cash
generated by the operations of Oxford NY, Oxford NJ, Oxford CT, Oxford NH,
Oxford PA, Oxford FL, Oxford IL and OHI to pay obligations of Oxford and limit
the Company's ability to declare and pay dividends.
Since December 31, 1997, the Company has made additional contributions of
cash and marketable securities (recorded at fair market value on the date of
contribution) of approximately $160,391,000 (see note 15). The capital
contributions were made to ensure that each subsidiary had sufficient surplus as
of December 31, 1997 under applicable regulations after giving effect to
operating losses and reductions to surplus resulting from the nonadmissibility
of certain assets.
(13) Concentrations of Credit Risk
Concentrations of credit risk with respect to premiums receivable are
limited due to the large number of employer groups comprising the Company's
customer base. As of December 31, 1997 and 1996, the Company had no significant
concentrations of credit risk. Financial instruments which potentially subject
the Company to concentrations of such credit risk consist primarily of
short-term investments in equity securities, obligations of certain state
governmental entities, the United States government and high-grade corporate
bonds and notes. These short-term investments are managed by professional
investment managers within the guidelines established by the Board of Directors,
which, as a matter of policy, limit the amounts which may be invested in any one
issuer and prescribe certain minimum investee company criteria.
54
<PAGE> 55
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Contingencies
Following the October 27, 1997 decline in the price per share of the
Company's common stock, several purported securities class action lawsuits were
filed 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 action lawsuits 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 Company anticipates that
additional purported shareholder derivative actions containing similar
allegations may be filed. Although the outcome of these actions cannot be
predicted at this time, the Company believes that the defendants have
substantial defenses to the claims asserted in the complaints and intends to
defend the actions vigorously. In addition, the Company is currently being
investigated and is undergoing examinations by various state and federal
agencies. The outcome of these examinations and investigations cannot be
predicted at this time.
The Company is involved in other legal actions in the normal course of
business, some of which seek monetary damages, including claims for punitive
damages which are not covered by insurance. The Company believes any ultimate
liability associated with these actions would not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
(15) Subsequent Events
As of February 23, 1998, the Company signed a definitive agreement with
the investment firm Texas Pacific Group providing that Texas Pacific will
purchase $350 million in preferred stock issued as Series A and Series B with
dividend rates of 8% and 9% respectively. The preferred shares also come with
warrants to acquire 22.5 million shares of Oxford common stock with an exercise
price of $17.75. This price represents a 5% premium over the average trading
price of Oxford shares for 30 trading days ended February 20, 1998. The
exercise price 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 Series A Preferred Stock will carry a
dividend of 8% and will be issued with warrants to purchase 15,800,000 shares
of common stock, or 19.9% of the present outstanding voting power of the
Company's common stock. The Series A Preferred Stock will have 16.6% of the
combined voting power of the Company's outstanding common stock and the Series
A shares. The Series B Preferred Stock, which will be issued with warrants to
purchase non-voting junior participating preferred stock, is non-voting and
will carry a dividend of 9%. The Series B Preferred Stock will become voting,
the dividend rate will decrease to 8% and the related warrants will be
exercisable for 6,730,000 shares of common stock at such time as the Company's
shareholders approve the increase in voting rights of Texas Pacific to 22.1%.
The terms of the investment will prohibit the Company from paying cash
dividends on its common stock. The investment is subject to various conditions,
which include regulatory approvals and completion of a debt financing in the
amount of $350 million. Closing is not subject to shareholder approval.
On February 6, 1998, the Company issued a $100 million senior secured
increasing rate note due February 6, 1999 ("Bridge Note") and on March 30, 1998,
issued an additional $100 million Bridge Note, pursuant to a Bridge Securities
Purchase Agreement, dated as of February 6, 1998, as amended on March 30, 1998
("Bridge Agreement"). The Company used the proceeds of the Bridge Notes to
make capital contributions to certain of its HMO subsidiaries, to pay expenses
in connection with the issuance and for general corporate purposes. A portion
of the March 30, 1998 proceeds aggregating $83,000,000 was used to make capital
contributions to certain of its HMO subsidiaries, bringing total capital
contributions since December 31, 1997 to $243,391,000. Pursuant to the Bridge
Agreement, the Company is prohibited from paying cash dividends on its common
stock so long as any Bridge Notes are outstanding.
55
<PAGE> 56
(16) Quarterly Information (Unaudited)
Tabulated below are certain data for each quarter of 1997 and 1996.
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------
Mar. 31 Jun. 30 Sep. 30 Dec. 31
---------- --------- --------- ---------
(In thousands, except membership and per share amounts)
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Net operating revenues ................ $ 973,191 1,047,550 1,049,160 1,109,915
Operating expenses .................... 927,520 998,712 1,196,198 1,573,355
Net earnings (loss) ................... 34,379 37,175 (78,157) (284,685)
Per common and common equivalent share:
Basic .............................. $ .44 .48 (.99) (3.58)
Diluted ............................ $ .42 .45 (.99) (3.58)
Membership at quarter-end ............. 1,738,800 1,833,500 1,942,600 2,008,100
Year ended December 31, 1996:
Net operating revenues ................ $ 651,364 715,114 800,006 866,085
Operating expenses .................... 624,976 685,569 763,471 824,524
Net earnings .......................... $ 18,517 22,458 26,650 31,998
Per common and common equivalent share:
Basic .............................. $ .27 .30 .35 .42
Diluted ............................ $ .25 .28 .33 .39
Membership at quarter-end ............. 1,200,400 1,321,100 1,442,200 1,535,500
</TABLE>
Net operating revenues include premiums earned and third-party administration,
net. Operating expenses include health care services and marketing, general and
administrative expenses.
Unusual charges increased operating expenses by $41,618,000 in the fourth
quarter of 1997 (see note 10).
56
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------
<S> <C>
2 --Agreement of Plan and Merger, dated as of March 30, 1995, by
and among Oxford Health Plans, Inc., OHP Acquisition Corporation
and OakTree Health Plan, Inc., incorporated by reference to the
Registrant's Registration Statement on Form S-3 (File No.
33-92006)
3(i) --Second Amended and Restated Certificate of Incorporation, as
amended, of the Registrant, incorporated by reference to Exhibit
3(a) of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-19442)
3(ii)(a) --Amended and Restated By-laws of the Registrant
4 --Form of Stock Certificate, incorporated by reference to
Exhibit 4 of the Registrant's Registration Statement of Form S-1
(File No. 33-40539).
10(a) --Employment Agreement, dated August 14, 1996, between the
Registrant and Stephen F. Wiggins, incorporated by reference to
Exhibit 10(a) of the Registrant's Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 0-19442)
10(b) --Employment Agreement, dated August 14, 1996, between the
Registrant and William M. Sullivan, incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 0-19442)
10(c) --Employment Agreement, dated August 14, 1996, between the
Registrant and Jeffery H. Boyd, incorporated by reference to
Exhibit 10(c) of the Registrant's Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 0-19442)
10(d) --Employment Agreement, dated August 14, 1996, between the
Registrant and Robert M. Smoler, incorporated by reference to
Exhibit 10(e) of the Registrant's Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 0-19442)
10(e) --Employment Agreement, dated August 14, 1996, between the
Registrant and David B. Snow, Jr., incorporated by reference to
Exhibit 10(f) of the Registrant's Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 0-19442)
10(f) --Employment Agreement, dated August 14, 1996 between the
Registrant and Andrew B. Cassidy, incorporated by reference to
Exhibit 10(d) of the Registrant's Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 0-19442)
10(g) --1991 Stock Option Plan, as amended, incorporated by reference
to Exhibit 10(h) of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 (File No. 0-19442)
10(h) --Letter Agreement, dated April 13, 1990, between the Registrant
and Lincoln National Administrative Services Corporation,
incorporated by reference to Exhibit 10(p) of the Registrant's
Registration Statement on Form S-1 (File No. 33-40539)
10(i) --Incentive Compensation Plan, adopted June 7, 1991,
incorporated by reference to Exhibit 10(n) of the Registrant's
Registration Statement on Form S-1 (File No. 33-40539)
10(j) --Oxford Health Plans, Inc. 401(k) Plan, as amended,
incorporated by reference to Exhibit 10(k) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-19442)
10(k) --Non-Employee Directors Stock Option Plan, as amended,
incorporated by reference to Exhibit 10(l)(ii) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 0-19442)
10(l) --Letter Agreement, dated April 18, 1990, between the Registrant
and Phoenix Mutual Life Insurance Company, incorporated by
reference to Exhibit 10(q) of the Registrant's Registration
Statement on Form S-1 (File No. 33-40539)
10(m) --Securities Purchase Agreement among Health Partners, Inc.,
Foxfield Ventures, Inc., the Registrant and certain management
investors, dated May 18, 1994, incorporated by reference to
Exhibit 10 of the Registrant's Form 10-Q for the quarterly
period ended June 30, 1994 (File No. 0-19442)
10(n) --Agreement and Plan of Merger by and among FPA Medical
Management, Inc., FPA Acquisition Corp. and Health Partners,
Inc. dated as of July 1, 1997
10(o) --Bridge Securities Purchase Agreement, dated as of February 6,
1998, between the Registrant and Oxford Funding, Inc.*
10(p) --Security Agreement, dated as of February 6, 1998, between the
Registrant and Oxford Funding, Inc.
10(q) --Amendment No. 1, dated as of March 30, 1998, to the Bridge
Securities Purchase Agreement, dated as of February 6, 1998,
between the Registrant and Oxford Funding, Inc.
</TABLE>
57
<PAGE> 58
EXHIBIT INDEX (Continued)
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------
<S> <C>
10(r) --Investment Agreement, dated as of February 23, 1998, between
TPG Oxford LLC and the Registrant
10(s) --Registration Rights Agreement, dated as of February 23, 1998,
between TPG Oxford LLC and the Registrant
10(t) --Employment Agreement, dated as of February 23, 1998, between
the Registrant and Dr. Norman C. Payson
10(u) --Oxford Health Plans, Inc. Stock Option Agreement, dated
February 23, 1998, by and between Dr. Norman C. Payson and the
Registrant.
10(v) --Amendment, dated as of February 23, 1998, to Employment
Agreement between the Registrant and William M. Sullivan
10(w) --Amendment, dated as of February 23, 1998, to Employment
Agreement between the Registrant and Jeffery H. Boyd
10(x) --Employment Agreement, dated as of February 16, 1998, between
the Registrant and Kevin F. Hickey
10(y) --Retirement, Consulting and Non-Competition Agreement, dated as
of February 23, 1998, between the Registrant and Stephen F.
Wiggins
10(z) --Employment Agreement, dated as of March 30,1998, by and between
the Registrant and Marvin P. Rich
21 --Subsidiaries of the Registrant
23 --Consent of KPMG Peat Marwick LLP*
</TABLE>
- ----------
* Filed herewith.
58
<PAGE> 1
Conformed Copy
BRIDGE SECURITIES PURCHASE AGREEMENT
dated as of
February 6, 1998
between
OXFORD HEALTH PLANS, INC.
and
OXFORD FUNDING, INC.
<PAGE> 2
Table of Contents
Page
----
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions....................................................1
SECTION 1.2. Accounting Terms and Determinations...........................10
SECTION 1.3. Rules of Construction.........................................10
ARTICLE II
PURCHASE AND SALE OF NOTES
SECTION 2.1. Commitment to Purchase........................................11
SECTION 2.2. Notice of Purchase............................................11
SECTION 2.3. Purchase of Notes.............................................11
SECTION 2.4. Mandatory Reduction of Commitment.............................12
SECTION 2.5. Termination of Commitment.....................................12
SECTION 2.6. Prepayment of Notes...........................................13
SECTION 2.7. Effectiveness.................................................14
SECTION 2.8. Reserve Account...............................................14
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Corporate Existence and Power.................................15
SECTION 3.2. Authorization and Execution...................................15
SECTION 3.3. Governmental Authorization....................................15
SECTION 3.4. Contravention.................................................16
SECTION 3.5. Financial Information.........................................16
SECTION 3.6. Litigation....................................................17
SECTION 3.7. Environmental Matters.........................................17
SECTION 3.8. Taxes.........................................................17
SECTION 3.9. No Subsidiaries...............................................17
SECTION 3.10. Investments...................................................17
SECTION 3.11. Not an Investment Company.....................................17
SECTION 3.12. Full Disclosure...............................................18
-i-
<PAGE> 3
Page
----
SECTION 3.13. Capitalization................................................18
SECTION 3.14. Solicitation; Access to Information...........................18
SECTION 3.15. Non-Fungibility...............................................19
SECTION 3.16. Permits.......................................................19
SECTION 3.17. Leases........................................................19
SECTION 3.18. Absence of Any Undisclosed Liabilities........................20
SECTION 3.19. Governmental Regulations......................................20
SECTION 3.20. Brokers.......................................................20
SECTION 3.21. Intellectual Property.........................................20
SECTION 3.22. ERISA.........................................................21
SECTION 3.23. Security Interests............................................21
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 4.1. Purchaser Representations.....................................21
ARTICLE V
CONDITIONS PRECEDENT TO PURCHASE OF NOTES
SECTION 5.1. Conditions to Purchaser's Obligation at Closing Date..........22
SECTION 5.2. Conditions to Purchaser's Obligation at Each Time
of Purchase.................................................24
ARTICLE VI
COVENANTS
SECTION 6.1. Information...................................................26
SECTION 6.2. Payment of Obligations........................................27
SECTION 6.3. Maintenance of Property; Insurance............................27
SECTION 6.4. Conduct of Business and Maintenance of Existence..............28
SECTION 6.5. Compliance with Laws..........................................28
SECTION 6.6. Inspection of Property, Books and Records.....................28
SECTION 6.7. Investment Company Act........................................29
SECTION 6.8. Debt or Other Liabilities.....................................29
SECTION 6.9. Restricted Payments...........................................29
-ii-
<PAGE> 4
Page
----
SECTION 6.10. Disqualified Stock; Subsidiary Stock..........................30
SECTION 6.11. Investments...................................................30
SECTION 6.12. Negative Pledge...............................................30
SECTION 6.13. Transactions and Affiliates...................................32
SECTION 6.14. Consolidations and Mergers; Sales of Assets...................32
SECTION 6.15. Appointment of Director.......................................33
SECTION 6.16. Supplemental Information......................................33
SECTION 6.17. Use of Proceeds...............................................33
SECTION 6.18. Certain Fees..................................................33
SECTION 6.19. Permanent Financing...........................................34
SECTION 6.20. Restrictions on Certain Amendments............................35
SECTION 6.21. Restriction on Business Activities............................35
SECTION 6.22. Prohibition of Prepayment of Debt.............................35
SECTION 6.23. ERISA.........................................................35
SECTION 6.24. Net Worth.....................................................35
SECTION 6.25. Limitation on Restrictions Affecting Subsidiaries.............35
SECTION 6.26. Mortgages.....................................................35
SECTION 6.27. Security Agreement Matters....................................35
ARTICLE VII
LIMITATION ON TRANSFERS
SECTION 7.1. Restrictions on Transfer......................................36
SECTION 7.2. Restrictive Legends...........................................37
SECTION 7.3. Notice of Proposed Transfers..................................37
ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. Events of Default.............................................38
SECTION 8.2. Powers and Remedies Cumulative................................41
ARTICLE IX
COLLATERAL AGENT
SECTION 9.1. Collateral Agent..............................................41
SECTION 9.2. Limitation of Liability.......................................42
-iii-
<PAGE> 5
Page
----
SECTION 9.3. Default; Collateral...........................................42
SECTION 9.4. Pledged Collateral Matters....................................42
ARTICLE X
MISCELLANEOUS
SECTION 10.1. Notices.......................................................43
SECTION 10.2. Waivers and Amendments........................................43
SECTION 10.3. Indemnification...............................................44
SECTION 10.4. Expenses; Documentary Taxes...................................47
SECTION 10.5. Payment.......................................................47
SECTION 10.6. Register......................................................47
SECTION 10.7. Successors and Assigns........................................48
SECTION 10.8. New York Law; Submission to Jurisdiction; Waiver of
Jury Trial..................................................48
SECTION 10.9. Independence of Representations, Warranties and Covenants.....48
SECTION 10.10. Severability..................................................48
SECTION 10.11. Entire Agreement; Benefit.....................................49
SECTION 10.12. Headings......................................................49
SECTION 10.13. Counterparts..................................................49
SECTION 10.14. Confidentiality...............................................49
Exhibit A -Form of Note
Exhibit B -Form of Engagement Letter
Exhibit C -Form of Status Certificate
Exhibit D -Interest Reserve Escrow Agreement
Schedule 3.6 -Litigation
Schedule 3.9 -Subsidiaries
Schedule 3.10 -Investments
Schedule 3.13(a) -Capitalization
Schedule 3.13(b) -Subscriptions for Subsidiary Stock
Schedule 3.17 -Leases
Schedule 3.18 -Liabilities
Schedule 3.21 -Intellectual Property
Schedule 3.23 -Filings and Recordings
-iv-
<PAGE> 6
BRIDGE SECURITIES PURCHASE AGREEMENT
BRIDGE SECURITIES PURCHASE AGREEMENT dated as of February 6, 1998
("Agreement") between Oxford Health Plans, Inc., a Delaware corporation, and
Oxford Funding, Inc., a Delaware corporation (the "Purchaser").
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used herein, have
the following meanings:
"Affiliate" means, with respect to any Person (the "Subject
Person"), (i) any other Person (a "Controlling Person") that directly, or
indirectly through one or more intermediaries, Controls the Subject Person or
(ii) any other Person (other than the Subject Person) which is Controlled by or
is under common Control with a Controlling Person.
"Availability Period" means the period from and including the date
hereof to the earlier of (i) the date which is six months from the Closing Date
and (ii) the Termination Date.
"Business Day" means any day except a Saturday, Sunday or other day
on which (i) commercial banks in the City of New York are authorized or required
by law to close or (ii) the New York Stock Exchange is not open for trading.
"Capital Contribution" means the contribution by the Company to the
capital of one or more of its Subsidiaries in order to satisfy regulatory
requirements for statutory capital levels at such Subsidiaries.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), maturing within one year of
the date of acquisition, (ii) time deposits and certificates of deposit of any
domestic commercial bank (including a domestic branch of a foreign bank) whose
outstanding senior long-term debt securities are rated, or that is a
wholly-owned Subsidiary
<PAGE> 7
-2-
of a bank holding company whose outstanding senior long-term debt securities are
rated, either A- or higher by Standard & Poor's Ratings Group or A3 or higher by
Moody's Investors Service, Inc., maturing within one year of the date of
acquisition, (iii) repurchase obligations with a term of not more than 7 days
for underlying securities of the types described in clause (i) above entered
into with any bank meeting the qualifications specified in clause (ii) above,
(iv) commercial paper rated at least A-1 or the equivalent thereof by Standard &
Poor's Ratings Group or at least P-1 or the equivalent thereof by Moody's
Investors Service, Inc., maturing within one year after the date of acquisition,
and (v) investments in money market funds substantially all of whose assets are
comprised of securities of the types described in clauses (i) through (iv)
above.
"Change of Control" means any Person acquiring (whether through
legal or beneficial ownership, by contract or otherwise), directly or
indirectly, the power to vote or direct the voting of securities having more
than 20% of the ordinary voting power for the election of directors of the
Company or having elected, or caused to be elected, a sufficient number of its
nominees to the Board of Directors of the Company such that the nominees so
elected (regardless of when elected) shall collectively constitute a majority of
the Board of Directors of the Company. For purposes of this definition, (x) the
term "Person" includes any "group" as that term is used in Section 13(d)(3) or
14(d)(2) of the Exchange Act and (y) the term "beneficial ownership" has the
meaning set forth in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
Person shall be deemed to have "beneficial ownership" of all securities that
such Person has the right to acquire whether such right is exercisable
immediately or after the passage of time.
"Closing Date" means the initial Time of Purchase.
"Collateral Agent" means the Person appointed Collateral Agent
pursuant to Section 9.1.
"Collateral Documents" means, collectively, the Security Agreement
and any other document or instrument executed in connection therewith, including
UCC financing statements.
"Commission" means the Securities and Exchange Commission.
"Commitment" means the Purchaser's obligation under Section 2.1.
<PAGE> 8
-3-
"Commitment Amount" means $100,000,000 (such amount, the "Initial
Commitment Amount"), as such amount may be reduced from time to time pursuant to
Section 2.4; provided, however, that the Commitment Amount shall be increased by
$100,000,000 (such amount, the "Additional Commitment Amount") upon the
consummation of a Qualifying Equity Issuance or upon the execution of a
definitive agreement with respect thereto, subject only to the receipt of any
required regulatory approval and such other customary closing conditions as
shall be reasonably acceptable to the Purchaser.
"Commonly Controlled Entity" means an entity, whether or not
incorporated, that is or was under common control with the Company or any of its
Subsidiaries within the meaning of Section 4001 of ERISA or is part of a group
that includes the Company or any of its Subsidiaries and that is treated as a
single employer under Section 414 of the Internal Revenue Code.
"Company" means Oxford Health Plans, Inc., a Delaware corporation.
"Company Corporate Documents" means the certificates of
incorporation (including any certificates of designations for preferred stock)
and by-laws of the Company and its Subsidiaries.
"Company Counsel" means Sullivan & Cromwell or other counsel for the
Company satisfactory to the Purchaser.
"Consolidated Net Worth" shall mean, as of the date of
determination, all items which in conformity with GAAP would be included under
shareholders' equity on a consolidated balance sheet of the Company and its
subsidiaries at such date; provided, however, there shall be excluded therefrom
the effect of (i) any reserve adjustments after the Closing Date for the year
ended December 31, 1997 or any future period resulting from changes in the
Company's estimates of its medical costs and expected cost trends, (ii) any
extraordinary non-cash charges (except for charges announced prior to the date
hereof) arising outside the ordinary course of business, (iii) transaction
expenses paid pursuant to the terms of any agreement relating to the proposed
issuance of securities entered into on or prior to the Closing Date (other than
the issuance of the Notes or any refinancing thereof), in an aggregate amount
not to exceed $5 million, and (iv) any operating losses incurred during the
first two quarters of 1998 in an aggregate amount not to exceed (A) for the
period from the Closing Date through June 30, 1998, $72.5 million, (B) for the
period from July 1,
<PAGE> 9
-4-
1998 through September 30, 1998, $36.25 million, and (C) for any period
thereafter, $0. As used in the preceding clause (iv) "operating losses" shall
mean any negative amounts determined by subtracting from total revenue, as
determined in accordance with GAAP, medical expenses and administrative
expenses.
"Control" (including, with correlative meanings, the terms
"Controlling," "Controlled by" and "under common Control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments issued
by such Person, (iii) all obligations of such Person to pay the deferred
purchase price of property or services, except trade accounts payable arising in
the ordinary course of business, (iv) all obligations of such Person under any
Financing Lease, (v) all reimbursement obligations of such Person in respect of
letters of credit or other similar instruments, (vi) all Debt of others secured
by a Lien on any asset of such Person, whether or not such Debt is otherwise an
obligation of such Person and (vii) all Debt of others Guaranteed by such
Person.
"Default" means any event or condition which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Designated Transaction" means (i) any issuance of any Debt (other
than the Notes) or equity securities, or any other incurrence of Debt (other
than Debt permitted by Section 6.8(a)(ii)), by the Company or any of its
Subsidiaries, or (ii) the disposition by the Company or any of its Subsidiaries
of any assets , provided, that a Designated Transaction shall not include a
Qualifying Equity Issuance.
"Disclosure Documents" has the meaning set forth in Section 10.3.
"DLJ" means Donaldson, Lufkin & Jenrette, Inc., a Delaware
corporation.
<PAGE> 10
-5-
"DLJSC" means Donaldson, Lufkin & Jenrette Securities Corporation, a
Delaware corporation.
"Engagement Letter" means the letter substantially in the form
attached as Exhibit B.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, petroleum
or petroleum products, chemicals or industrial, toxic or hazardous substances or
wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, together with all rules and regulations
promulgated pursuant thereto, as amended from time to time.
"Event of Default" has the meaning set forth in Section 8.1.
"Exchange Act" means the Securities Exchange Act of 1934.
"Expiration Date" means the earlier of (i) 5:00 p.m. on June 30,
1998 and (ii) the Termination Date.
"Financing Documents" means this Agreement, the Notes, the
Collateral Documents and the Interest Reserve Escrow Agreement referred to in
Section 2.8.
"Financing Lease" means any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
"GAAP" has the meaning assigned to it in Section 1.2.
"Governmental Authority" shall mean any government or political
subdivision of the United States or any other country
<PAGE> 11
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or any agency, authority, board, bureau, central bank, commission, department or
instrumentality thereof or therein, including any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic, or any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to such government or political subdivision.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing (whether by virtue
of partnership arrangements, by agreement to keepwell, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain a minimum net
worth, financial ratio or similar requirements, or otherwise) any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or (ii) entered into for the purpose of assuring in any other manner the
holder of such Debt of the payment thereof or to protect such holder against
loss in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hazardous Materials" means any hazardous materials, hazardous
wastes, hazardous constituents, hazardous or toxic substances or petroleum
products (including crude oil or any fraction thereof), defined or regulated as
such in or under any Environmental Laws.
"Holder" has the meaning set forth in Section 10.6.
"Indemnified Parties" has the meaning set forth in Section 10.3.
"Internal Revenue Code" means the Internal Revenue Code of 1986.
"Investment" means any investment in any Person, whether by means of
share purchase, capital contribution, loan, time deposit or otherwise.
"Lien" means any lien, mechanic's lien, materialmen's lien,
easement, charge, encumbrance, mortgage, conditional sale agreement, title
retention agreement, agreement to sell or convey, option, claim, title
imperfection, encroachment or other
<PAGE> 12
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survey defect, pledge, restriction, security interest or other adverse claim,
whether arising by contract or under law or otherwise (including any Financing
Lease having substantially the same economic effect as any of the foregoing, and
the filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction in respect of any of the foregoing).
"Majority Holders" means (i) at any time prior to the Closing Date,
the Purchaser and (ii) at any time thereafter, the Holders of more than 50% in
aggregate principal amount of the Notes outstanding at such time.
"Material Adverse Effect" means (i) a material adverse effect on the
business, condition (financial or otherwise), operations, properties or
prospects of the Company and its Subsidiaries taken as a whole (it being
understood that any material adverse effect on the ability of any Significant
Subsidiary to continue to conduct its business on a basis consistent with past
practices shall be deemed to be a Material Adverse Effect), (ii) a material
adverse effect on the ability of the Company to perform its obligations under
any Financing Document or (iii) an adverse effect on the legality, validity,
binding effect or enforceability of any Financing Document or the rights of
Holders or the Purchaser thereunder.
"Net Cash Proceeds" means the total amount of cash proceeds received
by the Company or any of its Subsidiaries as a result of any Designated
Transaction, including any cash proceeds derived from any non-cash proceeds from
or in respect of any Designated Transaction, less
(i) underwriters' fees, brokerage commissions, related professional
fees and other customary out-of-pocket expenses payable by the Company or
such Subsidiary in connection with such Designated Transaction;
(ii) in the case of a disposition of assets, the amount of all
income and other taxes reasonably estimated to be payable by the Company
or such Subsidiary as a result of such disposition of assets; and
(iii) in the case of a disposition of assets, the amount of Debt
secured by a Lien on the asset or assets disposed of and required to be,
and actually, repaid by the Company in connection therewith, and any trade
payables specifically relating to such asset or assets sold
<PAGE> 13
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by the Company or such Subsidiary that are not assumed by the purchaser of
such asset or assets.
"Notes" means the Company's promissory notes substantially in the
form set forth as Exhibit A in a maximum aggregate principal amount equal to(x)
$200,000,000 plus (y) the amount of interest paid on the Notes in the form of
Notes pursuant to the terms of the Notes.
"Permanent Financing" means any debt or equity securities to be
issued by the Company and any other Debt to be incurred by the Company, but
shall not include any Qualifying Equity Issuance.
"Permits" means all domestic and foreign licenses, permits and
approvals required for the full operation of the Company and its Subsidiaries,
including provincial, state, federal, city and county permits and approvals.
"Permitted Holder" has the meaning set forth in Section 7.3(a).
"Permitted Transferee" means any Person that acquires Notes in
compliance with Article VII other than any Person who acquires such Notes (i) in
a public offering or (ii) in the open market, pursuant to sales under Rule 144.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
government (or any agency or political subdivision thereof) or other entity of
any kind.
"Plan" means, at any time, any employee benefit plan (as defined in
Section 3(3) of ERISA) which is a defined benefit plan.
"Pledged Collateral" shall have the meaning assigned to such term in
the Security Agreement.
"Prior Liens" has the meaning set forth in the Security Agreement.
"Purchaser" means Oxford Funding, Inc., a Delaware corporation.
"Qualifying Equity Issuance" shall mean the issuance by the Company
of equity securities resulting in gross cash
<PAGE> 14
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proceeds of not less than $200,000,000, on terms and conditions reasonably
satisfactory to the Purchaser.
"Reserve Account" has the meaning set forth in Section 2.8.
"Rule 144A" means Rule 144A under the Securities Act.
"Secured Obligations" has the meaning set forth in the Security
Agreement.
"Securities Act" means the Securities Act of 1933.
"Security Agreement" means that certain security agreement, dated as
of the date hereof, between the Company, as debtor, and the Purchaser, as
collateral agent and secured party.
"Significant Subsidiary" means each of Oxford Health Plans (NY),
Inc., Oxford Health Plans (NJ), Inc., Oxford Health Plans (CT), Inc. and Oxford
Health Insurance, Inc.
"Status Certificate" means a certificate of the Chief Executive
Officer or the Chief Financial Officer of the Company, in the form of Exhibit C.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
"Termination Date" means the earliest of (i) the date upon which a
Change of Control shall have occurred, (ii) the date upon which any Note shall
have been declared to be, or shall become, due and payable pursuant to Section
8.1, (iii) the date of commencement of the marketing of any Debt or equity
securities for which DLJSC is not sole agent or underwriter by the Company or
any of its Subsidiaries (other than a fully underwritten bank financing pursuant
to a signed commitment letter containing only such conditions as are usual and
customary in such financings and which does not contain any condition relating
to the successful syndication of such transaction) or the date of issuance of
any Debt or equity security by the Company or any of its Subsidiaries (other
than the Notes or any securities issuable upon the exercise of any option or
warrant or the conversion of any convertible securities, in
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each case, outstanding on the date hereof and listed on Schedule 3.13, and
options granted to employees and others pursuant to a benefit or compensation
plan existing on the date hereof or approved by stockholders of the Company
after the date hereof and any securities issuable upon the exercise thereof) and
(iv) the date upon which any Note shall otherwise have become due and payable
pursuant to the terms thereof and shall not have been repaid.
"Time of Purchase" has the meaning set forth in Section 2.2(a).
"Transaction" means (i) a Capital Contribution and (ii) the payment
of fees and expenses in connection therewith.
"Transfer" means any disposition of Notes that would constitute a
sale thereof under the Securities Act.
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared, in accordance with
generally accepted accounting principles as in effect from time to time
("GAAP"), applied on a consistent basis.
SECTION 1.3. Rules of Construction. (a) The definitions in Section
1.1 shall apply equally to both the singular and plural forms of the terms
defined. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include,"
"includes" and "including" shall be deemed to be followed by the phrase "without
limitation."
(b) Unless the context shall otherwise require, all references
herein to (i) Articles, Sections, Exhibits and Schedules shall be deemed
references to Articles and Sections of, and Exhibits and Schedules to, this
Agreement, (ii) Persons include their respective permitted successors and
assigns or, in the case of governmental Persons, Persons succeeding to the
relevant functions of such Persons, (iii) agreements and other contractual
instruments include subsequent amendments, assignments, and other modifications
thereto to the date hereof and thereafter, but in the case of any amendment,
assignment or modification after the date hereof, only to the extent such
amendments, assignments or other modifications thereto are not prohibited by
their terms or the terms of any Financing Document, (iv) statutes and related
regulations include any amend-
<PAGE> 16
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ments of same and any successor statutes and regulations, and (v) time shall be
deemed to be to New York City time.
ARTICLE II
PURCHASE AND SALE OF NOTES
SECTION 2.1. Commitment to Purchase. Subject to the terms and
conditions set forth herein and in reliance on the representations and
warranties of the Company contained herein, the Purchaser agrees to purchase
from the Company at a purchase price of 100% of the principal amount thereof,
Notes in an aggregate principal amount not to exceed the Commitment Amount. If
any Notes are purchased, the Purchaser shall purchase on the Closing Date the
entire Initial Commitment Amount. Any subsequent purchases may be made at any
time during the Availability Period, but on no more than three separate
occasions.
SECTION 2.2. Notice of Purchase. Except for purchases on the Closing
Date, the Company shall give the Purchaser notice not later than 10:00 a.m. on
the fifth Business Day before each issuance and sale of Notes, specifying:
(a) the date and time of the purchase and sale of the Notes (such
date and time, if at all, the "Time of Purchase");
(b) the aggregate principal amount of Notes to be issued and sold to
the Purchaser at such Time of Purchase (which amount shall be, in the case
of purchases after the Closing Date, an integral multiple of $5,000,000
not less than $5,000,000); and
(c) wire instructions for the account of the Company (the "Company
Account") where the purchase price for the Notes is to be delivered at
such Time of Purchase.
SECTION 2.3. Purchase of Notes. (a) At each Time of Purchase,
subject to the satisfaction of all terms and conditions set forth herein, the
Purchaser shall deliver, by wire transfer to the Company Account, immediately
available funds in an amount equal to the aggregate purchase price of the Notes
to be issued and sold to the Purchaser at such Time of Purchase, less the
following amounts, which, in the case of clauses (i) and (ii) below, shall be
non-refundable and retained by Purchaser:
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(i) a takedown fee in respect of the Notes to be issued on such date
in an amount equal to 1.00% of the aggregate principal amount thereof;
(ii) reimbursement for all previously unreimbursed reasonable
out-of-pocket costs and expenses, including reasonable legal fees and
disbursements incurred or made in connection with this Agreement and the
preparation, execution and delivery of the Financing Documents; and
(iii) the amount required to be deposited in the Reserve Account
pursuant to Section 2.8.
At each Time of Purchase, against payment as set forth in the
preceding sentence, the Company shall deliver to the Purchaser a single Note
representing the aggregate principal amount of Notes issued at such Time of
Purchase, registered in the name of the Purchaser, or, if requested by the
Purchaser, separate Notes in such other denominations and registered in such
name or names as shall be designated by the Purchaser by notice to the Company
at least two Business Days prior to such Time of Purchase.
SECTION 2.4. Mandatory Reduction of Commitment. Upon the receipt by
the Company of Net Cash Proceeds from or in anticipation of a Designated
Transaction (other than a lease or sale and leaseback of computer equipment) at
a time at which no Notes are outstanding, the Commitment Amount shall be reduced
by the amount of such Net Cash Proceeds. Upon the receipt by the Company of any
such Net Cash Proceeds at a time at which Notes are outstanding, the Commitment
Amount shall be reduced by the excess, if any, of the amount of such Net Cash
Proceeds over the aggregate principal amount of all Notes then outstanding.
Notwithstanding the foregoing, the Commitment Amount shall be so reduced only to
the extent that Net Cash Proceeds from all Designated Transactions on and after
the date hereof exceed $1,000,000.
SECTION 2.5. Termination of Commitment. The Commitment shall
terminate on the Termination Date.
SECTION 2.6. Prepayment of Notes. (a) The Company at its option may,
upon ten days' written notice to the Holders, at any time, prepay all or any
part of the principal amount of Notes at a redemption price equal to 101% (or,
if the Company shall have paid the fee required by Section 6.18(b), 100%) of
the principal amount of Notes so prepaid, together with accrued interest
through the date of prepayment; provided,
<PAGE> 18
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that the redemption price shall be 103% of par plus accrued interest if the
Notes are refunded (whether at the time of redemption or maturity) with or in
anticipation of funds raised by any financing transaction in which DLJSC has
not acted as sole agent or underwriter to the Company (unless DLJSC, in its
sole discretion, shall have consented thereto).
(b) The Company shall, promptly upon the receipt by the Company of
the Net Cash Proceeds of any Designated Transaction, prepay an aggregate
principal amount of Notes equal to the amount of such Net Cash Proceeds, at a
redemption price equal to 101% of the principal amount of the Notes so prepaid,
together with accrued interest through the date of prepayment; provided, that
the redemption price shall be 103% of par plus accrued interest if the Notes are
refunded (whether at the time of redemption or maturity) with or in anticipation
of funds raised by any financing transaction in which DLJSC has not acted as
sole agent or underwriter to the Company (other than a fully underwritten bank
financing pursuant to a signed commitment letter containing only such conditions
as are usual and customary in such financings and which does not contain any
condition relating to the successful syndication of such transaction); and
provided, further, that Notes shall be required to be so prepaid only to the
extent that Net Cash Proceeds from all Designated Transactions on and after the
date hereof exceed $1,000,000.
(c) The Company shall, immediately upon the occurrence of a Change
in Control, prepay all Notes then outstanding at a redemption price equal to
103% of the principal amount thereof, together with accrued interest through
the date of prepayment.
(d) Any prepayment of the Notes pursuant to Section 2.6(a) shall be
in a minimum amount of at least $1,000,000 and multiples of $1,000,000, unless
less than $1,000,000 of the Notes remains outstanding, in which case all of the
Notes must be prepaid. Any prepayment of the Notes pursuant to Section 2.6(b)
shall be in a minimum amount which is a multiple of $1,000 times the number of
Holders at the time of such prepayment.
(e) Any partial prepayment shall be made so that the Notes then held
by each Holder shall be prepaid in a principal amount which shall bear the same
ratio, as nearly as may be, to the total principal amount being prepaid as the
principal amount of such Notes held by such Holder shall bear to the aggregate
principal amount of all Notes then outstanding. In the
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event of a partial prepayment, upon presentation of any Note the Company shall
execute and deliver to or on the order of the Holder, at the expense of the
Company, a new Note in principal amount equal to the remaining outstanding
portion of such Note.
SECTION 2.7. Effectiveness. This Agreement shall not be effective
unless, at Closing Date, the Company delivers to the Purchaser a commitment fee
in the amount of $3,000,000 in immediately available funds to the account
specified on the signature page hereof.
SECTION 2.8. Reserve Account. Prior to the Closing Date, the Company
shall establish an account with DLJSC in Snoga Inc.'s name as escrow agent for
the Company, the Purchaser and the Holders of the Notes (the "Reserve Account").
The Company, the Purchaser and Snoga Inc., as escrow agent, shall enter into an
Interest Reserve Escrow Agreement in substantially the form of Exhibit D hereto.
The Company hereby irrevocably directs the Purchaser to deposit into the Reserve
Account from the proceeds of the issuances of Notes retained by the Purchaser in
accordance with clause (iii) of Section 2.3, on the Closing Date and on each
subsequent Time of Purchase, an interest reserve of 11.0% of the aggregate
principal amount of Notes to be issued at such Time of Purchase, not to exceed
$22,000,000 in the aggregate. The Purchaser is hereby authorized and directed
(i) to cause the Escrow Agent to invest the balances from time to time in the
Reserve Account as provided in the Interest Reserve Escrow Agreement and to
credit all interest and other income from such investment to the Reserve
Account, and (ii) to debit the balances from time to time in the Reserve Account
first, for the accrued and unpaid interest in respect of the Notes when and as
due, second, for any unpaid fees and expenses due to the Purchaser hereunder,
and thereafter, when all of the Notes have been repaid in full, to the Company.
So long as no Default or Event of Default shall have occurred and is continuing,
the balance in the Reserve Account in excess of 11.0% of the aggregate principal
amount of Notes then outstanding shall be remitted to the Company to the extent
such balance is not then required to satisfy any prepayment obligations of the
Company under Section 2.6.
<PAGE> 20
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants, at the date hereof and at each
Time of Purchase, to the Purchaser and to each Holder as set forth below:
SECTION 3.1. Corporate Existence and Power. The Company and each of
its Subsidiaries is a corporation duly incorporated, validly existing and in
good standing under the laws of its respective jurisdiction of incorporation,
and has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted and as proposed to be conducted.
SECTION 3.2. Authorization and Execution. The execution, delivery
and performance by the Company of each Financing Document and the issuance by
the Company of the Notes have been duly and validly authorized and are within
its corporate powers. Each of the Financing Documents has been duly executed and
delivered by the Company and constitutes the valid and binding agreement of the
Company , and each of the Notes, upon issuance as contemplated hereby, will
constitute the valid and binding obligation of the Company, in each case
enforceable against the Company in accordance with its respective terms, subject
to (i) bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) equitable principles of general applicability.
SECTION 3.3. Governmental Authorization. The execution and delivery
by the Company of the Financing Documents did not and will not, and the issuance
and sale by the Company of the Notes and the consummation of the transactions
contemplated hereby and thereby will not, require any action by or in respect
of, or filing with, any governmental body, agency or governmental official
except such actions or filings that have been undertaken or made prior to the
date hereof and that will be in full force and effect on and as of the date
hereof or which are not required to be filed on or prior to any applicable Time
of Purchase.
SECTION 3.4. Contravention. The execution and delivery by the
Company of the Financing Documents did not and will not, the issuance and sale
by the Company of the Notes will not, and the consummation of the transactions
contemplated hereby and thereby will not, contravene or constitute a default
under or violation of (i) any provision of applicable law or
<PAGE> 21
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regulation, (ii) any Company Corporate Document or (iii) any judgment,
injunction, order or decree or any material agreement or other instrument
binding upon the Company or any of its Subsidiaries or any of their respective
assets, or, except as contemplated by the Collateral Documents, result in the
creation or imposition of any Lien on any asset of the Company or any of its
Subsidiaries.
SECTION 3.5. Financial Information. (a) The consolidated balance
sheets of the Company as of December 31, 1996, 1995 and 1994 and the related
consolidated statements of income and cash flows and stockholders' equity
(deficit) for the fiscal years then ended, reported on by KPMG Peat Marwick
L.L.P., fairly present in all material respects, in conformity with GAAP, the
consolidated financial position of the Company as of such date and its
consolidated results of operations and cash flows for such fiscal year.
(b) The consolidated balance sheets of the Company as of September
30, 1997 and the related consolidated statements of income and cash flows and
stockholders' equity (deficit) for the nine months then ended fairly present in
all material respects, in conformity with GAAP, the consolidated financial
position of the Company as of such date and its consolidated results of
operations and cash flows for such periods (subject to normal year-end
adjustments).
(c) There has occurred no material adverse change in the facts and
information supplied to the Purchaser through the date hereof with respect to
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and its Subsidiaries, taken as a whole,
or with respect to the ability of any Significant Subsidiary to continue to
conduct its business on a basis consistent with past practices.
SECTION 3.6. Litigation. Except as set forth on Schedule 3.6, there
is no action, suit or proceeding pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries before any
Governmental Authority in which there is a reasonable possibility of an adverse
decision which could have a Material Adverse Effect or which challenges the
validity of any Financing Document.
SECTION 3.7. Environmental Matters. The costs and liabilities
associated with Environmental Laws (including the cost of compliance therewith)
are unlikely to have a Material Adverse Effect. The Company and its Subsidiaries
conduct their
<PAGE> 22
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businesses in compliance in all material respects with all applicable
Environmental Laws.
SECTION 3.8. Taxes. All United States Federal income tax returns and
all other material tax returns (including foreign tax returns) which are
required to be filed by or on behalf of the Company or any of its Subsidiaries
have been filed or will be filed by the required time and all material taxes due
pursuant to such returns or pursuant to any assessment received by the Company
or any of its Subsidiaries have been paid or will be paid by the required time.
The charges, accruals and reserves on the books of the Company and its
Subsidiaries in respect of taxes or other governmental charges have been
established in accordance with GAAP.
SECTION 3.9. No Subsidiaries. The Company has no Subsidiaries except
as set forth in Schedule 3.9.
SECTION 3.10. Investments. Except as set forth on Schedule 3.10, the
Company has no direct or indirect Investment in any Person (other than its
Subsidiaries listed on Schedule 3.9); except as set forth on Schedule 3.10, the
Company is not a party to any partnership agreement under which the Company is a
general partner or any material partnership, management, stockholders' or joint
venture or similar agreement.
SECTION 3.11. Not an Investment Company. Neither the Company nor any
of its Subsidiaries is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
SECTION 3.12. Full Disclosure. The information heretofore furnished
by or on behalf of the Company to the Purchaser for purposes of or in connection
with this Agreement or any transaction contemplated hereby does not, and all
such information hereafter furnished by or on behalf of the Company to the
Purchaser will not (in each case taken together and on the date as of which such
information is furnished), contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
contained therein, in the light of the circumstances under which they are made,
not misleading. The Company has disclosed to the Purchaser any and all facts
which materially and adversely affect or may affect (to the extent the Company
can now reasonably foresee) the business, operations or financial condition of
the Company and its respective Subsidiaries or the ability of the Company to
perform its obligations under the Financing Documents.
<PAGE> 23
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SECTION 3.13. Capitalization. (a) As of the date hereof, the
authorized capital stock of the Company is as set forth on Schedule 3.13(a).
Other than as set forth on Schedule 3.13(a), as of the date hereof, there are no
subscriptions, options, warrants, rights, convertible securities, exchangeable
securities or other agreements or commitments of any character pursuant to which
the Company is required to issue any shares of its capital stock.
(b) All of the outstanding capital stock of the Company's
Subsidiaries has been duly authorized and validly issued and is fully paid and
non-assessable and owned by the Company free and clear of all Liens. Except as
set forth on Schedule 3.13(b), there are no subscriptions, options, warrants,
rights, convertible securities, exchangeable securities or other agreements or
commitments of any character pursuant to which any of the Company's Subsidiaries
is required to issue any shares of its capital stock (other than to the
Company).
SECTION 3.14. Solicitation; Access to Information. No form of
general solicitation or general advertising was used by the Company or, to the
best of its knowledge, any other Person acting on behalf of the Company, in
respect of the Notes. Neither the Company nor, to its knowledge, any Person
acting on its behalf has, either directly or indirectly, sold or offered for
sale to any Person any of the Notes or, within the six months prior to the date
hereof, any other similar security of the Company except as contemplated by this
Agreement, and neither the Company nor any Person authorized to act on its
behalf (except that the Company makes no representation as to the Purchaser and
its Affiliates) will sell or offer for sale any such security to, or solicit any
offers to buy any such security from, or otherwise approach or negotiate in
respect thereof with, any Person or Persons so as thereby, in any case, to cause
the issuance or sale of any of the Notes to be in violation of any of the
provisions of Section 5 of the Securities Act.
SECTION 3.15. Non-Fungibility. When issued and delivered pursuant to
this Agreement, none of the Notes will be of the same class (within the meaning
of Rule 144A) as securities which are (i) listed on a national securities
exchange registered under Section 6 of the Exchange Act or (ii) quoted in a U.S.
automated inter-dealer quotation system.
SECTION 3.16. Permits. (a) The Company and its Subsidiaries have
all Permits as are necessary for the conduct of their business as it has been
carried on; (b) all such Permits
<PAGE> 24
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are in full force and effect, and the Company and its Subsidiaries have
fulfilled and performed all obligations with respect to such Permits; (c) no
event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination by the issuer thereof or which results in any other
impairment of the rights of the holder of any such Permit; and (d) the Company
has no reason to believe that any governmental body or agency is considering
limiting, suspending or revoking any such Permit, except, in each case, to the
extent it would not, singly or in the aggregate, have a Material Adverse Effect.
SECTION 3.17. Leases. Except as set forth on Schedule 3.17, the
Company and each of its Subsidiaries enjoys peaceful and undisturbed possession
under all of their leases (the "Leases") necessary for the operation of its
properties and assets, none of which contains any unusual or burdensome
provisions which might materially adversely affect or impair the operation of
such properties and assets, and all such Leases are valid and subsisting and in
full force and effect, except where failure to be in full force and effect would
not have a Material Adverse Effect. None of the Company or its Subsidiaries is
in default under any of such Leases, except where any such default could not
reasonably be expected to have a Material Adverse Effect.
SECTION 3.18. Absence of Any Undisclosed Liabilities or Capital
Calls. Except as set forth on Schedule 3.18, neither the Company nor any of its
Subsidiaries has any liability of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances which could reasonably be
expected to result in such a liability, other than (i) those liabilities
provided for in the financial statements delivered pursuant to Section 3.5 (b)
and (ii) liabilities incurred since September 30, 1997 in the ordinary course of
the Company's business consistent with past practice.
SECTION 3.19. Governmental Regulations. The Company is not, and will
not be upon the issuance and sale of the Notes and the use of the proceeds
described herein, subject to regulation under the Public Utility Holding Company
Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act or
to any federal or state statute or regulation limiting its ability to issue and
perform its obligations under any Financing Document.
<PAGE> 25
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SECTION 3.20. Brokers. Except for DLJSC, the Company has not
employed any broker, finder, financial advisor or investment banker who might be
entitled to any brokerage, finder's or other fee or commission in connection
with the sale of the Notes.
SECTION 3.21. Intellectual Property. Except as set forth on Schedule
3.21, the Company and its Subsidiaries own, or possess adequate licenses or
otherwise have the right to use, all material patents, patent applications,
trademarks, trademark applications, service marks, service mark applications,
trade names, copyrights, trade secrets and know-how (collectively, "Intellectual
Property") that are necessary for the operation of the business of the Company
and its Subsidiaries as presently conducted. No claim is pending or, to the
knowledge of the Company, threatened that the Company or any of its Subsidiaries
has infringed or is infringing upon the asserted rights of any other Person with
respect to any Intellectual Property. No claim is pending or, to the knowledge
of the Company, threatened that any such Intellectual Property owned or licensed
by the Company or any of its Subsidiaries, or which the Company or any of its
Subsidiaries otherwise has the right to use, is invalid or unenforceable.
SECTION 3.22. ERISA. Neither the Company nor any Commonly Controlled
Entity maintains, administers, contributes to, is required to contribute to or
may incur any liability with respect to any Plan and neither the Company nor any
Commonly Controlled Entity has at any time maintained, administered, contributed
to or was required to contribute to any Plan.
SECTION 3.23. Security Interests. (a) Upon execution and delivery of
the Security Agreement by the Company on the Closing Date, the Security
Agreement will create and constitute valid, enforceable and, subject to all
required filings contemplated by clause (b) below, perfected security interests
in, liens on or pledges of all of the Pledged Collateral.
(b) Upon (A) execution and delivery of the Security Agreement by the
Company on the Closing Date, and (B) with respect to the Pledged Collateral, the
filing of Uniform Commercial Code financing statements specified in Schedule
3.23, the security interest, lien or pledge created by the Security Agreement in
the Pledged Collateral encumbered thereby will be a perfected security interest
prior to all other claims or security interests therein, except for Prior Liens.
<PAGE> 26
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 4.1. Purchaser Representations. The Purchaser represents and
warrants to the Company, at the date hereof and at each Time of Purchase, that:
(a) the Purchaser is an accredited investor within the meaning of
Rule 501(a) under the Securities Act and the Notes to be acquired by it
pursuant to this Agreement are being acquired for its own account and not
with a view toward, or for sale in connection with, any distribution
thereof except in compliance with applicable United States federal and
state securities laws;
(b) the execution, delivery and performance of this Agreement,
including the purchase of the Notes pursuant hereto, are within the
Purchaser's corporate powers and have been duly and validly authorized by
all requisite corporate action;
(c) this Agreement has been duly executed and delivered by the
Purchaser;
(d) this Agreement constitutes a valid and binding agreement of the
Purchaser, enforceable in accordance with its terms; and
(e) the Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of
its investment in the Notes and the Purchaser is capable of bearing the
economic risks of such investment.
ARTICLE V
CONDITIONS PRECEDENT TO PURCHASE OF NOTES
SECTION 5.1. Conditions to Purchaser's Obligation at Closing Date.
The Purchaser's obligation to purchase Notes at the Closing Date shall be
subject to the satisfaction of each of the following conditions:
(a) No change shall have occurred, and no additional information
shall have been disclosed to or discovered by the Purchaser, which the
Purchaser reasonably determines
<PAGE> 27
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to be materially adverse in respect of the condition (financial or
otherwise), business, assets, liabilities, properties, results of
operations, projections or prospects of the Company and its Subsidiaries,
taken as a whole, or the ability of any Significant Subsidiary to continue
to conduct its business on a basis consistent with past practice.
(b) The Purchaser shall have received all of the financial
statements referred to in Section 3.5 and such statements shall not differ
materially from the information previously supplied to the Purchaser.
(c) Neither the Company nor any of its Subsidiaries shall have any
Debt for borrowed money, other than Debt owed to the Company or any of its
wholly-owned Subsidiaries.
(d) The Purchaser shall have received evidence satisfactory to it as
to (i) the receipt by the Company of all governmental, board of directors,
stockholders and third party consents and approvals necessary or desirable
in connection with the transactions contemplated hereby and (ii) the
absence of any law or regulation that, in the judgment of the Purchaser,
restrains, prevents or imposes any materially adverse conditions thereon.
(e) The Engagement Letter shall have been duly executed and
delivered by the parties thereto.
(f) The corporate, tax, capital and ownership structure of the
Company and its Subsidiaries shall, except as contemplated hereby, be
consistent in all material respects with those previously disclosed to the
Purchaser, and shall not have been modified in any material respect other
than with the prior written consent of the Purchaser.
(g) The Financing Documents and all other documentation relating to
the Notes shall have been duly executed by each of the parties thereto and
delivered to the Purchaser in form and substance satisfactory to the
Purchaser and in compliance with all applicable laws and regulations.
(h) All conditions precedent to the Financing Documents shall have
been satisfied in compliance with all applicable laws and regulations.
<PAGE> 28
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(i) This Agreement shall have become effective pursuant to Section
2.7.
(j) The Purchaser shall have received an opinion, dated the Closing
Date, of Cahill Gordon & Reindel, special counsel to the Purchaser.
(k) The Purchaser shall have received an opinion, dated the Closing
Date, of Company Counsel, such corporate resolutions, certificates and
other documents as the Purchaser shall reasonably request.
(l) The Company, the Purchaser and Snoga, Inc. shall each have
executed and delivered the Interest Reserve Escrow Agreement substantially
in the form of Exhibit D hereto.
(m) The Company shall have executed and delivered to the Purchaser
and the Collateral Agent the Security Agreement.
Each of the documents, certificates and opinions to be delivered under this
Section 5.1 shall be in form and substance satisfactory to the Purchaser.
SECTION 5.2. Conditions to Purchaser's Obligation at Each Time of
Purchase. The obligation of the Purchaser to purchase any Notes at any Time of
Purchase (including the initial Time of Purchase) is subject to the satisfaction
of the following conditions contemporaneously with such Time of Purchase:
(a) The Company Corporate Documents shall be in full force and
effect and no term or condition thereof shall have been amended, waived or
otherwise modified without the prior written consent of the Purchaser.
(b) There shall have occurred no material adverse change (x) in the
business, condition (financial or otherwise), operations, performance,
properties, projections or prospects of the Company and its Subsidiaries,
taken as whole, or in the ability of any Significant Subsidiary to
continue to conduct its business on a basis consistent with past practice,
since the date hereof or (y) in the facts and information supplied to the
Purchaser through the date hereof with respect thereto.
<PAGE> 29
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(c) Except as set forth on Schedule 3.6, there shall exist no
action, suit, investigation, litigation or proceeding pending or
threatened before any Governmental Authority that challenges the validity
of or purports to affect any Financing Document or any of the transactions
contemplated hereby or that could reasonably be expected to have a
Material Adverse Effect.
(d) The representations and warranties of the Company contained in
each Financing Document (other than any representation or warranty which
expressly relates only to a specified other date) shall be true and
correct on and as of such Time of Purchase as if made on and as of such
time. The Company shall have performed and complied with all covenants and
agreements required by such Financing Documents to be performed or
complied with by it at or prior to such Time of Purchase. Immediately
before and after such Time of Purchase no Default or Event of Default
shall have occurred and be continuing.
(e) If the purchase of Notes is after the Closing Date, the
Collateral Agent shall have a valid, enforceable and perfected first
priority Lien on all material Pledged Collateral.
(f) The Purchaser shall have received the Notes to be issued at such
Time of Purchase, duly executed by the Company and in the denominations
and registered in the names specified in or pursuant to Section 2.3.
(g) There shall not have occurred any disruption or change in the
financial or capital markets which the Purchaser reasonably deems
materially adverse in connection with the purchase of the Notes or the
refinancing thereof.
(h) All fees and expenses due and payable to the Purchaser hereunder
or to DLJSC under the Engagement Letter on or prior to such Time of
Purchase shall have been paid or issued, as the case may be, in full.
(i) The Purchaser shall have received a certificate from the Chief
Executive Officer or the Chief Financial Officer of the Company to the
effect set forth in Section 5.2(a) through (e).
(j) The Purchaser shall have received all other opinions,
certificates, instruments, agreements or other documents as it shall
reasonably request.
<PAGE> 30
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(k) If the Purchaser is purchasing Notes after the Closing Date, the
Commitment Amount shall have been increased to $200,000,000 in accordance
with the terms of this Agreement.
ARTICLE VI
COVENANTS
The Company hereby agrees that, from and after the date hereof and
so long as the Commitment Amount shall be greater than zero or any Notes remain
outstanding and unpaid or any other amount is owing to the Purchaser, the
Collateral Agent or the Holders from time to time, and for the benefit of the
Purchaser and such Holders:
SECTION 6.1. Information. The Company will deliver, or cause to be
delivered, to each Holder:
(a) as soon as available and in any event within 90 days after the
end of each fiscal year of the Company, a consolidated balance sheet of
the Company as of the end of such fiscal year and the related consolidated
statements of income (loss) and cash flows and stockholders' equity
(deficit) for such fiscal year, setting forth in each case in comparative
form the figures for the previous fiscal year, all reported on in a manner
acceptable to the Commission by KPMG Peat Marwick L.L.P. or other
independent public accountants of nationally recognized standing;
(b) as soon as available and in any event within 45 days after the
end of each of the first three fiscal quarters of each fiscal year of the
Company, a consolidated balance sheet of the Company as of the end of such
quarter and the related consolidated statements of income (loss) and cash
flows and stockholders' equity (deficit) for such quarter and for the
portion of the Company's fiscal year ended at the end of such quarter,
setting forth in each case in comparative form the figures for the
corresponding quarter and the corresponding portion of the Company's
previous fiscal year, all certified (subject to footnote presentation and
normal year-end adjustments) as to fairness of presentation, generally
accepted accounting principles and consistency by the chief financial
officer or the chief accounting officer of the Company;
<PAGE> 31
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(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a Status Certificate
or, if as of the date of such delivery a Default shall have occurred and
be continuing, a certificate setting forth the details of such Default and
the action which the Company is taking or proposes to take with respect
thereto;
(d) within five days after any responsible officer of the Company
obtains knowledge of a Default, a certificate of the chief financial
officer or the chief accounting officer of the Company setting forth the
details thereof and the action which the Company is taking or proposes to
take with respect thereto;
(e) promptly upon the mailing thereof to the stockholders of the
Company generally, copies of all financial statements, reports and proxy
statements so mailed;
(f) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to which
the Company or any of its Subsidiaries is a party in which the amount
involved is $5,000,000 or more or in which injunctive or similar relief is
sought;
(g) promptly following the occurrence thereof, notice and a
description in reasonable detail of any material adverse change, or
development involving a prospective material adverse change, in the
business, operations, property, condition (financial or otherwise) or
prospects of the Company or any of its Subsidiaries; and
(h) from time to time such additional information regarding the
financial position or business of the Company or any of its Subsidiaries
as the Purchaser may reasonably request.
SECTION 6.2. Payment of Obligations. The Company will, and will
cause its Subsidiaries to, pay and discharge at or before maturity all material
obligations (including lease obligations, tax liabilities and trade payables),
except where the same may be contested in good faith by appropriate proceedings,
and will, and will cause its Subsidiaries to, maintain, in accordance with GAAP,
appropriate reserves for the accrual of any of the same.
<PAGE> 32
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SECTION 6.3. Maintenance of Property; Insurance. (a) The Company
will, and will cause its Subsidiaries to, keep all property useful and necessary
in their business in good working order and condition, ordinary wear and tear
excepted.
(b) The Company will, and will cause its Subsidiaries to, maintain
with financially sound and responsible insurance companies, insurance in at
least such amounts and against such risks as are usually insured against in the
same general areas by companies of established repute of similar size that are
engaged in the same or a similar business. The Company will deliver to the
Purchaser (i) on or prior to the initial Time of Purchase, a certificate dated
such date showing the amount of coverage as of such date, (ii) upon request of
the Purchaser from time to time full information as to the insurance carried,
(iii) within five days of receipt of notice from any insurer a copy of any
notice of cancellation or material change in coverage from that existing on the
date of this Agreement and (iv) forthwith, notice of any cancellation or
nonrenewal of coverage by the Company.
SECTION 6.4. Conduct of Business and Maintenance of Existence. The
Company will, and will cause its Subsidiaries to, continue to engage in business
of the same general type as now conducted by the Company and its Subsidiaries,
and will, and will cause its Subsidiaries to, preserve, renew and keep in full
force and effect its corporate existence and rights, privileges and franchises
necessary or desirable in the normal conduct of business, except that the
Company or any of its Subsidiaries may discontinue any line of business if the
Company determines that such discontinuation is in the best interests of the
Company and its Subsidiaries and does not materially adversely affect the
Company's ability to perform its obligations under the Financing Documents.
SECTION 6.5. Compliance with Laws. The Company will, and will cause
its Subsidiaries to, comply in all material respects with all applicable laws,
ordinances, rules, regulations, and requirements of Governmental Authorities
(including Environmental Laws and ERISA and the rules and regulations
thereunder) except (i) where compliance therewith is contested in good faith by
appropriate proceedings, (ii) where, in the case of any non-compliance known to
an officer of the Company, corrective actions reasonably acceptable to the
Purchaser are being taken with respect thereto, or (iii) where non-compliance
therewith, singly or in the aggregate, could not reasonably be expected to have
a Material Adverse Effect.
<PAGE> 33
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SECTION 6.6. Inspection of Property, Books and Records. The Company
will, and will cause its Subsidiaries to, keep proper books of record and
account in which full, true and correct entries shall be made of all dealings
and transactions in relation to their respective businesses and activities; and
will, and will cause its Subsidiaries to, permit during normal business hours
and upon written notice, representatives of the Purchaser to visit and inspect
any of their respective properties and, subject to compliance with applicable
law and any confidentiality obligations, to examine and make abstracts from any
of their respective books and records and to discuss their respective affairs,
finances and accounts with their respective executive officers and independent
public accountants, all at such reasonable times and as often as may reasonably
be desired. The Company will reimburse the Purchaser for all reasonable
out-of-pocket expenses, including fees and disbursements of its special counsel,
incurred in performing any of the activities described in the foregoing sentence
at and after the occurrence of a Default.
SECTION 6.7. Investment Company Act. The Company will not, and will
not cause or permit any of its Subsidiaries to, be or become an investment
company within the meaning of the Investment Company Act of 1940, as amended.
SECTION 6.8. Debt or Other Liabilities. (a) The Company will not,
and will not cause or permit any of its Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Debt; provided, however, that the
foregoing shall not prohibit (i) the Notes and other obligations of the Company
under the Financing Documents, (ii) up to $10,000,000 of Debt of the Company or
a Subsidiary thereof outstanding at any one time pursuant to bank overdrafts as
part of its cash management in the ordinary course of business or (iii) Liens
securing Financing Leases so long as such Liens do not cover any assets or
property of the Company other than the asset or property so financed.
(b) The Company will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any trade liability or other accounts payable other than trade liabilities
and other accounts payable arising in the ordinary course of business.
SECTION 6.9. Restricted Payments. The Company will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, declare or
make (i) any dividend or other distribution on any shares of capital stock of
the Com-
<PAGE> 34
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pany (except (A) dividends payable solely in shares of capital stock of the same
class of the Company, (B) so long as no Default or Event of Default has occurred
and is continuing, dividends on securities issued in a Qualifying Equity
Issuance and (C) the distribution of rights to purchase capital stock pursuant
to a customary shareholders' rights plan), (ii) any payment (other than to the
Company or any of its wholly-owned Subsidiaries) on account of the purchase,
redemption, retirement or acquisition of (x) any shares of capital stock of the
Company or any of its Subsidiaries or (y) any option, warrant or other right to
acquire shares of capital stock of the Company or any of its Subsidiaries or
(iii) any loan or advance to any Person (other than the Company or any of its
wholly-owned Subsidiaries) owning any capital stock of the Company or any of its
Subsidiaries (except loans and advances to any Person who was an employee of the
Company or any of its Subsidiaries at the time the loan or advance was made, not
to exceed $7,500,000 in the aggregate outstanding at any one time).
SECTION 6.10. Disqualified Stock; Subsidiary Stock. (a) The Company
will not issue any capital stock that, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date which is one year after the Closing Date.
(b) The Company will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, issue, sell, assign or otherwise
dispose of any shares of capital stock (or any securities convertible or
exchangeable into, or exercisable for, such shares) of any Subsidiary of the
Company, or enter into any agreement, understanding or restriction as to any of
the foregoing, provided, however, that the foregoing shall not prohibit the
issuance of any capital stock by a wholly owned Subsidiary of the Company to its
parent or to employees or consultants pursuant to a benefit or compensation plan
existing on the date hereof.
SECTION 6.11. Investments. The Company will not, and will not cause
or permit any of its Subsidiaries to, directly or indirectly, make or acquire
any Investment in any Person (other than by the creation of any Subsidiary, any
Investment in a wholly owned Subsidiary and Investments in Oxford Specialty
Holdings in an aggregate amount not to exceed
<PAGE> 35
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$15,000,000) other than Investments in Cash Equivalents and Investments in
professionally managed securities portfolios.
SECTION 6.12. Negative Pledge. The Company will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, create,
assume or suffer to exist any Lien on any Pledged Collateral other than Prior
Liens or any other Lien permitted by the Security Agreement. The Company will
not, and will not cause or permit any of its Subsidiaries to, directly or
indirectly, create, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired by it which does not constitute Pledged Collateral, except
(collectively, the "Permitted Liens"):
(a) Liens securing Financing Leases permitted under Section
6.8(a)(iii), so long as such Liens do not cover any assets or property of
the Company or any of its Subsidiaries other than the asset or property so
financed;
(b) Liens securing obligations permitted by Section 6.8 which
obligations represent all or part of the purchase price of equipment
purchased by the Company or any of its Subsidiaries for use in its
business; provided, however, that such Liens shall not encumber any asset
or property of the Company or any of its Subsidiaries other than such
equipment;
(c) (i) statutory and common law Liens of landlords under leases to
which the Company or any of its Subsidiaries is a party and (ii) Liens of
carriers, warehousemen, mechanics and materialmen or other similar
statutory Liens, in each case incurred in the ordinary course of business
for sums the payment of which is not delinquent or which are the subject
of good faith proceedings by the Company or any of its Subsidiaries ;
(d) Liens incurred on deposits made in the ordinary course of
business in connection with workers' compensation, performance bonds,
unemployment insurance and other types of social security, other than any
Lien imposed by or under ERISA;
(e) Liens in respect of judgments or orders for the payment of money
which in the aggregate at any one time do not exceed $15,000,000;
(f) Liens imposed by a Governmental Authority for taxes, assessments
or charges not yet due or which are be-
<PAGE> 36
-31-
ing contested in good faith and by appropriate proceedings if adequate
reserves with respect thereto are maintained on the books of the Company
or the affected Subsidiary, as the case may be, in accordance with GAAP;
(g) easements, rights of way, permits, licenses, zoning ordinances,
covenants, restrictions, defects, minor irregularities of title and other
similar Liens on property which in the case of any particular parcel of
real property do not materially detract from the value or utilization of
such real property;
(h) Liens created pursuant to the Collateral Documents; and
(i) any Liens on shares of FPA Medical Management, Inc. encumbered
pursuant to arrangements with regulatory authorities relating to capital
adequacy requirements of Subsidiaries.
SECTION 6.13. Transactions with Affiliates. The Company will not,
and will not cause or permit any of its Subsidiaries to, directly or indirectly,
pay any funds to or for the account of, make any investment (whether by
acquisition of stock or indebtedness, by loan, advance, transfer of property,
Guarantee or other agreement to pay, purchase or service, directly or
indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise
dispose of any assets, tangible or intangible, to, or participate in, or effect
any transaction in connection with any joint enterprise or other joint
arrangement with, any Affiliate of the Company or any of its Subsidiaries,
except, on terms to the Company or such Subsidiary no less favorable than terms
that could be obtained by the Company or such Subsidiary from a Person that is
not an Affiliate of the Company or such Subsidiary, as determined in good faith
by a majority of the disinterested members of the Board of Directors of the
Company or such Subsidiary as evidenced by a Board resolution; provided,
however, that no such determination of the Board of Directors shall be required
with respect to (i) any such transaction entered into in the ordinary course of
business consistent with past practice, (ii) any such transaction if such
transaction, together with all related transactions, does not involve property,
funds, investments or services with a fair market value in excess of $5,000,000,
(iii)transactions pursuant to arrangements existing on the date hereof with St.
Augustine Health Care, Inc., On-Call Medical Services, P.C., HumanCare Medical
Services (NY), P.C., Oxford Specialty Hold-
<PAGE> 37
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ings, Inc. and Oxford Specialty Management, Inc. or (iv) transactions with any
wholly owned Subsidiary of the Company.
SECTION 6.14. Consolidations and Mergers; Sales of Assets. (a) The
Company will not, and will not cause or permit any of its Subsidiaries to,
directly or indirectly, consolidate or merge with or into any other Person,
except that a wholly-owned Subsidiary of the Company may consolidate or merge
with or into another wholly-owned Subsidiary of the Company.
(b) The Company will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, sell, lease or otherwise transfer any
assets other than (i) in the ordinary course of business consistent with past
practice, or (ii) to the Company or a wholly-owned Subsidiary of the Company.
SECTION 6.15. Appointment of Director. If an Event of Default shall
have occurred and be continuing, the Company shall provide the Purchaser with
the right to appoint in its sole discretion one additional Director to its Board
of Directors; provided, however, that such right shall terminate at such time as
the Purchaser is no longer the Majority Holder.
SECTION 6.16. Supplemental Information. If at any time the Company
is not subject to the requirements of Section 13 or 15(d) of the Exchange Act,
the Company will promptly furnish at its expense, upon request, for the benefit
of the holders from time to time of Notes, to holders of Notes and prospective
purchasers of Notes information satisfying the requirements of subsection
(d)(4)(i) of Rule 144A.
SECTION 6.17. Use of Proceeds. The Company will use the proceeds
from the issuance and sale of Notes for the purposes of the Transactions;
provided, however that the Company may use up to $15,000,000 of the proceeds
from the issuance and sale of Notes on the Closing Date and up to $20 million of
the proceeds from the issuance and sale of Notes after the Closing Date for
general corporate purposes. None of the proceeds from the issuance and sale of
Notes by the Company pursuant to this Agreement will be used directly or
indirectly for the purpose, whether immediate, incidental or ultimate, of
purchasing or carrying any "margin stock" within the meaning of Regulation G of
the Board of Governors of the Federal Reserve System.
SECTION 6.18. Certain Fees. (a) The Company will pay to the
Purchaser a fee (the "Ticking Fee") (i) at the rate of one - half of onepercent
(0.50%) per annum on the undrawn Commitment
<PAGE> 38
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Amount and (ii) prior to such time as the Commitment Amount shall have
increased to $200,000,000, at the rate of one quarter of one percent (*.025 %)
per annum on the Additional Commitment Amount. The Ticking Fee will begin to
accrue commencing on the Closing Date and will be payable in cash, quarterly in
arrears.
(b) The Company will pay to the Purchaser a fee (the "Duration Fee")
at the rate of * one percent ( 1.00 * %) of the principal amount of the Notes
outstanding on the six month anniversary of the Closing Date. The Duration Fee
will be payable on the six month anniversary of the Closing Date.
SECTION 6.19. Permanent Financing. (a) The Company will take all
actions which, in the reasonable judgment of the Company and the Purchaser, are
necessary or desirable to obtain Permanent Financing as soon as practicable
through issuance of securities at such interest or dividend rates and terms as
are then prevailing for new issues of securities of comparable size and credit
rating in the United States capital markets. The amounts to be financed by the
Permanent Financing shall be as determined by the Company, but shall be in an
amount at least sufficient to repay or redeem the Notes in full in accordance
with their terms. The Company hereby covenants and agrees that the Net Cash
Proceeds from the Permanent Financing shall be used, to the extent required, to
redeem in full the Notes in accordance with their terms.
(b) The Company will enter into such agreements as in the reasonable
judgment of the Company and the Purchaser or an Affiliate of the Purchaser are
customary in connection with any such Permanent Financing, make such filings, if
any, under the Securities Act, the Exchange Act, the Trust Indenture Act of 1939
(if applicable) and state securities laws as in the reasonable judgment of the
Company and the Purchaser or such Affiliate of the Purchaser shall be required
to permit consummation of such Permanent Financing and take such steps as in the
reasonable judgment of the Company and the Purchaser or such Affiliate are
necessary to cause such filings to become effective or in the reasonable
judgment of the Company and the Purchaser or such Affiliate are otherwise
required to consummate such Permanent Financing; provided, however, that the
Company will not be obligated to qualify to do business as a foreign corporation
in any jurisdiction in which it is not then so qualified to facilitate the
Permanent Financing.
(c) In the event that all or any portion of the securities issued in
the Permanent Financing are issued under circumstances in which a registration
statement relating to
<PAGE> 39
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such securities has not been declared effective by the Commission under the
Securities Act, the Company agrees to grant to the purchasers of securities
issued in such Permanent Financing registration rights on terms reasonably
required by the Purchaser or any Affiliate of the Purchaser.
SECTION 6.20. Restrictions on Certain Amendments. The Company will
not, and will not cause or permit any of its Subsidiaries to, amend, or suffer
to be amended, any Company Corporate Document or any partnership or stockholder
agreement to which the Company or any of its Subsidiaries is a party if such
amendment would adversely affect the Purchaser or the holder of any Notes.
SECTION 6.21. Restriction on Business Activities. The Company will
not, and will not cause or permit any of its Subsidiaries to, directly or
indirectly, engage in any business activities other than the business activities
engaged in by the Company and its Subsidiaries on the date hereof and activities
reasonably related thereto.
SECTION 6.22. Prohibition of Prepayment of Debt. The Company will
not repay any Debt (other than the Notes) prior to its scheduled maturity.
SECTION 6.23. ERISA. The Company will not, and will not suffer any
Commonly Controlled Entity to, adopt, maintain, administer, contribute to, or
become required to contribute to a Plan.
SECTION 6.24. Minimum Consolidated Net Worth. The Company shall not
permit the Consolidated Net Worth at the end of any fiscal quarter to be less
than the greater of (x) $380 million and (y) the Company's shareholders' equity
as shown on its audited financial statements for the year ended December 31,
1997.
SECTION 6.25. Limitation on Restrictions Affecting Subsidiaries. The
Company will not, and will not cause or permit any of its Subsidiaries to,
directly or indirectly, enter into, or suffer to exist, any agreement (other
than the Financing Documents and agreements or restrictions entered into with
regulatory authorities) with any Person which prohibits or limits the ability of
any Subsidiary to (a) pay dividends or make other distributions or pay any Debt
owed to the Company or any of its Subsidiaries, (b) make loans or advances to
the Company or any of its Subsidiaries, (c) transfer any of its properties or
assets to the Company or any of its Subsidiaries or (d) cre-
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ate, incur, assume or suffer to exist any Lien upon any of its property, assets
or revenues, whether now owned or hereafter acquired.
6.26. Mortgages. As collateral security for the payment of all
obligations hereunder, on or after the date which is the six month anniversary
of the Closing Date, upon the request of the Purchaser, the Company shall take
all steps necessary to grant to the Purchaser a duly perfected first priority
mortgage and security interest in all real property owned by the Company.
6.27. Security Agreement Matters.
(a) Within five Business Days after the Closing Date, the Company
shall cause to be delivered to the Collateral Agent (i) the certificates
identified on Annex 1 to the Security Agreement, accompanied by undated stock
powers executed in blank and (ii) Uniform Commercial Code financing statements
in appropriate form for filing in the locations listed on Schedule 3.23.
(b) The Company shall obtain all consents and approvals of
Governmental Authorities necessary to grant a duly perfected first priority Lien
and security interest in the capital stock of each of Oxford Health Plans (NY),
Inc., Oxford Health Plans (NJ), Inc. and Oxford Health (CT), Inc. as soon as
practicable, but in any event no later than 10 Business Days after the Closing
Date.
ARTICLE VII
LIMITATION ON TRANSFERS
SECTION 7.1. Restrictions on Transfer. From and after their
respective dates of issuance, none of the Notes shall be transferable except
upon the conditions specified in this Section 7.1 and in Sections 7.2 and 7.3,
which conditions are intended to ensure compliance with the provisions of the
Securities Act in respect of the Transfer of any of such Notes or any interest
therein. The Purchaser will use its best efforts to cause any proposed
transferee of any Notes (or any interest therein) held by it to agree to take
and hold such Notes (or any interest therein) subject to the provisions and upon
the conditions specified in this Section 7.1 and in Sections 7.2 and 7.3.
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SECTION 7.2. Restrictive Legends. Each Note shall (unless otherwise
permitted by the provisions of Section 7.3) include a legend in substantially
the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD,
UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND
THEN ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE
BRIDGE SECURITIES PURCHASE AGREEMENT DATED AS OF FEBRUARY 6, 1998, A COPY
OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE
OFFICE.
SECTION 7.3. Notice of Proposed Transfers. (a) Two Business Days
prior to any proposed Transfer (other than Transfers of Notes (i) registered
under the Securities Act, (ii) to an Affiliate of DLJ or a general partnership
in which DLJ or an Affiliate of DLJ is one of the general partners (each, a
"Permitted Holder"), provided that any such transferee shall agree to be bound
by the terms of this Agreement or (iii) to be made in reliance on Rule 144A) of
any Notes, the Holder thereof shall give written notice to the Company of such
Holder's intention to effect such Transfer, setting forth the manner and
circumstances of the proposed Transfer, and shall be accompanied by (i) an
opinion of counsel reasonably satisfactory to the Company addressed to the
Company to the effect that the proposed Transfer of such Notes may be effected
without registration under the Securities Act, (ii) such representation letters
in form and substance reasonably satisfactory to the Company to ensure
compliance with the provisions of the Securities Act and (iii) such letters in
form and substance reasonably satisfactory to the Company from each such
transferee stating such transferee's agreement to be bound by the terms of this
Agreement. Such proposed Transfer may be effected only if the Company shall have
received such notice of transfer, opinion of counsel, representation letters and
other letters referred to in the immediately preceding sentence, whereupon the
Holder of such Notes shall be entitled to Transfer such Notes in accordance with
the terms of the notice delivered by the Holder to the Company. Each certificate
evidencing the Notes transferred as above provided shall bear the legend set
forth in Section 7.2 except that such certificate shall not bear such legend if
the opinion of counsel referred to above is to the further effect that neither
such legend nor the restrictions on
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Transfer in Sections 7.1 through 7.3 are required in order to ensure compliance
with the provisions of the Securities Act.
(b) Two Business Days prior to any proposed Transfer of any Notes to
be made in reliance on Rule 144A, the Holder thereof shall give written notice
to the Company of such Holder's intention to effect such Transfer, setting forth
the manner and circumstances of the proposed Transfer and certifying that such
Transfer will be made (i) in full compliance with Rule 144A and (ii) to a
transferee that (A) such Holder reasonably believes to be a "qualified
institutional buyer" within the meaning of Rule 144A and (B) is aware that such
Transfer will be made in reliance on Rule 144A. Such proposed Transfer may be
effected only if the Company shall have received such notice of transfer and an
agreement from such transferee agreeing to be bound by the terms of this
Agreement, whereupon the Holder of such Notes may transfer them in accordance
with the terms of the notice delivered by the Holder to the Company. Each
certificate evidencing the Notes transferred as above provided shall bear the
legend set forth in Section 7.2.
ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. Events of Default. If one or more of the following
events (each an "Event of Default") shall have occurred and be continuing:
(a) failure by the Company to pay when due all or any part of the
principal of any of the Notes or any fee due under Section 6.18;
(b) failure by the Company to pay within 5 days of the due date
thereof any interest on any Note, any other fees or any other amount
payable by the Company under any Financing Document;
(c) failure on the part of the Company to observe or perform any
covenant contained in Sections 6.7 through 6.11, inclusive, Section 6.12
(other than with respect to Liens which are inadvertently created or
suffered to exist and which would not have a Material Adverse Effect) and
Sections 6.13 through 6.27, inclusive;
(d) failure on the part of the Company to observe or perform any
covenant contained in any Financing Document
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(other than those covered by clauses (a), (b) or (c) above) for 30 days
after the Majority Holders deliver a notice thereof to the Company;
(e) the Company or any of its Subsidiaries has commenced a voluntary
case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or has consented
to any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding commenced against
it, or has made a general assignment for the benefit of creditors, or has
failed generally to pay its debts as they become due, or has taken any
corporate action to authorize any of the foregoing;
(f) an involuntary case or other proceeding has been commenced
against the Company or any of its Subsidiaries seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days, or an order for relief has been entered
against it under the federal bankruptcy laws as now or hereafter in
effect;
(g) default in respect of one or more Debts of the Company or any of
its Subsidiaries in excess of an aggregate of $5,000,000 if such default
results in acceleration of the maturity of such Debt or Debts or enables
(or with the giving of notice or lapse of time or both, would enable) the
holders of such Debt or Debts or any Person acting on such holders' behalf
to accelerate the maturity thereof, or the Company or any of its
Subsidiaries has failed to pay at maturity or within any applicable period
of grace any such Debt or Debts;
(h) judgments or orders for the payment of money which are not
covered by insurance and which in the aggregate at any one time exceed
$15,000,000 have been rendered against the Company or any of its
Subsidiaries by a court of competent jurisdiction and such judgments or
orders
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shall continue unsatisfied and unstayed for a period of 60 days;
(i) any representation, warranty, certification or statement made by
the Company in any Financing Document or which is contained in any
certificate, document or financial or other statement furnished at any
time under or in connection with any Financing Document shall prove to
have been untrue in any material respect when made or deemed made;
(j) a breach under the Engagement Letter has occurred;
(k) a Change of Control has occurred;
(l) a breach of any of the provisions of the Collateral Documents or
the Lien purported to be created by any of the Collateral Documents shall
be invalid or shall be challenged or questioned by the Company or any of
its Subsidiaries or shall cease to be a first priority Lien;
then, and in every such occurrence, the holders of not less than 33-1/3% of the
aggregate principal amount of Notes outstanding (which percentage shall be 50.01
at any time when the Purchaser and its Affiliates own, in the aggregate, not
less than 50.01% of the aggregate principal amount of Notes outstanding) may, by
notice to the Company, declare the Notes (together with accrued interest
thereon) to be, and the Notes shall thereon become immediately due and payable;
provided, however, that in the case of any of the Events of Default specified in
paragraph (e) or (f) above, then, without any notice to the Company or any other
act by the Holder, the entire principal amount of the Notes together with
accrued interest thereon shall become immediately due and payable. The Majority
Holders may, on behalf of all of the Holders, by written notice to the Company,
rescind an acceleration and its consequences if all existing Events of Default
have been cured or waived, except nonpayment of principal or interest that has
become due solely because of the acceleration, and if the rescission would not
conflict with any judgment or decree then in effect; provided that any uncured
monetary defaults existing other than solely because of the acceleration may be
waived only by Holders of all the Notes.
SECTION 8.2. Powers and Remedies Cumulative. No right or remedy
herein conferred upon or reserved to the Holders is intended to be exclusive of
any other right or remedy,
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and every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
or subsequent assertion or employment of any other appropriate right or remedy.
Every power and remedy given hereunder or by law may be exercised from time to
time, and as often as shall be deemed expedient, by the Holders.
ARTICLE IX
COLLATERAL AGENT
SECTION 9.1. Collateral Agent. (a) Each Holder by acceptance of a
Note appoints the Purchaser (and the Purchaser accepts appointment) as its
nominee and agent, in its name and on its behalf pursuant to the terms and
conditions of the Financing Documents to be the secured party, mortgagee,
beneficiary, recipient and similar party in respect of any collateral for the
benefit of the Holders (in such capacity, the "Collateral Agent"). If the
initial or any successor Collateral Agent ever ceases to be a party to this
Agreement or if the initial or any successor Collateral Agent ever resigns
(whether voluntarily or at the request of Majority Holders) then Majority
Holders shall appoint the successor Collateral Agent from among the Holders
(other than the resigning Collateral Agent).
(b) The Collateral Agent, in its capacity as a Holder, has the same
rights under the Financing Documents as any other Holder and may exercise those
rights as if it were not acting as Collateral Agent; the term "Holder" shall,
unless the context otherwise indicates, include the Collateral Agent; and the
Collateral Agent's resignation or removal shall not impair or otherwise affect
any rights that it has or may have in its capacity as an individual Holder. Each
Holder and the Company agree that the Collateral Agent is not a fiduciary for
the Holders or for the Company but simply is acting in the capacity described in
this Agreement to alleviate administrative burdens for the Company and the
Holders, and that the Collateral Agent has no duties or responsibilities to the
Holders or the Company, except those expressly set forth in the Financing
Documents.
SECTION 9.2. Limitation of Liability. Neither the Collateral Agent
nor any of its Affiliates, successors or assigns will be liable for any action
taken or omitted to be
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taken by it or them under the Financing Documents in good faith and believed by
it or them to be within the discretion or power conferred upon it or them by the
Financing Documents or be responsible for the consequences of any error in
judgment (except for fraud, gross negligence or willful misconduct), and none of
them has a fiduciary relationship with any Holder by virtue of the Financing
Documents.
SECTION 9.3. Default; Collateral. While a Default exists, the
Holders agree to promptly confer in order that Majority Holders may agree upon a
course of action for the enforcement of the right of Holders and the Collateral
Agent is entitled to refrain from taking any action(without incurring any
liability to any Person for so refraining) unless and until it has received
instructions from Majority Holders. In actions with respect to any property of
the Company, the Collateral Agent is acting for the ratable benefit of each
Holder. The Collateral Agent shall hold, for the ratable benefit of all Holders,
any security it receives for the Secured Obligation or any guaranty of the
Secured Obligation it receives upon or in lieu of foreclosure.
SECTION 9.4. Pledged Collateral Matters. (a) Each Holder authorizes
and directs the Collateral Agent to enter into the Collateral Documents for the
ratable benefit of the Holders and to take any action concerning any Pledged
Collateral with the consent of, or at the request of, the Majority Holders in
accordance with the provisions of the Financing Documents, and the exercise by
the Collateral Agent (with the consent of, or at the request of, the Majority
Holders) of powers concerning the Pledged Collateral set forth in any Financing
Documents, together with other reasonably incidental powers, shall be authorized
by and binding upon all Holders.
(b) The Collateral Agent is authorized on behalf of all Holders,
without the necessity of any notice to or further consent from any Holders, from
time to time before a Default or an Event of Default, to take any action with
respect to any Pledged Collateral or Collateral Documents that may be necessary
to perfect and maintain perfected the Liens upon the Pledged Collateral granted
by the Collateral Documents.
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ARTICLE X
MISCELLANEOUS
SECTION 10.1. Notices. All notices, demands and other communications
to any party hereunder shall be in writing (including telecopier or similar
writing) and shall be given to such party at its address set forth on the
signature pages hereof, or such other address as such party may hereafter
specify for the purpose to the other parties. Each such notice, demand or other
communication shall be effective (i) if given by telecopy, when such telecopy is
transmitted to the telecopy number specified on the signature pages hereof and
receipt thereof is confirmed by telephone or in writing, (ii) if given by mail,
four days after such communication is deposited in the mail with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in or pursuant to this Section.
SECTION 10.2. Waivers and Amendments. (a) No failure or delay on the
part of any party in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy.
(b) Any provision of this Agreement may be amended, supplemented or
waived if, but only if, such amendment, supplement or waiver is in writing and
is signed by the Company and the Majority Holders; provided, however, that
without the consent of each Holder of any Note affected thereby an amendment or
waiver may not (i) reduce the aggregate principal amount of Notes whose Holders
must consent to an amendment or waiver, (ii) reduce the rate or extend the time
for payment of interest on any Note, (iii) reduce the principal amount of or
extend the stated maturity of any Note or (iv) make any Note payable in money or
property other than as stated in such Note. In determining whether the Holders
of the requisite principal amount of Notes have concurred in any direction,
consent, or waiver as provided in any Financing Document, Notes which are owned
by the Company or any other obligor on or guarantor of the Notes, or by any
Person Controlling, Controlled by, or under common Control with any of the
foregoing, shall be disregarded and deemed not to be outstanding for the purpose
of any such determination; provided, further, however, that no such amendment,
supplement or waiver which affects the rights of the Purchaser and its
Affiliates otherwise than solely in their capacities as
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Holders of Notes shall be effective with respect to them without their prior
written consent.
SECTION 10.3. Indemnification. The Company agrees to indemnify and
hold harmless the Purchaser, its affiliates, and each Person, if any, who
controls the Purchaser, or any of its affiliates, within the meaning of the
Securities Act or the Exchange Act (a "Controlling Person"), and their
respective partners, agents, employees, officers and directors of the Purchaser,
its affiliates and any such Controlling Person (each an "Indemnified Party" and
collectively, the "Indemnified Parties"), from and against any and all losses,
claims, damages, liabilities and expenses (including, as incurred, reasonable
costs of investigating, preparing or defending any such claim or action, whether
or not such Indemnified Party is a party thereto) relating to or arising out of,
or in connection with, any activities contemplated by any Financing Document or
any other services rendered in connection therewith, including, but not limited
to, losses, claims, damages, liabilities or expenses arising out of or based
upon any untrue statement or any alleged untrue statement of a material fact or
any omission or any alleged omission to state a material fact in any of the
disclosure or offering or confidential information documents (the "Disclosure
Documents") pertaining to any of the transactions or proposed transactions
contemplated therein, including any eventual refinancing or resale of the Notes;
provided, however, that the Company will not be responsible for any claims,
liabilities, losses, damages or expenses that are determined by final judgment
of a court of competent jurisdiction to result solely from such Indemnified
Party's gross negligence, willful misconduct or bad faith. The Company also
agrees that no Indemnified Party shall have any liability for claims,
liabilities, damages, losses or expenses, including legal fees, incurred by the
Company in connection with this Agreement unless they are determined by final
judgment of a court of competent jurisdiction to result solely from such
Indemnified Party's gross negligence, willful misconduct or bad faith.
If any action shall be brought against an Indemnified Party with
respect to which indemnity may be sought against the Company under this
Agreement, such Indemnified Party shall promptly notify the Company in writing
and the Company shall, if requested by such Indemnified Party or if the Company
desires to do so, assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Party and payment of all
reasonable fees and expenses. The failure to so notify the Company shall not
affect any obligations the Company may have to such Indemnified Party under this
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Agreement or otherwise unless the Company is materially adversely affected by
such failure. Such Indemnified Party shall have the right to employ separate
counsel in such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party,
unless: (i) the Company has failed to assume the defense and employ counsel
reasonably satisfactory to such Indemnified Party or (ii) the named parties to
any such action (including any impleaded parties) include such Indemnified Party
and the Company, and such Indemnified Party shall have been advised by counsel
that there may be one or more legal defenses available to it which are different
from or additional to those available to the Company, in which case, if such
Indemnified Party notifies the Company in writing that it elects to employ
separate counsel at the expense of the Company, the Company shall not have the
right to assume the defense of such action or proceeding on behalf of such
Indemnified Party, provided, however, that the Company shall not, in connection
with any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be responsible hereunder for the
reasonable fees and expenses of more than one such firm of separate counsel, in
addition to any local counsel, which counsel shall be designated by the
Purchaser. The Company shall not be liable for any settlement of any such action
effected without the written consent of the Company (which shall not be
unreasonably withheld) and the Company agrees to indemnify and hold harmless
each Indemnified Party from and against any loss or liability by reason of
settlement of any action effected with the consent of the Company. In addition,
the Company will not, without the prior written consent of the Purchaser, settle
or compromise or consent to the entry of any judgment in or otherwise seek to
terminate any pending or threatened action, claim, suit or proceeding in respect
to which indemnification or contribution may be sought hereunder (whether or not
any Indemnified Party is a party thereto) unless such settlement, compromise,
consent or termination includes an express, unconditional release of the
Purchaser and the other Indemnified Parties, satisfactory in form and substance
to the Purchaser, from all liability arising out of such action, claim, suit or
proceeding.
If for any reason the foregoing indemnity is unavailable to an
Indemnified Party or insufficient to hold an Indemnified Party harmless, then in
lieu of indemnifying such Indemnified Party, the Company shall contribute to the
amount paid or payable by such Indemnified Party as a result of such claims,
liabilities, losses, damages, or expenses (i) in such
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proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and by the Purchaser on the other from the transactions
contemplated by this Agreement or (ii) if the allocation provided by clause (i)
is not permitted under applicable law, in such proportion as is appropriate to
reflect not only the relative benefits received by the Company on the one hand
and the Purchaser on the other, but also the relative fault of the Company and
the Purchaser as well as any other relevant equitable considerations.
Notwithstanding the provisions of this Section 9.3, the aggregate contribution
of all Indemnified Parties shall not exceed the amount of fees actually received
by the Purchaser pursuant to this Agreement. It is hereby further agreed that
the relative benefits to the Company on the one hand and the Purchaser on the
other with respect to the transactions contemplated hereby shall be deemed to be
in the same proportion as (i) the total value of the transactions contemplated
hereby bears to (ii) the fees paid to the Purchaser with respect to the
transactions contemplated hereby. It is hereby further agreed that the relative
fault of the Company on the one hand and the Purchaser on the other with respect
to the transactions contemplated hereby shall be determined by reference to,
among other things, whether any untrue or alleged untrue statement of material
fact or the omission or alleged omission to state a material fact related to
information supplied by the Company or by the Purchaser and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
The indemnification, contribution and expense reimbursement
obligations set forth in this Section 9.3(i) shall be in addition to any
liability the Company may have to any Indemnified Party at common law or
otherwise, (ii) shall survive the termination of this Agreement and the other
Financing Documents and the payment in full of the Notes and (iii) shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Purchaser or any other Indemnified Party.
SECTION 10.4. Expenses; Documentary Taxes. The Company agrees to pay
all reasonable out-of-pocket costs, expenses and other payments in connection
with the purchase and sale of the Notes as contemplated by this Agreement,
including (i) all reasonable fees and disbursements of special counsel for the
Purchaser incurred in connection with the preparation of the
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Financing Documents, (ii) all reasonable out-of-pocket expenses of the
Purchaser, including fees and disbursements of counsel, in connection with any
waiver or consent hereunder or under any other Financing Document or any
amendment hereof or thereof and (iii) all out-of-pocket expenses of the
Purchaser and each Holder, including fees and disbursements of counsel, in
connection with any collection, bankruptcy, insolvency and other enforcement
proceedings resulting therefrom. In addition, the Company agrees to pay any and
all stamp, transfer and other similar taxes, assessments or charges payable in
connection with the execution and delivery of any Financing Document or the
issuance of Notes (other than any Note issued in a Transfer).
SECTION 10.5. Payment. The Company agrees that, so long as the
Purchaser shall own any Notes purchased by it from the Company hereunder, the
Company will make payments to the Purchaser of all amounts due thereon by wire
transfer by 1:00 p.m. on the date of payment to such account as is specified
beneath the Purchaser's name on the signature page hereof or to such other
account or in such other similar manner as the Purchaser may designate to the
Company in writing.
SECTION 10.6. Register. The Company shall keep at its principal
office a register (the "Register") in which shall be entered the names and
addresses of the registered holders of the Notes and particulars of the
respective Notes held by them and of all transfers of such Notes. References to
the "Holder" or "Holders" shall mean the Person or Persons listed in the
Register as the payee of any Note. The ownership of the Notes shall be proven by
the Register.
SECTION 10.7. Successors and Assigns. This Agreement shall be
binding upon the Company and upon the Purchaser and their respective successors
and assigns; provided, however, that the Company shall not assign or otherwise
transfer its rights or obligations under this Agreement to any other Person
without the prior written consent of the Majority Holders. All provisions
hereunder purporting to give rights to DLJ and its Affiliates or to Holders are
for the express benefit of such Persons.
SECTION 10.8. New York Law; Submission to Jurisdiction; Waiver of
Jury Trial. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED IN THAT STATE. EACH PARTY HERETO HEREBY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
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SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW
YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A
COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 10.9. Independence of Representations, Warranties and
Covenants. The representations, warranties and covenants contained herein shall
be independent of each other, and no exception to any representation, warranty
or covenant shall be deemed to be an exception to any other representation,
warranty or covenant contained herein unless expressly provided, nor shall any
such exception be deemed to permit any action or omission that would be in
contravention of applicable law.
SECTION 10.10. Severability. If any provision of this Agreement, or
the application of such provision to any Person or circumstance, is held by a
court of competent jurisdiction to be invalid, the remainder of this Agreement
or the application of such provision to other Persons or circumstances shall in
no way be affected thereby; provided, however, that the parties shall negotiate
in good faith to replace the offending provision or application with a
substitute provision or application that will have substantially the same
economic effect. To the extent that it may effectively do so under applicable
law, each party hereby waives any provision of law which renders any provision
of this Agreement invalid, illegal or unenforceable in any respect.
SECTION 10.11. Entire Agreement; Benefit. This Agreement and the
other Financing Documents constitute the entire contract among the parties
relating to the subject matter hereof. Any previous agreement among the parties
with respect to the subject matter hereof is superseded by this Agreement and
the other Financing Documents. Nothing in any Financing Document is intended to
confer upon any Person (other than the parties thereto and any Indemnified
Party) any rights, remedies, obligations or liabilities under or by reason of
the Financing Documents.
<PAGE> 53
-48-
SECTION 10.12. Headings. Article and Section headings and the Tables
of Contents and Exhibits and Schedules are for convenience of reference only,
are not part of this Agreement and are not to affect the construction of, or to
be taken into consideration in interpreting, this Agreement.
SECTION 10.13. Counterparts. This Agreement may be executed in any
number of counterparts each of which shall be an original with the same effect
as if the signatures thereto and hereto were upon the same instrument.
SECTION 10.14 Confidentiality. The Purchaser agrees to take normal
and reasonable precautions to maintain the confidentiality of information
provided to it by the Company in connection with this Agreement to the extent it
is not a matter of general public knowledge or it was not previously known to
the Purchaser at the time such information was provided to it; provided,
however, that the Purchaser may disclose such information (a) at the request of
any bank regulatory or securities authority or the National Association of
Insurance Commissioner (the "NAIC") or in connection with an examination of the
Purchaser by any such authority or the NAIC, (b) pursuant to subpoena or other
court process, (c) when required to do so in accordance with the provisions of
any applicable law, (d) at the direction of any governmental authority, (e) to
the Purchaser's Affiliates, independent auditors and other professional advisors
or (f) to any transferee or potential transferee or to any direct or indirect
contractual counterparties in swap agreements or to the professional advisors of
such swap counterparties; provided, however, that in the case of (e) or (f) they
agree with the Company to comply with the provisions of this Section 10.14.
<PAGE> 54
S-1
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers, as of the date first
above written.
COMPANY:
OXFORD HEALTH PLANS, INC.
By: /s/ William M. Sullivan
--------------------------------
Name: William M. Sullivan
Title: President and Chief
Executive Officer
800 Connecticut Avenue
Norwalk, CT 06854
Attention: Jeffrey H. Boyd
Telecopy: (203) 851-2465
OXFORD FUNDING, INC.:
By: /s/ Paul Thompson III
--------------------------------
Name: Paul Thompson III
Title: Managing Director
277 Park Avenue
c/o DLJ Bridge Finance, Inc.
New York, New York 10172
Attention: Paul Thompson III
Telecopy: (212) 892-7272
Account Number and Bank for
Payment:
<PAGE> 55
A-1
EXHIBIT A
FORM OF NOTE
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD, UNLESS IT
HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND THEN ONLY IN COMPLIANCE
WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE BRIDGE SECURITIES PURCHASE
AGREEMENT DATED AS OF FEBRUARY 6, 1998, A COPY OF WHICH MAY BE OBTAINED FROM THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE.
No. $
OXFORD HEALTH PLANS, INC.
Senior Secured Increasing Rate Note
OXFORD HEALTH PLANS, INC., a Delaware corporation (together with its successors,
the "Company"), for value received hereby promises to pay to
[NAME OF HOLDER]
(the "Holder") and registered assigns the principal sum of
[Amount in words] Dollars ($[Amount in numbers])
by wire transfer of immediately available funds to the Holder's account (the
"Bank Account") at such bank in the United States as may be specified in writing
by the Holder to the Company, on the earlier of (i) the date which is one year
after the Closing Date (as defined in the Bridge Securities Purchase Agreement
referred to below) and (ii) the date the principal amount of the Notes shall be
declared to be or shall automatically become (as provided in Article 8 of the
Bridge Securities Purchase Agreement) due and payable (in any such case, the
"Maturity Date") in such coin or currency of the United States of America as at
the time of payment shall be legal tender for the payment of public and private
debts, and to pay interest, quarterly in arrears, on the [date corresponding to
Closing Date] day of each third month after the Closing Date (unless such day is
not a Business Day, in which event on the next succeeding Business Day) (each an
"Interest Payment Date") and on the Maturity
<PAGE> 56
A-2
Date, on the principal sum hereof outstanding in like coin or currency, at the
rates per annum set forth below, by wire transfer of immediately available funds
to the Bank Account from the most recent Interest Payment Date to which interest
has been paid on this Note, or if no interest has been paid on this Note, from
the date of this Note until payment in full of the principal sum hereof has been
made.
This Note is one of a duly authorized issue of Notes of the Company
(the "Notes") referred to in the Bridge Securities Purchase Agreement dated as
of February 6, 1998 between the Company and Oxford Funding, Inc. (the
"Purchaser") (as the same may be amended from time to time in accordance with
its terms, the "Agreement"). All terms defined in the Agreement and not
otherwise defined herein shall have for purposes hereof the meanings provided
for therein.
This Note shall bear interest at a rate per annum (the "Interest Rate")
equal to the sum of (i) the Prime Rate in effect from time to time plus (ii)
250 basis points plus (iii) an additional spread equal to 0 basis points prior
to the date which is three months after the Closing Date and 50 basis points
from and including the date which is three months after the Closing Date,
increasing by 50 basis points at the end of each subsequent three-month period,
until the principal amount hereof is paid in full or, in any case, if less, the
maximum rate permitted by applicable law. "Prime Rate" means, for any day, a
rate per annum equal to the rate of interest publicly announced by The Bank of
New York (or its successor) from time to time in The City of New York as its
prime, reference or base rate. The Interest Rate shall be reduced by 50 basis
points on the date on which the Purchaser purchases Notes in excess of the
Initial Commitment Amount.
Notwithstanding anything to the contrary set forth herein, at no time
shall the per annum interest rate on this Note exceed seventeen * percent (17
%), nor shall the per annum interest rate on this Note be lower than * ten and
one-half percent (10.50 * %). In addition, that portion, if any, of any
interest payment representing a per annum interest rate in excess of fifteen *
percent (15.0 * %) may be paid, at the option of the Company, by issuing and
delivering Notes with a principal amount equal to such excess portion of
interest.
Interest on this Note will be calculated on the basis of a 365-day
year and paid for the actual number of days elapsed.
<PAGE> 57
A-3
This Note is transferable and assignable to one or more purchasers
in accordance with the provisions set forth in the Agreement. The Company agrees
to issue from time to time replacement Notes in the form hereof to facilitate
such transfers and assignments.
Unless the Majority Holders otherwise consent in writing, the
Company covenants and agrees to observe and perform each of its obligations and
undertakings contained in Article VI of the Agreement, which obligations and
undertakings are expressly assumed herein by the Company and made for the
benefit of the Holders.
This Note may be required to be prepaid upon the occurrence of
certain events specified in, and in accordance with, the Agreement.
This Note may be prepaid, in whole or in part, at any time or from
time to time in accordance with the provisions of the Agreement.
In the event of an Event of Default, the principal of and interest
on this Note may be declared to be or become automatically due and payable in
the manner and with the effect provided in the Agreement.
This Note shall be deemed to be a contract made under the laws of
the State of New York, and for all purposes shall be governed by and construed
in accordance with the laws of said State applicable to contracts made and to be
performed in that State. The parties hereto, including all guarantors or
endorsers, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance and
enforcement of this Note, except as specifically provided herein, and assent to
extensions of the time of payment, or forbearance or other indulgence without
notice. The Company hereby submits to the exclusive jurisdiction of the United
States District Court for the Southern District of New York and of any New York
state court sitting in New York City for purposes of all legal proceedings
arising out of or relating to this Note. The Company irrevocably waives, to the
fullest extent permitted by law, any objection which it may now or hereafter
have to the laying of the venue of any such proceeding brought in such a court
and any claim that any such proceeding brought in such a court has been brought
in an inconvenient forum. The Company hereby irrevocably waives any and all
right to trial by jury in any legal proceeding arising out of or relating to
this Note.
<PAGE> 58
A-4
The Holder of this Note by acceptance of this Note agrees to be
bound by the provisions of this Note and the Agreement which are expressly
binding on such Holder.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
Dated: ______________, 199
OXFORD HEALTH PLANS, INC.
By:
--------------------------------
Name:
Title
<PAGE> 59
EXHIBIT C
FORM OF STATUS CERTIFICATE
I, [Name], [Executive Officer] of Oxford Health Plans, Inc. (the
"Company") DO HEREBY CERTIFY, to the best of my knowledge and belief, as
follows:
(a) As of the date hereof, no Default has occurred and is
continuing.
(b) The representations and warranties of the Company contained in
each Financing Document (other than any representation or warranty that
expressly relates only to a specified other date) are true and correct on and as
of the date hereof as if made on and as of such date and the Company has
performed and complied with all covenants and agreements required by the
Financing Documents to be performed or complied with at or prior to the date
hereof.
I have made or caused to be made such examination or investigation
(including reading the relevant provisions (including related definitions) of
the Bridge Securities Purchase Agreement referred to below) as is necessary to
enable me to make the foregoing certifications.
All terms not otherwise defined herein shall have the respective
meanings set forth in the Bridge Securities Purchase Agreement dated as of
February 6, 1998 between the Company and .
IN WITNESS WHEREOF, I have hereunto set my hand.
____________, 199_
---------------------------------
[Name]
[Title]
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Oxford Health Plans, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 33-92006 and 333-2464) on Form S-3 and the registration statements (Nos.
33-70908, 33-49738, 33-94242 and 333-988) on Form S-8 of Oxford Health Plans,
Inc. of our report dated February 23, 1998, except as to the last paragraph of
note 15, which is as of March 30, 1998, relating to the consolidated balance
sheets of Oxford Health Plans, Inc. and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-K/A of Oxford Health Plans, Inc.
KPMG Peat Marwick LLP
Stamford, Connecticut
April 2, 1998
