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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-19442
OXFORD HEALTH PLANS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1118515
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
800 Connecticut Avenue, Norwalk, Connecticut 06854
(Address of principal executive offices) (Zip Code)
(203) 852-1442
(Registrant's telephone number, including area code)
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 or any amendment to this
Form 10-K. [X]
As of March 1, 1999, there were 80,757,351 shares of common stock issued and
outstanding. The aggregate market value of such stock held by nonaffiliates, as
of that date, was $1,451,478,000.
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 currently providing health benefit plans in New York, New Jersey,
Connecticut, Florida, New Hampshire and Pennsylvania. 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 plans and third-party administration of
employer-funded benefit plans ("self-funded health 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.
The Company currently 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") and Oxford Health
Plans (FL), Inc. ("Oxford FL"), and through Oxford Health Insurance, Inc.
("OHI"), the Company's health insurance subsidiary. 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. The Company anticipates that it will have ceased doing
business in Pennsylvania, Florida and New Hampshire by the end of 1999. Oxford
also owns Oxford Health Plans (IL), Inc. ("Oxford IL") which is licensed by the
Illinois Department of Insurance as an accident and health insurance company
with authority to offer HMO products. However, Oxford ceased its Illinois
operation in the third quarter of 1998.
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 1998 and the ten largest employer groups contributed 7.7% of total
premiums earned during 1998. The Company's revenue under its contracts with the
federal Health Care Financing Administration ("HCFA") represented 21.9% of its
premium revenue earned during 1998.
RECENT DEVELOPMENTS
Net Losses
As more fully discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Company incurred net losses
attributable to common stock of $291 million in 1997 and $624 million in 1998
and may incur additional losses in 1999, the extent of which cannot be predicted
at this time. As a result of its losses in 1997 and 1998, the Company has been
required to make capital contributions to certain of its HMO and insurance
subsidiaries and expects that additional capital contributions will be required
in 1999.
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, 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. The Company retired the Bridge Notes with a portion of the proceeds of
the Financing referred to below.
Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC (together with
the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350 million of ten-year redeemable Preferred Stock with Warrants to
acquire up to 22,530,000 shares of common stock. Simultaneously with the
consummation of the Investment Agreement, the Company issued $200 million
principal amount of 11% Senior Notes due May 15, 2005 (the "Senior Notes") and
entered into a Term Loan Agreement pursuant to which the Company borrowed $150
million in the form of a senior secured term loan (the "Term Loan"). For
additional information regarding the Preferred Stock, the
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Warrants, the Senior Notes and the Term Loan, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". Also simultaneously with the aforementioned transactions,
Norman C. Payson, M.D., the Company's Chief Executive Officer, purchased 644,330
shares of Oxford common stock for an aggregate purchase price of $10 million.
The investments under the Investment Agreement and by Dr. Payson and the debt
financings through the Senior Notes and the Term Loan are herein collectively
called the "Financing".
Management Changes
Norman C. Payson, M.D., became Chief Executive Officer of the Company on
May 13, 1998. William M. Sullivan, formerly Chief Executive Officer, continues
to serve as President of the Company.
In February 1998, Fred F. Nazem, a director of the Company, was elected
nonexecutive Chairman of the Board. Steven F. Wiggins, founder and former
Chairman of the Board, continues to serve as a director of the Company.
In March 1998, Marvin P. Rich agreed to become Chief Administrative
Officer of the Company. Alan Muney, M.D., M.H.A. joined the Company as Chief
Medical Officer in April 1998, and Yon Y. Jorden became the Company's Chief
Financial Officer in June 1998.
Pursuant to the terms of the Investment Agreement, Dr. Payson became a
director of the Company in May 1998 and TPG nominated David Bonderman, Jonathan
J. Coslet and James G. Coulter to the board in May 1998 and Kent J. Thiry in
August 1998. In addition, James Adamson did not stand for reelection to the
Board of Directors and, accordingly, ceased to be a director in August 1998.
Status of Information Systems
In September 1996, the Company converted a significant portion 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 function,
delayed billing functions and telephone service and adversely affected the
Company's claims payment and billing processes. For information regarding the
Company's plans with respect to its information systems, see "Business - Status
of Information Systems".
Turnaround Plan
During 1998, the Company recorded restructuring and unusual charges
primarily associated with implementation of the Company's plan ("Turnaround
Plan") to attempt to restore the Company's profitability by focusing on its core
commercial and Medicare markets and disposing of or restructuring noncore
businesses, reducing administrative costs, reducing payments to specialist
physicians and other providers, completing and operationalizing risk transfer
and other provider agreements, reducing unnecessary utilization of hospital and
other services, increasing commercial group premiums, improving service levels
and strengthening operations. The Company has focused its resources on employer
group products in 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 any inappropriate medical costs and, where applicable,
refining benefit plans and increasing premiums.
The Company has also focused on attempting to reduce losses in its
government programs by, among other things, transferring a substantial portion
of the medical cost risk associated with the provision of covered services to
its Medicare beneficiaries to certain health care provider entities in certain
counties, by withdrawing from participation in the Medicare program in other
counties and by withdrawing completely from the Medicaid business. In June 1998,
in coordination with the Health Care Financing Administration ("HCFA"), the
Company voluntarily suspended marketing and most enrollment of new members under
its Medicare programs in order to provide the Company with an opportunity to
strengthen its operations and institute certain corrective actions required by
HCFA. In February 1999, the Company reinstated marketing to and enrollment of
Medicare beneficiaries. See "Business - Products - Medicare and Medicaid",
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Restructuring and Unusual Charges".
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The Company also intends to continue to attempt to reduce losses in the
New York mandated individual HMO and point-of-service plans (the "New York
Mandated Plans"). The losses resulting from the New York Mandated Plans are
primarily attributable to the rapidly rising medical costs in these plans and
insufficient premium rates. See "Business - Products - New York Mandated Plans"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In 1998, in furtherance of its Turnaround Plan, the Company focused
efforts on withdrawing from the Florida, Pennsylvania, New Hampshire and
Illinois markets. The Company sold its Pennsylvania subsidiary in January 1999,
although it continues to service certain insured PPO products sold through OHI
in Pennsylvania. The Company reinsured its Illinois health care obligations to
another health plan and ceased its Illinois operations in the third quarter of
1998. The Company has ceased offering its products in Florida and New Hampshire
and anticipates being completely out of these two markets by the end of 1999.
The Company has substantially scaled back its plans to offer dental plans and
has ceased to offer life insurance products. The Company has also concluded
several other initiatives, including the closing of its specialty care
management business and the sale of one health center, and is evaluating its
financial commitment to certain other ongoing initiatives. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Restructuring and Unusual Charges".
The Company is attempting to reduce its future expected costs associated
with payment for laboratory and radiology services and pharmacy benefits through
the negotiation of new contracts with network managers. In the second half of
1998, the Company entered into definitive agreements for laboratory and
radiology services and pharmacy benefit management that are structured to
provide significant savings compared to estimated cost increases for laboratory
and radiology services and pharmacy benefits for 1999. However, implementing
such contract cannot be assured and may involve operational or unforeseen
difficulties, and there can be no assurance that these contracts will be
successful in reducing the Company's future costs associated with such services
and benefits.
The Turnaround Plan also calls for significant reductions in
administrative costs on a per member per month basis and as a percentage of
operating revenue over the long term through such measures as increasing
operating efficiencies and reducing 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, among other things, costs associated with strengthening the Company's
operations, resolving historical claim and member issues, ongoing regulatory
investigations and inquiries and litigation. There can be no assurance that the
Company will be successful in implementing the foregoing measures, in
implementing medical cost control measures and provider contracting initiatives,
or in reducing administrative costs and such steps could adversely affect the
Company's provider network or sales of its product. 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 of Financial
Condition 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, officers and employees.
PRODUCTS
Freedom Plan
Oxford's Freedom Plan is a point-of-service ("POS") health care plan that
combines the benefits of Oxford's HMOs with some of the benefits of conventional
indemnity health insurance. Oxford's Freedom Plan gives members the option at
any time of using the network of providers under contract with Oxford's HMOs or
exercising their freedom to choose providers not under contract with Oxford,
although certain benefits are only available through network providers. The
Freedom Plan, first offered in January 1988 in New York, had approximately
1,318,100 members at December 31, 1998 compared with 1,333,500 at the end of
1997. As a percentage of total premiums earned, Freedom Plan premiums were 61.0%
in 1998, 59.2% in 1997 and 61.2% in 1996. The largest employer group offering
the Freedom Plan accounted for approximately 1.2% of Freedom
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Plan premiums earned during 1998, and the ten largest employer groups offering
the Freedom Plan accounted for 9.2% of Freedom Plan premiums earned in 1998.
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 each Freedom Plan member receives two
forms of coverage - HMO coverage through Oxford NY 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
administered by Oxford.
HMOs
Oxford currently offers HMO plans in New York, New Jersey and Connecticut.
The largest HMO commercial employer group accounted for 3.7% of total HMO
premiums earned during 1998, while the ten largest HMO groups accounted for
18.0% of total HMO premiums earned in 1998. Commercial HMO membership
approximated 260,700 members at December 31, 1998 compared with 270,400 members
at the end of 1997. As a percentage of total premiums earned, group commercial
HMO revenues were 11.8% in 1998, 11.1% in 1997 and 10.7% in 1996.
Liberty Plan
The Company introduced the Liberty Plan, a point-of-service health care
plan, in late 1993. This plan offers lower premiums than the standard Freedom
Plan by allowing member groups to choose from a smaller network of in-network
providers. The Company believes that 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.
Liberty Plan membership approximated 140,800 members at December 31, 1998
compared with 124,100 members at the end of 1997.
Individual Plans
In 1996, New York mandated that HMOs doing business in the community-rated
market in the state must provide POS and HMO coverage with mandated benefits to
individuals (the "New York Mandated Plans"). Oxford also continues to cover
individuals in the state under a grandfathered POS plan (together with the New
York Mandated Plans, the "New York Individual Plans"). The grandfathered plan is
closed to new membership. The Company offers individual HMO and various
individual indemnity plans in New Jersey (the "New Jersey Mandated Plans"). The
Company had approximately 68,700 members in the New York Individual Plans as of
December 31, 1998 as compared with 84,500 members as of December 31, 1997. The
Company had approximately 5,200 members in the New Jersey Mandated Plans as of
December 31, 1998 as compared with 7,900 members as of December 31, 1997.
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 as a result of
rapidly rising medical costs in those plans. The Company believes it experiences
significant selection bias in these plans which are chosen, on average, by
individuals who require more health care services than the average commercial
population. In April 1998, the NYSID denied the Company's rate increase request,
but directed the Company to apply funds allocated to the Company from the New
York State Market Stabilization Pools against rate relief in the individual and
small group market. The Company received approximately $6.4 million in August
1998 and another $6.4 million in December 1998 from these pools. Although the
Company anticipates that it will receive refunds from these pools in 1999, there
can be no assurance that such payments will be received or, if received, will
not be less than the payments received in 1998. In addition, the NYSID is
currently finalizing regulations which will modify the methodology used to fund
these pools. The proposed changes to the operation of the pooling methodology
will affect the distribution of remaining 1997 and 1998 pool amounts. In the
fourth quarter of 1998, the Company established a $27.4 million reserve for
premium deficiency losses in the New York Individual Plans and the New Jersey
Mandated Plans. The Company currently intends to reduce the size of the provider
network serving the New York Individual Plans, subject to receipt of government
approvals, in an effort to better control medical costs and utilization to
promote affordability for the plans. The Company has filed with the NYSID to
increase its rates for this product by only 9.8% effective as of April 1, 1999.
The Company expects that operating results for the New York Individual Plans
will continue to be adversely
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affected by high medical costs and that losses will continue in the absence of
significant additional rate or regulatory relief. Further, there can be no
assurance that the Company will be successful in implementing the network
changes, cost and utilization controls or rate increases referred to above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations".
Preferred Provider Organizations
The Company currently offers a PPO product in New Jersey and Pennsylvania
and a non-gatekeeper POS plan in New York. The current Pennsylvania PPO
membership is minimal. Applications for approval of PPO products have been filed
in both New York and Connecticut.
Medicare
The Company offers as Oxford Medicare Advantage a number of Medicare plans
to Medicare eligible individuals through its New York, New Jersey and
Connecticut HMO subsidiaries. Under Medicare contracts with HCFA, Oxford is paid
a fixed per member per month capitation amount by HCFA based upon a formula that
projects the 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. Effective January 1, 1999,
federal legislation replaced the Medicare risk contract program with the
Medicare+Choice program (hereinafter referred to as "Medicare"). See
"Business-Government Regulation - Recent Regulatory Developments".
Medicare contracts provide revenues that are generally higher per member
than those for non-Medicare members. 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. In addition, in 1998 the Company finalized
agreements pursuant to which it has transferred a substantial portion of the
medical cost risk associated with the provision of covered services for Medicare
members to providers in some of its service areas where the Company had
experienced substantial losses, and the Company withdrew from certain areas
where agreements could not be completed. Under these risk transfer arrangements,
providers assume a substantial portion of the risk of increasing health care
costs. These arrangements may give rise to regulatory issues and, among other
risks and uncertainties involved in the successful implementation of these
contracts, the Company bears the risk of nonperformance or default by the
providers. The Company has experienced certain operational difficulties in the
implementation of these risk transfer arrangements, and the risk sharing
provider groups have not achieved acceptable performance levels on certain key
operating measures. See "Business - Physician Network - Risk Sharing Groups".
At December 31, 1998, the Company had approximately 148,600 Medicare
members enrolled in its Medicare plans compared with 161,000 members at the end
of 1997. However, as the result of the Company's withdrawal from the Medicare
program in certain counties in New York, New Jersey, Pennsylvania and
Connecticut, the Company had approximately 110,400 Medicare members as of
January 1, 1999. Medicare premiums accounted for approximately 21.9% of total
premiums earned for the year ended December 31, 1998 compared with 22.0% in 1997
and 19.8% in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of operating losses
incurred in the Company's Medicare programs and "Legal Proceedings" for a
description of site visits by HCFA during 1998 and the beginning of 1999.
Medicaid
As of January 1, 1998, Oxford offered a Medicaid Healthy Start plan to
individuals eligible for Medicaid benefits in New York, New Jersey, Metropolitan
Philadelphia and Connecticut. The Company received fixed monthly premiums per
member under risk contracts with the respective state agencies administering the
Medicaid program. At December 31, 1998, approximately 97,800 members were
enrolled in the Company's Medicaid plans compared with 189,600 members at the
end of 1997. Medicaid premiums accounted for approximately 5.3% of total
premiums earned for the year ended December 31, 1998 compared with 7.7% in 1997
and 8.3% in 1996. 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 withdrew from the
Medicaid program in Connecticut and New Jersey, effective April 1, 1998 and July
1, 1998,
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respectively. In November 1998, the Company completed an agreement to assign its
New York Medicaid contract and certain rights under its provider agreements to a
third party. In January 1999, the Company concluded the sale of its Pennsylvania
HMO subsidiary, including the Pennsylvania Medicaid business. Accordingly, as of
February 1, 1999, the Company had completed its withdrawal from participation in
all state Medicaid programs.
Self-Funded Health Plans
Oxford's self-funded health plans have a flexible plan design similar to
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. As of December 31, 1998, the Company was administering twenty-four
self-funded groups in New York, sixteen self-funded groups in New Jersey and two
self-funded groups in Connecticut.
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. In exchange, the
Company received 2,090,109 shares of common stock of FPA Medical Management,
Inc. ("FPAM"). FPAM filed for bankruptcy protection in July 1998. The Company
had several risk sharing agreements with entities owned or managed by FPAM, all
of which were terminated as of January 31, 1999. As of December 31, 1997, the
Company wrote down its investment in FPAM by $38.0 million. As a result, the
Company recognized a pretax gain of approximately $25.2 million ($20.5 million
after taxes, or $.26 per share). The Company wrote down its remaining investment
in FPAM to nominal value in the second quarter of 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview".
In November 1995, Oxford acquired a 19% equity interest in St. Augustine
Health Care, Inc. ("St. Augustine"), a Florida health maintenance organization.
Oxford provided $14.3 million in equity and debt financing to St. Augustine. As
part of the Company's decision to focus on its core markets of the New York
Metropolitan Tri-State area, the Company reduced by $14.3 million the carrying
value of its investment in St. Augustine as of December 31, 1997 and disposed of
its fully reserved interest in St. Augustine in October 1998.
MARKETING AND SALES
Oxford distributes its products through several different internal
channels, including direct sales representatives, business representatives,
inbound telemarketing representatives and executive account representatives as
well as through external insurance agents, brokers and consultants.
Internal Representatives
The direct sales representatives sell the Company's traditional HMO
programs, the Freedom Plan, the Liberty Plan, the PPO plans and the self-funded
plans directly to employers. 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 also maintains a Medicare
sales force that sells directly to Medicare beneficiaries. 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, the Medicare sales force and the
independent brokers and agents.
The Company maintains regional executive account representatives who work
directly with employer groups exceeding 1,000 lives as well as accounts
maintained by noncommissioned consultants. The Company also maintains staff that
is responsible for business opportunities associated with inbound calls from
prospective members and group accounts. Account managers responsible for
servicing employer accounts sold directly or through a broker or agent are
employed on a regional basis. These account managers are the principal
administrative contact for employers and their benefit managers by, among other
things, conducting on-site employee meetings and by providing reporting and
troubleshooting services.
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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 9,200 independent
insurance agents and brokers as of December 31, 1998 (compared with 7,300 at the
end of 1997) who are paid a commission on sales. The Company maintains regional
broker business unit representatives who work directly with the independent
agents and brokers. The independent insurance agents and brokers have been
responsible for a significant portion of Oxford's Freedom Plan and Liberty Plan
enrollment growth during their initial years, and the Company expects to
continue using independent insurance agents and brokers in its marketing system
in the future. 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. However, no assurance can be given that the
Company will continue to be able to maintain as large a distribution system of
independent insurance agents and brokers as it has in the past.
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 that do not require referrals from primary
care physicians.
Oxford maintains a network of more than 47,000 providers that are under
contract with the Company, with approximately 28,000 in New York, 12,000 in New
Jersey and 7,000 in Connecticut. The Company also maintains a small network of
providers to service its remaining Pennsylvania PPO business. The majority of
Oxford's physicians have contracted individually and directly with Oxford,
although Oxford also has contracts with hospitals, physician hospital
organizations, individual practice associations and physician groups.
Risk Sharing Groups
In an effort to control increasing medical costs in its Medicare programs,
the Company has entered into agreements pursuant to which it has transferred a
substantial portion of the medical cost risk associated with the provision of
covered services to providers in certain service areas where the Company had
been experiencing substantial losses. Under these risk transfer arrangements,
providers assume a substantial portion of the risk of increasing health care
costs. The Company intends to pursue additional risk transfer agreements in
certain of its other Medicare service areas. These arrangements give rise to
regulatory issues and, among other risks and uncertainties involved in the
implementation and operation of these contracts, the Company bears the risk of
nonperformance or default by these providers. See "Legal Proceedings" for a
description of site visits by HCFA during 1998 and the beginning of 1999.
The Company entered into two risk-sharing arrangements in the third
quarter of 1998, which became fully operational as of December 31, 1998. An
agreement with North Shore-Long Island Jewish Health Systems covers
approximately 34,400 members in certain New York counties as of December 31,
1998. An agreement with Heritage New Jersey Medical Group ("Heritage") covers
all of the Company's approximately 17,600 members in New Jersey as of December
31, 1998. The Company and the risk sharing groups have experienced operational
difficulties in implementing these transactions, including difficulties in
timely payment of provider claims by the risk sharing groups. In addition, the
New Jersey Department of Health and Senior Services has granted only a
conditional approval of the New Jersey arrangement, and the New Jersey
Department of Banking and Insurance has indicated that its final approval of the
arrangement will be subject to the condition that certain aspects of the
arrangements be modified. These modifications must be acceptable to the Company,
Heritage and the regulatory authorities. The Company and the risk sharing groups
have made progress in resolving the operational difficulties referred to above
and will attempt to address the regulatory concerns raised;
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however, no assurance can be given as to the outcome, and a failure of one of
these arrangements could have a material adverse effect on the Company's results
of operations.
In 1993, the Company introduced the Private Practice Partnership program
(the "Partnerships") to organize individual physicians into groups designed to
promote efficient, quality care. The payment structure for the Partnerships
involves a degree of risk sharing and certain incentive payments in an attempt
to promote cost-effective, quality care. In 1996, the Company formed a specialty
care management business to manage specialty medical costs in distinct
specialties for certain diagnostic conditions. As part of the Turnaround Plan,
in 1998 the Company assessed the cost to the Company of running these programs
as well as the effect of new government regulations on such programs. As a
result of this assessment, the Company closed its specialty care management
business and by March 1, 1999 had reduced the number of risk-sharing
Partnerships to seven.
Physician Compensation
Exclusive of the above described Partnerships and risk sharing
arrangements for portions of the Company's Medicare program, certain other
contractual services described below and a small number of individual
physicians, Oxford currently compensates its participating physicians primarily
based upon a fixed 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.
The compensation arrangement under the Company's Medicare risk-sharing
arrangements is based on allocating a fixed percentage of the premium received
by the Company from HCFA on a per member per month basis without regard to the
amount or scope of services rendered. These arrangements are subject to
compliance with risk sharing regulations adopted by HCFA and the States of New
York and New Jersey, which require disclosure and reinsurance for specified
levels of risk sharing.
Delays in payment of provider claims and claims payment errors by the
Company during the last two years have created a significant number of provider
complaints and a backlog in responding to such complaints. In addition, several
medical societies have filed notices of arbitration against the Company to
resolve claims related issues of member 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".
Hospital Arrangements
The Company has contracts with over 200 hospitals in its New York, New
Jersey and Connecticut service areas providing for inpatient and outpatient care
to the Company's members at prices usually discounted from the hospital's billed
charges. The Company believes that the rates in these contracts are generally
competitive and, in many cases, revenue received from the Company represents a
significant portion of the hospital's total revenue. Most of these contracts may
be terminated after a specified notice period or have remaining terms of less
than one year. In addition, there has been significant consolidation among
hospitals in the Company's service area, which tends to enhance the combined
entity's bargaining power with managed care payors. As a result, the Company has
the risk that certain hospitals may seek higher rates and in connection
therewith threaten to or, in fact, terminate their agreements with the Company.
The Company is in the process of renegotiating several major hospital
agreements. See "Cautionary Statement Regarding Forward - Looking Statements".
Other Contracted Services
The Company has entered into new long-term risk sharing contracts for
pharmacy benefits management and laboratory services, effective January 1, 1999,
and for radiology services which is expected to be effective April 15, 1999.
These agreements are structured to provide significant savings to the Company
compared to estimated cost increases for these services over the next several
years. However, implementing these contracts involves various risks and
operational challenges, and there can be no assurance that these contracts, if
implemented, will be successful in reducing the Company's future costs.
Moreover, cost savings under these
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contracts are achieved in certain instances through fee reductions, more
rigorous utilization review and reductions in the size of the provider network,
all of which may adversely affect member and provider satisfaction with the
Company's benefit plans. See "Cautionary Statement Regarding Forward Looking
Statements".
CONTROL OF HEALTH CARE COSTS
Oxford's medical review program attempts to measure and, in some cases,
influence inappropriate utilization of certain outpatient services, elective
surgeries and hospitalizations provided to Oxford members. Under the medical
review program, for many 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 outpatient 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, in order to receive the highest level of
benefits, all elective hospitalizations must be authorized in advance by a
member's primary care physician and must be delivered by providers who have
contracted with Oxford. For out-of-network services, the member must obtain
approval directly from Oxford in order to receive the highest level of benefits.
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 and irregularities. 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. In addition, regulatory considerations, the
threat of litigation or liability concerns, operational and systems issues and
arrangements with hospitals and physicians may limit the Company's ability to
apply all available cost control measures. See "Legal Proceedings".
STATUS OF INFORMATION SYSTEMS
In September 1996, the Company converted a significant part of its
business operations to a new computer operating system developed at Oxford. From
September 1996, most business functions at the Company were operated on the new
system, with the exception of the processing of claims, which continued to
operate on the previous system. Since the conversion, the Company must operate
both systems and reconcile the two systems on an ongoing basis by a process
known as "backbridging".
Unanticipated software and hardware problems arising in connection with
the conversion resulted in significant delays in the Company's claims payments
and group and individual billing and adversely affected claims payment and
billing accuracy. 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, 1997 and 1998 in an effort to
improve claims turnaround times and claims backlogs and claims and billing
errors. However, the backbridging process continues to create issues relating to
transfer of data, which continues to cause delays for certain claims, and there
have been delays in delivering all needed functionality under the new system.
Moreover, the Company's claims turnaround times and accuracy still need
improvement to reach acceptable levels. The Company is continuing to seek
improvements in the processes referred to above and to add needed functionality.
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The Company has undertaken a review of its information systems needs and
capabilities. As a result of this review, the Company has decided to continue
operations on its current claims processing systems and continue to work on
requisite modifications and enhancements.
Although the Company made certain modifications and enhancements to
attempt to improve systems controls and processing efficiencies during 1998, the
Company continues to review its long-term information system strategy. The
Company's resources are currently focused on (i) Year 2000 readiness, (ii)
making requisite modifications and enhancements to the existing information
systems and (iii) establishing improved performance and management information.
There can be no assurance that the Company will be successful in
mitigating the existing system problems that have resulted in payment delays and
claims processing errors. Moreover, operating and other issues can lead to data
problems that affect performance of important functions, including claims
payment and group and individual billing. There can also be no assurance that
the process of improving existing systems will not be delayed or that additional
systems issues will not arise in the future.
For information as to the Company's "Year 2000" readiness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "--Year 2000 Readiness".
QUALITY MANAGEMENT
The majority of Oxford's physicians in its commercial and Medicare rosters
are board certified in their specialty (by passing certifying examinations in
the 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 periodically
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 Utilization Review Programs. Oxford's Quality Management
Committees, which are composed of physicians from within Oxford's network of
providers, advise the Company's Chief Medical Officer 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.
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 selected
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.
In September 1998, the National Committee on Quality Assurance ("NCQA")
changed the status of the NCQA accreditation of the Company's principal health
care subsidiaries to provisional, primarily as a consequence of the
well-publicized systems, operational and financial difficulties experienced by
the Company and the results of an interim review conducted by NCQA staff. In
February 1999, NCQA conducted its regular periodic review of the Company's
accreditation which is scheduled to expire in May 1999. There can be no
assurance that the Company's accreditation will be renewed or that the Company
will achieve the same level of accreditation previously held. An adverse
decision by NCQA could adversely affect sales and renewals of commercial group
and other business.
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RISK MANAGEMENT
The Company limits, in part, the risk of catastrophic losses by
maintaining high deductible reinsurance coverage. The Company's operating
subsidiaries also maintain insolvency coverage as required by the states in
which they do business.
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 consistent with industry standards.
GOVERNMENT REGULATION
The Company's HMO subsidiaries are 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 currently subject to regulation as a foreign
insurer by New Jersey, Pennsylvania, New Hampshire, Florida and Connecticut.
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
HCFA's requirements. 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 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 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 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. In
November 1998, prior to awarding Medicare contracts to health plans for calendar
year 1999, HCFA conducted audits of Medicare applicants, including the Company.
The Company's operations were found to be qualified to enter into the Medicare
contracts. For a description of a recent site examination by HCFA, see "Legal
Proceedings".
In 1996, HCFA promulgated regulations that prohibit HMOs with Medicare
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. These regulations impose reinsurance, disclosure and other
requirements relating to physician incentive plans that place physicians
participating in a Medicare plan at substantial financial risk. In 1997, New
York and New Jersey implemented similar regulations applicable to the Company's
commercial members. The Company's ability to maintain compliance with these
rules and regulations depends, in part, on its receipt of timely and accurate
information from its providers.
Other Federal laws which govern the Company's operations include the
Federal Health Insurance Portability and Accountability Act of 1996 ("HIPA") and
the Mental Health Parity Act of 1996 ("MHPA"). HIPA (i) ensures 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 provisions of HIPA became 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. MHPA applies to
group health plans and health
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insurance issuers and became 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.
The Company also administers self-funded plans that are governed by the
Employee Retirement Income Security Act of 1974 ("ERISA") and is subject to
requirements imposed on ERISA fiduciaries. The U.S. Department of Labor is
engaged in an ongoing ERISA enforcement program which may result in additional
constraints on how ERISA-governed benefit plans conduct their activities. There
have been recent legislative attempts to limit ERISA's preemptive effect on
state laws. If such limitations are enacted, they might increase the Company's
exposure under state law claims that relate to self-funded plans administered by
the Company and may permit greater state regulation of other aspects of those
business operations.
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 HMOs, the rates and benefits
applicable to products and financial condition and practices. In addition, state
regulations require the Company's HMO and insurance 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 Condition 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, including risk sharing 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".
In 1997 and 1998, New Jersey, Connecticut and New York all implemented
significant pieces of legislation relating to managed care plans which contain
provisions relating, among other things, to consumer disclosure, utilization
review, removal of providers from the network, appeals processes for both
providers and members, mandatory benefits and products, state funding pools,
prompt payment and provider contract requirements.
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, New Hampshire, Florida and Connecticut.
Applicable state laws and regulations contain requirements relating to OHI's
financial condition, reserve requirements, premium rates, form contracts, and
the periodic filing of reports with the applicable insurance departments. OHI's
affairs and operations are also subject to periodic examination by the
applicable departments. For a description of recent examinations, see "Legal
Proceedings".
Certain state regulations 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 combine the
relevant community rate with traditional indemnity insurance rating criteria.
The Company's ability to increase rates on its products is, in certain
instances, subject to prior approval of state insurance departments, which may
or may not be granted. For a description of certain regulatory issues relating
to the Company's rates, see "Legal Proceedings - State Insurance Departments".
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
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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 other states
where the Company does business 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 were
filed with and approved by the appropriate regulatory authorities in New York,
New Jersey, Connecticut, Pennsylvania, New Hampshire, Florida and Illinois prior
to completing the investment pursuant to the Investment Agreement. See "Business
- - Recent Developments".
Recent Regulatory Developments
State and federal government authorities are continually considering
changes to laws and regulations applicable to Oxford's HMO and insurance
subsidiaries. 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, exclusive of the user fee described below. This agreement was
enacted into law as the Balanced Budget Act of 1997 (the "1997 Act"). The 1997
Act 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 Medicare
reimbursement for the next five years exclusive of the user fee described below.
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 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.
Effective January 1, 1999, HCFA issued Medicare regulations, the interim Quality
Improvement System for Managed Care, and supplemental policies to implement the
1997 Act and the Medicare program. The new regulations and guidelines add
requirements applicable to Medicare providers and enrollees in the areas of
provider contracting, quality assurance, utilization management, grievances and
appeals. These changes could have the effect of increasing competition in the
Medicare market and are expected to increase the Company's costs of
administering its Medicare plans.
In 1998, the Company received a 2% increase in Medicare premiums, minus
the user fee assessment of 0.428% of the Company's gross monthly Medicare
premium. The user fee is applied to all Medicare 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 Medicare plans in the Company's
service areas minus the user fee which is 0.355% for 1999. However, the user fee
for 2000 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 contractors. The data is being used to
develop and implement a new risk adjustment mechanism by January 1, 2000. On
January 15, 1999, HCFA gave advance notice to Medicare plans detailing the risk
adjustment mechanism (the "Mechanism"). Currently, HCFA intends to phase in the
Mechanism over five years as follows: 10% in 2000; 30% in 2001; 55% in 2002; 80%
in 2003; and 100% in 2004. Although the Mechanism will impact each Medicare plan
differently, HCFA projected that, overall, the Mechanism will reduce payments to
Medicare plans by 7.6% or $11 billion over the five year phase-in period.
Because of the phase-in schedule and the minimum 2% increase, HCFA estimates
that no Medicare plan will receive a reduction in total payments in 2000
compared to 1999. On March 1, 1999, HCFA announced the county by county payment
rates and the final details of the Mechanism and other information necessary to
ensure that Medicare plans may recalculate their final county rates for 2000. As
a result thereof, the Company anticipates a 2% increase in Medicare premium
rates in 1999. Although it is likely that reimbursement rates will be adversely
affected by the Mechanism and the 1997 Act, the Company cannot predict the
ultimate impact that the Mechanism and the 1997 Act will have on its Medicare
business and results of operations in future periods. In addition, Congressional
leaders have indicated an interest in reviewing the impact of the Mechanism and
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the 1997 Act on Medicare plans and on the success of the Medicare program in
general. As result of this review, Congress may further change the Mechanism and
other Medicare payment methodologies.
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 Congress and the administration in the aftermath of the failure of
the National Bipartisan Commission on the Future of Medicare to reach a
consensus on recommended changes to the Medicare program.
Other recent enacted federal laws include the Women's Health and Cancer
Rights Act of 1998 ("WHCRA") and the Newborn's and Mothers' Health Protection
Act of 1996 ("NMHPA"). WHCRA became effective on October 21, 1998. This act
amended existing federal law (ERISA and the Public Health Service Act) to
require health insurance carriers of group and individual commercial policies
that cover mastectomies to cover reconstructive surgery or related services
following a mastectomy. Oxford already offers this benefit to its commercial
members in New York, New Jersey and Connecticut. NMHPA, which applies to group
and individual health plans and to health insurance issuers, became 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 to less than 96 hours for a cesarean section. Only limited authorization and
precertification requirements may be imposed for these mandatory minimum
hospital stays. Interim rules implementing the changes made by NMHPA went into
effect January 1, 1999.
New York State has recently passed several pieces of legislation which
affect the Company's business. Effective January 22, 1998, New York implemented
prompt payment requirements which require health plans to pay clean claims
within 45 days of receipt and 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. See "Legal Proceedings - State Insurance Departments". Effective
January 1, 1998, New York passed legislation mandating coverage of chiropractic
benefits. Effective July 1, 1999, New York State will implement an independent
external appeal process for members who have been denied coverage of health care
services based on a determination by the plan that the service is not medically
necessary or such service is experimental or investigational. The effect of this
new regulation on the Company cannot be predicted at this time. The graduate
medical education and bad debt and charity care assessments authorized by the
New York Health Care Reform Act expires on December 31, 1999. The New York
legislature may reauthorize these assessments during the 1999 legislative
session. However, if such assessments are reauthorized, the Company cannot
predict whether these assessments will increase or decrease from their prior
levels.
On January 21, 1999 the New Jersey State legislature passed prompt pay
legislation which requires insurers to pay all electronic claims within the
earlier of 30 days or the time prescribed by HCFA for Medicare plans. Paper
claims are required to be paid within 40 days of receipt. In addition, separate
legislation concerning prompt pay enforcement passed the New Jersey State
legislature in February 1999. This legislation, if enacted, will require health
plans to give providers, upon request, a monthly statement showing the paper
claims received from that provider during the previous nine months. This
legislation, if enacted, also will require the State to fine health plans
$10,000 for rejecting or not paying an unreasonably large or disproportionate
number of eligible claims and for not paying the previously described interest.
Legislation has also been proposed in New Jersey that would increase statutory
capital requirements and require health plans to contribute to a guaranty fund.
The Company cannot predict the impact that this legislation will have on its
operations or financial condition.
Over the past several years there has been significant public controversy
surrounding alleged abuses by managed care plans and widely publicized instances
where care or payment for care has allegedly been inappropriately withheld or
delayed. This has led to significant public and political support for reform of
managed care regulation. The U.S. Congress and each of the states in which
Oxford operates are currently considering regulations or legislation relating to
mandatory benefits (such as mental health), 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 the Medicare program, including changes which could significantly
reduce reimbursement to HMOs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". In recent years, bills have been
introduced in the legislature in
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New York, New Jersey and Connecticut 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 reduce Medicare reimbursement rates and otherwise adversely affect the
Company's business, results of operations and financial condition. See
"Cautionary Statement Regarding Forward - Looking Statements - Government
Regulation - Reimbursement".
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, 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, which have significant enrollment in the New York metropolitan
area. The Company also competes with HMOs and managed care plans sponsored by
large health insurance companies, such as CIGNA Corporation, Aetna U.S.
Healthcare Inc., UnitedHealth Group and Blue Cross/Blue Shield. These
competitors have large enrollment in the Company's service areas and, in some
cases, greater financial resources than the Company. Aetna U.S. Healthcare, Inc.
has announced an agreement to acquire the health plan business of The Prudential
Insurance Company, and additional consolidation of competitors is likely.
Additional competitors may enter the Company's markets in the future. The
Company believes that the network of providers under contract with Oxford is 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 and Medicare members.
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, among other
things, 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, including hospital
systems, to contract with physicians and other providers. Recent developments
concerning the Company may adversely affect its ability to compete for such
contracts.
EMPLOYEES
At December 31, 1998, the Company had approximately 5,000 full-time
employees, none of whom is represented by a labor union.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Business", "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", including statements concerning future results of operations or
financial position, future liquidity at the parent company, future health care
and administrative costs, future premium rates for commercial and Medicare
business, the employer renewal process, future growth of membership and
membership composition, future health care benefits, future provider network,
future provider utilization rates, future medical-loss ratio levels, future
claims payment, service performance and other operations matters, the Company's
information systems and readiness for Year 2000, proposed efforts to control
health care and administrative costs, future dispositions of certain businesses
and assets, future provider payment and risk-sharing agreements with health care
providers, the Turnaround Plan, future enrollment levels, future government
regulation and relations and the future of the health care industry, and the
impact on the Company of recent events, legal proceedings and regulatory
investigations and examinations, and other statements contained herein regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Securities Exchange Act of 1934, as amended). Because
such statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to, those discussed below.
Net losses; restructuring and unusual charges
The Company incurred net losses attributable to common stock of $291
million in 1997 and $624 million in 1998 and may incur additional losses in
1999, the extent of which cannot be predicted at this time. As a result of
losses at certain of its HMO and insurance subsidiaries in 1997 and 1998, the
Company has had to make capital contributions to these subsidiaries and expects
that additional capital contributions will be required to be made by the Company
in 1999. The Company has also made significant additions to its reserves for
medical claims and experienced significant levels of retroactive member and
group terminations as well as difficulties with collection of premium
receivables.
A significant portion of the loss incurred by the Company in 1998 was
associated with restructuring and unusual charges relating to the Company's
Turnaround Plan. These restructuring and unusual charges are based on estimates
of the anticipated costs to the Company of taking the actions contemplated by
the Turnaround Plan, including disposition of certain businesses and assets.
There can be no assurance that these estimates correctly reflect the ultimate
costs which the Company will incur in implementing the Turnaround Plan.
The Company's ability to control net losses depends, to a large extent, on
the success of its Turnaround Plan, which includes focusing on core commercial
and Medicare markets and disposing of or restructuring noncore businesses,
reducing administrative costs, reducing payments to health care providers,
completing and operationalizing risk transfer and other provider arrangements,
reducing unnecessary utilization of hospital and other services, increasing
commercial group premiums, improving service levels and strengthening
operations. There can be no assurance that the Turnaround Plan will be
implemented in the manner described herein, or that it will be successful or
that other efforts by the Company to control net losses will be successful.
Furthermore, despite the Company's efforts to the contrary, implementation of
the Turnaround Plan could adversely affect members and employer groups, or
physicians, hospitals and other health care providers and ultimately sales and
renewals of the Company's health plans. Moreover, the Company cannot predict the
impact of adverse publicity, legal and regulatory proceedings or other future
events on the Company's membership, operations and financial results, including
ongoing financial losses.
Inability to control, and unpredictability of, health care costs
Oxford's future results of operations depend, in part, on its ability to
predict and maintain effective control over health care costs (through, among
other things, appropriate benefit design, utilization review and case management
programs and risk-sharing and other payment arrangements with providers) while
providing members with coverage for the health care benefits provided under
their contracts. However, Oxford's ability to control such costs may be affected
by various factors, including: new technologies and health care practices,
hospital costs, changes in demographics and trends, selection biases, increases
in unit costs paid to providers, major epidemics, catastrophes, inability to
establish acceptable compensation arrangements with providers, operational and
regulatory issues which could delay, prevent or impede those arrangements, and
higher utilization of medical services, including higher out-of-network
utilization under point of service plans. There can
17
<PAGE> 18
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 or paid claims ("IBNR") which are estimated by
Oxford. Oxford estimates the amount of such reserves using standard actuarial
methodologies based upon historical data including the average interval between
the date services are rendered and the date claims are paid and between the date
services are rendered and the date claims are received by the Company, expected
medical cost inflation, seasonality patterns and changes in membership. The
estimates for submitted claims and IBNR are made on an accrual basis and
adjusted in future periods as required. Oxford believes that its reserves for
IBNR are adequate in order to satisfy its ultimate claim liability. However,
Oxford's prior rapid growth, delays in paying claims, paying or denying claims
in error and changing speed of payment affect the Company's ability to rely on
historical information in making IBNR reserve estimates. There can be no
assurances as to the ultimate accuracy of such estimates. Any adjustments to
such estimates could adversely affect Oxford's results of operations in future
periods.
The effect of high administrative costs on results
In 1999, the Company expects that results will continue to be adversely
affected by high administrative costs associated with the Company's efforts to
strengthen its operations and service levels and address systems issues,
including those related to Year 2000 readiness. Although a key element of the
Company's Turnaround Plan is a reduction in administrative expenses, no
assurance can be given that the Company will not continue to experience
significant service and systems infrastructure problems in 1999 and beyond which
could have a significant impact on administrative costs. Further, the Company
has been adversely affected by high administrative costs in connection with
increased levels of employee attrition over the last several quarters, and there
can be no assurance that the Company will not continue to experience such
attrition in 1999.
Changes in laws and regulations could adversely impact operations,
financial condition and prospects
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. State regulations require the Company's HMO and insurance subsidiaries
to maintain restricted cash or available cash reserves and restrict their
ability to make dividend payments, loans or other transfers of cash to the
Company.
In recent years, significant federal and state legislation affecting the
Company's business was enacted. For example, New York State implemented a
requirement that health plans pay interest on delayed payment of claims at a
rate of 12% per annum, effective January 1998, and that managed care members
have a right to an external appeal of certain final adverse determinations,
effective July 1999. State and federal government authorities are continually
considering changes to laws and regulations applicable to Oxford and are
currently considering regulations relating to mandatory benefits and products,
defining medical necessity, provider compensation, health plan liability to
members who fail to receive appropriate care, disclosure and composition of
physician networks, all of which would apply to the Company. In addition,
Congress is considering significant changes to Medicare 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 reimbursement rates. Oxford is unable to
predict the ultimate impact on the Company of recently enacted and future
legislation and regulations but such legislation and regulations, particularly
in New York where much of the Company's business is located, could have a
material adverse impact on the Company's operations, financial condition and
prospects.
Premiums for Oxford's Medicare programs are determined through formulas
established by HCFA for Oxford's Medicare contracts. Federal legislation enacted
in 1997 provides for future adjustment of Medicare reimbursement by HCFA which
could reduce the reimbursement received by the Company. Premium reductions, or
premium rate increases in a particular region that are lower than the rate of
increase in health care service expenses for Oxford's Medicare members in such
region, could adversely affect Oxford's results of operations. Risk transfer
provider agreements entered into by Oxford could be adversely affected by
regulatory actions or by the failure of the providers to comply with the terms
of such agreements. Such agreements could also have an
18
<PAGE> 19
adverse effect on the Company's membership or its relationship with its other
providers. Oxford's Medicare programs are subject to certain additional risks
compared to commercial programs, such as higher comparative medical costs and
higher levels of utilization. Oxford's Medicare programs are subject to higher
marketing and advertising costs associated with selling to individuals rather
than to groups. Further, there can be no assurance that the Company will be
successful in completing or operationalizing such risk transfer and other
provider arrangements. See "Business - Government Regulation" and "Legal
Proceedings".
Service and systems infrastructure problems caused by rapid growth
The Company experienced rapid growth in its business and in its staff
since it began operations in 1986 through 1997. The Company has and will
continue to be affected by its ability to manage such growth effectively,
including its ability to continue to develop processes and systems to support
its operations. In September 1996, the Company converted a significant part of
its business operations to a new computer operating system. Unanticipated
software and hardware problems arising in connection with the conversion
resulted in significant delays in the Company's claims payments and group and
individual billing and adversely affected claims payment and billing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The Company does not intend to promote significant membership or
revenue growth in 1999 because the Company's priority in 1999 will continue to
be to attempt to strengthen its service and systems infrastructure, reduce
medical and administrative spending and increase premium rates. No assurance can
be given that the Company will not continue to experience significant service
and systems infrastructure problems, high levels of medical and administrative
spending and difficulties in obtaining premium rate increases in 1999 and
beyond. In addition, the Company has experienced attrition of its Medicare and
commercial business in 1998 and there can be no assurance that the Company will
be successful in the future in promoting membership growth and will not continue
to experience membership attrition.
Health care provider network
The Company is subject to the risk of disruption in its health care
provider network, including termination by the physicians, hospitals and other
health care providers that comprise the network of their relationships with the
Company. Such a disruption could have a material adverse effect on the Company's
ability to market its products and service its membership. Furthermore, the
effect of mergers and consolidations of health care providers in the Company's
service areas could enhance the combined entity's bargaining power with respect
to demands for higher reimbursement levels and changes to the Company's
utilization review and administrative procedures.
Management of information systems
There can be no assurance that the Company will be successful in
mitigating the existing system problems that have resulted in payment delays and
claims processing errors, in developing processes and systems to support its
operations and in improving its service levels. Moreover, operating and other
issues can lead to data problems that affect performance of important functions,
including, but not limited to, claims payment and group and individual billing.
There can also be no assurance that the process of improving existing systems,
developing processes and systems to support the Company's operations and
improving service levels will not be delayed or that additional systems issues
will not arise in the future. See "Status of Information Systems".
Year 2000 readiness
The Company's failure to timely resolve its own Year 2000 issues or the
failure of the Company's external vendors to resolve their Year 2000 issues
could have a material adverse effect on the Company's results of operations,
liquidity or financial condition. Further, the Company's estimates for the
future costs and timely and successful completion of its Year 2000 program are
subject to uncertainties that could cause actual results to differ from those
currently projected by the Company. See "Year 2000 Readiness".
Recent events and related publicity
Events at the Company over the course of the last two years have resulted
in adverse publicity. Such events and related publicity may adversely affect the
Company's provider network, the employer renewal process and future enrollment
in the Company's health benefit plans.
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<PAGE> 20
Collectibility of advances
As part of its attempts to ameliorate delays in processing claims for payment
in 1997, the Company advanced approximately $276 million to providers pending
the Company's disposition of claims for payment. As of December 31, 1998,
approximately $139.5 million, net of allowances, remained outstanding. See
"Management's Discussion Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". The NYSID is requiring the Company
to obtain written acknowledgments of such advances from recipients of advances,
and the New Jersey Department of Banking and Insurance is requiring the Company
to provide certain collateral for repayment of the advances by setting aside in
trust at the parent company funds equal to the admitted portions of the advances
on the New Jersey subsidiary's statutory financial statements. If the Company is
unable to receive written acknowledgments or fails to provide such collateral
there can be no assurance that the insurance regulators will continue to
recognize such advances as admissible assets for regulatory purposes. If the
insurance regulators do not recognize such advances as admissible assets, the
capital of certain of the Company's regulated subsidiaries could be impaired.
The Company may be required to make additional capital contributions to
compensate for any impairment. Although the Company believes that the advances
will be repaid, there can be no assurance that this will occur.
Concentration of business
The Company's commercial and Medicare business is concentrated in New York,
New Jersey and Connecticut, with more than 80% of its tri-state premium revenues
received from New York business. As a result, changes in regulatory, market or
health care provider conditions in any of these states, particularly New York,
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the Company's revenue under its
contracts with HCFA represented 21.9% of its premium revenue earned during 1998.
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<PAGE> 21
ITEM 2. PROPERTIES
Summarized in the table below are the Company's lease commitments for
office space as of December 31, 1998.
<TABLE>
<CAPTION>
EARLIEST CURRENT
TYPE OF TERMINATION SQUARE
LOCATION SPACE DATE FEET
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
White Plains, NY Sales/Admin November-00 363,000 (1)
Trumbull, CT Administrative October-04 238,000
Norwalk, CT HQ/Admin February-01 182,000 (1)
Edison, NJ Sales/Admin March-02 127,000
Nashua, NH Administrative June-04 127,000 (2)
Hooksett, NH Administrative November-02 121,000
Trumbull, CT Administrative April-02 115,000
Milford, CT Administrative January-99 95,000
Milford, CT Administrative February-02 89,000
Hidden River, FL Administrative January-04 76,000
Philadelphia, PA Sales/Admin April-05 58,000
Nashua, NH Administrative June-00 53,000
New York City Sales/Admin July-05 43,000 (1)
Woodbridge, NJ Administrative November-07 43,000 (2)
Melville, Long Island, NY Sales/Admin June-02 39,000 (1)
Edison, NJ Administrative April-01 36,000 (1)
Rosemont, IL Sales/Admin April-05 31,000
Mullingar, Ireland Administrative September-02 22,000
Chinatown, NYC Sales/Admin May-00 13,000
Chicago, IL Administrative December-00 13,000
Sarasota, FL Administrative March-98 10,000
Bronx, NY Clinical November-01 8,000 (1)
Rocky Hill, CT Sales/Admin April-99 6,000
Philadelphia, PA Administrative May-98 5,000 (1)
Queens, NY Clinical December-98 4,000 (1)
==========
1,917,000
==========
</TABLE>
(1) The Company expects that the square footage of these properties will be
reduced in 1999 as a result of continued consolidation efforts pursuant to
the Company's Turnaround Plan.
(2) The Company expects that the square footage of these properties will be
increased slightly in 1999 as a result of consolidations with respect to
other properties pursuant to the Company's Turnaround Plan.
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 by failing to disclose certain allegedly material information
regarding changes in Oxford's computer system, and the Company's membership
21
<PAGE> 22
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 in violation of Section 20A of the Exchange Act certain of the
individual defendants disposed of Oxford's common stock while the price of that
stock was artificially inflated by allegedly false and misleading statements and
omissions. The complaints seek unspecified damages, attorneys' and experts' fees
and costs, and such other relief as the court deems proper.
The purported class actions commenced in the United States District Court
for the Southern District of New York are Metro Services, Inc., et al. v. Oxford
Health Plans, Inc., et al., No. 97 Civ. 08023 (filed Oct. 29, 1997); Worldco,
LLC, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ. 8494 (filed Nov.
14, 1997); Jerovsek, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ.
8882 (filed Dec. 2, 1997); North River Trading Co., LLC v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 9372 (filed Dec. 22, 1997); National Industry Pension
Fund v. Oxford Health Plans, Inc., et al., No. 97 Civ. 9566 (filed Dec. 31,
1997); Scheinfeld v. Oxford Health Plans, Inc., et al., No. 98 Civ. 1399
(originally filed Dec. 31, 1997 in the United States District Court for the
District of Connecticut and transferred); Paskowitz v. Oxford Health Plans,
Inc., et al., No. 98 Civ. 1991 (filed March 19, 1998); and Sapirstein v. Oxford
Health Plans, Inc., et al., No. 98 Civ. 4137 (filed September 11, 1998).
The purported class actions commenced in the United States District Court
for the Eastern District of New York are Koenig v. Oxford Health Plans, et al.,
No. 97 Civ. 6188 (filed Oct. 29, 1997); Wolper v. Oxford Health Plans, Inc., et
al., No. 97 Civ. 6299 (filed Oct. 29, 1997); Tawil v. Oxford Health Plans, Inc.,
et al., No. 97 Civ. 7289 (filed Dec. 11, 1997); Winters, et al. v. Oxford Health
Plans, Inc., et al., No. 97 Civ. 7449 (filed Dec. 18, 1997); and Krim v. Oxford
Health Plans, Inc., et al., No. 98 Civ. 4032 (filed September 5, 1998).
The purported class actions commenced in the United States District Court
for the District of Connecticut are Heller v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02295 (filed Oct. 28, 1997); Fanning v. Oxford Health Plans, Inc., et
al., No. 397 CV 02300 (filed Oct. 29, 1997); Lowrie, IRA v. Oxford Health Plans,
Inc., et al., No. 397 CV 02299 (filed Oct. 29, 1997); Barton v. Oxford Health
Plans, Inc., et al., No. 397 CV 02306 (filed Oct. 30, 1997); Sager v. Oxford
Health Plans, Inc., et al., No. 397 CV 02310 (filed Oct. 30, 1997); Cohen v.
Oxford Health Plans, Inc., et al., No. 397 CV 02316 (filed Oct. 31, 1997);
Katzman v. Oxford Health Plans, Inc., et al., No. 397 CV 02317 (filed Oct. 31,
1997); Shapiro v. Oxford Health Plans, Inc., et al., No. 397 CV 02324 (filed
Oct. 31, 1997); Willis v. Oxford Health Plans, Inc., et al., No. 397 CV 02326
(filed Oct. 31, 1997); Saura v. Oxford Health Plans, Inc., et al., No. 397 CV
02329 (filed Nov. 3, 1997); Selig v. Oxford Health Plans, Inc., et al., No. 397
CV 02337 (filed Nov. 4, 1997); Brandes v. Oxford Health Plans, Inc., et al., No.
397 CV 02343 (filed Nov. 4, 1997); Ross v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02344 (filed Nov. 4, 1997); Sole v. Oxford Health Plans, Inc., et
al., No. 397 CV 02345 (filed Nov. 4, 1997); Henricks v. Wiggins, et al., No. 397
CV 02346 (filed Nov. 4 1997); Williams v. Oxford Health Plans, Inc., et al., No.
397 CV 02348 (filed Nov. 5, 1997); Direct Marketing Day in New York, Inc. v.
Oxford Health Plans, Inc., et al., No. 397 CV 02349 (filed Nov. 5, 1997); Howard
Vogel Retirement Plans, Inc., et al. v. Oxford Health Plans, Inc., et al., No.
397 CV 02325 (filed Oct. 31, 1997 and amended Dec. 17, 1997); Serbin v. Oxford
Health Plans, Inc., et al., No. 397 CV 02426 (filed Nov. 18, 1997); Hoffman v.
Oxford Health Plans, Inc., et al., No. 397 CV 02458 (filed Nov. 24, 1997);
Armstrong v. Oxford Health Plans, Inc., et al., No. 397 CV 02470 (filed Nov. 25,
1997); Roeder, et al. v. Oxford Health Plans, Inc., et al., No. 397 CV 02496
(filed Nov. 26, 1997); Braun v. Oxford Health Plans, Inc., et al., No. 397 CV
02510 (filed Dec. 1, 1997); Blauvelt, et al. v. Oxford Health Plans, Inc., et
al., No. 397 CV 02512 (filed Dec. 2, 1997); Hobler et al. v. Oxford Health
Plans, Inc., et al., No. 397 CV 02535 (filed Dec. 3, 1997); Bergman v. Oxford
Health Plans, Inc., et al., No. 397 CV 02564 (filed Dec. 8, 1997); Pasternak v.
Oxford Health Plans, Inc., et al., No. 397 CV 02567 (filed Dec. 8, 1997);
Perkins Partners I, Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02573
(filed Dec. 9, 1997); N.I.D.D., Ltd. v. Oxford Health Plans, Inc., et al., No.
397 CV 02584 (filed Dec. 9, 1997); Burch v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02585 (filed Dec. 9, 1997); Mark v. Oxford Health Plans, Inc., et
al., No. 397 CV 02594 (filed Dec. 11, 1997); Ross, et al. v. Oxford Health
Plans, Inc., et al., No. 397 CV 02613 (filed Dec. 12, 1997); Lerchbacker v.
Oxford Health Plans, Inc., et al., No. 397 CV 02670 (filed Dec. 22, 1997); State
Board of Administration of Florida v. Oxford Health Plans, Inc., et al., No. 397
CV 02709 (filed Dec. 29, 1997) (the complaint, although purportedly not brought
on behalf of a class of shareholders, invites similarly situated persons to join
as plaintiffs); and Ceisler v. Oxford Health Plans, Inc., et al., No. 397 CV
02729 (filed Dec. 31, 1997).
The purported class actions commenced in the United States District Court
for the Eastern District of Arkansas is Rudish v. Oxford Health Plans, Inc., et
al., No. LR-C-97-1053 (filed Dec. 29, 1997).
22
<PAGE> 23
The Company anticipates that additional class action complaints containing
similar allegations may be filed in the future.
On January 6, 1998, certain plaintiffs filed an application with the
Judicial Panel on Multidistrict Litigation ("JPML") to transfer most of these
actions for consolidated or coordinated pretrial proceedings before Judge
Charles L. Brieant of the United States District Court for the Southern District
of New York. The Oxford defendants subsequently filed a similar application with
the JPML seeking the transfer of all of these actions for consolidated or
coordinated pretrial proceedings, together with the shareholder derivative
actions discussed below, before Judge Brieant. On April 28, 1998, the JPML
entered an order transferring substantially all of these actions for
consolidated or coordinated pretrial proceedings, together with the federal
shareholder derivative actions discussed below, before Judge Brieant.
On July 15, 1998, Judge Brieant appointed the Public Employees Retirement
Associates of Colorado ("ColPERA"), three individual shareholders (the "Vogel
plaintiffs") and The PBHG Funds, Inc. ("PBHG"), as co-lead plaintiffs and
ColPERA's counsel (Grant & Eisenhofer), the Vogel plaintiffs' counsel (Milberg
Weiss Hynes Lerach & Bershad), and PBHG's counsel (Chitwood & Harley), as
co-lead counsel. ColPERA appealed this decision. On October 15, 1998 the United
States Court of Appeals for the Second Circuit dismissed the appeal.
On October 2, 1998, the co-lead plaintiffs filed a consolidated amended
complaint ("Amended Complaint") in the securities class actions. The Amended
Complaint (which has since been further amended by stipulation) names as
defendants Oxford, Oxford Health Plans (NY), Inc., KPMG LLP (which was Oxford's
outside independent auditor during 1996 and 1997) and several current or former
Oxford directors and officers (Stephen F. Wiggins, William M. Sullivan, Andrew
B. Cassidy, Brendan R. Shanahan, Benjamin H. Safirstein, Robert M. Smoler,
Robert B. Milligan, David A. Finkel, Jeffery H. Boyd, and Thomas A. Travers).
The Amended Complaint purports to be brought on behalf of purchasers of Oxford's
common stock during the period from November 6, 1996 through December 9, 1997
("Class Period"), purchasers of Oxford call options or sellers of Oxford put
options during the Class Period and on behalf of persons who, during the Class
Period, purchased Oxford's securities contemporaneously with sales of Oxford's
securities by one or more of the individual defendants. The Amended Complaint
alleges that defendants violated Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder by making false and misleading statements and
failing to disclose certain allegedly material information regarding changes in
Oxford's computer system and the Company's membership, enrollment, revenues,
medical expenses and ability to collect on its accounts receivable. The Amended
Complaint also asserts claims against the individual defendants alleging
"controlling person" liability under Section 20(a) of the Exchange Act. The
Amended complaint also alleges violations of Section 20A of the Exchange Act by
virtue of the individual defendants' sales of shares of Oxford's common stock
while the price of that common stock was allegedly artificially inflated by
allegedly false and misleading statements and omissions. The Amended Complaint
seeks unspecified damages, attorneys' and experts' fees and costs, and such
other relief as the court deems proper.
On December 18, 1998, Oxford and the individual defendants moved to
dismiss the Amended Complaint on the grounds that: (1) plaintiffs have failed to
allege with particularity, as required by the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") and Rule 9(b) of the Federal Rules of Civil
Procedure, that any of the defendants acted with scienter; (2) plaintiffs cannot
premise their securities fraud claims on allegations of mismanagement; (3)
plaintiffs have failed, as required by the PSLRA and Rule 9(b), to specify the
particular facts on which they base their allegations on "information and
belief"; (4) none of the misstatements or omissions alleged in the Amended
Complaint are actionable under the federal securities law; (5) the individual
defendants cannot be liable under the federal securities laws for alleged
misstatements that they did not make; (6) no basis exists for "controlling
person" liability under Section 20(a) of the Exchange Act; and (7) no basis
exists for illegal insider trading liability under Section 20A of the Exchange
Act. Briefing on the motion to dismiss is scheduled to be completed on April 2,
1999.
The State Board of Administration of Florida (the "SBAF") has stipulated
that, in the action brought by it individually (the "SBAF Action"), it will be
bound by the dismissal of any claims it has that are asserted in the Amended
Complaint. In addition, the parties have stipulated, and Judge Brieant has
ordered, that SBAF may file an amended complaint ("Amended SBAF Complaint")
within thirty (30) days after Judge Brieant rules on Oxford's and the individual
defendants' motion to dismiss the class actions. The Amended SBAF Complaint
likely will assert claims similar to those asserted in the Amended Complaint in
the purported class actions (see above).
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<PAGE> 24
The Amended SBAF Complaint may also assert claims against all of the defendants
alleging: (i) violations of Section 18(a) of the Exchange Act, by virtue of
alleged false and misleading information disseminated in the 10-K report Oxford
filed for the year ended December 31, 1996; (ii) violations of the Florida Blue
Sky laws; and (iii) common law fraud and negligent misrepresentation. The
Amended SBAF Complaint likely will seek unspecified damages, attorneys' and
experts' fees and costs, and such other relief as the court deems proper.
Defendants intend to move to dismiss the SBAF Action, to the extent it includes
claims not precluded by Judge Brieant's decision on the motions to dismiss the
Amended Complaint. Pursuant to a stipulation so-ordered by Judge Brieant, such a
motion is to be filed within sixty days after the later of either a ruling on
Oxford's and the individual defendants' motion to dismiss the securities class
actions or the serving upon Oxford of the Amended SBAF Complaint.
The outcomes of these actions cannot be predicted at this time, although
the Company believes that it and the individual defendants have substantial
defenses to the claims asserted and intends to defend the actions vigorously.
SHAREHOLDER DERIVATIVE LITIGATION
As previously reported by the Company, in the months following the October
27, 1997 decline in the price per share of the Company's common stock, ten
purported shareholder derivative actions were commenced on behalf of the Company
in Connecticut Superior Court (the "Connecticut derivative actions") and in the
United States District Courts for the Southern District of New York and the
District of Connecticut (the "federal derivative actions") against the Company's
directors and certain of its officers (and the Company itself as a nominal
defendant).
These derivative complaints generally alleged that defendants breached
their fiduciary obligations to the Company, mismanaged the Company and wasted
its assets in planning and implementing certain changes to Oxford's computer
system, by making misrepresentations concerning the status of those changes in
Oxford's computer system, by failing to design and to implement adequate
financial controls and information systems for the Company, and by making
misrepresentations concerning Oxford's membership enrollment, revenues, profits
and medical costs in Oxford's financial statements and other public
representations. The complaints further allege that certain of the defendants
breached their fiduciary obligations to the Company by disposing of Oxford
common stock while the price of that common stock was artificially inflated by
their alleged misstatements and omissions. The complaints seek unspecified
damages, attorneys' and experts' fees and costs and such other relief as the
court deems proper. None of the plaintiffs has made a demand on the Company's
Board of Directors that Oxford pursue the causes of action alleged in the
complaint. Each complaint alleges that plaintiff's duty to make such a demand
was excused by the directors' alleged conflict of interest with respect to the
matters alleged therein.
The purported shareholder derivative actions commenced in Connecticut
Superior Court are Reich v. Wiggins, et al., No. CV 97-485145 (filed on or about
Dec. 12, 1997); Gorelkin v. Wiggins, et al., No. CV98-0163665 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 purported shareholder derivative actions commenced in the United
States District Court for the Southern District of New York are Roth v. Wiggins,
et al., No. 98 Civ. 0153 (filed Jan. 12, 1998); Plevy v. Wiggins, et al., No. 98
Civ. 0165 (filed Jan. 12, 1998); Mosson v. Wiggins, et al., No. 98 Civ. 0219
(filed Jan. 13, 1998); Boyd, et al. v. Wiggins, et al., No. 98 Civ. 0277 (filed
Jan. 16, 1998); and Glick v. Wiggins, et al., No. 98 Civ. 0345 (filed Jan. 21,
1998).
The purported shareholder derivative actions commenced in the United
States District Court for the District of Connecticut are Mosson v. Wiggins, et
al., No. 397 CV 02651 (filed Dec. 22, 1997), and Fisher, et al. v. Wiggins, et
al., No. 397 CV 02742 (filed Dec. 31, 1997).
In March 1998, Oxford and certain of the individual defendants moved to
dismiss or, alternatively, to stay the Connecticut derivative actions. Since
then, the parties to the Connecticut derivative actions have stipulated, under
certain conditions, to hold all pretrial proceedings in those actions in
abeyance during the pretrial proceedings in the federal derivative actions, and
to allow the plaintiffs in the Connecticut derivative actions to participate to
a limited extent in any discovery that is ultimately ordered in the federal
derivative actions.
24
<PAGE> 25
Stipulations memorializing this agreement have been entered in the Connecticut
derivative actions. On February 19, 1999, Judge Brieant entered an order in the
federal derivative actions permitting the plaintiffs in the Connecticut
derivative actions to participate to a limited extent in any discovery that
ultimately occurs in the federal derivative actions.
In addition, on January 27, 1998, defendants filed an application with the
JPML to transfer the federal derivative actions for consolidated or coordinated
pretrial proceedings before Judge Charles L. Brieant of the Southern District of
New York. On April 28, 1998, the JPML entered an order transferring all of these
actions for consolidated or coordinated pretrial proceedings, together with the
securities class actions discussed above, before Judge Brieant.
The parties to the federal derivative actions have agreed to suspend
discovery in those actions until the filing of a consolidated amended derivative
complaint in those actions and during the pendency of any motion to dismiss or
to stay the federal derivative actions or the securities class actions. A
stipulation memorializing this agreement, consolidating the federal derivative
actions under the caption In re Oxford Health Plans, Inc. Derivative Litigation,
MDL-1222-D, and appointing lead counsel for the federal derivative plaintiffs,
was entered and so ordered by Judge Brieant on September 26, 1998.
On October 2, 1998, the federal derivative plaintiffs filed an amended
complaint. On January 29, 1999, the plaintiffs filed a second amended derivative
complaint (the "Amended Derivative Complaint"). The Amended Derivative Complaint
names as defendants certain of Oxford's directors and a former director (Stephen
F. Wiggins, James B. Adamson, Robert B. Milligan, Fred F. Nazem, Marcia J.
Radosevich, Benjamin H. Safirstein and Thomas A. Scully) and the Company's
former auditors KPMG LLP, together with the Company itself as a nominal
defendant. The Amended Derivative Complaint alleges that the individual
defendants breached their fiduciary obligations to the Company, mismanaged the
Company and wasted its assets in planning and implementing certain changes to
Oxford's computer system, by making misrepresentations concerning the status of
those changes to Oxford's computer system, by failing to design and implement
adequate financial controls and information systems for the Company and by
making misrepresentations concerning Oxford's membership, enrollment, revenues,
profits and medical costs in Oxford's financial statements and other public
representations. The Amended Derivative Complaint further alleges that certain
of the individual defendants breached their fiduciary obligations to the Company
by selling shares of Oxford common stock while the price of the common stock was
allegedly artificially inflated by their alleged misstatements and omissions.
The Amended Derivative Complaint seeks declaratory relief, unspecified damages,
attorneys' and experts' fees and costs and such other relief as the court deems
proper. No demand has been made upon the Company's Board of Directors that
Oxford pursue the causes of action alleged in the Amended Derivative Complaint.
The Amended Derivative Complaint alleges that the federal derivative plaintiffs'
duty to make such a demand was excused by the individual defendants' alleged
conflict of interest with respect to the matters alleged therein.
Pursuant to stipulations entered into and filed by the parties and
expected to be so ordered by Judge Brieant, defendants must answer, move or
otherwise respond to the Amended Derivative Complaint on or before March 15,
1999. These stipulations further provide that proceedings in the federal
derivative actions are stayed in all respects until March 15, 1999 (and during
the pendency of any motion to dismiss those actions), unless any of the parties
provides written notice of their desire to terminate this stay, in which case
defendants shall have sixty (60) days from such notice to answer, move to
dismiss the Amended Derivative Complaint or, in the alternative, to stay the
federal derivative actions pending resolution of the securities class actions
(see above).
Although the outcome of the federal and Connecticut derivative actions
cannot be predicted at this time, the Company believes that the defendants have
substantial defenses to the claims asserted in the complaints.
STATE INSURANCE DEPARTMENTS
On August 10, 1998, the New York State Insurance Department ("NYSID")
completed its triennial examination and market conduct examination of Oxford's
New York HMO and insurance subsidiaries. In the Reports on Examination (the
"Reports") the NYSID, based on information available through July 1998,
determined that certain assets on the December 31, 1997 balance sheets of the
Company's New York subsidiaries should not be admitted for statutory reporting
purposes and NYSID actuaries recorded additional reserves totaling approximately
$81.3 million for both subsidiaries on the balance sheet as determined by the
examiners. The Company contributed $152 million to the capital of its New York
HMO and insurance subsidiaries in satisfaction
25
<PAGE> 26
of the issues raised in the Reports relating to the subsidiaries' financial
statements, and maintaining such subsidiaries' compliance with statutory capital
requirements as of June 30, 1998. The Reports also made certain recommendations
relating to financial record-keeping, settlement of intercompany accounts and
compliance with certain NYSID regulations. The Company has agreed to address the
recommendations in the Reports. As previously reported, in December 1997, the
Company made additions of $164 million to the reserves of its New York
subsidiaries at the direction of the NYSID. The NYSID issued a Market Conduct
Report identifying several alleged violations of state law and NYSID
regulations. On December 22, 1997, the NYSID and Oxford entered into a
stipulation under which Oxford promised to take certain corrective measures and
to pay restitution and a $3 million fine. The stipulation provides that the
NYSID will not impose any other fines for Oxford's conduct up to November 1,
1997. The NYSID has directed the Company's New York subsidiaries to obtain notes
or other written evidence of agreements to repay from each provider who has
received an advance. The NYSID has continued to review market conduct issues,
including, among others, those relating to claims processing and continues to
express concern with the Company's claims turnaround and performance. The
Company has agreed to take certain other corrective actions with respect to
certain of these market conduct issues, but additional corrective action may be
required and such actions could adversely affect the Company's results of
operations.
On January 5, 1999, the Company agreed to pay a fine of $40,900 to the
NYSID in connection with certain alleged violations of New York's prompt payment
law. On February 5, 1999, the NYSID proposed an additional fine of $77,800 for
subsequent alleged violations of the prompt payment law. Fines for similar
alleged violations have also been imposed on other health plans in New York.
The NYSID has also raised certain issues relating to the Company's
methodology for determining premium rates for the Company's large group
business. The Company believes the NYSID will likely issue rule interpretations
which affect pricing practices of the Company and competing health plans in the
large group market. These interpretations could have the effect of requiring
changes in health plan pricing practices and the form in which the Company's
large group Freedom Plan product is offered to customers in the future.
At this time, the Company cannot predict the outcome of continuing market
conduct reviews by the NYSID, enforcement of the New York prompt payment law or
changes in premium pricing practices.
The New Jersey Department of Banking and Insurance ("NJDBI") is nearing
completion of its market conduct and financial examinations of the Company's New
Jersey HMO subsidiary. The market conduct examination relates to the
subsidiary's activities in 1997 and the first half of 1998 and is expected to
assert deficiencies relating to, among others, claims processing and handling of
complaints. The NJDBI may seek imposition of a fine in connection with
completion of the examination. In connection with the financial examination, the
NJDBI is requiring the Company to provide certain collateral for repayment of
advances made in 1997 to providers in respect of delayed claims by setting aside
in trust at the parent company funds equal to the admitted portions of the
advances on the New Jersey subsidiary's statutory financial statements. The
Company is also subject to ongoing examinations with respect to financial
condition and market conduct for its HMO and insurance subsidiaries in other
states where it conducts business. The outcome of these examinations cannot be
predicted at this time.
NEW YORK STATE ATTORNEY GENERAL
As previously reported, on November 6, 1997, the New York State Attorney
General served a subpoena duces tecum on the Company requiring the production of
various documents, records and materials "in regard to matters relating to the
practices of the Company and others in the offering, issuance, sale, promotion,
negotiation, advertisement, distribution or purchase of securities in or from
the State of New York." Since then, Oxford has produced a substantial number of
documents in response to the subpoena, and expects to produce additional
documents. In addition, some of Oxford's present and former directors and
officers have provided testimony to the Attorney General's staff.
In addition, as previously reported, the Company entered into an Assurance
of Discontinuance, effective July 25, 1997, with the Attorney General under
which the Company agreed to pay interest at 9% per annum on provider clean
claims not paid by Oxford within 30 days on its New York commercial and Medicaid
lines of business until January 22, 1998. Since that time, the Company's
obligations to make prompt payments have been governed by applicable New York
law. In addition, contemporaneously, the Company agreed to pay varying interest
rates to providers in Connecticut, New Jersey, New Hampshire and Pennsylvania.
26
<PAGE> 27
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 documents
in response to the subpoena.
The Attorney General's Health Care Bureau also periodically inquires of
the Company with respect to hospital and provider payment issues and member
complaints.
The Company intends to cooperate fully with the Attorney General's
inquiries, the outcome of which cannot be predicted at this time.
SECURITIES AND EXCHANGE COMMISSION
As previously reported, the Company received an informal request on
December 9, 1997 from the Securities and Exchange Commission's Northeast
Regional Office seeking production of certain documents and information
concerning a number of subjects, including disclosures made in the Company's
October 27, 1997 press release announcing a loss in the third quarter. Oxford
has produced documents and has provided information in response to this informal
request.
The Commission has served the Company and certain of its current and
former officers and directors with several subpoenae duces tecum requesting
documents concerning a number of subjects, including, but not limited to, the
Company's public disclosure of internal and external audits, uncollectible
premium receivables, timing of and reserves with respect to payments to vendors,
doctors and hospitals, payments and advances to medical providers, adjustments
related to terminations of group and individual members and for nonpaying group
and individual members, computer system problems, agreements with the New York
State Attorney General, employment records of former employees, and the sale of
Oxford securities by officers and directors. Oxford and certain of its current
and former officers and directors have produced and are continuing to produce
documents in response to these subpoenae. Some of Oxford's present and former
directors and officers have provided testimony to the Commission, and others are
expected to do so.
Oxford intends to cooperate fully with the Commission and cannot predict
the outcome of the Commission's investigation at this time.
HEALTH CARE FINANCING ADMINISTRATION
From February 9, 1998 through February 13, 1998, 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 its Medicare programs. On May 20,
1998, the Company received a final report from HCFA and on June 10, 1998, the
Company voluntarily suspended marketing and most enrollment of new members under
its Medicare programs in New York, New Jersey, Connecticut and Pennsylvania.
This action was taken by the Company in order to provide the Company with an
opportunity to strengthen its operations and institute certain corrective
actions required by HCFA as a result of its visit. This action, however, did not
apply to potential enrollees of the Company's Medicare group accounts. On
January 6, 1999, HCFA notified the Company that it was satisfied that the
necessary corrective actions had been taken, permitting reinstitution of
marketing and enrollment of individual enrollees into the Company's Medicare
programs. HCFA will continue to monitor the Company's operations to ensure that
the Company complies with its corrective action plans and improves its operating
performance in key areas, including claims payment. In February 1999, the
Company reinstituted marketing to and enrollment of Medicare beneficiaries.
However, there can be no assurance that administrative or systems issues or the
Company's current or future provider arrangements will not result in adverse
action by HCFA.
27
<PAGE> 28
ARBITRATION PROCEEDINGS
As previously reported by the Company, on February 3, 1998, the New York
County Medical Society ("NYCMS") initiated an arbitration proceeding before the
American Arbitration Association ("AAA") in New York against Oxford alleging
breach of the written agreements between Oxford and some NYCMS physician members
and failure to adopt standards and practices consistent with the intent of those
agreements. The notice of intention to arbitrate was subsequently amended to
join thirteen additional New York medical associations as co-claimants. NYCMS
and the other claimants seek declaratory and injunctive relief requiring various
changes to Oxford's internal practices and policies, including practices in the
processing and payment of claims submitted by physicians. Oxford has petitioned
the New York State Supreme Court for a permanent stay of this proceeding; the
outcome of this motion cannot be predicted at this time. On or about September
9, 1998, the NYCMS announced that it was breaking off settlement negotiations
with Oxford, and would resume its litigation against Oxford.
Also, some individual physicians claiming that payments under their
contracts with Oxford were delayed have announced their intention to seek
arbitration, one of which has been withdrawn by the physician. Oxford has been
served with additional notices of intent to arbitrate, on behalf of more than
twenty individual physicians, many of which may not have been filed with the
AAA. At least six arbitration proceedings have been filed and commenced by
individual physicians.
In November 1998, various individual physicians purported to amend their
demands for arbitration by adding a claim for punitive damages. These claims all
allege that Oxford's failure to develop the computer systems and personnel
necessary for the prompt and efficient processing of claims was reckless and
intentional, and that Oxford's failure to pay claims was arbitrary, capricious
and without good faith basis.
In addition, on March 30, 1998, Oxford received a demand for arbitration
from two physicians purporting to commence a class action arbitration before the
AAA in Connecticut against Oxford alleging breach of contract and violation of
the Connecticut Unfair Insurance Practices Act.
The outcome and settlement prospects of the various arbitration
proceedings cannot be predicted at this time although the Company believes that
it has substantial defenses to the claims asserted and intends to defend the
arbitrations vigorously.
JEFFREY S. OPPENHEIM, M.D., ET AL. V. OXFORD HEALTH PLANS, INC., ET AL.,
INDEX NO. 97/109088
As previously reported by the Company, on May 19, 1997, Oxford was served
with a purported "Class Action Complaint" filed in the New York State Supreme
Court, New York County by two physicians and a medical association of five
physicians. Plaintiffs alleged that Oxford (i) failed to make timely payments to
plaintiffs for claims submitted for health care services and (ii) improperly
withheld from plaintiffs a portion of plaintiffs' agreed compensation.
Plaintiffs alleged causes of action for common law fraud and deceit, negligent
misrepresentation, breach of fiduciary duty, breach of implied covenants and
breach of contract. The complaint sought an award of an unspecified amount of
compensatory and exemplary damages, an accounting, and equitable relief.
On July 24, 1997, Oxford and plaintiffs reached a settlement in principle
of the class claims wherein Oxford agreed to pay, from September 1, 1997 to
January 1, 2000, interest at certain specified rates to physicians who did not
receive payments from Oxford within certain specified time periods after
submitting "clean claims" (a term that was to be applied in a manner consistent
with certain industry guidelines). Moreover, Oxford agreed to provide to
plaintiffs' counsel, on a confidential basis, certain financial information that
Oxford believed would demonstrate that Oxford acted within its contractual
rights in making decisions on payments withheld from plaintiffs and members of
the alleged class. The settlement in principle provided that, if plaintiffs'
counsel reasonably does not agree with Oxford's belief in this regard,
plaintiffs retain the right to proceed individually (but not as a class) against
Oxford by way of arbitration. Oxford has supplied financial information to
plaintiffs' counsel and has exchanged draft settlement papers with plaintiffs'
counsel.
28
<PAGE> 29
OTHER
On May 18, 1998, a purported "Class Action Complaint" was brought against
Oxford and other un-named defendant plan administrators filed in the United
States District Court for the Eastern District of New York by four plaintiffs
who claim to be beneficiaries of defendants' health insurance plans seeking
declaratory and other relief from defendants for alleged wrongful denial of
insurance coverage for the drug Viagra. On September 8, 1998, Oxford moved to
dismiss the complaint based on plaintiffs' failure to exhaust their
administrative remedies; the outcome of this motion cannot be predicted this
time.
On October 26, 1998, Complete Medical Care, P.C. ("CMC"), United Medical
Care, P.C. ("UMC"), Comprehensive Health Care Corp. ("CHC") and Oscar Fukilman,
M.D. commenced actions in the Supreme Court of the State of New York for New
York County against Oxford and certain of its officers. The complaints in United
Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No. 605176/98, and
Complete Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No.
605178/98, generally allege that Oxford and the individual defendants: (i)
breached, and have announced their intention to breach, certain agreements with
CMC and UMC for the delivery of health care services to certain of Oxford's
members; (ii) breached an implied convenant of good faith and fair dealing with
UMC and CMC; (iii) fraudulently induced CMC and UMC to enter into their
respective agreements with Oxford; (iv) tortiously interfered with CMC's and
UMC's current and prospective contractual relations with certain physicians; and
(v) defamed CMC and UMC. The complaints each seek at least $165 million in
damages, at least $500 million in punitive damages, unspecified interest, costs
and disbursements, and such other relief as the court deems proper. The
complaint in the Complete Medical Care action also alleges that Oxford has
unjustly enriched itself by withholding from CMC certain funds to which CMC
claims it is entitled, and seeks the imposition of a constructive trust with
respect to those funds. The complaint in Oscar Fukilman, M.D. et al v. Oxford
Health Plans, Inc. et al., Index No. 604177/98, alleges that Oxford and certain
officers defamed, and conspired to defame, Dr. Fukilman and CHC, and seeks at
least $25 million in damages and unspecified costs and disbursements and such
other relief as the court deems proper.
On January 8, 1999, defendants: (1) served an answer and counterclaims in
the Complete Medical Care case; (2) filed a motion to compel arbitration and
dismiss the United Medical Care complaint; and (3) moved to dismiss the Fukilman
v. Oxford complaint.
Although the outcome of these actions cannot be predicted at this time,
the Company believes that it and the individual defendants have substantial
defenses to the claims asserted and intends to defend the actions vigorously.
Oxford, like HMOs and health insurers generally, excludes certain health
care services from coverage under its POS, HMO, PPO and other plans. In the
ordinary course of business, the Company is subject to legal claims asserted by
its members for damages arising from decisions to restrict reimbursement for
certain treatments. The loss of even one such claim, if it were to result in a
significant punitive damage award, could have a material adverse effect on the
Company's financial condition or results of operations. In addition, the risk of
potential liability under punitive damages theories may significantly increase
the difficulty of obtaining reasonable settlements of coverage claims. The
financial and operational impact that such evolving theories of recovery may
have on the managed care industry generally, or Oxford in particular, is
presently unknown.
In the ordinary course of its business, the Company also 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.
29
<PAGE> 30
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,
1998.
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.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter .......... $ 22.00 $ 14.00 $ 67.13 $ 48.88
Second Quarter ......... 19.50 14.50 75.75 55.25
Third Quarter .......... 16.38 5.81 89.00 71.50
Fourth Quarter ......... 15.81 7.00 79.00 13.75
</TABLE>
As of March 1, 1999, there were 1,967 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 on common stock 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". Furthermore, the
Investment Agreement between the Company and TPG, and the other agreements and
instruments entered into in connection with the Financing, prohibit the Company
from paying cash dividends on its common stock.
For a discussion of the sale of the redeemable Preferred Stock and
Warrants to purchase common stock of the Company pursuant to the Investment
Agreement, the sale of the Senior Notes and the sale of common stock to Norman
C. Payson, M.D. pursuant to his employment agreement, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
30
<PAGE> 31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The operating data and balance sheet information set forth below for each year
in the five-year period ended December 31, 1998 have been derived from the
consolidated financial statements of the Company. The information below is
qualified by reference to and should be read in conjunction with the audited
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
<TABLE>
<CAPTION>
(In thousands, except per share
amounts and operating statistics) 1998 1997 1996 1995 (3) 1994 (3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES AND EARNINGS:
Operating revenues $ 4,630,166 $ 4,179,816 $ 3,032,569 $ 1,745,975 $ 752,832
Investment and other income, net 89,245 71,448 42,620 19,711 7,479
Net earnings (loss) (596,792) (291,288) 99,623 52,398 28,231
Net earnings (loss)
attributable to common shares (624,460) (291,288) 99,623 52,398 28,231
FINANCIAL POSITION:
Working capital 209,443 85,790 451,957 103,448 71,731
Total assets 1,637,750 1,390,101 1,356,397 611,149 331,084
Long-term debt 350,000 -- -- -- --
Redeemable preferred stock 298,816 -- -- -- --
Common shareholders' equity (deficit) (181,105) 349,216 598,170 220,033 132,394
NET EARNINGS (LOSS) PER COMMON SHARE (1):
Basic $ (7.79) $ (3.70) $ 1.34 $ 0.78 $ 0.43
Diluted $ (7.79) $ (3.70) $ 1.25 $ 0.71 $ 0.40
Weighted-average number of
Common shares outstanding:
Basic 80,120 78,635 74,285 67,450 65,410
Diluted 80,120 78,635 79,662 73,344 70,554
OPERATING STATISTICS:
Enrollment 1,881,400 2,008,100 1,535,500 1,007,700 513,000
Fully insured member months 23,081,900 21,584,700 15,604,400 9,338,610 4,101,863
Self-funded member months 765,500 602,900 474,200 514,200 524,000
Medical loss ratio (2) 93.7% 94.0% 80.1% 77.5% 74.1%
</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 and 1995.
(2) Defined as health care services expense as a percentage of premiums
earned.
(3) 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.
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In 1998, the Company's revenues consisted 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+Choice
("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 or paid
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, 1998 were adversely
affected by additions to the Company's reserves for IBNR in the second and
fourth quarters. See "Liquidity and Capital Resources". The Company's results
for the year ended December 31, 1998 were also adversely affected by significant
restructuring and unusual charges, as described below.
The Company experienced substantial growth in membership and revenues
since it began operations in 1986 through 1997. The membership and revenue
growth has been accompanied by increases in the cost of providing health care in
the Company's service areas. The Company experienced declines in membership and
revenue through 1998 and such declines may continue through 1999 and beyond. The
Company does not intend to promote significant membership or revenue growth in
1999 because the Company has redirected 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.
32
<PAGE> 33
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>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums earned 97.7% 98.0% 98.3%
Third-party administration, net 0.4% 0.3% 0.3%
Investment and other income, net 1.9% 1.7% 1.4%
- --------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Expenses:
Health care services 91.6% 92.1% 78.8%
Marketing, general and
administrative 16.4% 17.3% 15.5%
Interest and other financing costs 1.2% 0.3% --
Restructuring charges 3.0% -- --
Unusual charges 0.8% 1.0% --
- --------------------------------------------------------------------------------
Total expenses 113.0% 110.7% 94.3%
- --------------------------------------------------------------------------------
Operating earnings (loss) (13.0%) (10.7%) 5.7%
Income (loss) from affiliate -- 0.6% (0.1%)
- --------------------------------------------------------------------------------
Earnings (loss) before income taxes (13.0%) (10.1%) 5.6%
Income tax expense (benefit) (0.4%) (3.3%) 2.4%
- --------------------------------------------------------------------------------
Net earnings (loss) (12.6%) (6.8%) 3.2%
Less preferred dividends and amortization (0.6%) -- --
================================================================================
Net earnings (loss) attributable to common shares (13.2%) (6.8%) 3.2%
================================================================================
Medical loss ratio 93.7% 94.0% 80.1%
================================================================================
</TABLE>
The medical loss ratio for 1998 and 1997 reflects significant additions to
the Company's reserves recorded in each year. A portion of the reserve additions
in 1997 and 1998 represent 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.
33
<PAGE> 34
RESTRUCTURING AND UNUSUAL CHARGES
The Company recorded restructuring charges totaling $174.5 million ($165.8
million after income taxes, or $2.08 per share) in the first half of 1998. These
charges resulted from the Company's actions to better align its organization and
cost structure as part of the Company's Turnaround Plan. These charges included
estimated costs related to: (i) the disposition or closure of noncore
businesses; (ii) expected losses on government contracts; (iii) write-down of
certain property and equipment; (iv) severance and related costs; and (v) costs
of operations consolidation, including long term lease commitments. These
reserves are generally classified in the Company's balance sheet as accounts
payable and accrued expenses with the exception of property and equipment
reserves, which have been classified against fixed assets. These reserve charges
and their activity for 1998 are summarized in the table below: [OBJECT OMITTED]
<TABLE>
<CAPTION>
Ending
Restructuring Noncash Changes in Restructuring
(In thousands) Charges Cash Used Activity Estimate Reserves
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provisions for loss on
noncore businesses $ 55,700 $ (9,827) $(18,725) $(13,343) $13,805
Provisions for loss on government
contracts 51,000 (31,800) -- (19,200) --
Write-down of property and
equipment 29,272 -- (6,308) (1,005) 21,959
Severance and related costs 24,800 (4,246) (11,200) -- 9,354
Costs of consolidating operations 13,728 (548) -- 4,505 17,685
-------------------------------------------------------------------
$174,500 $(46,421) $(36,233) $(29,043) $62,803
===================================================================
</TABLE>
The changes in estimate totaling $29.0 million were recognized as a credit
to restructuring charges in the fourth quarter of 1998 and reduced the net loss
by $.36 per share.
Provisions for loss on noncore business
As part of its Turnaround Plan, the Company decided to withdraw from
noncore markets in Pennsylvania, Illinois, Florida and New Hampshire by selling
or closing its health plans in these markets. Total premium revenue for these
businesses in 1998 was approximately $170.4 million, with operating losses
totaling approximately $37.0 million. In addition, the Company decided to close
its specialty management initiatives and to sell or close certain other health
care services operations and investments in noncore businesses. Restructuring
reserves were established relating to estimated losses associated with premium
deficiencies in the HMO subsidiaries to be sold or closed, the net book value of
noncore investments were reduced to their estimated recoverable value, and
accruals were recorded for incremental disposition and closing costs associated
with the Turnaround Plan. During the second half of 1998, the Company entered
into an agreement to sell its Pennsylvania subsidiary to a third party for $7.1
million in cash plus a capital surplus note for $2.5 million and transferred its
membership in Illinois to a third party. Operations in Florida, Pennsylvania and
New Hampshire are expected to be closed by the middle of 1999 pursuant to plans
adopted during 1998. Based on favorable progress to date, the Company has
revised its estimate of the remaining costs associated with the final
disposition or closure of these operations, and accordingly a total of $13.3
million of reserves were reversed as a reduction of restructuring charges in the
fourth quarter of 1998. The Company expects to complete the closure or disposal
of these noncore businesses in 1999.
Provisions for loss on government contracts
As part of its Turnaround Plan, the Company decided to restructure its
current Medicare arrangements and/or withdraw from Medicare in certain counties
and to withdraw from Medicaid business entirely. Premium deficiency reserves
totaling $51.0 million were established in the second quarter of 1998. This
amount represented an estimate of the deficiency for the remainder of 1998
pending implementation of the plan to restructure or withdraw from these
businesses.
The Company entered into an agreement to dispose of its remaining Medicaid
business in the fourth quarter of 1998, completed two Medicare risk transfer
agreements late in the third quarter of 1998 and notified HCFA in the fourth
quarter of 1998 of its intention to withdraw from Medicare in certain counties
effective January 1, 1999. Amortization of the
34
<PAGE> 35
reserves against losses in these programs amounted to $31.8 million in the
second half of 1998. As a result of the Company's early completion of this
portion of its Turnaround Plan, the remaining reserve balance of $19.2 million
was reversed as a reduction of restructuring charges in the fourth quarter of
1998.
Write-down of property and equipment
In connection with the Company's attempts to reduce administrative costs
under the Turnaround Plan, the Company decided to consolidate operations and
reduce its occupied square footage from approximately 2,000,000 square feet
under lease to approximately 1,200,000 square feet. Additionally, the Company
anticipated and experienced a reduction in workforce of over 1,000 employees as
a result of this consolidation and its administrative expense reduction plan. A
reserve of approximately $29.3 million, against approximately $37.1 million of
net book value, was established for the estimated unrecoverable book value of
furniture and equipment and leasehold improvements no longer in use as a result
of these steps. Estimated recoveries were determined by the Company based upon a
specific review of the relevant fixed assets and the Company's prior experience
in connection with past dispositions of similar assets. The effect of this
write-down was to reduce depreciation expense by approximately $6.3 million for
the second half of 1998. The Company expects these activities to be completed
over the next 18 to 24 months.
Severance and related costs
The Company's Turnaround Plan contemplated significant changes in the
Company's senior management and, in connection therewith, certain members of the
former management team were granted severance arrangements. As a result, the
Company recorded restructuring charges related to severance costs of $20.8
million in the first quarter of 1998 and an additional $4.0 million in the
second quarter of 1998 for fifteen former executives and managers. The December
31, 1998 balance represents contracted amounts payable through the first half of
2001.
Costs of consolidating operations
In connection with the consolidating of operations to reduce its occupied
square footage, restructuring charges totaling approximately $13.7 million were
recorded in the first half of 1998 for estimated costs associated with future
rental obligations (net of estimated sublease revenues), commissions, legal
costs, penalties and other expenses relating to disposition of excess space. The
Company recorded an additional restructuring charge of approximately $4.5
million in the fourth quarter as a change in estimate as the Company's
experience in negotiating subleases and lease cancellations through the fourth
quarter indicates that costs will exceed previous estimates. The Company's
relevant lease obligations extend to July 2005, but the Company expects that a
significant portion of the expense will be incurred prior to January 1, 2000,
including termination fees aggregating approximately $2.4 million.
Unusual charges and gain on Health Partners
The Company disposed of its 47% interest in Health Partners, Inc. ("Health
Partners") in October 1997, and received 2,090,109 shares of common stock of FPA
Medical Management, Inc. ("FPAM") stock with a market value of approximately
$76.4. million, resulting in a pretax gain of approximately $63.1 million. As of
December 31, 1997, the market value of the FPAM stock had dropped to
approximately $38.4 million. At year-end 1997, the Company wrote down its
investment in FPAM by $38.0 million, thereby reducing the 1997 pretax gain on
the sale of Health Partners to approximately $25.2 million ($20.5 million after
taxes, or $.26 per share).
During the second quarter of 1998, the Company sold 540,000 shares of FPAM
and recognized a loss of $8.1 million. In July 1998, FPAM filed for protection
under Chapter 11 of the U.S. Bankruptcy Code and the market value per share of
its common stock fell below one dollar. The Company wrote down its remaining
investment in FPAM to nominal value and recognized a loss in the second
quarter of 1998 of $30.2 million. The total 1998 recognized loss and write-down
of $38.3 million, or $.49 per share, has been recognized as an unusual charge in
the accompanying financial statements.
The 1997 charges resulted from a reduction in the level of future
investment in expansion markets and, accordingly, the Company wrote down its
investments in its Florida and Illinois subsidiaries and one affiliate.
35
<PAGE> 36
These write downs have been shown as unusual charges in the accompanying
financial statements and are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<S> <C>
Compass PPA, Incorporated $ 23,427
Riscorp Health Plans, Inc. 3,894
St. Augustine Health Care, Inc. 14,297
- --------------------------------------------------------------------------------
Total $ 41,618
================================================================================
</TABLE>
In connection with the completion of the Company's year-end closing,
certain nonrecurring items that were previously classified as unusual charges
and restructuring charges in the second quarter of 1998 were reclassified to
operating and income tax captions in the 1998 statement of operations. A
reclassification of unusual charges aggregating approximately $73.5 million was
made related to charges taken in the second quarter for strengthening medical
claim reserves, establishing reserves for losses on provider advances, and
certain other asset impairment losses. A reclassification of restructuring
charges aggregating $18.8 million was made related to the write-down of
government program account receivables and accruals of certain litigation
defense costs and other expenses. These reclassifications do not affect the
reported net loss for the second quarter or for the full year, but do have the
effect of increasing the second quarter medical loss ratio and administrative
loss ratio from the levels previously reported and full year ratios are also
slightly higher. In addition, a reclassification of restructuring charges
approximating $6.0 million was made related to certain deferred tax assets,
which charges are now included in the 1998 statement of operations as income tax
expense. This reclassification has no effect on the reported net loss for the
second quarter or the full year of 1998.
<TABLE>
<CAPTION>
Before After
Quarter ended June 30, 1998 (Dollars in thousands) Reclassification Reclassification
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $1,191,112 $1,191,112
Health services expenses 1,188,265 1,256,214
Marketing, general and administrative expenses 203,659 227,968
Restructuring charges 174,266 149,500
Unusual charges 111,790 38,341
Income tax expense -- 5,957
Medical loss ratio 102.8% 108.7%
Administrative loss ratio 17.6% 19.6%
</TABLE>
Software and hardware problems experienced in the conversion of a portion
of the Company's computer system in September 1996 resulted in significant
delays in the Company's billing of group and individual customers and have
adversely affected the Company's premium billing. The Company's revenues were
adversely affected by adjustments of approximately $173.5 million in 1997 and
$218.2 million in 1998 related to estimates for terminations of group and
individual members and for nonpaying group and individual members. The Company
has taken steps to attempt to improve billing timeliness, reduce billing errors,
reduce lags in recording enrollment and disenrollment notifications, and improve
the Company's collection processes and is attempting to make requisite
improvements in management information systems concerning the value and aging of
outstanding accounts receivable. The Company continues to experience significant
levels of retroactive member and group terminations impacting revenue and
believes it has made adequate provision in its estimates for group and
individual member terminations and for nonpaying group and individual members as
of December 31, 1998. Adjustments to the estimates may be necessary, however,
and any such adjustments would be included in the results of operations for the
period in which such adjustments were made.
As a consequence of the charges described in the previous paragraphs,
comparisons of operating results for 1996, 1997 and 1998 may not be meaningful.
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 risk sharing agreements with providers) while providing members
with coverage for the health care benefits provided under their contracts.
Factors such as new technologies and
36
<PAGE> 37
health care practices, hospital costs, changes in demographics and trends,
selection biases, increases in unit costs paid to providers, major epidemics,
catastrophes, inability to establish acceptable compensation agreements with
providers, higher utilization of medical services, including higher
out-of-network utilization under point of service plans, operational and
regulatory issues and numerous other factors may affect the Company's ability to
control such costs. The Company attempts to use its medical cost containment
capabilities, such as claim auditing systems and utilization review protocols,
with a view to reducing the rate of growth in health care service expense. The
Company's Turnaround Plan also contemplates attempting to implement new medical
management policies aimed at reducing costs in various lines of business,
principally through utilization management of hospital services. There can be no
assurance that the Company will be successful in mitigating the effect of any or
all of the above-listed or other factors. In addition, the Company's
relationship 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 of future period trends. The
Company continues to reconcile delayed claims and claims previously paid or
denied in error and pay down backlogged claims. Information gained as the
process continues may result in future changes to the Company's estimates of its
medical costs and expected cost trends.
The Company may continue to report losses in 1999 as the result of high
medical costs and high administrative costs. The Company's Turnaround Plan
contemplates steps to better control medical and administrative spending and
increase premium rates and discontinue unprofitable businesses, but there can be
no assurance that it will be successful. Results of operations will be adversely
affected if such steps cannot be successfully implemented or if there are delays
in such implementation. In addition, the Company may decide to increase certain
administrative costs to attempt to improve service levels. The Company's ability
to control administrative costs could be adversely affected by a continuation of
the high level of employee attrition that the Company has experienced over the
last several quarters.
37
<PAGE> 38
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total revenues for the year ended December 31, 1998 were $4.7 billion, up
11.0% from $4.3 billion in the prior year. The net loss attributable to common
stock for 1998 totaled $624.4 million, or $7.79 per share, compared with a net
loss of $291.3 million, or $3.70 per share, for 1997. Results of operations for
the year 1998 were adversely affected by significantly higher medical costs in
the Company's commercial group business, Medicare, Medicaid and New York
Individual Plans as well as approximately $145.5 million of restructuring
charges and $38.3 million of unusual charges. Results for 1998 were also
adversely affected by interest and financing expense of $57.1 million relating
primarily to debt issuance costs and interest on claims for medical services.
Results of operations for 1997 were adversely affected by a pretax charge of
approximately $173.5 million relating to accounts receivable write-offs and
additions to accounts receivable reserves, unusual charges of approximately
$41.6 million relating to write-downs of certain investments and a pretax charge
of approximately $327.0 million relating to increased reserves for medical costs
payable. See "Liquidity and Capital Resources" and "Overview".
The following tables show plan revenues earned and membership by product:
<TABLE>
<CAPTION>
Percent
(Dollars In thousands) 1998 1997 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Freedom Plan $2,813,712 $2,468,259 14.0%
HMOs 542,835 463,428 17.1%
- ----------------------------------------------------------------------
Commercial 3,356,547 2,931,687 14.5%
- ----------------------------------------------------------------------
Medicare 1,010,831 916,126 10.3%
Medicaid 244,950 319,411 (23.3%)
- ----------------------------------------------------------------------
Government programs 1,255,781 1,235,537 1.6%
- ----------------------------------------------------------------------
Total premium revenues 4,612,328 4,167,224 10.7%
Third-party administration, net 17,838 12,592 41.7%
Investment and other income 89,245 71,448 24.9%
- ----------------------------------------------------------------------
Total revenues $4,719,411 $4,251,264 11.0%
======================================================================
</TABLE>
<TABLE>
<CAPTION>
As of December 31, Percent
1998 1997 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
MEMBERSHIP:
Freedom Plan 1,318,100 1,333,500 (1.2%)
HMOs 260,700 270,400 (3.6%)
- ----------------------------------------------------------------------
Commercial 1,578,800 1,603,900 (1.6%)
- ----------------------------------------------------------------------
Medicare 148,600 161,000 (7.7%)
Medicaid 97,800 189,600 (48.4%)
- ----------------------------------------------------------------------
Government programs 246,400 350,600 (29.7%)
- ----------------------------------------------------------------------
Total fully insured 1,825,200 1,954,500 (6.6%)
Third-party administration 56,200 53,600 4.9%
- ----------------------------------------------------------------------
Total membership 1,881,400 2,008,100 (6.3%)
======================================================================
</TABLE>
Total commercial premiums earned for the year ended December 31, 1998
increased 14.5% to $3.4 billion compared with $2.9 billion in the prior year.
This increase is primarily attributable to a 11.2% increase in member months in
the Company's commercial health care programs, including a 10.8% member months
increase in the Freedom Plan. Commercial premium revenue was adversely affected
by adjustments of $173.5 million in 1997 and $218.2 million in 1998 related to
estimates for termination of group and individual members and for nonpaying
group and individual members. See "Overview". Average premium yields of
commercial programs were 2.9% higher in 1998, net of such adjustments, when
compared with 1997. Medical costs incurred in 1998 in the Company's core
commercial business were higher than estimates used in establishing rates for
groups sold and renewing in late 1997 and early 1998. As a consequence, premium
rates were insufficient and the Company
38
<PAGE> 39
incurred losses. The Company has attempted to increase its premium rates based
on current estimates of medical costs. Renewals and new enrollments in the
Company's core commercial group business for January 1, 1999 received an average
price increase estimated at 9.8%. The Company recently filed with the NYSID for
a 9.8% rate increase for the New York Individual Plans, effective April 1, 1999.
The Company's commercial revenue in 1999 will be adversely affected by the
Company's disposition or withdrawal from noncore commercial markets in
Pennsylvania, Illinois, Florida and New Hampshire. In addition, the Company
experienced attrition of commercial members in its core commercial markets in
1998 and expects such attrition to continue in 1999, adversely affecting
revenue.
Premiums earned from government programs increased 1.6% to $1.26 billion
in 1998 compared with $1.24 billion in 1997. The overall increase was
attributable to an 8.3% increase in member months of Medicare programs offset,
in part, by a 28.0% decline in member months of Medicaid programs due primarily
to the withdrawal from the Connecticut and New Jersey Medicaid markets during
1998. Additionally, the Company's New York Medicaid contract was assigned to a
third party in January 1999, and the Company's Pennsylvania subsidiary,
including its Pennsylvania Medicaid business, was sold in January 1999. As of
February 1, 1999, the Company had no Medicaid members and will have limited
Medicaid revenue in 1999. The Company expects its Medicare revenue to be
significantly lower in 1999 as the result of withdrawals from Medicare in
certain counties as well as net losses in membership due to changes in provider
arrangements and benefit plans in other counties. Reimbursement levels for the
Company's 1999 Medicare business are expected to be 1.6% higher than 1998 (net
of the applicable HCFA user fee). The Company believes that future Medicare
premiums may be adversely affected by the implementation of risk adjustment
mechanisms recently announced by HCFA. See "Business - Government Regulations -
Recent Regulatory Developments".
Net investment and other income for the year ended December 31, 1998
increased 24.9% to $89.2 million from $71.4 million in the prior year primarily
due to higher investment income as a result of an increase in average invested
balances in 1998 resulting from the Company's May 1998 Financing. Investment
income also benefited from the movement from low yield municipal bonds and
equity securities to high quality government and corporate fixed income
investments. This increase in interest income during 1998 more than offset a
$10.6 million decrease in net capital gains from 1997. In addition, the Company
recognized income of approximately $5.1 million in the second quarter of 1998
related to the sale of its New Jersey Medicaid business. See "Liquidity and
Capital Resources".
Health care services expense stated as a percentage of premium revenues
(the "medical loss ratio") was 93.7% for the year 1998 compared with 94.0% for
the year 1997. Overall per member per month revenue in 1998 was $199.82,
however, overall per member per month health care services expenses increased
3.2% to $187.46 in 1998 from $181.38 in 1997. Software and hardware problems
experienced in the conversion of a portion of the Company's computer system in
September 1996 resulted in significant delays in the Company's payment of
provider claims and adversely affected payment accuracy during 1997. Medical
costs for 1997 reflect additions to the Company's reserves for IBNR in the third
quarter of 1997 aggregating $88 million and in the fourth quarter of 1997
aggregating $239 million. These reserve additions represent revisions to
estimates of the Company's incurred medical costs based on information gained in
the process of reviewing and reconciling previously delayed claims and claims
paid or denied in error. Results in the fourth quarter of 1998 were affected by
the establishment of an additional $49 million in medical claims reserves for
disputed claims, a $27 million provision for anticipated losses on individual
products and net accruals of $30 million for certain other medical expense
liabilities partially offset by favorable medical reserve adjustments totaling
$92 million. A portion of these reserve additions represent revisions to
estimates for claims incurred in prior periods.
The Company's paid and received claims data and revised estimates showed
significant increases in medical costs in 1996, 1997 and 1998 for the Company's
commercial, Medicare, Medicaid and New York Individual Plans. These increases
resulted primarily from higher expenses for hospital and specialist physician
services and increases in per member per month pharmacy costs. Results for 1998
continued to reflect high costs in these areas and the Company expects further
increases in 1999. The Company's Turnaround Plan was designed to address the
operating losses incurred in these lines of business, but there can be no
assurance that the Turnaround Plan will succeed. Moreover, improvement of
results in the New York Mandated Plans will require increases in rates or
additional cost control measures which require NYSID approval. The Company
expects to continue to experience losses in these plans. The Company believes it
has made adequate provision for medical costs as of December 31, 1998. There can
be no assurance that additional reserve additions will not be necessary as the
Company continues to review and reconcile delayed claims and claims paid or
denied in error.
39
<PAGE> 40
Moreover, the Company's claims payment and accuracy still require improvement to
meet acceptable standards. Additions to reserves could also result as a
consequence of regulatory examinations, and such additions also would be
included in the results of operations for the period in which such adjustments
are made. See "Liquidity and Capital Resources".
Marketing, general and administrative expenses increased 4.7% to $772.0
million during the year 1998 compared with $737.4 million during the year 1997.
The increase in 1998 was primarily attributable to a $20.0 million rise in
payroll and benefits due to higher average staffing levels through the first
half of 1998 and an $8.0 million increase in consulting fees primarily related
to enhancements to management information systems offset, in part, by
significantly lower marketing expenses for advertising and member acquisition.
Marketing, general and administrative expenses as a percent of operating revenue
were 16.7% during 1998 compared with 17.6% during 1997. The Company's Turnaround
Plan calls for significant reductions in administrative costs, but there can be
no assurance the Company will be successful in reducing such costs, and the
Company expects that results for 1999 will continue to be adversely affected by
high administrative costs. Moreover, the Company may decide to increase certain
administrative costs to attempt to improve service levels. Administrative costs
in future periods may also be adversely affected by costs associated with
responding to regulatory inquiries, investigations and defending pending
securities class actions, shareholder derivative and other litigation, including
fees and disbursements of counsel and other experts, to the extent such costs
are not reimbursed under existing policies of insurance and exceed existing
accruals. There can be no assurance that ultimate costs will not exceed those
estimates. See "Legal Proceedings". The Company's ability to control
administrative costs could also be adversely affected by a continuation of the
high level of employee attrition which the Company has experienced over the last
several quarters.
Effective January 1, 1997, the New York Health Care Reform Act of 1996
(the "New York 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 New York Act. Previously, hospital bad debt
and charity care and graduate medical education were financed by surcharges on
payments to hospitals for inpatient services. The Company's costs have increased
as these payment obligations have not been offset by corresponding reductions in
payments to hospitals and others.
The Company incurred interest and other financing charges of $41.6 million
in 1998 related to the issuance of $200 million in bridge financing in the first
quarter of 1998 and $350 million of long-term debt in May 1998. Interest expense
on capital leases entered into in 1998 aggregated $1.4 million. No such interest
was incurred in 1997. Interest expense on delayed claims totaled $14.1 million
in 1998, compared with $11.1 million in 1997. Interest payments have been made
in accordance with the Company's interest payment policy and applicable law. 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".
The Company has established a tax valuation allowance related to certain
net operating losses and the effect of the Company's net tax deductible
temporary differences. Based on the results of operations, management does not
currently believe that such tax benefits relating to losses incurred subsequent
to the first quarter of 1998 are more likely than not to be realized in the
foreseeable future. Accordingly, the Company discontinued providing tax benefits
beginning in the second quarter of 1998. Based on management's assessment of the
progress to date in its Turnaround Plan, together with projections of future
performance, management currently believes that it is more likely than not that
deferred tax benefits recorded prior to April 1998 will be realized. However,
the Company will continue to monitor its tax position throughout the
implementation of its Turnaround Plan to determine whether such deferred tax
benefits will require an additional valuation allowance or adjustment. The
amounts of future taxable income necessary during the carryforward period to
utilize the unreserved net deferred tax assets is approximately $320 million.
As of December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $600 million, which will begin to expire in 2012.
40
<PAGE> 41
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>
Percent
(Dollars In thousands) 1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Freedom Plan $2,468,259 $1,849,167 33.5%
HMOs 463,428 322,288 43.8%
- ----------------------------------------------------------------------
Commercial 2,931,687 2,171,455 35.0%
- ----------------------------------------------------------------------
Medicare 916,126 599,824 52.7%
Medicaid 319,411 250,889 27.3%
- ----------------------------------------------------------------------
Government programs 1,235,537 850,713 45.2%
- ----------------------------------------------------------------------
Total premium revenues 4,167,224 3,022,168 37.9%
Third-party administration, net 12,592 10,401 21.1%
Investment and other income 71,448 42,620 67.6%
- ----------------------------------------------------------------------
Total revenues $4,251,264 $3,075,189 38.2%
======================================================================
</TABLE>
<TABLE>
<CAPTION>
As of December 31, Percent
1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
MEMBERSHIP:
Freedom Plan 1,333,500 1,015,100 31.4%
HMOs 270,400 192,300 40.6%
- ----------------------------------------------------------------------
Commercial 1,603,900 1,207,400 32.8%
- ----------------------------------------------------------------------
Medicare 161,000 125,000 28.8%
Medicaid 189,600 162,000 17.0%
- ----------------------------------------------------------------------
Government programs 350,600 287,000 22.2%
- ----------------------------------------------------------------------
Total fully insured 1,954,500 1,494,400 30.8%
Third-party administration 53,600 41,100 30.4%
- ----------------------------------------------------------------------
Total membership 2,008,100 1,535,500 30.8%
======================================================================
</TABLE>
Commercial premium revenues increased 35% 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 yields 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 $173.5
million related to estimates for terminations of group and individual members
and for nonpaying group and individual members.
Premium revenues of government programs increased 45.2% 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
premium rates during 1997. Average premium yields of Medicare programs in 1997
were 4.3% higher than in 1996.
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 and other income for the year ended December 31, 1997
increased to $71.4 million from $42.6 million in 1996. This was principally due
to significantly greater realized capital gains in 1997 when compared with 1996.
41
<PAGE> 42
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 17.0% to $181.46 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 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.
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 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 incurred interest expense of approximately $11.1 million
during 1997 for payment of interest on delayed claims.
The Company disposed of its 47% interest in Health Partners, Inc. ("Health
Partners") in October 1997, and received 2,090,109 shares of common stock of FPA
Medical Management, Inc. ("FPAM") stock with a market value approximately $76.4
million, resulting in a pretax gain of approximately $63.1 million. As of
December 31, 1997, the market value of the FPAM stock had dropped to
approximately $38.4 million. At year-end 1997, the Company wrote down its
investment in FPAM by $38.0 million, thereby reducing the pretax gain on the
sale of Health Partners to approximately $25.2 million ($20.5 million after
taxes, or $.26 per share). 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 acquired all of the outstanding stock of Compass PPA,
Incorporated, 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 determined to focus available administrative resources in its core
markets in the Northeast and to reduce significantly the level of investment
planned for
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these expansion markets. The Company believes that such reduction in future
investments will adversely impact the value of these companies and, accordingly,
the Company 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 the carrying value of its minority
investment in the capital stock and subordinated surplus notes of St. Augustine
Health Care, Inc., a Florida-based HMO by $14.3 million.
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.
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 commercial, Medicare, Medicaid, and New York Individual
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 to attempt to maintain margins. The Company's
cost control measures and risk-sharing arrangements with various health care
providers as well as its withdrawal from participation in state Medicaid
programs 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 1998 aggregated $46.5 million compared with
$152.6 million in 1997. The improvement is primarily attributable to the receipt
in 1998 of federal and state tax refunds totaling $121 million. During 1998, the
Company significantly strengthened its balance sheet and enhanced short-term
liquidity through the infusion of $710 million in cash in the Financing
described below.
Cash used for capital expenditures totaled $40.0 million during 1998. This
amount was used primarily for computer equipment and software and leasehold
improvements. The Company acquired an additional $40.3 million of computer and
other equipment under capital leases. The Company also sold and leased back
computer equipment with a value of $10.0 million. The Company currently
anticipates that capital expenditures and payments under capital leases for 1999
will be approximately $19 million, a significant portion of which will be
devoted to management information systems. Except for anticipated capital
expenditures and requirements to provide the required levels of capital to its
operating subsidiaries, including any requirement arising from nonadmissibility
of provider advances (as discussed below) or other assets or from operating
losses, the Company currently has no definitive commitments for use of material
cash.
Cash and investments aggregating $44.8 million at December 31, 1998 have
been segregated as restricted investments to comply with federal and state
regulatory requirements. The Company expects to set aside additional funds not
expected to exceed $30 million as collateral for certain advances made by the
Company's New Jersey subsidiary (see below). In addition, the Company's
subsidiaries are subject to certain restrictions on their abilities to make
dividend payments, loans or other transfers of cash to the parent company, which
limit the ability of the Company to use cash generated by subsidiary operations
to pay the obligations of the parent, including debt service and other financing
costs.
In September 1998, the National Association of Insurance Commissioners
("NAIC") adopted new minimum capitalization requirements, known as risk-based
capital rules, for health care coverage provided by HMOs and other risk-bearing
health care entities. Depending on the nature and extent of the new minimum
capitalization requirements ultimately adopted by each state, there could be an
increase in the capital required for certain of the Company's regulated
subsidiaries. Connecticut has introduced legislation allowing the Connecticut
Department of Insurance ("CTDOI") to promulgate regulations based on the NAIC
model. The Company expects the CTDOI regulations to be applicable to its 1999
annual financial statements. Neither New York nor New Jersey have introduced
similar legislation. However, the New Jersey Department of Banking and Insurance
("NJDBI") has published draft solvency regulations that it estimates will result
in an additional $250 million worth of deposit by all
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New Jersey health care plans. The New York Superintendent of Insurance has
announced an intention to strengthen current solvency regulations to allow the
NYSID to take over failing health plans without a court order. The Company
intends to fund any increase from available parent company cash reserves;
however, there can be no assurance that such cash reserves will be sufficient to
fund these minimum capitalization requirements. The new requirements are
expected to be effective on or before December 31, 1999 upon enactment by each
state.
Premiums receivable at December 31, 1998 decreased to $110.3 million from
$275.6 million at December 31, 1997 primarily due to improved collections and
continued clean-up efforts for nonpaying groups and reconcilliations and
increased reserves for doubtful accounts.
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 and reductions in IBNR relating to the
Company's exit from certain businesses during the first quarter of 1998 and
thereafter. Outstanding advances, net of a $35 million valuation reserve,
aggregated approximately $139.5 million at December 31, 1998 and have been
netted against medical costs payable in the Company's consolidated balance
sheet. The Company believes that it will be able to recover outstanding advance
payments, either through repayment by the provider or application against future
claims, but any failure to recover funds advanced in excess of the reserve would
adversely affect the Company's results of operations. There can be no assurance
that insurance regulators will continue to recognize such advances as admissible
assets and the New Jersey Department of Banking and Insurance is requiring the
Company to provide collateral for repayment of the advances by setting aside in
trust at the parent company funds equal to the admitted portion of the advances
on the New Jersey subsidiary's statutory financial statement (currently not
expected to exceed $30 million). If the Company fails to provide such collateral
or if all or a portion of the advances were deemed nonadmitted, the capital of
the Company's operating subsidiaries would be impaired and additional capital
contributions would be required for the subsidiaries to meet statutory
requirements.
The Company's medical costs payable was $989.7 million as of December 31,
1998, before netting advance claim payments of $139.5 million (including $864.5
million for IBNR) compared with $965.9 million as of December 31, 1997, before
netting advance claim payments of $203.4 million (including $936.7 million for
IBNR). 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 changes
in membership. The liability is also affected by shared risk arrangements,
including arrangements relating to the Company's Medicare business in certain
counties and Private Practice Partnerships ("Partnerships"). In determining the
liability for medical costs payable, the Company accounts for the financial
impact of the transfer of risk for certain Medicare members and the experience
of risk-sharing Partnership providers (who may be entitled to credits from
Oxford for favorable experience or subject to deductions for accrued deficits).
In the case of the Medicare risk arrangements, the Company no longer records a
reserve for claims liability since the payment obligation has been transferred
to third parties. In the case of Partnership providers subject to deficits, the
Company has established reserves to account for delays or other impediments to
recovery of those deficits. The Company has reviewed its partnership program and
has terminated most of its partnership arrangements as a result of difficulties
and expense associated with administering the program as well as other
considerations. The Company recognized estimated costs in taking these actions
in the second quarter of 1998. The Company believes that its reserves for IBNR
are adequate to satisfy its ultimate claim liabilities. However, the Company's
prior rapid growth, delays in paying claims, paying or denying claims in error
and changing speed of payment may affect the Company's ability to rely on
historical information in making IBNR reserve estimates.
During 1997 and 1998, the Company made cash contributions to the capital of
its HMO subsidiaries aggregating $65.7 million and $537.5 million, respectively.
In addition, in 1997, the Company contributed the outstanding capital stock of
OHI, its insurance subsidiary, to Oxford NY to increase Oxford NY's surplus.
These contributions to its subsidiaries were made to ensure that each subsidiary
had sufficient surplus as of December 31, 1998 under applicable regulations
after giving effect to operating losses and reductions to surplus resulting from
the nonadmissibility of certain assets. The Company expects that additional
contributions to the subsidiaries will be required if operating losses are
incurred in 1999. Further, additional capital contributions may 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".
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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, as amended on
March 30, 1998. The Company used the proceeds of the Bridge Notes to make a
portion of the above described contributions to its HMO subsidiaries, to pay
expenses in connection with the issuance of the Bridge Notes and for general
corporate purposes. The Bridge Notes were redeemed as part of the financing
described below.
Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC ("TPG", together
with the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350 million in redeemable Preferred Stock with Warrants to acquire up
to 22,530,000 shares of common stock. The Preferred Stock and Warrants were
issued without registration under the Securities Act in reliance on Section 4(2)
of the Securities Act, which provides an exemption for transactions not
involving any public offering. In determining that such exemption was available,
the Company relied on, among other things, the facts that the Preferred Stock
and Warrants were being issued through direct communication only to a limited
number of sophisticated investors having knowledge and access to information
regarding the Company and that the certificates evidencing such Preferred Stock
and Warrants bear a legend restricting transfer in nonregistered transactions.
Dividends on the Preferred Stock may be paid in kind for the first two years.
The Warrants have an exercise price of $17.75, which represents a 5% premium
over the average trading price of Oxford shares for the 30 trading days ended
February 20, 1998. The exercise price will become 115% of the average trading
price of Oxford common stock for the 20 trading days following the filing of the
Company's annual report on Form 10-K for the year ended December 31, 1998, if
such adjustment would reduce the exercise price.
The Preferred Stock was originally issued as 245,000 shares of Series A
and 105,000 shares of Series B. The Series A Preferred Stock carried a cash
dividend of 8% per annum, payable quarterly, provided that prior to May 13,
2000, the Series A Preferred Stock accumulated dividends at a rate of 8.243216%
per annum, payable annually in cash or additional shares of Series A Preferred
Stock, at the option of the Company. The Series A Preferred Stock was issued
with Series A Warrants to purchase 15,800,000 shares of common stock, or
approximately 19.9% of the then outstanding voting power of Oxford's common
stock. The Series A Preferred Stock had approximately 16.6% of the combined
voting power of Oxford's then outstanding common stock and the Series A
Preferred Stock. The Series B Preferred Stock, which was originally issued with
Series B Warrants to purchase nonvoting junior participating preferred stock,
was nonvoting and carried a cash dividend of 9% per annum, payable quarterly,
provided that prior to May 13, 2000, the Series B Preferred Stock accumulated
dividends at a rate of 9.308332% per annum, payable annually in cash or
additional shares of Series B Preferred Stock, at the option of the Company. The
Preferred Stock was not redeemable by the Company prior to May 13, 2003.
Thereafter, subject to certain conditions, the Series A and Series B Preferred
Stock were each redeemable at the option of the Company at a redemption price of
$1,000 per share (in each case, plus accrued and unpaid dividends), and were
subject to mandatory redemption at the same price on May 13, 2008. The Series A
Warrants and the Series B Warrants expire on the earlier May 13, 2008 or
redemption of the related series of Preferred Stock. The Warrants are detachable
from the Preferred Stock. With respect to dividend rights, the Series A and
Series B Preferred Stock rank on a parity with each other and prior to the
Company's common stock. On August 28, 1998, the Company held its annual
shareholders meeting at which its shareholders approved the vesting of voting
rights in respect of the Series B Preferred Stock and the issuance, subject to
adjustment, of up to 6,730,000 shares of common stock upon exercise of the
Series B Warrants. This approval resulted in the reduction of the dividend on
the Series B Preferred Stock to 8% (8.243216% prior to May 13, 2000) and an
increase in the voting rights of TPG to 22.1% of the combined voting power of
the Company's outstanding common stock and Series A and Series B Preferred
Stock.
On February 13, 1999, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with TPG, its affiliates and others to make an
adjustment of the dividends payable among the shares of Series A Preferred Stock
and Series B Preferred Stock in connection with the possible sale of shares of
Preferred Stock by the holders thereof to institutional holders. Pursuant to the
Exchange Agreement, the 245,000 shares of Series A Preferred Stock were
exchanged for 260,146.909 shares of a new Series D Preferred Stock (the "Series
D Preferred Stock"), and the 105,000 shares of Series B Preferred Stock were
exchanged for 111,820.831 shares of a new Series E Preferred Stock (the "Series
E Preferred Stock"). In the exchange, (1) a holder received in exchange for each
share of Series A Preferred Stock, one share of Series D Preferred Stock, plus
0.061824118367 share of Series D Preferred Stock representing dividends on the
Series
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A Preferred Stock accrued and unpaid through February 13, 1999, and (2) a holder
received in exchange for each share of Series B Preferred Stock, one share of
Series E Preferred Stock, plus 0.064960295238 share of Series E Preferred Stock
representing dividends on the Series B Preferred Stock accrued and unpaid
through February 13, 1999. As a result of the exchange, the holders hold only
Series D Preferred Stock and Series E Preferred Stock. On March 9, 1999, the
Company filed Certificates of Elimination for the Series A Preferred Stock and
the Series B Preferred Stock that have the effect of eliminating from the
Certificate of Incorporation all matters with respect to the Series A Preferred
Stock and the Series B Preferred Stock. The terms of the shares of the Series D
Preferred Stock are identical to the terms of the Series A Preferred Stock,
except that the Series D Preferred Stock accumulates cash dividends at the rate
of 5.12981% per annum, payable quarterly, provided that prior to May 13, 2000,
the Series D Preferred Stock accumulates dividends at a rate of 5.319521% per
annum, payable annually in cash or additional shares of Series D Preferred
Stock, at the option of the Company. The terms of the shares of the Series E
Preferred Stock are identical to the terms of the shares of the Series B
Preferred Stock except that the Series E Preferred Stock accumulates cash
dividends at a rate of 14.00% per annum, payable quarterly, provided that prior
to May 13, 2000, the Series E Preferred Stock accumulates dividends at a rate of
14.589214% per annum, payable annually in cash or additional shares of Series E
Preferred Stock, at the option of the Company. In addition, prior to May 13,
2000, the holders of the Series D Preferred Stock may only use to pay the
exercise price of the Warrants a percentage of the total amount of Series D
Preferred Stock issued on February 13, 1999 that does not exceed the percentage
of the total number of shares of Series E Preferred Stock issued on February 13,
1999 that have been redeemed, repurchased or retired by the Company, or used as
consideration for the Warrants by the holders. With respect to dividend rights,
the Series D and Series E Preferred Stock rank on a parity with each other and
prior to the Company's common stock.
The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock.
Simultaneously with the consummation of the Investment Agreement, the
Company issued $200 million principal amount of 11% Senior Notes due May 15,
2005. The Senior Notes were issued in a private placement to Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), the initial purchasers, who agreed to
sell the Senior Notes only to "qualified institutional buyers", as defined in
Rule 144A under the Securities Act in reliance upon the exemption from the
registration requirements of the Securities Act provided by Rule 144A, or
outside the United States in accordance with Regulation S under the Securities
Act. DLJ received $6,000,000 in discounts and commissions in connection with the
initial purchase of the Senior Notes. The Senior Notes are senior unsecured
obligations of the Company and rank pari passu in right of payment with all
current and future senior indebtedness of the Company. The Company's obligations
under the Senior Notes are effectively subordinated to all existing and future
secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness and are structurally subordinated to all existing and
future indebtedness, if any, of the Company's subsidiaries. Interest is payable
semi-annually on May 15 and November 15 of each year commencing November 15,
1998. At any time on or before May 15, 2001, the Company may redeem for cash up
to 33 1/3% of the original aggregate principal amount of the Senior Notes at a
redemption price of 111% of the principal amount thereof, in each case, plus any
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of a public equity offering provided that at least 66 2/3% of the
original aggregate principal amount of the Senior Notes remains outstanding
immediately after the occurrence of such redemption. After May 15, 2002, the
Senior Notes will be subject to redemption for cash at the option of the
Company, in whole or in part, at a redemption prices ranging from 105.5% of face
amount beginning May 15, 2002 to 100% on and after May 15, 2004.
At the same time, the Company entered into a Term Loan Agreement pursuant
to which the Company borrowed $150 million in the form of a senior secured term
loan (the "Term Loan") with a final maturity in 2003 at which time all
outstanding amounts will be due and payable. Prior to the final maturity of the
Term Loan there are no scheduled principal payments. The Term Loan provides for
mandatory prepayments in certain circumstances. The Term Loan bears interest at
a rate per annum equal to the administrative agent's reserve adjusted LIBO rate
plus 4.25%.
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Also simultaneously with the transactions described above, Norman C.
Payson, M.D., the Company's Chief Executive Officer, purchased 644,330 shares of
Oxford common stock for an aggregate purchase price of $10 million pursuant to
his employment agreement. The common stock issued to Dr. Payson was issued
without registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, which provides an exemption for transactions not involving any
public offering.
The aggregate proceeds of the above Financing of $710 million were
utilized, in part, to retire the Bridge Notes, make capital contributions to
certain regulated subsidiaries and pay fees and expenses approximating $39
million related to the transactions. The balance has been and will be used for
future subsidiary capital contributions, as necessary, and for general corporate
purposes. The Company believes that the above described proceeds will be
sufficient to finance the capital needs referred to previously and to provide
additional capital for losses or contingencies in excess of the Company's
current expectations. However, there can be no assurance that such proceeds will
be sufficient to finance such capital needs and to provide additional capital
for losses or contingencies in excess of the Company's current expectations.
Year 2000 Readiness
The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and is
continuing to carry out the implementation plan to resolve the Year 2000 date
issue which it developed as a result of the assessment. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations. The
Company is utilizing and will utilize both internal and external resources to
identify, correct or reprogram, and test the systems for Year 2000 compliance.
The Company has divided its Year 2000 compliance program into the following
phases: assessment, planning, remediation and testing. As of December 31, 1998,
the Company was 80% complete with its Year 2000 compliance program and
anticipates being complete with all phases of the program by the second quarter
of 1999. The Company's Year 2000 compliance program requires remediation of
certain programs within particular time frames in order to avoid disruption of
the Company's operations. These time frames include certain dates throughout
1999. Although the Company believes it will complete the remediation of these
programs within the applicable time frames, there can be no assurance that such
remediation will be completed or that the Company's operations will not be
disrupted to some degree.
The Company is communicating with certain material vendors to determine
the extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting project plans, status reports and Year 2000
compliance certifications or written assurances from its material vendors,
including certain software vendors, business partners, landlords and suppliers.
The effect of such vendors' noncompliance, if any, is not reasonably estimable
at this time.
The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities which regulate its business.
The Company is in compliance with such Year 2000 reporting requirements. Such
regulatory authorities have also asked the Company to submit to certain audits
regarding its Year 2000 compliance.
The Company is in the process of completing the modifications of its
computer systems to accommodate the Year 2000 and will undertake testing to
ensure its systems and applications will function properly after December 31,
1999. The Company currently expects this modification and testing to be
completed in a time frame to avoid any material adverse effect on operations.
The Company has deferred certain other information technology initiatives to
concentrate on its Year 2000 compliance efforts but the Company believes that
such deferral is not reasonably likely to have a material adverse effect on the
Company's financial condition or results of operations. The Company's inability
to complete Year 2000 modifications on a timely basis or the inability of other
companies with which the Company does business to complete their Year 2000
modifications on a timely basis could adversely affect the Company's operations.
The Company expects to incur associated expenses of approximately $5
million in 1999 to complete this effort. As of December 31, 1998, the Company
had incurred approximately $9.8 million of expenses in connection with its Year
2000 compliance efforts. The costs of the project and the date on which the
Company
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plans to complete the necessary Year 2000 modifications are based on
management's best estimate, which include assumptions of future events including
the continued availability of certain resources. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans.
The Company has contracted with an external consulting firm to assist in
the generation of a Year 2000 contingency plan in the event compliance is not
achieved. In connection therewith, the Company has begun to identify reasonably
likely scenarios which could arise in the event of the Company's Year 2000
noncompliance. The Company has completed a contingency strategy and will develop
detailed plans to support this strategy. The Company expects to be substantially
complete with these detailed plans by the second quarter of 1999. However, there
can be no assurance that this contingency plan will be completed on a timely
basis or that such a plan will protect the Company from experiencing a material
adverse effect on its financial condition or results of operations.
Potential consequences of the Company's failure to timely resolve its Year
2000 issues could include, among others: (i) the inability to accurately and
timely process claims, enroll and bill groups and members, pay providers, record
and disclose accurate data and perform other core functions; (ii) increased
scrutiny by regulators and breach of contractual obligations; and (iii)
litigation in connection therewith.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's consolidated balance sheet as of December 31, 1998 includes
a significant amount of assets whose fair values are subject to market risk.
Since the substantial portion of the company's investments are in fixed rate
debt securities, interest rate fluctuations represent the largest market risk
factor affecting the Company's consolidated financial position. Interest rate
risk is managed within a tight duration band, and credit risk is managed by
investing in U.S. government obligations and in corporate debt securities with
high average quality ratings and maintaining a diversified sector exposure
within the debt securities portfolio. A hypothetical immediate increase of 100
basis points in market interest rates would decrease the fair value of the
Company's investments in debt securities as of December 31, 1998 by
approximately $23.3 million, while a 200 basis points increase in rates would
decrease the value of such investments by approximately $45.9 million. A
hypothetical immediate decrease of 100 basis points in market interest rates
would increase the fair value of the Company's investments in debt securities as
of December 31, 1998 by approximately $22.4 million, while a 200 basis points
decrease in rates would increase the value of such investments by approximately
$45.7 million. The Company's investment in equity securities as of December 31,
1998 was not significant. The foregoing valuation estimates were based upon
industry calculations of security durations and convexities as provided by such
third party vendors as Bloomberg and Yield Book. Due to the fact that durations
and convexity are estimated rather than known quantities for certain
securities, there can be no assurance that the Company's portfolio would
perform in-line with the estimated values.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules on page 52.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 2, 1998, the Company dismissed KPMG LLP as the independent
auditors of the Company. At the same time, the Company selected the firm of
Ernst & Young LLP to serve as the independent auditors of the Company. The
reports of KPMG LLP on the financial statements of the Company for the past two
fiscal years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
This change in auditors was approved by the Audit Committee of the Board of
Directors of the Company. During the Company's two most recent fiscal years and
through June 2, 1998, there were no disagreements with KPMG LLP concerning
accounting principles or practices, financial statement disclosures or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
KPMG LLP would have caused KPMG LLP to make reference thereto in their report on
the financial statements for such years, and there were no reportable events as
that term is defined in Item 304(a)(1)(v) of Regulation S-K. The Company
provided KPMG LLP with a copy of the disclosure contained herein and has
requested that KPMG LLP furnish it with a letter addressed to the Securities and
Exchange Commission stating whether or not it agrees with the above statements.
A copy of such letter, dated June 9, 1998, is filed as an exhibit to the
Company's Form 8-K filed on June 9, 1998 with the Securities and Exchange
Commission.
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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, 1998.
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 Consolidated Financial
Statements and Schedules on page 52.
2. Financial statement schedules - see Index to Consolidated Financial
Statements and Schedules on page 52.
3. Exhibits - see Exhibit Index on page 87.
(b) Reports on Form 8-K
In a report on Form 8-K dated October 2, 1998 and filed on October 5, 1998,
the Company reported under Item 5 "Other Events" its exit from a portion of the
Medicare market.
In a report on Form 8-K dated and filed on October 14, 1998, the Company
reported under Item 5 "Other Events" its agreement to sell its Pennsylvania
subsidiary to Health Risk Management, Inc. for $10.4 million.
In a report on Form 8-K dated and filed on October 30, 1998, the Company
reported under Item 5 "Other Events" its earnings press release for the third
quarter of 1998.
In a report on Form 8-K dated and filed on November 19, 1998, the Company
reported under Item 5 "Other Events" an amendment to its agreement with TPG
Partners, L.P. (the "Investor") permitting principals of the Investor to
purchase up to an aggregate of 2,000,000 shares of the Company's common stock.
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 18th day of
March, 1999.
OXFORD HEALTH PLANS, INC.
By: /s/ NORMAN C. PAYSON
---------------------------------
NORMAN C. PAYSON, M.D.
Chief Executive Officer
50
<PAGE> 51
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 March 18, 1999.
SIGNATURE TITLE
/s/ NORMAN C. PAYSON Principal Executive Officer
- --------------------------------------
NORMAN C. PAYSON, M.D.
/s/ YON Y. JORDEN Principal Financial Officer
- --------------------------------------
YON Y. JORDEN
/s/ KURT B. THOMPSON Principal Accounting Officer
- --------------------------------------
KURT B. THOMPSON
/s/ ROBERT B. MILLIGAN, JR Director
- --------------------------------------
ROBERT B. MILLIGAN, JR.
/s/ DAVID BONDERMAN Director
- --------------------------------------
DAVID BONDERMAN
/s/ JONATHAN T. COSLET Director
- --------------------------------------
JONATHAN T. COSLET
/s/ JAMES G. COULTER Director
- --------------------------------------
JAMES G. COULTER
/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, M.D.
/s/ THOMAS A. SCULLY Director
- --------------------------------------
THOMAS A. SCULLY
/s/ KENT J. THIRY Director
- --------------------------------------
KENT J. THIRY
Director
- --------------------------------------
STEPHEN F. WIGGINS
51
<PAGE> 52
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports ................................................... 53
Consolidated Balance Sheets as of December 31, 1998 and 1997 .................... 55
Consolidated Statements of Operations for the years ended December 31, 1998, 1997
and 1996 ..................................................................... 55
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive
Earnings (Loss) for the years ended December 31, 1998, 1997 and 1996 ......... 57
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996 ..................................................................... 58
Notes to Consolidated Financial Statements ...................................... 60
Independent Auditors' Reports on Financial Statement Schedules .................. 80
Financial Statement Schedules:
I Condensed Financial Information of Registrant ................................ 85
II Valuation and Qualifying Accounts ............................................ 86
</TABLE>
52
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Oxford Health Plans, Inc.:
We have audited the consolidated balance sheet of Oxford Health Plans, Inc.
and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity (deficit) and
comprehensive earnings (loss) and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 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, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Stamford, Connecticut
March 9, 1999
53
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Oxford Health Plans, Inc.:
We have audited the accompanying consolidated balance sheet of Oxford Health
Plans, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity (deficit) and
comprehensive earnings (loss) and cash flows for each of the years in the
two-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 the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG LLP
Stamford, Connecticut
February 23, 1998
54
<PAGE> 55
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
Current assets: 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 237,717 $ 4,141
Investments - available-for-sale, at market value 922,990 635,743
Premiums receivable, net 110,254 275,646
Other receivables 36,540 42,517
Prepaid expenses and other current assets 9,746 10,097
Refundable income taxes -- 120,439
Deferred income taxes 43,385 38,092
- -------------------------------------------------------------------------------------------------------------
Total current assets 1,360,632 1,126,675
Property and equipment, net 112,941 147,093
Deferred income taxes 94,182 86,406
Restricted investments - held-to-maturity, at amortized cost 44,798 --
Other noncurrent assets 25,197 29,927
- -------------------------------------------------------------------------------------------------------------
Total assets $ 1,637,750 $ 1,390,101
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical costs payable $ 850,197 $ 762,959
Trade accounts payable and accrued expenses 176,833 144,264
Unearned premiums 105,993 124,603
Current portion of capital lease obligations 15,938 --
Deferred income taxes 2,228 9,059
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 1,151,189 1,040,885
Long-term debt 350,000 --
Obligations under capital leases 18,850 --
Redeemable preferred stock 298,816 --
Shareholders' equity (deficit):
Preferred stock, $.01 par value, authorized 2,000,000 shares;
none issued and outstanding -- --
Common stock, $.01 par value, authorized 400,000,000 shares;
issued and outstanding 80,515,872 in 1998 and 79,474,439 in 1997
805 795
Additional paid-in capital 506,243 437,653
Accumulated deficit (692,290) (95,498)
Accumulated other comprehensive earnings 4,137 6,266
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 1,637,750 $ 1,390,101
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE> 56
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums earned $ 4,612,328 $ 4,167,224 $ 3,022,168
Third-party administration, net 17,838 12,592 10,401
Investment and other income, net 89,245 71,448 42,620
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 4,719,411 4,251,264 3,075,189
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 4,321,737 3,916,742 2,421,167
Marketing, general and administrative 772,015 737,425 477,373
Interest and other financing charges 57,090 11,118 --
Restructuring charges and provision for loss on government contracts 145,457 -- --
Unusual charges 38,341 41,618 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 5,334,640 4,706,903 2,898,540
- -----------------------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) (615,229) (455,639) 176,649
Equity in net loss of affiliate -- (1,140) (4,600)
Gain on sale of affiliate -- 25,168 --
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (615,229) (431,611) 172,049
Income tax expense (benefit) (18,437) (140,323) 72,426
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) (596,792) (291,288) 99,623
Less preferred dividends and amortization (27,668) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) attributable to common shares $ (624,460) $ (291,288) $ 99,623
===================================================================================================================================
Earnings (loss) per common and common equivalent share:
Basic $ (7.79) $ (3.70) $ 1.34
Diluted $ (7.79) $ (3.70) $ 1.25
Weighted average common stock and common stock equivalents outstanding:
Basic 80,120 78,635 74,285
Effect of dilutive securities-stock options -- -- 5,377
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted 80,120 78,635 79,662
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE> 57
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------ Additional Retained Other
Number Par Paid-In Earnings Comprehensive Comprehensive
of Shares Value Capital (Deficit) Earnings (Loss) Earnings (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 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 - -
One-for-one stock dividend 34,794 348 (348) - -
Net earnings - - - 99,623 $ 99,623 -
Appreciation in value of available-for-sale
securities, net of deferred income taxes
- - - - 3,120 3,120
---------
Comprehensive earnings $ 102,743
=========
- ----------------------------------------------------------------------------------------------- -----------------
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) $(291,288) -
Depreciation in value of available-for-sale
securities, net of deferred income taxes - - - - (3,738) (3,738)
---------
Comprehensive earnings (loss) $(295,026)
=========
- ----------------------------------------------------------------------------------------------- -----------------
Balance at December 31, 1997 79,474 795 437,653 (95,498) 6,266
Exercise of stock options 397 4 2,651 - -
Proceeds from sale of common stock 645 6 9,994 - -
Issuance of Series A and Series B preferred
stock warrants - - 67,000 - -
Compensatory stock grants under executive
stock agreements - - 16,613 - -
Preferred stock dividends and amortization
of discount - - (26,103) - -
Amortization of preferred stock issuance costs - - (1,565) - -
Net loss - - - (596,792) $(596,792) -
Depreciation in value of available-for-sale
securities, net of deferred income taxes - - - - (2,129) (2,129)
---------
Comprehensive earnings (loss) $(598,921)
=========
- ----------------------------------------------------------------------------------------------- -----------------
Balance at December 31, 1998 80,516 $805 $ 506,243 $(692,290) $ 4,137
=============================================================================================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE> 58
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Cash flows from operating activities: 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) $ (596,792) $ (291,288) $ 99,623
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 67,141 61,045 42,886
Noncash restructuring and unusual charges 101,547 41,618 --
Deferred income taxes (18,437) (75,279) (13,196)
Provision for doubtful accounts 60,209 25,000 4,505
Equity in net loss of affiliate -- 1,140 4,600
Realized gain on sale of investments (10,695) (28,736) (4,734)
Gain on sale of affiliate -- (25,168) --
Other, net 13,289 245 480
Changes in assets and liabilities, net of effect of acquisitions:
Premiums receivable 130,183 25,942 (223,353)
Other receivables 2,679 (18,320) (11,083)
Prepaid expenses and other current assets 351 (3,928) (2,251)
Medical costs payable 62,238 116,387 323,851
Trade accounts payable and accrued expenses 33,802 84,967 14,764
Income taxes payable/refundable 121,102 (123,624) 42,098
Unearned premiums (18,610) 61,378 12,753
Other, net 5,511 (3,959) (3,747)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (46,482) (152,580) 287,196
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (40,045) (101,946) (48,348)
Purchases of available-for-sale securities (1,353,403) (589,690) (794,099)
Sales of available-for-sale securities 951,941 756,174 311,783
Maturities of available-for-sale securities 41,547 34,621 33,298
Acquisitions, net of cash acquired (1,312) (14,034) --
Investments in and advances to unconsolidated affiliates (5,410) (19,842) (18,597)
Other, net 3,193 (1,986) 723
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (403,489) 63,297 (515,240)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of notes and loans payable 550,000 -- --
Redemption of notes and loans payable (200,000) -- --
Proceeds from issuance of preferred stock and warrants, net of expenses 338,148 -- --
Proceeds from issuance of common stock 10,000 -- 220,539
Proceeds from exercise of stock options 2,655 21,264 21,215
Debt issuance expenses (11,793) -- --
Payments under capital leases (5,463) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 683,547 21,264 241,754
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 233,576 (68,019) 13,710
Cash and cash equivalents at beginning of year 4,141 72,160 58,450
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 237,717 $ 4,141 $ 72,160
=================================================================================================================================
</TABLE>
58
<PAGE> 59
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Unrealized appreciation (depreciation) of short-term investments $ (4,255) $ 6,336 $ 5,288
Capital lease obligations incurred 40,251 -- --
Preferred stock dividends paid in-kind 18,548 -- --
Amortization of preferred stock discount 7,555 -- --
Amortization of preferred stock issuance expenses 1,565 -- --
Tax benefit realized on exercise of stock options -- 24,808 33,624
Sale of affiliate in a pooling-of-interests transaction -- 38,442 --
One-for-one stock dividend -- -- 348
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE> 60
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 coverage in New York, New Jersey, Connecticut, New
Hampshire, Florida and Pennsylvania. Oxford was incorporated on September 17,
1984 and began operations in 1986. Oxford owns and operates five health
maintenance organizations ("HMOs"), three of which are qualified as Competitive
Medical Plans, and an accident and health insurance company 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 (FL), Inc. and Oxford Health Plans (NH), 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. The Company anticipates that
it will have ceased doing business in Pennsylvania, Florida, Illinois and New
Hampshire by the end of 1999. Oxford also owns Oxford Health Plans (IL), Inc.
("Oxford IL") which is licensed by the Illinois Department of Insurance as an
accident and health insurance company with authority to offer HMO products.
However, Oxford ceased its Illinois operations in the third quarter of 1998.
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. The Company's investment in Health Partners, Inc. was accounted
for using the equity method until its disposal in October 1997 (see note 12).
(b) Premium revenue. Membership contracts are generally on a yearly basis
subject to cancellation 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 of
$37.7 million in 1998 and $6.5 million in 1997. 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.
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 or paid
claims. The Company estimates the amount of the provision for incurred but not
reported or paid claims 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, denied claim activity, expected medical
cost inflation, seasonality patterns and changes in membership. The estimates
for submitted claims and incurred but not reported or paid claims are made on an
accrual basis and adjusted in future periods as required. Any adjustments to the
prior period estimates are included in the current period. Medical costs payable
also reflects surplus or deficit experience for physicians participating in
risk-sharing arrangements. Amounts advanced to providers for delayed claims,
which are net of a valuation reserve of $35.0 million have been applied against
medical claims payable in the accompanying balance sheet and aggregated
approximately $139.5 million at
60
<PAGE> 61
December 31, 1998. Management believes that the Company's reserves for medical
costs payable are adequate to satisfy its ultimate claim liabilities.
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 as commercial, individual and government contracts
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) Investments. Investments are classified as either available-for-sale or
held-to-maturity. Investments that the Company has the intent and ability to
hold to maturity are designated as held-to-maturity and are stated at amortized
costs. The Company has determined that all other investments might be sold prior
to maturity to support its investment strategies. Accordingly, these other
investments are classified as available for sale and are stated at fair value
based on quoted market prices. Unrealized gains and losses on available for sale
investments are excluded from earnings and are reported in accumulated other
comprehensive earnings (loss), net of income tax effects. Realized gains and
losses are determined on a specific identification basis and are included in
results of operations.
(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. The Company had no intangible assets recorded
as of December 31, 1998 or 1997.
(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 temporary differences 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
reviews assets and certain identifiable intangibles 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 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.
(k) Earnings per share. 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 and warrants 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 split in
1996.
Options to purchase 15.3 million shares of common stock and preferred stock
warrants to purchase 22.5 million shares of common stock were outstanding at
December 31, 1998 but were not included in the computation of diluted earnings
per share because the Company had a net loss for 1998 and their inclusion would
have been antidilutive.
61
<PAGE> 62
(l) Stock option plans. 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 Accounting Principals Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and provide pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
subsequent 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 9).
(m) Marketing costs. Marketing and other costs associated with the
acquisition of plan member contracts are expensed as incurred.
(n) Use of estimates. The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
(o) Reclassifications. Certain reclassifications have been made to prior
years' financial statement amounts to conform to the 1998 presentation.
(p) Adoption of New Accounting Standards. The Company has adopted Statements
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and display of
comprehensive earnings (loss) and its components. The adoption of this statement
had no impact on the Company's net income or shareholder's equity. SFAS No. 130
requires unrealized gains or losses, net of taxes, on the Company's available
for sale securities which, prior to adoption, were reported separately in
shareholders' equity, to be included in other comprehensive earnings.
The changes in value of available for sale securities as reported in the
consolidated statements of shareholders' equity (deficit) and comprehensive
earnings (loss) include unrealized holding losses on available for sale
securities of $6.4 million, $22.4 million and $10.0 million, reduced by the tax
effects of $1.6 million, $7.5 million and $4.1 million in 1998, 1997 and 1996,
respectively, and reclassification adjustments of $10.7 million, $28.7 million
and $4.7 million, reduced by the tax effects of $3.7 million, $10.1 million and
$1.9 million in 1998, 1997 and 1996, respectively.
The Company has adopted the standards associated with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information". Management
evaluates its operating performance as a single segment. Therefore, the Company
has not included the additional disclosures required by SFAS No. 131. Adoption
of this accounting standard has no impact on the Company's financial position or
net income.
The Company has adopted the standards associated with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Company does
not invest in derivative instruments or use hedging activities. The adoption of
this accounting standard has no impact on the Company's financial position or
results of operations.
The Company is required to adopt Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use",
effective January 1, 1999. The Company's current practice in accounting for
costs of software developed or obtained for internal use is consistent with
those required by the statement.
62
<PAGE> 63
(3) INVESTMENTS
The following is a summary of marketable securities as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
Gross Gross
(In thousands) Amortized Unrealized Unrealized Fair
December 31, 1998: Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government obligations $585,028 $ 4,568 $1,673 $587,923
Corporate obligations 331,596 3,688 218 335,066
- -----------------------------------------------------------------------------------------------------------------------
Total debt securities 916,624 8,256 1,891 922,989
Equity securities 1 -- -- 1
- -----------------------------------------------------------------------------------------------------------------------
Total short-term investments $916,625 $ 8,256 $1,891 $922,990
=======================================================================================================================
Held-to-maturity - U.S. government obligations $ 44,798 $ 1,028 $ -- $ 45,826
=======================================================================================================================
December 31, 1997-all available-for-sale:
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
=======================================================================================================================
</TABLE>
The amortized cost and estimated fair value of marketable debt securities at
December 31, 1998, 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>
Available-for-Sale Held-to-Maturity
------------------------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 74,139 $ 74,448 $ 3,229 $ 3,242
Due after one year through five years 811,330 816,669 41,569 42,584
Due after five years through ten years 31,156 31,873
-- --
============================================================================================================================
Total $916,625 $922,990 $ 44,798 $ 45,826
============================================================================================================================
</TABLE>
Certain information related to marketable securities is as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sale or maturity of available-for-sale securities $993,488 $790,795 $345,081
Proceeds from sale or maturity of held-to-maturity securities 3,500 -- --
============================================================================================================================
Total proceeds from sale or maturity of marketable securities $996,988 $790,795 $345,081
============================================================================================================================
Gross realized gains on sale of available-for-sale securities $ 19,986 $ 36,615 $ 9,036
Gross realized losses on sale of available-for-sale securities (9,291) (7,879) (4,302)
============================================================================================================================
Net realized gains on sale of marketable securities $ 10,695 $ 28,736 $ 4,734
============================================================================================================================
Net unrealized gain (loss) on available-for-sale securities included
in comprehensive earnings (loss) $ (4,255) $ (6,336) $ 5,288
Deferred income tax expense (benefit) (2,126) (2,598) 2,168
============================================================================================================================
Other comprehensive earnings (loss) $ (2,129) $ (3,738) $ 3,120
============================================================================================================================
</TABLE>
63
<PAGE> 64
(4) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
(In thousands) Current Deferred Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998:
Federal -- $ (14,371) $ (14,371)
State and local -- (4,066) (4,066)
===========================================================================================================================
Total -- $ (18,437) $ (18,437)
===========================================================================================================================
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
===========================================================================================================================
</TABLE>
For the year ended December 31, 1998, cash refunds, net of cash taxes paid,
were $113.0 million. For the years ended December 31, 1997 and 1996, cash
payments for income taxes, net of refunds received, were $66.9 million and $51.9
million, respectively.
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>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory tax rate $(217,415) $(151,064) $ 60,217
Write-off of goodwill -- 9,895 --
State and local income taxes, net of
federal income tax benefit (44,073) 4,458 11,805
Nontaxable gain on sale of affiliate -- (4,104) --
Equity in net loss of affiliate -- 399 1,610
Tax-exempt interest on municipal bonds (1,060) (2,484) (1,630)
Change in valuation allowance - federal
242,632 -- --
Other, net 1,479 2,577 424
- ------------------------------------------------------------------------------------------------------------------------
Actual income tax expense (benefit) $ (18,437) $(140,323) $ 72,426
========================================================================================================================
</TABLE>
64
<PAGE> 65
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 256,024 $ 99,895
Medical costs payable 15,357 16,440
Allowance for doubtful accounts 18,804 11,799
Unearned premiums 9,088 10,509
Trade accounts payable and accrued expenses 20,298 8,361
Write-down of investment in affiliate 19,402 5,618
Property and equipment 6,750 3,404
Restructuring related 64,712 --
Other 9,730 5,368
- ----------------------------------------------------------------------------------------------------
Total gross deferred assets 420,165 161,394
Less valuation allowances (282,598) (36,896)
- ----------------------------------------------------------------------------------------------------
Total deferred tax assets 137,567 124,498
- ----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized appreciation of short-term investments 2,228 4,354
Gain on sale of affiliate -- 4,705
- ----------------------------------------------------------------------------------------------------
Total deferred tax liabilities 2,228 9,059
- ----------------------------------------------------------------------------------------------------
Net deferred tax assets $ 135,339 $ 115,439
====================================================================================================
</TABLE>
The Company has established a valuation allowance related to certain net
operating losses and the effect of the Company's net tax deductible temporary
differences. Based on the results of operations, management does not currently
believe that such tax benefits relating to losses incurred subsequent to the
first quarter of 1998 are more likely than not to be realized in the foreseeable
future. Accordingly, the Company has provided a full valuation allowance for tax
benefits generated subsequent to the first quarter of 1998. Based on
management's assessment of the progress to date in its turnaround plan, together
with projections of future performance, management currently believes that it is
more likely than not that deferred tax benefits recorded prior to April 1998
will be realized. However, the Company will continue to monitor its tax position
throughout the implementation of its turnaround plan to determine whether such
deferred tax benefits will require an additional valuation allowance or
adjustment. The amounts of future taxable income necessary during the
carryforward period to utilize the unreserved net deferred tax assets is
approximately $320 million.
As of December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $600 million, which will begin to expire in 2012
(5) PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation is as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 230 $ 2,313
Furniture and fixtures 31,747 32,298
Equipment 204,249 176,803
Leasehold improvements 37,146 61,605
- --------------------------------------------------------------------------------------------
Property and equipment, gross 273,372 273,019
Accumulated depreciation and amortization (160,431) (125,926)
- --------------------------------------------------------------------------------------------
Property and equipment, net $ 112,941 $ 147,093
============================================================================================
</TABLE>
Depreciation and amortization of property and equipment aggregated $63.7
million in 1998, $57.9 million in 1997 and $40.3 million in 1996.
65
<PAGE> 66
(6) DEBT
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
(In thousands) 1998
- --------------------------------------------------------------------------------
<S> <C>
11% Senior Notes due 2005 $200,000
Term Loan due 2003 150,000
- --------------------------------------------------------------------------------
Total long-term debt $350,000
================================================================================
</TABLE>
Simultaneously with the consummation of the agreement with TPG described in
note 7, the Company issued $200 million principal amount of 11% Senior Notes due
May 15, 2005 (the "Senior Notes"). The Senior Notes were issued in a private
placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), the
initial purchaser, who agreed to sell the Senior Notes only to "qualified
institutional buyers", as defined in Rule 144A under the Securities Act in
reliance upon the exemption from the registration requirements of the Securities
Act provided by Rule 144A, or outside the United States in accordance with
Regulation S under the Securities Act. DLJ received $6,000,000 in discounts and
commissions in connection with the initial purchase of the Senior Notes. The
Senior Notes are senior unsecured obligations of the Company and rank pari passu
in right of payment with all current and future senior indebtedness of the
Company. The Company's obligations under the Senior Notes are effectively
subordinated to all existing and future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness and are
structurally subordinated to all existing and future indebtedness, if any, of
the Company's subsidiaries. Interest is payable semiannually on May 15 and
November 15 of each year commencing November 15, 1998.
At any time on or before May 15, 2001, the Company may redeem for cash up to
33 1/3% of the original aggregate principal amount of the Senior Notes at a
redemption price of 111% of the principal amount thereof, in each case plus any
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of a public equity offering provided that at least 66 2/3% of the
original aggregate principal amount of the Senior Notes remains outstanding
immediately after the occurrence of such redemption. After May 15, 2002, the
Senior Notes will be subject to redemption for cash at the option of the
Company, in whole or in part, at redemption prices ranging from 105.5% of face
amount beginning May 15, 2002 to 100% on and after May 15, 2004.
The Senior Notes indenture provides that upon the occurrence of a change of
control (as defined), each holder of Senior Notes will have the right to require
the Company to repurchase all or any part of such holder's Senior Notes pursuant
to the offer described therein at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages, if any, thereon to the date of purchase. The indenture also
contains covenants for the benefit of the holders of Senior Notes that, among
other things, restrict the ability of the Company to pay any dividend or make
any payment or distribution or incur additional indebtedness.
At the same time, the Company entered into a Term Loan Agreement that
provided for a new $150 million senior secured term loan (the "Term Loan") with
a final maturity in 2003 at which time all outstanding amounts will be due and
payable. Prior to the final maturity of the Term Loan, there are no scheduled
principal payments. The Term Loan provides for mandatory prepayments in certain
circumstances and bears interest at a rate per annum equal to the administrative
agent's reserve adjusted LIBO rate plus 4.25%. As of December 31, 1998, the
interest rate on the Term Loan was 9.335%. Interest is payable semiannually on
May 15 and November 15 each year commencing November 15, 1998. The Term Loan is
secured by a perfected first priority security interest in substantially all of
the assets of the Company. The Term Loan contains covenants that, among other
things, restrict the ability of the Company to pay any dividend or make any
payment or distribution or incur additional indebtedness.
The costs incurred in connection with the issuance of the Senior Notes and
Term Loan, aggregating approximately $7.1 million and $4.7 million,
respectively, have been capitalized and are being amortized over periods of
seven years and five years, respectively.
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 February 6, 1998 as amended on March 30, 1998 (the
"Bridge
66
<PAGE> 67
Agreement"). The Bridge Notes bore interest at prime plus 2.5% per annum
during the first three months, and thereafter the spread over prime increased by
0.5% every three months; provided, however that the per annum interest rate
would not be less than 10.5%, nor more than 17%. The Company used the proceeds
of the Bridge Notes to make capital contributions to certain of its HMO
subsidiaries, to pay for expenses in connection with the issuance of the Bridge
Notes and for general corporate purposes. The Company capitalized the costs of
$9.9 million incurred in the issuance of the Bridge Notes, and these costs were
to be amortized over the life of the Bridge Notes. The capitalized debt issuance
costs were written off on May 13, 1998 due to extinguishment of the Bridge Notes
using funds obtained through the financings referred to above and in note 7.
The Company made cash payments for interest expense on indebtedness and
delayed claims aggregating approximately $38.7 million in 1998 and $5.3 million
in 1997.
No payments for interest expense were made in 1996.
(7) REDEEMABLE PREFERRED STOCK
Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC ("TPG", together
with the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350 million in redeemable Preferred Stock with Warrants to acquire up
to 22,530,000 shares of common stock. The Preferred Stock and Warrants were
issued without registration under the Securities Act in reliance on Section 4(2)
of the Securities Act, which provides an exemption for transactions not
involving any public offering. In determining that such exemption was available,
the Company relied on, among other things, the facts that the Preferred Stock
and Warrants were being issued through direct communication only to a limited
number of sophisticated investors having knowledge and access to information
regarding the Company and that the certificates evidencing such Preferred Stock
and Warrants bear a legend restricting transfer in non-registered transactions.
Dividends on the Preferred Stock may be paid in kind for the first two years.
The Warrants have an exercise price of $17.75, which represents a 5% premium
over the average trading price of Oxford shares for the 30 trading days ended
February 20, 1998. The exercise price will become 115% of the average trading
price of Oxford common stock for the 20 trading days following the filing of the
Company's annual report on Form 10-K for the year ended December 31, 1998, if
such adjustment would reduce the exercise price.
The Preferred Stock was originally issued as 245,000 shares of Series A and
105,000 shares of Series B. The Series A Preferred Stock carried a cash dividend
of 8% per annum, payable quarterly, provided that prior to May 13, 2000, the
Series A Preferred Stock accumulated dividends at a rate of 8.243216% per annum,
payable annually in cash or additional shares of Series A Preferred Stock, at
the option of the Company. The Series A Preferred Stock and was issued with
Series A Warrants to purchase 15,800,000 shares of common stock, or
approximately 19.9% of the then outstanding voting power of the Company's common
stock. The Series A Preferred Stock had approximately 16.6% of the combined
voting power of the Company's then outstanding common stock and the Series A
Preferred Stock. The Series B Preferred Stock, which was originally issued with
Series B Warrants to purchase nonvoting junior participating preferred stock,
was nonvoting and carried a cash dividend of 9% per annum, payable quarterly,
provided that prior to May 13, 2000, the Series B Preferred Stock accumulated
dividends at a rate of 9.308332% per annum, payable annually in cash or
additional shares of Series B Preferred Stock, at the option of the Company. The
terms of the agreement prohibit the Company from paying cash dividends on its
common stock. The Preferred Stock was not redeemable by the Company prior to May
13, 2003. Thereafter, subject to certain conditions, the Series A and B
Preferred Stock were each redeemable at the option of the Company at a
redemption price of $1,000 per share (in each case, plus accrued and unpaid
dividends), and were subject to mandatory redemption at the same price on May
13, 2008. The Series A and Series B Warrants expire on the earlier of May 13,
2008 or redemption of the related series of Preferred Stock. The Warrants are
detachable from the Preferred Stock. The carrying value of the Preferred Stock
has been reduced in the financial statements by the value of the Warrants,
estimated to be approximately $67 million at the date of issuance. This amount
has been added to additional paid-in capital and is being amortized using the
interest method over five years. The costs incurred in connection with the
issuance of the Preferred Stock aggregated approximately $11.9 million and have
been charged against the Preferred Stock in the accompanying balance sheet. Such
costs will be amortized over a period of five years. With respect to dividend
rights, the Series A and Series B Preferred Stock rank on a parity with each
other and prior to the Company's common stock. On August 28, 1998, the Company
held its annual shareholders meeting at which its shareholders approved the
vesting of voting rights in respect of the Series B Preferred Stock and the
issuance, subject to adjustment, of up to 6,730,000 shares of common stock upon
67
<PAGE> 68
exercise of the Series B Warrants. This approval resulted in the reduction of
the dividend on the Series B Preferred Stock to 8% (8.243216% prior to May 13,
2000) and an increase in the voting rights of TPG to approximately 22.1% of the
combined voting power of the Company's then outstanding common stock and Series
A and Series B Preferred Stock.
Activity for redeemable preferred stock for the year 1998 is as follows:
<TABLE>
<CAPTION>
(In thousands) Activity
- -------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1997 $ --
Issuance of preferred stock, net of 338,148
issuance expenses
Discount allocated to detachable warrants (67,000)
Amortization of discount 7,555
Amortization of issuance expenses 1,565
Accrued in-kind dividends 18,548
- -------------------------------------------------------------------------------
Balance at December 31, 1998 $ 298,816
================================================================================
</TABLE>
On February 13, 1999, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with TPG, its affiliates and others to make an
adjustment of the dividends payable among the shares of Series A Preferred Stock
and Series B Preferred Stock in connection with the possible sale of shares of
Preferred Stock by the holders thereof to institutional holders. Pursuant to the
Exchange Agreement, the 245,000 shares of Series A Preferred Stock were
exchanged for 260,146.909 shares of a new Series D Preferred Stock (the "Series
D Preferred Stock"), and the 105,000 shares of Series B Preferred Stock were
exchanged for 111,820.831 shares of a new Series E Preferred Stock (the "Series
E Preferred Stock"). In the exchange, (1) a holder received in exchange for each
share of Series A Preferred Stock, one share of Series D Preferred Stock, plus
0.061824118367 share of Series D Preferred Stock representing dividends on the
Series A Preferred Stock accrued and unpaid through February 13, 1999, and (2) a
holder received in exchange for each share of Series B Preferred Stock, one
share of Series E Preferred Stock, plus 0.064960295238 share of Series E
Preferred Stock representing dividends on the Series B Preferred Stock accrued
and unpaid through February 13, 1999. As a result of the exchange, the holders
hold only Series D preferred Stock and Series E Preferred Stock. On March 9,
1999, the Company filed Certificates of Elimination for the Series A Preferred
Stock and the Series B Preferred Stock that have the effect of eliminating from
the Certificate of Incorporation all matters set forth in the Certificates of
Designations with respect to the Series A Preferred Stock and the Series B
Preferred Stock. The terms of the shares of the Series D Preferred Stock are
identical to the terms of the Series A Preferred Stock, except that the Series D
Preferred Stock accumulates cash dividends at the rate of 5.12981% per annum,
payable quarterly, provided that prior to May 13, 2000, the Series D Preferred
Stock accumulates dividends at a rate of 5.319521% per annum, payable annually
in cash or additional shares of Series D Preferred Stock, at the option of the
Company. The terms of the shares of the Series E Preferred Stock are identical
to the terms of the shares of the Series B Preferred Stock except that the
Series E Preferred Stock accumulates cash dividends at a rate of 14% per annum,
payable quarterly, provided that prior to May 13,2000, the Series E Preferred
Stock accumulates dividends at a rate of 14.589214% per annum, payable annually
in cash or additional shares of Series E Preferred Stock, at the option of the
Company. In addition, prior to May 13, 2001, the holders of the Series D
Preferred Stock may only use to pay the exercise price of the Warrants a
percentage of the total amount of Series D Preferred Stock issued on February
13, 1999 that does not exceed the percentage of the total number of shares of
Series E Preferred Stock issued on February 13, 1999 that have been redeemed,
repurchased or retired by the Company, or used as consideration for the Warrants
by the holders. With respect to dividend rights, the Series D and Series E
Preferred Stock rank on a parity with each other and prior to the Company's
common stock.
The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock.
Simultaneously with closing of the Investment Agreement, Norman C. Payson,
M.D., the Company's Chief Executive Officer, purchased 644,330 shares of Oxford
common stock at an aggregate purchase price of
68
<PAGE> 69
$10 million pursuant to his employment agreement. The common stock issued to Dr.
Payson was issued without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, which provides an exemption for transactions
not involving any public offering.
The aggregate proceeds of $710 million related to the Senior Notes, Term
Loan, common stock sale to Dr. Payson and the Investment Agreement were
utilized, in part, to retire the previously outstanding Bridge Notes, make
capital contributions to certain regulated subsidiaries and pay fees and
expenses million related to the transactions. The balance has been and will be
used for subsidiary capital contributions, as necessary, and for general
corporate purposes.
(8) COMMON 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.
All appropriate share, weighted average share and earnings per share amounts
in the consolidated financial statements were restated to retroactively reflect
the stock splits.
(9) 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 five 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 terms,
but not more than seven years from the date of grant. The Employee Plan is
administered by a committee consisting of five 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.
69
<PAGE> 70
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, 1996 11,549,436 $11.65
Granted 1,518,176 42.58
Exercised (3,368,208) 6.30
Cancelled (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
Cancelled (319,012) 37.35
- -------------------------------------------------------------
Outstanding at December 31, 1997 10,206,829 37.06
Granted 11,810,173 12.95
Exercised (397,103) 6.67
Cancelled/exchanged (6,319,168) 46.41
- -------------------------------------------------------------
Outstanding at December 31, 1998 15,300,731 $15.40
======================================================================================
Exercisable at December 31, 1998 4,378,029 $16.80
======================================================================================
</TABLE>
As of December 31, 1998, there were 19,052,625 shares of common stock
reserved for issuance under the plans, including 3,751,894 shares reserved for
future grant. In addition, there were 22,530,000 shares of common stock reserved
for issuance in connection with the warrants issued to TPG (see note 7).
With the exception of the options described in the next paragraph, the
Company, as of October 1, 1998, offered certain option holders the right to
exchange unexercised options granted subsequent to January 10, 1995 and prior to
December 2, 1997 for options equal to one-half the number of unexercised shares
exchanged. Exercise prices of options granted during that period ranged from
$21.22 per share to $85.812 per share. The options received in exchange were
granted at the then current market value of $9.875 per share and vest over a
period of three years. A total of 1,234,464 original option shares were
exchanged. The Directors, the Chairman, the President, the Chief Executive
Officer and certain Executive Vice Presidents were not permitted to participate
in this exchange.
On August 8, 1997, the Company granted a total of 3,162,436 options under
the Employee Plan and the Independent Contractor 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 of 1997, 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, the 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 per share.
Under the terms of an employment agreement, Norman C. Payson, M.D., the Chief
Executive Officer of the Company, was granted on February 23, 1998 a
nonqualified stock option (the "Option") to purchase 2,000,000 shares of common
stock at an exercise price of $15.52 per share and, in August 1998, a
nonqualified stock option (the "Additional Option") was granted to purchase an
additional 1,000,000 shares of Company common stock under the 1991 Stock Option
Plan. The Option generally provides that 800,000 shares will vest on February
23, 1999, and that the remaining 1,200,000 shares will vest ratably on a monthly
basis over the 36 month period ending February 23, 2002, provided in each case
that Dr. Payson is employed by the Company on the applicable vesting date. The
Option also provides for acceleration of vesting and extended exercisability
periods in certain circumstances, including certain terminations of employment
and a change in control (as defined in the Employee Plan) of the Company. The
Additional Option has an exercise price equal to $6.0625, vests ratably over the
four years from the date of grant, and is otherwise subject to the terms and
conditions of the Employee Plan. The Additional Option also provides for
accelerated vesting following a change in control (as
70
<PAGE> 71
defined in the Employee Plan). On March 30, 1998, another executive officer of
the Company received a nonqualified option to acquire 800,000 shares of the
Company's common stock at the then current market price.
Information about fixed stock options outstanding at December 31, 1998, 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 - $ 10.31 5,562,771 $ 6.56 3.4 Years
11.25 - 16.36 5,535,159 15.57 6.0 Years
16.44 - 19.63 2,516,392 17.12 4.1 Years
19.75 - 74.00 1,686,409 41.96 2.6 Years
==========
$ 0.32 - $ 74.00 15,300,731 $ 15.40 4.4 Years
======= ======= ========== =======
</TABLE>
Information about fixed stock options exercisable at December 31, 1998, is
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Range of Number Average
Exercise Prices Outstanding Exercise Price
------------------------ --------------- --------------------
<S> <C> <C> <C>
$ 0.32 - $ 10.31 1,592,032 $ 6.19
11.25 - 16.36 1,675,159 16.16
16.44 - 19.63 121,900 17.73
19.75 - 74.00 988,938 34.86
=========
$ 0.32 - $ 74.00 4,378,029 $ 16.80
====== ======= ========= ========
</TABLE>
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 (loss) and earnings (loss) per share for the years ended December 31,
1998, 1997 and 1996, would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) attributable As reported $ (624,460) $ (291,288) $ 99,623
To common shares Pro forma $ (711,311) $ (315,188) $ 90,011
Basic earnings (loss) per share As reported $ (7.79) $ (3.70) $ 1.34
Pro forma $ (8.88) $ (4.01) $ 1.21
Diluted earnings (loss) per share As reported $ (7.79) $ (3.70) $ 1.25
Pro forma $ (8.88) $ (4.01) $ 1.13
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $9.00, $40.03 and $19.58, 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 72.94% in 1998, 69.56% in 1997 and 48.99% in 1996,
risk-free interest rates of 5.33% in 1998, 6.15% in 1997 and 6.5% in 1996; and
expected lives of four years for all years.
Pro forma net income reflects only options granted since 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 for 1997 and 1996
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.
71
<PAGE> 72
(10) LEASES
Oxford leases office space and equipment under capital and operating leases.
Rent expense under operating leases for the years ended December 31, 1998, 1997
and 1996 was approximately $31.0 million, $22.6 million and $18.5 million,
respectively. The Company's lease terms range from one to eleven years with
certain options to renew. Certain lease agreements provide for escalation of
payments which are based on fluctuations in certain published cost-of-living
indices.
Property held under capital leases at December 31, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
(In thousands) 1998
- --------------------------------------------------------------------------------
<S> <C>
Computer equipment $ 39,792
Other equipment 459
- --------------------------------------------------------------------------------
Gross 40,251
Less accumulated amortization (7,940)
- --------------------------------------------------------------------------------
Net capital lease assets $ 32,311
================================================================================
</TABLE>
Future minimum lease payments required under capital and operating leases
that have initial or remaining noncancelable lease terms in excess of one year
at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
- -------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 17,837 $ 26,471
2000 13,576 24,409
2001 6,704 16,027
2002 -- 12,848
Thereafter -- 23,848
- ------------------------------------------------------------------------------------
Total minimum future rental payments 38,117 $103,603
========
Less amount representing interest (3,329)
- --------------------------------------------------------------------
Present value of minimum lease payments 34,788
Less current maturities (15,938)
====================================================================
Obligations under capital leases $ 18,850
====================================================================
</TABLE>
The above amounts for operating leases are net of future minimum subrentals
aggregating approximately $7.0 million.
(11) 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 $8.2 million in cash. The acquisition was recorded as a purchase
and goodwill of approximately $24.1 million resulted. Subsequent to the
acquisition, the Company decided to reduce the level of its future investment in
expansion markets and, therefore, determined the carrying amount of its
investment was not recoverable. Accordingly, the Company, as of December 31,
1997, wrote off the remaining unamortized goodwill of $23.4 million.
On November 3, 1997, the Company acquired all of the outstanding stock of
Riscorp Health Plans, Inc., a Florida-based HMO, for approximately $5.3 million
in cash. The acquisition was recorded as a purchase and resulted in goodwill of
approximately $3.9 million. During 1998, the Company made an additional
contingent payment of $1.3 million. 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 was not
recoverable. Accordingly, the Company, wrote off the goodwill of $3.9 million in
1997 and the contingent payment of $1.3 million in 1998.
These acquisitions were accounted for by the purchase method and have been
included from the date of acquisition. The pro forma effects of the acquisitions
on the consolidated results of operations for the years
72
<PAGE> 73
ended December 31, 1997 and 1996, assuming these acquisitions had occurred as of
January 1, 1996, are not material and have not been presented.
(12) 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. Under this method, the Company recognized
losses of $1.1 million in 1997 and $4.6 million in 1996. 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 $76.4 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 believed that the decline was
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 in 1997 a pretax gain of approximately $25.2 million ($20.5 million
after taxes, or $.26 per share) on the sale of Health Partners. During 1998, the
Company wrote down to nominal value its remaining investment in FPAM (see note
14). The Company contracts with provider groups managed by Health Partners in
the Company's service areas.
Oxford provided $14.3 million in equity and debt financing, representing a 19.9%
interest, to St. Augustine Health Care, Inc. ("St. Augustine"). As of December
31, 1997, the Company decided to reduce the level of its future investment in
expansion markets and, therefore, wrote off the $14.3 million carrying value of
its investment in the capital stock and subordinated surplus notes of St.
Augustine. The Company fully disposed of its interest in St. Augustine in
October 1998.
(13) RESTRUCTURING CHARGES
The Company recorded restructuring charges totaling $174.5 million, ($165.8
million after income taxes, or $2.08 per share) in the first half of 1998. These
charges resulted from the Company's actions to better align its organization and
cost structure as part of the Company's Turnaround Plan. These charges included
estimated costs related to: (i) the disposition or closure of non-core
businesses; (ii) expected losses on government contracts; (iii) write-down of
certain property and equipment; (iv) severance and related costs; and (v) costs
of operations consolidation, including long term lease commitments. These
reserves are generally classified in the Company's balance sheet as accounts
payable and accrued expenses with the exception of property and equipment
reserves, which have been classified against fixed assets. These reserve charges
and their activity for 1998 are summarized in the table below:
<TABLE>
<CAPTION>
Ending
Restructuring Noncash Changes in Restructuring
(In thousands) Charges Cash Used Activity Estimate Reserves
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provisions for loss on noncore businesses $ 55,700 $ (9,827) $ (18,725) $ (13,343) $ 13,805
Provisions for loss on government contracts 51,000 (31,800) - (19,200) -
Write-down of property and equipment 29,272 -- (6,308) (1,005) 21,959
Severance and related costs 24,800 (4,246) (11,200) - 9,354
Costs of consolidating operations 13,728 (548) - 4,505 17,685
==================================================================================
$ 174,500 $ (46,421) $ (36,233) $ (29,043) $ 62,803
==================================================================================
</TABLE>
The changes in estimate totaling $29.0 million were recognized as a credit to
restructuring charges in the fourth quarter of 1998 and reduced the net loss by
$.36 per share.
Provisions for loss on noncore business
As part of its Turnaround Plan, the Company decided to withdraw from noncore
markets in Pennsylvania, Illinois, Florida and New Hampshire by selling or
closing its health plans in these markets. Total premium revenue for these
businesses in 1998 was approximately $170.4 million with operating losses
totaling
73
<PAGE> 74
approximately $37.0 million. In addition, the Company decided to close
its specialty management initiatives and to sell or close certain other health
care services operations and investments in noncore businesses. Restructuring
reserves were established relating to estimated losses associated with premium
deficiencies in the HMO subsidiaries to be sold or closed, the net book value of
noncore investments were reduced to their estimated recoverable value, and
accruals were recorded for incremental disposition and closing costs associated
with the Turnaround Plan. During the second half of 1998, the Company entered
into an agreement to sell its Pennsylvania subsidiary to a third party for $7.1
million in cash plus a capital surplus note for $2.5 million and transferred its
membership in Illinois to a third party. Operations in Florida and New Hampshire
are expected to be closed by the middle of 1999 pursuant to plans adopted during
the year. Based on favorable progress to date, the Company has revised its
estimate of the remaining costs associated with the final disposition or closure
of these operations, and accordingly a total of $13.3 million of reserves were
reversed as a reduction of restructuring charges in the fourth quarter of 1998.
The Company expects to complete the closure or disposal of these noncore
businesses in 1999.
Provisions for loss on government contracts
As part of its Turnaround Plan, the Company decided to restructure its
current Medicare arrangements and/or withdraw from Medicare in certain counties
and to withdraw from Medicaid business entirely. Premium deficiency reserves
totaling $51.0 million were established in the second quarter of 1998. This
amount represented an estimate of the deficiency for the remainder of 1998
pending implementation of the plan to restructure or withdraw from these
businesses.
The Company entered into an agreement to dispose of its remaining Medicaid
business in the fourth quarter, completed two Medicare risk transfer agreements
late in the third quarter and notified HCFA in the fourth quarter of its
intention to withdraw from Medicare in certain counties effective January 1,
1999. Amortization of the reserves against losses in these programs amounted to
$31.8 million in the second half of 1998. As a result, of the Company's early
completion of this portion of its Turnaround Plan the remaining reserve balance
of $19.2 million was reversed as a reduction of restructuring charges in the
fourth quarter of 1998.
Write-down of property and equipment
In connection with the Company's attempts to reduce administrative costs
under the Turnaround Plan, the Company decided to consolidate operations and
reduce its occupied square footage from approximately 2,000,000 square feet
under lease to approximately 1,200,000 square feet. Additionally, the Company
anticipated and experienced a reduction in workforce of over 1,000 employees as
a result of this consolidation and its administrative expense reduction plan. A
reserve of approximately $29.3 million, against approximately $37.1 million of
net book value, was established for the estimated unrecoverable book value of
furniture and equipment and leasehold improvements no longer in use as a result
of these steps. The effect of this write-down was to reduce depreciation expense
by approximately $6.3 million for the second half of 1998.
Severance and related costs
The Company's Turnaround Plan contemplated significant changes in the
Company's senior management and, in connection therewith, certain members of the
former management team were granted severance arrangements. As a result, the
Company recorded restructuring charges related to severance costs of $20.8
million in the first quarter of 1998 and an additional $4.0 million in the
second quarter of 1998 for fifteen former executives and managers. The December
31, 1998 balance represents contracted amounts payable through the first half of
2001.
Costs of consolidating operations
In connection with the consolidating of operations to reduce its occupied
square footage, restructuring charges totaling approximately $13.7 million were
recorded in the first half of 1998 for estimated costs associated with future
rental obligations (net of estimated sublease revenues), commissions, legal
costs, penalties and other expenses relating to disposition of excess space. The
Company recorded an additional restructuring charge of approximately $4.5
million in the fourth quarter as a change in estimate as the Company's
experience in negotiating subleases and lease cancellations through the fourth
quarter indicates that costs will exceed previous estimates. The Company's
relevant lease obligations extend to July 2005, but the Company expects that a
74
<PAGE> 75
significant portion of the expense will be incurred prior to January 1, 2000,
including termination fees aggregating approximately $2.4 million.
(14) UNUSUAL CHARGES
The Company disposed of its 47% interest in Health Partners, Inc. ("Health
Partners") in October 1997, and received 2,090,109 shares of common stock of FPA
Medical Management, Inc. ("FPAM") stock with a market value of approximately
$76.4. million, resulting in a pretax gain of approximately $63.1 million. As of
December 31, 1997, the market value of the FPAM stock had dropped to
approximately $38.4 million. At year-end 1997, the Company wrote down its
investment in FPAM by $38.0 million, thereby reducing the pretax 1997 gain on
the sale of Health Partners to approximately $25.2 million ($20.5 million after
taxes, or $.26 per share).
During the second quarter of 1998, the Company sold 540,000 shares of FPAM
and recognized a loss of $8.1 million. In July 1998, FPAM filed for protection
under Chapter 11 of the U.S. Bankruptcy Code and the market value per share of
its common stock fell below one dollar. The Company wrote its remaining
investment in FPAM down to nominal value and recognized a loss in the second
quarter of 1998 of $30.2 million. The total 1998 recognized loss and write-down
of $38.3 million, or $.49 per share, has been recognized as an unusual charge in
the accompanying financial statements.
The 1997 charges, as described in note 11, resulted from a reduction in the
level of future investment in expansion markets and, accordingly, the Company
wrote down its investments in two subsidiaries (see note 11) and one affiliate
(see note 12). These write-downs have been shown as unusual charges in the
accompanying financial statements and are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<S> <C>
Compass PPA, Incorporated $23,427
Riscorp Health Plans, Inc. 3,894
St. Augustine Health Care, Inc. 14,297
================================================================================
Total $41,618
================================================================================
</TABLE>
(15) DEFINED CONTRIBUTION PLAN
The Company has a qualified defined contribution plan ("the Savings Plan")
that 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 $2.8 million in 1998, $3.2 million in 1997 and $1.8 million in
1996.
(16) REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS
Certain restricted investments at December 31, 1998 and 1997 are held on
deposit with various financial institutions to comply with federal and state
regulatory requirements. As of December 31, 1998, approximately $44.8 million
was so restricted and is shown as restricted investments in the accompanying
balance sheet. 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 $130 million and $155.6 million at December 31, 1998
and 1997, respectively, and are included in short-term investments.
In addition to the foregoing requirements, the Company's HMO and insurance
subsidiaries 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 these entities to pay
obligations of Oxford and limit the Company's ability to declare and pay
dividends.
During 1998, the Company made cash contributions to its HMO and insurance
subsidiaries of approximately $537.5 million. The capital
contributions were made to ensure that each subsidiary had sufficient surplus as
of December 31, 1998 under applicable regulations after giving effect to
operating losses and reductions to surplus resulting from the nonadmissibility
of certain assets.
The Company is subject to ongoing examinations with respect to financial
condition and market conduct for its HMO and insurance subsidiaries. In
connection with these financial examinations, the NYSID is requiring the Company
to obtain written acknowledgements of certain advances made in prior years in
respect to delayed claims, and the New Jersey Department of Banking and
Insurance is requiring the Company to provide collateral for repayment of the
advances by setting aside in trust at the parent company funds equal to the
advances on the New Jersey subsidiary's financial statements. If the Company is
unable to receive written acknowledgements or fails to provide such collateral
there can be no assurance that the insurance regulators will continue to
recognize such advances as admissible assets for regulatory purposes.
75
<PAGE> 76
(17) 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, 1998 and 1997, 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 the United States
government, certain state governmental entities and high-grade corporate bonds
and notes. These 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.
(18) CONTINGENCIES
Following the October 27, 1997 decline in the price per share of the
Company's common stock, more than fifty purported securities class action
lawsuits were filed against the Company and certain of its officers and
directors in the United States District Courts for the Southern and Eastern
Districts of New York, the District of Connecticut and the District of Arkansas.
In addition, purported shareholder derivative actions were filed against the
Company, its directors and certain of its officers in the United States District
Courts for the Southern District of New York and the District of Connecticut,
and Connecticut Superior Court. The purported securities class and derivative
actions assert claims arising out of the October 27 decline in the price per
share of the Company's common stock. The purported class actions are now all
consolidated before Judge Charles L. Brieant of the United States District Court
for the Southern District of New York. The purported federal derivative actions
have been consolidated before Judge Brieant for all purposes, and any discovery
in the Connecticut derivative actions will be coordinated with discovery in the
federal derivative actions under the supervision of Judge Brieant. The State
Board of Administration of Florida has filed an individual action against the
Company and certain of its officers and directors, which is also now pending in
the United States District Court for the Southern District of New York,
asserting claims arising from the October 27 decline in the price per share of
the Company's common stock. Additional purported securities class, shareholder
derivative, and individual actions may be filed against the Company and certain
of its officers and directors asserting claims arising from the October 27
decline in the price per share of the Company's common stock. 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, including the Securities and Exchange
Commission, various state insurance departments, and the New York State Attorney
General. The outcome of these investigations and examinations cannot be
predicted at this time.
The Company is also involved in other legal actions in the normal course of
its business, some of which seek monetary damages, including claims for punitive
damages, which may not be covered by insurance. The Company believes any
ultimate liability associated with these other legal actions would not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and cash equivalents: The carrying amount approximates fair value based
on the short-term maturities of these instruments.
Short-term and restricted investments: Fair values for fixed maturity
securities are based on quoted market prices, where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained form independent pricing services.
Long-term debt: The carrying amount of long-term debt, including the current
portion, approximates fair value as the interest rates of outstanding debt are
similar to like borrowing arrangements at December 31, 1998.
Preferred stock: The carrying amount of preferred stock approximates fair
value as the stated dividend rates are similar to like investments at December
31, 1998 after the impact of discounting for the value attributed to the
detachable warrants.
76
<PAGE> 77
(20) GOVERNMENT PROGRAMS
As a risk contractor for Medicare programs, the Company is subject to
regulations covering operating procedures. During 1998, 1997, and 1996, the
Company had premiums earned of $1.26 billion, $1.24 billion and $850.7 million,
respectively, associated with Medicare and Medicaid.
The Company has executed agreements with third-parties to transfer a
substantial portion of the risk of providing health care and administrative
services to certain of the participants in its Medicare programs. However, the
Company remains primarily liable to pay the cost of covered services provided to
its Medicare members.
The laws and regulations governing risk contractors are complex and subject
to interpretation. The Health Care Financing Administration ("HCFA") monitors
the Company's operations to ensure compliance with the applicable laws and
regulations. There can be no assurance that administrative or systems issues or
the Company's current or future provider arrangements will not result in
adverse action by HCFA.
(21) YEAR 2000 READINESS
The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and is
continuing to carry out the implementation plan to resolve the Year 2000 date
issue which it developed as a result of the assessment. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations. The
Company is utilizing and will utilize both internal and external resources to
identify, correct or reprogram, and test the systems for Year 2000 compliance.
The Company has divided its Year 2000 compliance program into the following
phases: assessment, planning, remediation and testing. As of December 31, 1998,
the Company was 80% complete with its Year 2000 compliance program and
anticipates being complete with all phases of the program by the second quarter
of 1999. The Company's Year 2000 compliance program requires remediation of
certain programs within particular time frames in order to avoid disruption of
the Company's operations. These time frames include certain dates throughout
1999. Although the Company believes it will complete the remediation of these
programs within the applicable time frames, there can be no assurance that such
remediation will be completed or that the Company's operations will not be
disrupted to some degree.
The Company is communicating with certain material vendors to determine the
extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting project plans, status reports and Year 2000
compliance certifications or written assurances from its material vendors,
including certain software vendors, business partners, landlords and suppliers.
The effect of such vendors' noncompliance, if any, is not reasonably estimable
at this time.
The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities which regulate its business.
The Company is in compliance with such Year 2000 reporting requirements. Such
regulatory authorities have also asked the Company to submit to certain audits
regarding its Year 2000 compliance.
The Company is in the process of completing the modifications of its computer
systems to accommodate the Year 2000 and will undertake testing to ensure its
systems and applications will function properly after December 31, 1999. The
Company currently expects this modification and testing to be completed in a
time frame to avoid any material adverse effect on operations. The Company has
deferred certain other information technology initiatives to concentrate on its
Year 2000 compliance efforts but the Company believes that such deferral is not
reasonably likely to have a material effect on the Company's financial condition
or results of operations. The Company's inability to complete Year 2000
modifications on a timely basis or the inability of other companies with which
the Company does business to complete their Year 2000 modifications on a timely
basis could adversely affect the Company's operations.
The Company expects to incur associated expenses of approximately $5 million
in 1999 to complete this effort. As of December 31, 1998, the Company had
incurred approximately $9.8 million of expenses in connection with its Year 2000
compliance efforts. The costs of the project and the date on which the Company
plans to complete the necessary Year 2000 modifications are based on
management's best estimate, which include assumptions of future events including
the continued availability of certain resources. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans.
77
<PAGE> 78
The Company has contracted with an external consulting firm to assist in the
generation of a Year 2000 contingency plan in the event compliance is not
achieved. In connection therewith, the Company has begun to identify reasonably
likely scenarios which could arise in the event of the Company's Year 2000
noncompliance. The Company has completed a contingency strategy and will develop
detailed plans to support this strategy. The Company expects to be substantially
complete with these detailed plans by the second quarter of 1999. However, there
can be no assurance that this contingency plan will be completed on a timely
basis or that such a plan will protect the Company from experiencing a material
adverse effect on its financial condition or results of operations.
Potential consequences of the Company's failure to timely resolve its Year
2000 issues could include, among others: (i) the inability to accurately and
timely process claims, enroll and bill groups and members, pay providers, record
and disclose accurate data and perform other core functions; (ii) increased
scrutiny by regulators and breach of contractual obligations; and (iii)
litigation in connection therewith.
78
<PAGE> 79
(22) QUARTERLY INFORMATION (UNAUDITED)
Tabulated below are certain data for each quarter of 1998 and 1997.
<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except membership -----------------------------------------------------------------------------
and per share amounts) Mar. 31 Jun. 30 Sep. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Net operating revenues $ 1,218,087 $ 1,160,263 $ 1,147,134 $ 1,104,682
Operating expenses 1,292,470 1,677,980 1,188,848 1,124,209
Net loss (507,620) (35,922) (7,948) (45,302)
Net loss attributable to common shares (513,338) (46,989) (18,831) (45,302)
Per common and common equivalent share:
Basic $ (0.57) $ (6.41) $ (0.58) $ (0.23)
Diluted $ (0.57) $ (6.41) $ (0.58) $ (0.23)
Membership at quarter-end 2,095,700 2,004,700 1,924,900 1,881,400
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) 37,175 (78,157) (284,685) 34,379
Per common and common equivalent share:
Basic $ 0.44 $ 0.48 $ (0.99) $ (3.58)
Diluted $ 0.42 $ 0.45 $ (0.99) $ (3.58)
Membership at quarter-end 1,738,800 1,833,500 1,942,600 2,008,100
</TABLE>
Net operating revenues include premiums earned and third-party administration
fees, net. Operating expenses include health care services and marketing,
general administrative expenses, and restructuring and unusual charges and
credits.
Restructuring charges related to severance and operations consolidation costs
increased operating expenses by $25.0 million in the first quarter of 1998.
Results of operations for the second quarter of 1998 reflects restructuring
charges of $149.5 million. These charges include a $55.7 million provision for
loss on disposal of noncore businesses and unconsolidated affiliates; a $51.0
million provision for loss on government contracts; a $29.3 million write-down
of property and equipment, primarily leasehold improvements; and a $13.7 million
provision for operations consolidation costs (see note 13). Results for the
second quarter of 1998 also reflect an unusual charge of $38.3 million related
to the write-down of the Company's investment in FPA Medical Management, Inc.
(see note 14).
The second quarter 1998 amount shown for operating expenses differs from that
included in the Company's Form 10-Q for the period ended June 30, 1998 due to
the reclassification to operating expense of $92.3 million of which $73.4
million was originally included in unusual charges and $24.8 million was
included in restructuring charges.
Results of operations for the fourth quarter of 1998 includes a net
restructuring credit of $29.0 million which represents a change in estimate of
the restructuring charges incurred in the second quarter of 1998 (see note 13).
Unusual charges related to write-downs of subsidiaries and unconsolidated
affiliates increased operating expenses by $41.6 million in the fourth quarter
of 1997 (see note 14).
79
<PAGE> 80
Independent Auditors Report On Schedules
We have audited the consolidated financial statements of Oxford Health Plans,
Inc. and subsidiaries as of December 31, 1998, and for the year then ended, and
have issued our report thereon dated March 9, 1999. Our audit also included the
financial statement schedules listed in Item 14(a) of this Annual Report on Form
10-K. These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
Stamford, Connecticut
March 9, 1999
80
<PAGE> 81
Independent Auditors' Report
The Board of Directors and Shareholders
Oxford Health Plans, Inc.:
Under date of February 23, 1998, we reported on the consolidated balance
sheet of Oxford Health Plans, Inc. and subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, shareholders' equity
(deficit) and comprehensive earnings (loss) and cash flows for each of the years
in the two-year period ended December 31, 1997, which are included in the annual
report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules in the annual report on Form 10-K. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Stamford, Connecticut
February 23, 1998
81
<PAGE> 82
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 225,248 $ 1,657
Investments - available-for-sale 4,575 38,442
Receivables, net 4,309 3,844
Refundable income taxes -- 120,439
Deferred income taxes -- 38,092
Other current assets 5,000 5,409
- -------------------------------------------------------------------------------------------------------
Total current assets 239,132 207,883
Property and equipment, net 103,105 131,606
Investments in and advances to subsidiaries, net 301,657 51,089
Deferred income taxes 40,681 86,406
Other assets 13,496 21,853
- -------------------------------------------------------------------------------------------------------
Total assets $ 698,071 $ 498,837
=======================================================================================================
Current liabilities:
Accounts payable, accrued expenses and medical claims payable $ 195,568 $ 140,562
Current portion of capital lease obligations 15,938 --
Deferred income taxes 4 9,059
- -------------------------------------------------------------------------------------------------------
Total current liabilities 211,510 149,621
- -------------------------------------------------------------------------------------------------------
Long-term debt 350,000 --
Obligations under capital leases 18,850 --
Redeemable preferred stock 298,816 --
Shareholders' equity (deficit):
Common stock 805 795
Additional paid-in capital 506,243 437,653
Retained earnings (deficit) (692,290) (95,498)
Accumulated other comprehensive earnings 4,137 6,266
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (181,105) 349,216
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 698,071 $ 498,837
=======================================================================================================
</TABLE>
82
<PAGE> 83
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues-management fees and investment and
other income, net $ 696,119 $ 697,426 $ 494,500
- ----------------------------------------------------------------------------------------------------------
Expenses:
Health care services 2,827 --
Marketing, general and administrative 713,021 702,136 474,215
Interest and other financing charges 43,038 -- --
Restructuring charges 145,457 -- --
Unusual charges -- 41,618 --
- ----------------------------------------------------------------------------------------------------------
Total expenses 904,343 743,754 474,215
- ----------------------------------------------------------------------------------------------------------
Operating earnings (loss) (208,224) (46,328) 20,285
Equity in net earnings (losses) of subsidiaries (401,160) (265,439) 91,214
Equity in net loss of affiliate -- (1,140) (4,600)
Gain on sale of affiliate -- 25,168 --
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (609,384) (287,739) 106,899
Income tax expense (benefit) (12,592) 3,549 7,276
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $(596,792) $(291,288) $ 99,623
==========================================================================================================
</TABLE>
During 1998, the Registrant received a cash dividend from one consolidated
subsidiary aggregating $9.6 million.
83
<PAGE> 84
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net cash provided (used) by operating activities $ 88,212 $ (92,956) $ 99,321
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (34,895) (89,846) (45,820)
Sale or maturity of available-for-sale securities -- 275,872 78,923
Purchase of available-for-sale investments (4,563) (143,873) (127,442)
Acquisitions and other investments (1,312) (33,876) (10,295)
Other, net 20,675 (2,437) (3,078)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (20,095) 5,840 (107,712)
- -------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from issuance of common stock 10,000 -- 220,539
Proceeds from exercise of stock options 2,655 21,264 21,215
Proceeds of preferred stock, net of issuance expenses 338,148 -- --
Proceeds of notes and loans payable 550,000 -- --
Redemption of notes and loans payable (200,000) -- --
Debt issuance expenses (11,793) -- --
Investments in and advances to subsidiaries, net (528,073) 65,953 (233,423)
Payments under capital lease obligations (5,463) -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 155,474 87,217 8,331
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 223,591 101 (60)
Cash and cash equivalents at beginning of year 1,657 1,556 1,616
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 225,248 $ 1,657 $ 1,556
===================================================================================================================
</TABLE>
84
<PAGE> 85
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Balance at Charged to Charged to Balance at
Beginning of Cost and Other End of
Description Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Estimated uncollectible amount of
notes and accounts receivable $ 6,514 $35,209 $ -- $ 3,964 $37,759
========= ======= ========= ======= =======
Estimated uncollectible amount of
claims advances $ 10,000 $25,000 $ -- $ -- $35,000
========= ======= ========= ======= =======
Year Ended December 31, 1997:
Estimated uncollectible amount of
notes and accounts receivable $ 5,117 $15,000 $ -- $13,603 $ 6,514
========= ======= ========= ======= =======
Estimated uncollectible amount of
claims advances $ -- $10,000 $ -- $ -- $10,000
========= ======= ========= ======= =======
Year Ended December 31, 1996:
Estimated uncollectible amount of
notes and accounts receivable $ 3,029 $ 4,505 $ -- $ 2,417 $ 5,117
========= ======= ========= ======= =======
</TABLE>
85
<PAGE> 86
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(a) --Second Amended and Restated Certificate of Incorporation, as amended,
of the Registrant*
3(b) --Amended and Restated By-laws of the Registrant, incorporated by
reference to Exhibit 3(ii) of the Registrant's Form 10-Q for the
quarterly period ended September 30, 1998 (File No. 0-19442)
4 --Form of Stock Certificate, incorporated by reference to Exhibit
4 of the Registrant's Registration Statement on 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 Form10-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, incorporated by reference to Exhibit
10(n) of the Registrant's Annual Report on Form 10-K/A for the
period ended December 31, 1997 (File No. 0-19442)
</TABLE>
86
<PAGE> 87
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<S> <C>
10(o) --Bridge Securities Purchase Agreement, dated as of February 6, 1998,
between the Registrant and Oxford Funding, Inc., incorporated by
reference to Exhibit 10(o) of the Registrant's Annual Report on Form
10-K/A for the period ended December 31, 1997 (File No. 0-19442)
10(p) --Security Agreement, dated as of February 6, 1998, between the
Registrant and Oxford Funding, Inc., incorporated by reference to
Exhibit 10(p) of the Registrant's Annual Report on Form 10-K/A for
the period ended December 31, 1997 (File No. 0-19442)
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., incorporated by
reference to Exhibit 10(q) of the Registrant's Annual Report on
Form 10-K/A for the period ended December 31, 1997 (File No.
0-19442)
10(r) --Investment Agreement, dated as of February 23, 1998, between TPG
Oxford LLC and the Registrant., incorporated by reference to
Exhibit 10(r) of the Registrant's Annual Report on Form 10-K/A for
the period ended December 31, 1997 (File No. 0-19442)
10(s) --Registration Rights Agreement, dated as of February 23, 1998,
between TPG Oxford LLC and the Registrant, incorporated by
reference to Exhibit 10(s) of the Registrant's Annual Report on
Form 10-K/A for the period ended December 31, 1997 (File No.
0-19442)
10(t) --Employment Agreement, dated as of February 23, 1998, between the
Registrant and Dr. Norman C. Payson, incorporated by reference to
Exhibit 10(t) of the Registrant's Annual Report on Form 10-K/A for
the period ended December 31, 1997 (File No. 0-19442)
10(u) --Oxford Health Plans, Inc. Stock Option Agreement, dated February
23, 1998, by and between Dr. Norman C. Payson and the Registrant,
incorporated by reference to Exhibit 10(u) of the Registrant's
Annual Report on Form 10-K/A for the period ended December 31,
1997 (File No. 0-19442)
10(v) --Amendment Number 1 to Employment Agreement, dated as of December
9, 1998, by and between the Registrant and Norman C. Payson, M.D.*
10(w) --Amendment, dated as of February 23, 1998, to Employment
Agreement between the Registrant and William M. Sullivan,
incorporated by reference to Exhibit 10(v) of the Registrant's
Annual Report on Form 10-K/A for the period ended December 31,
1997 (File No. 0-19442)
10(x) --Amendment, dated as of February 23, 1998, to Employment
Agreement between the Registrant and Jeffery H. Boyd, incorporated
by reference to Exhibit 10(w) of the Registrant's Annual Report on
Form 10-K/A for the period ended December 31, 1997 (File No.
0-19442)
10(y) --Employment Agreement, dated as of February 16, 1998, between the
Registrant and Kevin F. Hickey, incorporated by reference to
Exhibit 10(x) of the Registrant's Annual Report on Form 10-K/A for
the period ended December 31, 1997 (File No. 0-19442)
10(z) --Retirement, Consulting and Non-Competition Agreement, dated as
of February 23, 1998, between the Registrant and Stephen F.
Wiggins, incorporated by reference to Exhibit 10(y) of the
Registrant's Annual Report on Form 10-K/A for the period ended
December 31, 1997 (File No. 0-19442)
10(aa) --Employment Agreement, dated as of March 30, 1998, by and between
the Registrant and Marvin P. Rich, incorporated by reference to
Exhibit 10(z) of the Registrant's Annual Report on Form 10-K/A for
the period ended December 31, 1997 (File No. 0-19442)
10(bb) --Purchase Agreement, dated May 7, 1998, between Registrant and
Donaldson, Lufkin & Jenrette Securities Corporation, incorporated
by reference to Exhibit 10(a) of the Registrant's Form 10-Q for
the quarterly period ended March 31, 1998 (File No. 0-19442)
10(cc) --Registration Rights Agreement, dated May 13, 1998, between
Registrant and Donaldson, Lufkin & Jenrette Securities
Corporation, incorporated by reference to Exhibit 10(b) of the
Registrant's Form 10-Q for the quarterly period ended March 31,
1998 (File No. 0-19442)
</TABLE>
87
<PAGE> 88
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<S> <C>
10(dd) --Indenture of Registrant, dated May 13, 1998, between Registrant and
the Chase Manhattan Bank, as Trustee, including for of 11% Senior
Notes, incorporated by reference to Exhibit 10(c) of the
Registrant's Form 10-Q for the quarterly period ended March 31,
1998 (File No. 0-19442)
10(ee) --Term Loan Agreement, dated May 13, 1998, among Registrant,
Lenders listed therein, DLJ Capital Funding, Inc. and IBJ Schroder
Bank & Trust Company, including exhibits, incorporated by
reference to Exhibit 10(d) of the Registrant's Form 10-Q for the
quarterly period ended March 31, 1998 (File No. 0-19442)
10(ff) --Amendment, dated June 26, 1998, to Employment Agreement between
the Registrant and William M. Sullivan, incorporated by reference
to Exhibit 10(a) of the Registrant's Form 10-Q for the quarterly
period ended June 30, 1998 (File No. 0-19442)
10(gg) --Amendment, dated June 23, 1998, to Employment Agreement between
the Registrant and Jeffery H. Boyd, incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-Q for the quarterly
period ended June 30, 1998 (File No. 0-19442)
10(hh) --Employment Agreement, dated as of June 9, 1998, between the
Registrant and Yon Y. Jorden, incorporated by reference to Exhibit
10(c) of the Registrant's Form 10-Q for the quarterly period ended
June 30, 1998 (File No. 0-19442)
10(ii) --Employment Agreement, dated as of April 1, 1998, between the
Registrant and Alan Muney, M.D., M.H.A., incorporated by reference
to Exhibit 10(d) of the Registrant's Form 10-Q for the quarterly
period ended June 30, 1998 (File No. 0-19442)
10(jj) --Letter Agreement, dated September 28, 1998, between the
Registrant and Fred F. Nazem, incorporated by reference to Exhibit
10(a) of the Registrant's Form 10-Q for the quarterly period ended
September 30, 1998 (File No. 0-19442)
10(kk) --Letter Agreement, dated July 24, 1998, between the Registrant
and Benjamin Safirstein, M.D., incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-Q for the quarterly
period ended September 30, 1998 (File No. 0-19442)
10(ll) --Amendment Number 1 to Investment Agreement, dated as of May 13,
1998 between TPG Oxford LLC and the Registrant*
10(mm) --Amendment Number 2 to Investment Agreement, dated as of August
27, 1998, by and between TPG Partners II, L.P. and the Registrant*
10(nn) --Amendment Number 3 to Investment Agreement, dated as of November
19, 1998, by and between TPG Partners II, L.P. and the Registrant*
10(oo) --Oxford Health Plans, Inc. 1996 Management Incentive Compensation Plan*
10(pp) --Amendment, dated December 10, 1998, to Employment Agreement between
the Registrant and Jeffery H. Boyd*
10(qq) --Amendment, dated December 9, 1998, to Employment Agreement between
the Registrant and Norman C. Payson, M.D.*
10(rr) --Share Exchange Agreement, dated as February 13, 1999 by and among
TPG Partners II, L.P., TPG Investors II, L.P., TPG Parallel II,
L.P., Chase Equity Associates, L.P., Oxford Acquisition Corp. and
the DLJ Entities listed therein*
16 --Letter from KPMG Peat Marwick LLP regarding change in certifying
accountant of Registrant, incorporated by reference to Exhibit 16 of
the Registrant's Form 8-K dated June 2, 1998 (File No.
0-19442)
21 --Subsidiaries of the Registrant*
23(a) --Consent of Ernst & Young LLP*
23(b) -- Consent of KPMG LLP*
</TABLE>
* Filed herewith.
88
<PAGE> 1
Exhibit 3(b)
Part 1
Conformed Copy
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
OXFORD HEALTH PLANS, INC.
(a Delaware corporation)
OXFORD HEALTH PLANS, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Oxford Health Plans, Inc. The date of
filing of its original Certificate of Incorporation with the Secretary of State
was September 17, 1984, and the name under which it was originally incorporated
was Integrated Health Plans, Inc.
2. This Restated Certificate of Incorporation amends, restates and
integrates the provisions of the Certificate of Incorporation (as previously
amended and restated) and has been duly adopted in accordance with Sections 242
and 245 of the General Corporation Law of the State of Delaware, the written
consent of the stockholders of the Corporation was given in accordance with
Section 228 of the General Corporation Law of the State of Delaware, and written
notice to the stockholders who did not consent in writing was provided as
required by Section 228 of the General Corporation Law of the State of Delaware.
3. The text of the present Amended and Restated Certificate of
Incorporation of the Company is hereby amended and restated in its entirety to
read in full as set forth on the attached Exhibit A.
IN WITNESS WHEREOF, OXFORD HEALTH PLANS, INC. has caused this Second
Amended and Restated Certificate of Incorporation to be signed by Stephen F.
Wiggins, its President, and attested by Donald V. Barrett, its Secretary,
this 13th day of August, 1991.
OXFORD HEALTH PLANS, INC.
By: /s/ S.F. WIGGINS
----------------------------
Stephen F. Wiggins
President
ATTESTED:
By: /s/ D.V. BARRETT
-----------------------
Donald V. Barrett
Secretary
<PAGE> 2
Exhibit 3(b)
Part 1
Conformed Copy
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
OXFORD HEALTH PLANS, INC.
(a Delaware Corporation)
ARTICLE FIRST
Name
The name of the corporation is OXFORD HEALTH PLANS, INC. (the "Corporation").
ARTICLE SECOND
Purpose
The purposes for which the Corporation is formed are as follows:
1. To establish a plan or plans under which the Corporation, directly or
through one or more subsidiaries or affiliates, may provide health services
and/or any form of health insurance to subscribers both individually and in
groups; to engage in all of the activities of a health services or health
maintenance or health insurance organization, however designated, as permitted
by applicable law. Health services may include diagnostic services, preventive
medicine and medical treatment in clinics, hospitals, treatment centers, or
other medical facilities or institutions by licensed physicians, nurses and
other health services personnel and the furnishing of drugs and other medical
products and equipment;
2. To establish, operate, and maintain medical service centers, clinics
and other medical facilities;
3. To contract for medical and related services with physicians, hospital
service corporations, medical service corporations and other corporations,
plans, persons and entities;
4. To own or contract with mutual and stock insurance companies,
underwriters and other corporations and persons for and in connection with
health insurance;
5. To contract with agencies of federal, state and local governments;
6. To acquire by purchase, lease or otherwise, and to construct, own,
hold, use maintain, improve, and operate, and to sell, lease, and otherwise
dispose of real and
<PAGE> 3
Exhibit 3(b)
Part 1
Conformed Copy
personal property;
7. To form, participate in or acquire other health service or health
maintenance organizations or health insurance companies or other business
entities;
8. In general to perform and do, whether directly or indirectly and
whether alone or in conjunction or cooperation with other persons and
organizations of every kind and nature, all other acts and things incidental to
or in furtherance of the accomplishment of the purposes of the Corporation, and
to sue and exercise all applicable powers conferred from time to time by
applicable law; and
9. To engage in any lawful act or activity for which a corporation may be
organized under the General Corporation Law of Delaware (the "Delaware
Statute").
ARTICLE THIRD
Registered Office
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE FOURTH
Capital Stock
The total authorized capital stock of the Corporation consists of
15,000,000 shares, of which 2,000,000 are shares of Preferred Stock, $.01 par
value ("Preferred Stock"), and 13,000,000 are shares of Common Stock, $.01 par
value, ("Common Stock"). The designations and the powers, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, of the Preferred Stock and
the Common Stock shall be as follows:
1. The Preferred Stock may be issued, from time to time, in one or more
series, with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors. The Board of Directors, in such resolution or resolutions (a copy of
which shall be filed and recorded as required by law), is also expressly
authorized to fix:
(i) the distinctive serial designations and the division of such shares
into series and the number of shares of a particular series, which may be
increased or decreased, but not
<PAGE> 4
Exhibit 3(b)
Part 1
Conformed Copy
below the number of shares thereof then outstanding, by a certificate made,
signed, filed and recorded as required by law;
(ii) the annual dividend rate (or method of determining such rate) for the
particular series, the date or dates upon which such dividends shall be payable,
and the date or dates or method of determining the date or dates from which
dividends on all shares of such series shall be cumulative, if dividends on
stock of the particular series shall be cumulative;
(iii) the price or prices at which, the period or periods within which and
the terms and conditions upon which the shares of such series may be redeemed,
in whole or in part, at the option of the Corporation;
(iv) the right, if any, of the holders of a particular series or the
Corporation to convert such stock into other classes or series of stock or to
exchange such stock for shares of any other class of stock or series thereof,
and the terms and conditions, if any, including the price or prices or the rate
or rates of conversion and the terms and conditions of any adjustments thereof,
of such conversion;
(v) the obligation, if any, of the Corporation to purchase and retire and
redeem, in whole or in part, shares of a particular series as a sinking fund or
redemption or purchase account, the terms thereof and the redemption price or
prices per share for such series redeemed pursuant to the sinking fund or
redemption account;
(vi) the voting rights, if any, of the shares of such series in addition
to those required by law, including the number of votes per share and any
requirement for the approval by the holders of up to 66 2/3% of all Preferred
Stock, or of the shares of one or more series, or of both, as a condition to
specified corporate action or amendments to the certificate of incorporation;
(vii) the ranking of the shares of the series as compared with shares of
other series of the Preferred Stock in respect of the right to receive payments
out of the assets of the Corporation upon voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; and
(viii) any other rights, obligations, or provisions which may be so
determined to the fullest extent permitted by Delaware law.
All shares of any one series of Preferred Stock shall be alike in every
particular and all series shall rank equally and be identical in all respects
except in so far as they may vary with respect to the matters which the Board of
Directors is hereby expressly authorized to determine in the resolution or
resolutions providing for the issue of any series of the Preferred Stock.
<PAGE> 5
Exhibit 3(b)
Part 1
Conformed Copy
2. All shares of Preferred Stock shall rank senior to the Common Stock in
respect of the right to receive dividends and the right to receive payments out
of the assets of the Corporation upon voluntary or involuntary liquidation,
dissolution or winding up of the Corporation. The shares of any one series of
Preferred Stock shall be identical with each other in all respects except as to
the dates from and after which dividends thereon shall be cumulative. All shares
of Preferred Stock redeemed, purchased or otherwise acquired by the Corporation
(including shares surrendered for conversion) shall be canceled and thereupon
restored to the status of authorized but unissued Preferred Stock undesignated
as to series.
3. Holders of shares of Common Stock shall be entitled to one vote for
each share of such stock upon all questions presented to shareholders of the
Corporation. The rights of holders of Common Stock shall be subject to the
powers, preferences and rights, and the qualifications, limitations or
restrictions thereof, of the Preferred Stock.
ARTICLE FIFTH
Management of the Affairs of the Corporation
Except as otherwise provided by this Certificate of Incorporation or as
may otherwise be provided in the By-Laws of the Corporation, the Board of
Directors of the Corporation is expressly authorized to adopt, amend or repeal
By-Laws of the Corporation.
ARTICLE SIXTH
Election of Directors
Election of Directors of the Corporation need not be by written ballot
except and to the extent provided in the By-Laws of the Corporation.
ARTICLE SEVENTH
Meetings of the Board
The Board of Directors shall have the power to hold its meetings within or
outside the State of Delaware, at such place as from time to time may be
designated by the By-Laws or by resolution of the Board.
ARTICLE EIGHTH
Indemnification
The Corporation shall indemnify its officers and directors to the fullest
extent permitted by law.
<PAGE> 6
Exhibit 3(b)
Part 1
Conformed Copy
ARTICLE NINTH
Director's Liability
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, a Director of this Corporation
shall not be liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a Director.
ARTICLE TENTH
Stockholder Action
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such holders.
ARTICLE ELEVENTH
Vote Required for Certain Business Transactions
1. In addition to the requirements of the provisions of any series of
Preferred Stock which may be outstanding, and whether or not a vote of the
stockholders is otherwise required, the affirmative vote of the holders of not
less than eighty percent (80%) of the voting power of the Voting Stock shall be
required for the approval or authorization of any Business Transaction with a
Related Person, or any Business Transaction in which a Related Person has an
interest (other than only a proportionate interest as a stockholder of the
Corporation); provided, however, that the eighty percent (80%) voting
requirement shall not be applicable if (i) the Business Transaction is duly
approved by the continuing Directors, or (ii) all of the following conditions
are satisfied:
(a) the Business Transaction is a merger or consolidation or sale
of substantially all of the assets of the Corporation, and the
aggregate amount of cash and the fair market value of the
property, securities or other consideration to be received per
share (on the date of effectiveness of such merger or
consolidation or on the date of distribution to stockholders
of the Corporation of the proceeds from such sale of assets)
by holders of Common Stock of the Corporation (other than such
Related Person) in connection with such Business Transaction
is at least equal in value to such Related Person's Highest
Common Stock Purchase Price;
(b) after such Related Person has become the Beneficial Owner of
not less than twenty percent (20%) of the voting power of the
Voting Stock and
<PAGE> 7
Exhibit 3(b)
Part 1
Conformed Copy
prior to the consummation of such Business Transaction, such
Related Person shall not have become the Beneficial Owner of
any additional shares of Voting Stock or securities
convertible into Voting Stock, except (x) as a part of the
transaction which resulted in such Related Person becoming the
Beneficial Owner of not less than ten percent (10%) of the
voting power of the Voting Stock or (y) as a result of a pro
rata stock dividend or stock split; and
(c) prior to the consummation of such Business Transaction, such
Related Person shall not have, directly or indirectly, (x)
received the benefit (other than only a proportionate benefit
as a stockholder of the Corporation) of any loans, advances,
guarantees, pledges or other financial assistance or tax
credits provided by the Corporation or any of its
subsidiaries, (y) caused any material change in the
Corporation's business or equity capital structure, including,
without limitation, the issuance of shares of capital stock of
the Corporation or (z) except as duly approved by the
Continuing Directors, caused the Corporation to fail to
declare and pay quarterly cash dividends on the outstanding
Common Stock on a per share basis at least equal to the cash
dividends being paid thereon by the Corporation immediately
prior to the date on which the Related Person became a Related
Person.
(2) For the purpose of this Article ELEVENTH:
(i) The term "Business Transaction" shall mean (a) any merger or
consolidation involving the Corporation or a subsidiary of the
Corporation, (b) any sale, lease, exchange, transfer or other
disposition (in one transaction or a series of related
transactions), including, with limitation, a mortgage or any other
security device, of all or any Substantial Part of the assets either
of the Corporation or of a subsidiary of the Corporation, (c) any
sale, lease, exchange, transfer or other disposition (in one
transaction or a series of related transaction) of all or any
Substantial Part of the assets of an entity to the Corporation or a
subsidiary of the Corporation, (d) the issuance, sale, exchange,
transfer or other disposition (in one transaction or in a series of
related transactions) by the Corporation or a subsidiary of the
Corporation of any securities of the Corporation or any subsidiary
of the Corporation having an aggregate fair market value of
$20,000,000 or more, (e) any recapitalization or reclassification of
the securities of the Corporation (including, without limitation,
any reverse stock split) or other transaction that would have the
effect of increasing the voting power of a Related Person or
reducing the number of shares of each class of Voting Stock
outstanding, (f) any liquidation, spinoff, splitoff, splitup or
dissolution of the Corporation, and (g) any agreement, contract or
other arrangement providing for any of the transactions described in
this definition of Business Transaction.
<PAGE> 8
Exhibit 3(b)
Part 1
Conformed Copy
(ii) The term "Related Person" shall mean and include (a) any individual,
corporation, partnership, group, association or other person or
entity which, together with its Affiliates and Associates, is the
Beneficial Owner of not less than ten percent (10%) of the voting
power of the Voting Stock or was the Beneficial Owner of not less
than ten percent (10% ) of the voting power of the Voting Stock (x)
at the time the definitive agreement providing for the Business
Transaction (including any amendment thereof) was entered into, (y)
at the time a resolution approving the Business Transaction was
adopted by the Board of Directors of the Corporation or (z) as of
the record date for the vote on, or consent to, the Business
Transaction, and (b) any Affiliate or Associate of any such
individual, corporation, partnership, group, association or other
person or entity; provided, however, and notwithstanding anything in
the foregoing to the contrary, the term "Related Person" shall not
include the Corporation, a wholly-owned subsidiary of the
Corporation, or any trustee of, or fiduciary with respect to, any
such plan when acting in such capacity.
(iii) The term "Beneficial Owner" shall be defined by reference to Rule
13d-3 under the Securities Exchange Act of 1934, as in effect on
August 13, 1991; provided, however, that any individual,
corporation, partnership, group, association or other person or
entity which has the right to acquire any Voting Stock at any time
in the future, whether such right is contingent or absolute,
pursuant to any agreement, arrangement or understanding or upon
exercise of conversion rights, warrants or options, or otherwise,
shall be deemed the Beneficial Owner of such Voting Stock.
(iv) The term "Highest Common Stock Purchase Price" shall mean the
highest amount of consideration paid by such Related Person for a
share of Common Stock of the Corporation (including any brokerage
commission, transfer taxes and soliciting dealers' fees) in the
transaction which resulted in such Related Person becoming a Related
Person, at any time while such Related Person was a Related Person
or within one year prior to the date such Related Person became a
Related Person, whichever is higher; provided, however, that the
Highest Common Stock Purchase Price shall be appropriately adjusted
to reflect the occurrence of any reclassification, recapitalization,
stock split, reverse stock split or other similar corporate
readjustment in the number of outstanding shares of Common Stock of
the Corporation between the last date upon which such Related Person
paid the Highest Common Stock Purchase Price to the effective date
of the merger or consolidation or the date of distribution to
stockholders of the Corporation of the proceeds from the sale of
substantially all of the assets of the Corporation referred to in
subparagraph (a) of Section 1 of this Article ELEVENTH.
(v) The term "Substantial Part" shall mean more than twenty percent
(20%) of the fair market value of the total assets of the entity in
question, as reflected on the most recent consolidation balance
sheet of such entity existing at the time the
<PAGE> 9
Exhibit 3(b)
Part 1
Conformed Copy
shareholders of the Corporation would be required to approve or
authorize the Business Transaction involving the assets
constituting any such Substantial Part.
(vi) In the event of a merger in which the Corporation is the surviving
corporation, for the purpose of subparagraph (a) of Section 1 of
this Article ELEVENTH, the phrase "property, securities or other
consideration to be received" shall include, without limitation,
Common Stock of the Corporation retained by its stockholders (other
than such Related Person).
(vii) The term "Voting Stock" shall mean all outstanding shares of
capital stock of the Corporation entitled to vote generally in the
election of Directors, considered for the purpose of this Article
ELEVENTH as one class.
(viii) The term "Preferred Stock" shall mean each class of series of
capital stock which may from time to time be authorized in or by
Article FOURTH of this Certificate of Incorporation which is not
designated as "Common Stock".
(ix) The term "Continuing Director" shall mean a Director who either was
a member of the Board of Directors of the Corporation on August 13,
1991, or who became a Director of the Corporation subsequent to
such date and whose election, or nomination for election by the
Corporation's stockholders, was Duly Approved by the Continuing
Directors then on the Board, either by a specific vote or by
approval of the proxy statement issued by the Corporation on behalf
of the Board of Directors in which such person is named as nominee
for Director, without due objection to such nomination; provided,
however, that in no event, shall a Director be considered a
"Continuing Director" if such Director is a Related Person and the
Business Transaction to be voted upon is with such Related Person
or is one in which such Related Person has an interest (other than
only a proportionate interest as a stockholder of the Corporation).
(x) The term "Duly Approved by the Continuing Directors" shall mean an
action approved by the vote of at least a majority of the
Continuing Directors then on the Board, except, if the votes of
such Continuing Directors in favor of such action would be
insufficient to constitute an act of the Board of Directors if a
vote by all of its members were to have been taken, then such term
shall mean an action approved by the unanimous vote of the
Continuing Directors so long as there are at least three Continuing
Directors on the Board at the time of such unanimous vote.
(xi) The term "Affiliate", used to indicate a relationship to a
specified person, shall mean a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by,
or is under common control with, such specified person.
<PAGE> 10
Exhibit 3(b)
Part 1
Conformed Copy
(xii) The term "Associate", used to indicate a relationship with a
specified person, shall mean (a) any corporation, partnership or
other organization of which such specified person is an officer or
partner (b) any trust or other estate in which such specified person
has a substantial beneficial interest or as to which such specified
person serves as trustee or in a similar fiduciary capacity, (c) any
relative or spouse of such specified person, or any relative of such
spouse, who has the same home as such specified person or who is a
Director or officer of the Corporation or any of its parents or
subsidiaries and (d) any person who is a Director, officer or
partner of such specified person or of any corporation (other than
the Corporation or any wholly-owned subsidiary of the Corporation),
partnership or other entity which is an Affiliate of such specified
person.
3. For the purpose of this Article ELEVENTH, so long as Continuing Directors
constitute at least a majority of the entire Board of Directors, the Board of
Directors shall have the power to make a good faith determination, on the
basis of information know to them, of: (i) the number of shares of Voting
Stock of which any person is the Beneficial Owner, (ii) whether a person is a
Related Person or is an Affiliate or Associate of another, (iii) whether a
person has an agreement, arrangement or understanding with another as to the
matters referred to in the definition of Beneficial Owner herein, (iv)
whether the assets subject to any Business Transaction constitute a
Substantial Part, (v) whether any Business Transaction is with a Related
Person or is one in which a Related Person has an interest (other than only a
proportionate interest as a stockholder of the Corporation), (vi) whether a
Related Person has, directly or indirectly, received the benefits or caused
any of the changes referred to in subparagraph (c) of Section 1 of this
Article ELEVENTH, and (vii) such other matters with respect to which a
determination is required under this Article ELEVENTH; and such determination
by the Board of Directors shall be conclusive and binding for all purposes of
this Article ELEVENTH.
4. Nothing contained in this Article ELEVENTH shall be construed to relieve any
Related Person of any fiduciary obligation imposed by law.
5. The fact that any Business Transaction complies with the provisions of
Section 1 of this Article ELEVENTH shall not be construed to impose any
fiduciary duty, obligation or responsibility on the Board of Directors, or
any member thereof, to approve such Business Transaction or recommend its
adoption or approval to the stockholders of the Corporation.
ARTICLE TWELFTH
Board of Directors; Numbers; Qualifications; Classification
<PAGE> 11
Exhibit 3(b)
Part 1
Conformed Copy
1. (i) The number of Directors shall be fixed from time to time by or
pursuant to the By-Laws of the Corporation. Directors need not be
stockholders.
(ii) Unless waived by the Board of Directors, no person not already a
director shall be eligible to be elected to or serve as a director
unless such person's candidacy shall have been notified to the Board
of Directors at least seventy-five (75) days before initiation of
solicitation to the stockholders for election in the event of an
election other than at an annual meeting and seventy-five (75) days
before the corresponding date that had been the record date of the
previous year's annual meeting in the event of an election at an
annual meeting. Any such notification pursuant to this subparagraph
(ii) shall be effective and such person shall be eligible to be
elected or to serve only if the notification contains all
information concerning such person which would be required to be
included in a proxy statement pursuant to the rules and regulations
under the Securities Exchange Act of 1934 or any successor
provisions.
(iii) The Directors shall be divided into three classes, designated Class
I, Class II and Class III. Each class shall consist, as nearly as
may be possible, of one-third of the total number of Directors
constituting the entire Board of Directors. The term of the initial
Class I Directors shall terminate on the date of the 1992 annual
meeting of stockholders; the term of the initial Class II Directors
shall terminate on the date of the 1993 annual meeting of
stockholders, and the term of the initial Class III Directors shall
terminate on the date of the 1994 annual meeting of stockholders. At
each annual meeting of stockholders beginning in 1992, successors to
the class of Directors whose term expires at that annual meeting,
other than those Directors elected under particular circumstances by
a separate class vote of the holders of any class or series of
Preferred Stock, shall be elected for a three-year term. If the
number of Directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of
Directors in each class as nearly equal as possible, and any
additional Directors of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class, but
in no case will a decrease in the number of Directors shorten the
term of any incumbent Director.
2. Each Director shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal. Any Director
may resign at any time upon written notice to the Board of Directors or to
the President or the Secretary of the Corporation. Such written notice
shall be necessary to make a Director's resignation effective. Except as
may be provided in the terms of any class or series of Preferred Stock
relating to the rights of the holders of such class or series to elect, by
separate class vote, additional Directors, any Director or the entire
Board of Directors may be removed only for cause, and only by the holders
of 80% of the shares then
<PAGE> 12
Exhibit 3(b)
Part 1
Conformed Copy
entitled to vote at an election of Directors. Unless otherwise provided in
this Certificate of Incorporation or in the By-Laws, vacancies and newly
created directorships resulting from any increase in the authorized number
of Directors or from any other cause may be filled by a majority of the
Directors, although less than a quorum, then remaining in office and
elected by the holders of the capital stock of the Corporation entitled to
vote generally in the election of Directors or, in the event that there is
only one such Director, by such sole remaining Director, and the Directors
so chosen shall hold office for a term that shall coincide with the term
of the class to which such Director shall have been elected.
3. In the event that the holders of any class or series of Preferred Stock
are entitled, by a separate class vote, to elect Directors pursuant to the
terms of such class or series, then the provisions of such class or series
with respect to such rights of election shall apply to the election of
such Directors. The number of Directors that may be elected by the holders
of any such class or series of stock shall be in addition to the number
fixed by or pursuant to the By-Laws. Except as otherwise expressly
provided in the terms of such class or series, the number of directors
that may be so elected by the holders of any such class or series of stock
shall be elected for terms expiring at the next Annual Meeting of the
Stockholders and without regard to the classification of the remaining
members of the Board of Directors, and vacancies among Directors so
elected by the separate class vote of any such class or series of
Preferred Stock shall be filled by the affirmative vote of a majority of
the remaining Directors elected by such class or series, or, if there are
no such remaining Directors, by the holders of such class or series in the
same manner in which such class or series initially elected a Director.
If at any meeting for the election of Directors, more than one class
of stock, voting separately as classes, shall be a quorum of only one such
class of stock, that class of stock shall be entitled to elect its quota
of Directors notwithstanding absence of a quorum of the other class or
classes of stock.
ARTICLE THIRTEENTH
Amendment of By-Laws
Subject to any limitations imposed by this Certificate of Incorporation,
the Board of Directors shall have power to adopt, amend, or repeal the By-Laws
of the Corporation, Any By-Laws made by the Directors under the powers conferred
hereby may be amended or repealed by the Directors or by the stockholders.
Notwithstanding the foregoing and any other provisions of this Certificate of
Incorporation or the By-Laws of the Corporation (and notwithstanding that a
lesser percentage may be specified by law), no provisions of the By-Laws shall
be adopted, amended, or repealed by the stockholders without an affirmative vote
of the holders of not less than eighty percent (80%) of the voting power of all
of the outstanding shares of capital stock of the Corporation entitled
<PAGE> 13
Exhibit 3(b)
Part 1
Conformed Copy
to vote generally in the election of Directors, considered for the purposes of
this Article as a single class.
ARTICLE FOURTEENTH
Higher Vote Requirement for Amendment
Notwithstanding any other provisions of this Certificate of Incorporation
or the By-Laws of the Corporation (and notwithstanding that a lesser percentage
may be specified by law), the provisions of Articles TENTH, ELEVENTH, TWELFTH,
THIRTEENTH OR FOURTEENTH hereof may not be amended or repealed unless such
action is approved by the affirmative vote of the holders of not less than
eighty percent (80%) of the voting power of all of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
Directors, considered for the purpose of this Article as a single class.
<PAGE> 14
Exhibit 3(b)
Part 2
Conformed Copy
CERTIFICATE OF AMENDMENT TO THE
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
OXFORD HEALTH PLANS, INC.
Oxford Health Plans, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies that at a
meeting of the stockholders of the Corporation held on September 17, 1993, it
was resolved by the duly adopted vote of the stockholders in accordance with
Section 242 of the General Corporation Law of the State of Delaware that the
first sentence of the first paragraph of Article Fourth of the Corporation's
Second Amended and Restated Certificate of Incorporation be amended to read as
follows:
ARTICLE FOURTH
Capital Stock
The total authorized capital stock of the Corporation consists of 27,000,000
shares of which 2,000,000 are shares of Preferred Stock, $.01 par value
("Preferred Stock"), and 25,000,000 are shares of Common Stock, $.01 par value,
("Common Stock").
IN WITNESS WHEREOF, the Corporation has caused this amendment to be signed
by Stephen F. Wiggins, its Chairman of the Board of Directors, and attested by
Donald V. Barrett, its Secretary, this 17th day of September, 1993.
OXFORD HEALTH PLANS, INC.
By: /s/ S.F. WIGGINS
-------------------------------
Stephen F. Wiggins
Chairman of the Board
of Directors
ATTEST:
By: /s/ D.V. BARRETT
-----------------------------
Donald V. Barrett
Secretary
<PAGE> 15
Exhibit 3(b)
Part 3
Conformed Copy
CERTIFICATE OF AMENDMENT TO THE
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION, AS AMENDED,
OF
OXFORD HEALTH PLANS, INC.
Oxford Health Plans, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies that at a
meeting of the stockholders of the Corporation held on March 3, 1995, it was
resolved by the duly adopted vote of the stockholders in accordance with Section
242 of the General Corporation Law of the State of Delaware that the first
sentence of the first paragraph of Article Fourth of the Corporation's Second
Amended and Restated Certificate of Incorporation, as amended, be amended to
read as follows:
ARTICLE FOURTH
Capital Stock
The total authorized capital stock of the Corporation consists of 202,000,000
shares, of which 2,000,000 are shares of Preferred Stock, $.01 par value
("Preferred Stock"), and 200,000,000 are shares of Common Stock, $.01 par value,
("Common Stock").
IN WITNESS WHEREOF, the Corporation has caused this amendment to be signed
by Stephen F. Wiggins, its Chief Executive Officer, this 6th day of March, 1995.
OXFORD HEALTH PLANS, INC.
By: /s/ S.F. WIGGINS
------------------------------
Stephen F. Wiggins
Chief Executive Officer
<PAGE> 16
Exhibit 3(b)
Part 4
Conformed Copy
CERTIFICATE OF AMENDMENT TO THE
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION, AS AMENDED,
OF
OXFORD HEALTH PLANS, INC.
Oxford Health Plans, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies that at a
meeting of the stockholders of the Corporation held on April 22, 1997, it was
resolved by the duly adopted vote of the stockholders in accordance with Section
242 of the General Corporation Law of the State of Delaware that the first
sentence of the first paragraph of Article Fourth of the Corporation's Second
Amended and Restated Certificate of Incorporation, as amended, be amended to
read as follows:
ARTICLE FOURTH
Capital Stock
The total authorized capital stock of the Corporation consists of 402,000,000
shares, of which 2,000,000 are shares of Preferred Stock, $.01 par value
("Preferred Stock"), and 400,000,000 are shares of Common Stock, $.01 par value,
("Common Stock").
IN WITNESS WHEREOF, the Corporation has caused this amendment to be signed
by Stephen F. Wiggins, its Chief Executive Officer, this 1st day of May, 1997.
OXFORD HEALTH PLANS, INC.
By: /s/ S.F. WIGGINS
--------------------------------
Stephen F. Wiggins
Chief Executive Officer
<PAGE> 17
Exhibit 3(b)
Part 5
Conformed
CERTIFICATE OF DESIGNATIONS
of
SERIES A CUMULATIVE PREFERRED STOCK
of
OXFORD HEALTH PLANS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Oxford Health Plans, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation (the "Board of Directors") pursuant to authority of
the Board of Directors as required by Section 151 of the Delaware General
Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the Second Amended
and Restated Certificate of Incorporation of the Corporation, as amended (the
"Certificate of Incorporation"), the Board of Directors hereby creates a series
of the Corporation's previously authorized preferred stock, par value $0.01 per
share (the "Preferred Stock"), and hereby states the designation and number
thereof, and fixes the voting powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, as follows:
Series A Cumulative Preferred Stock:
I. Designation and Amount
The designation of this series of shares shall be "Series A
Cumulative Preferred Stock" (the "Series A Preferred Stock"); the stated value
per share shall be $1,000 (the "Stated Value"); and the number of shares
constituting such series shall be 300,000. The number of shares of the Series A
Preferred Stock may be decreased from time to time by a resolution or
resolutions of the Board of Directors; provided, however, that such number shall
not be decreased below the aggregate number of
<PAGE> 18
shares of the Series A Preferred Stock then outstanding.
II. Rank
A. With respect to dividend rights, the Series A Preferred Stock
shall rank (i) junior to each other class or series of Preferred Stock which by
its terms ranks senior to the Series A Preferred Stock as to payment of
dividends, (ii) on a parity with each other class or series of Preferred Stock
which by its terms ranks on a parity with the Series A Preferred Stock as to
payment of dividends, including the Series B Preferred Stock, par value $0.01
per share, of the Corporation (the "Series B Preferred Stock") and (iii) prior
to the Corporation's Common Stock, par value $.01 per share (the "Common
Stock"), and, except as specified above, all other classes and series of capital
stock of the Corporation hereafter issued by the Corporation. With respect to
dividends, all equity securities of the Corporation to which the Series A
Preferred Stock ranks senior, including the Common Stock, are collectively
referred to herein as the "Junior Dividend Securities"; all equity securities of
the Corporation with which the Series A Preferred Stock ranks on a parity,
including the Series B Preferred Stock, are collectively referred to herein as
the "Parity Dividend Securities"; and all equity securities of the Corporation
(other than convertible debt securities) to which the Series A Preferred Stock
ranks junior, with respect to dividends, are collectively referred to herein as
the "Senior Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series A Preferred Stock shall rank (i) junior to each other class or series
of Preferred Stock which by its terms ranks senior to the Series A Preferred
Stock as to distribution of assets upon liquidation, dissolution or winding up,
(ii) on a parity with each other class or series of Preferred Stock which by its
terms ranks on a parity with the Series A Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation, including
the Series B Preferred Stock, and (iii) prior to the Common Stock, and, except
as specified above, all other classes and series of capital stock of the
Corporation hereinafter issued by the Corporation. With respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, all equity securities of the
Corporation to which the Series A Preferred Stock ranks senior, including the
Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series A Preferred Stock ranks on parity,
including the Series B Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series A Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series A Preferred Stock shall be subject to the creation of
<PAGE> 19
Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities") but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series B
Preferred Stock), or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof and the Investment Agreement, including, without limitation,
Article VIII, Section F hereof.
III. Dividends
A. Dividends. Prior to the Second Anniversary Date, shares of Series
A Preferred Stock shall accumulate dividends at a rate of 8.243216% per annum,
payment of which may be made in cash or by the issuance of additional shares of
Series A Preferred Stock (which, upon issuance, shall be fully paid and
nonassessable), at the option of the Company; provided that if any such dividend
is paid after the Second Anniversary Date, such dividend shall be paid in cash.
On and after the Second Anniversary Date, shares of Series A Preferred Stock
shall accumulate dividends at a rate of 8% per annum, which dividends shall be
paid in cash. On and prior to the Second Anniversary Date, dividends shall be
paid annually on the anniversary of the original issuance of Series A Preferred
Stock, and thereafter dividends shall be paid in four equal quarterly
installments on the last day of March, June, September and December of each
year, or if any such date is not a Business Day, the Business Day next preceding
such day (each such date, regardless of whether any dividends have been paid or
declared and set aside for payment on such date, a "Dividend Payment Date"), to
holders of record (the "Registered Holders") as they appear on the stock record
books of the Corporation on the fifteenth day prior to the relevant Dividend
Payment Date. Dividends shall be paid only when, as and if declared by the Board
of Directors out of funds at the time legally available for the payment of
dividends. Dividends shall begin to accumulate on outstanding shares of Series A
Preferred Stock from the date of issuance and shall be deemed to accumulate from
day to day whether or not earned or declared until paid. Dividends shall
accumulate on the basis of a 360-day year consisting of twelve 30-day months
(four 90-day quarters) and the actual number of days elapsed in the period for
which payable.
B. Accumulation. Dividends on the Series A Preferred Stock shall be
cumulative, and from and after any Dividend Payment Date on which any dividend
that has accumulated or been deemed to have accumulated through such date has
not been paid in full or any payment date set for a redemption on which such
redemption payment has not been paid in full, additional dividends shall
accumulate in respect of the amount of such unpaid dividends or unpaid
redemption payment (the "Arrearage") at the annual rate then in effect as
provided in Section A of this Article III (or such lesser rate as may be the
maximum rate that is then permitted by
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applicable law). Such additional dividends in respect of any Arrearage shall be
deemed to accumulate from day to day whether or not earned or declared until the
Arrearage is paid, shall be calculated as of such successive Dividend Payment
Date and shall constitute an additional Arrearage from and after any Dividend
Payment Date to the extent not paid on such Dividend Payment Date. References in
any Article herein to dividends that have accumulated or that have been deemed
to have accumulated with respect to the Series A Preferred Stock shall include
the amount, if any, of any Arrearage together with any dividends accumulated or
deemed to have accumulated on such Arrearage pursuant to the immediately
preceding two sentences. Additional dividends in respect of any Arrearage may be
declared and paid at any time, in whole or in part, without reference to any
regular Dividend Payment Date, to Registered Holders as they appear on the stock
record books of the Corporation on such record date as may be fixed by the Board
of Directors (which record date shall be no less than 10 days prior to the
corresponding payment date). Dividends in respect of any Arrearage shall be paid
in cash.
C. Method of Payment. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on all outstanding shares of Series A Preferred
Stock shall be allocated pro rata on a share-by-share basis among all such
shares then outstanding. After the Second Anniversary Date, dividends that are
declared and paid in an amount less than the full amount of dividends
accumulated on the Series A Preferred Stock (and on any Arrearage) shall be
applied first to the earliest dividend which has not theretofore been paid. All
cash payments of dividends on the shares of Series A Preferred Stock shall be
made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
IV. Liquidation Preference
In the event of a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of then-outstanding
shares of Series A Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share equal to the sum of (i) the dividends, if any,
accumulated or deemed to have accumulated thereon to the date of final
distribution to such holders, whether or not such dividends are declared, and
(ii) the Stated Value thereof, and no more, before any payment shall be made or
any assets distributed to the holders of any Junior Liquidation Securities.
After any such payment in full, the holders of Series A Preferred Stock shall
not, as such, be entitled to any further participation in any distribution of
assets of the Corporation. All the assets of the Corporation available for
distribution to stockholders after the liquidation preferences of any Senior
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Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series A Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series A Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
Neither a consolidation or merger of the Corporation with or into
any other Person or Persons, nor a sale, conveyance, lease, exchange or transfer
of all or part of the Corporation's assets for cash, securities or other
property to a Person or Persons shall be deemed to be a liquidation, dissolution
or winding up of the Corporation for purposes of this Article IV, but the
holders of shares of Series A Preferred Stock shall nevertheless be entitled
from and after any such consolidation, merger or sale, conveyance, lease,
exchange or transfer of all or part of the Corporation's assets to the rights
provided by this Article IV following any such transaction. Notice of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, stating the payment date or dates when, and the place or places
where, the amounts distributable to each holder of shares of Series A Preferred
Stock in such circumstances shall be payable, shall be given by first-class
mail, postage prepaid, mailed not less than 30 days prior to any payment date
stated therein, to holders of record as they appear on the stock record books of
the Corporation as of the date such notices are first mailed.
V. Redemption
A. Optional Redemption. The Corporation shall not have any right to
redeem any shares of Series A Preferred Stock prior to the fifth anniversary of
the original issuance of the Series A Preferred Stock. On and after such date,
the Corporation shall have the right, at its option and election, to redeem all
the outstanding shares of Series A Preferred Stock, in whole but not in part, at
any time, in accordance with the provisions of this Article V. The redemption
price for such shares of Series A Preferred Stock shall be paid in cash out of
funds legally available therefor and shall be in an amount per share equal to
the sum of (i) the amount, if any, of all unpaid dividends accumulated thereon
to the date of actual payment of the Redemption Price, whether or not such
dividends have been declared, and (ii) the Stated Value thereof (the "Redemption
Price").
B. Mandatory Redemption. On the tenth anniversary of the original
issuance of the Series A Preferred Stock (the "Mandatory Redemption Date"), the
Corporation shall redeem (the "Mandatory Redemption") all outstanding shares of
Series A Preferred Stock by paying the Redemption Price therefor in cash out of
funds legally available for such purpose.
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C. Notice and Redemption Procedures. Notice of the redemption of
shares of Series A Preferred Stock pursuant to Section A or B hereof (a "Notice
of Redemption") shall be sent to the holders of record of the shares of Series A
Preferred Stock to be redeemed by first class mail, postage prepaid, at each
such holder's address as it appears on the stock record books of the Corporation
not more than 120 nor fewer than 90 days prior to the date fixed for redemption,
which date shall be set forth in such notice (the "Redemption Date"); provided
that failure to give such Notice of Redemption to any holder, or any defect in
such Notice of Redemption to any holder shall not affect the validity of the
proceedings for the redemption of any shares of Series A Preferred Stock held by
any other holder. Notwithstanding the foregoing, in the event that
contemporaneously with or prior to the delivery of a Notice of Redemption, the
Corporation irrevocably deposits, in accordance with Section F of this Article
V, funds sufficient to pay the aggregate Redemption Price for the Series A
Preferred Stock, such Notice of Redemption shall be delivered not more than 120
days nor fewer than 30 days prior to the Redemption Date; provided, however,
that, if such Notice of Redemption is delivered fewer than 60 days prior to the
Redemption Date and the Investor or any of its Affiliates Beneficially Owns
shares of Series A Preferred Stock as of the date of the Notice of Redemption
and uses its reasonable best efforts to consummate the sale of its shares of
Series A Preferred Stock prior to the stated Redemption Date but has not
completed the sale of all the Series A Preferred Stock Beneficially Owned by the
Investor and its Affiliates (or such other amount desired to be sold by the
Investor and its Affiliates), the Corporation shall, at the option of the
Investor (or any such Affiliate), delay such Redemption Date for a period not to
exceed 30 days as requested by the Investor (or any such Affiliate) in order to
complete such sale or sales, and shall notify the holders of Series A Preferred
Stock of such delay within five days of receiving the request therefor. Any
delay of the Redemption Date pursuant to the proviso to the preceding sentence
shall be requested by the Investor (or its Affiliate) in writing no later than
the tenth day preceding the then-scheduled Redemption Date stated in the Notice
of Redemption. The Redemption Date stated in a Notice of Redemption shall not be
delayed more than once in connection with the redemption of shares of Series A
Preferred Stock pursuant to such Notice of Redemption. In order to facilitate
the redemption of shares of Series A Preferred Stock, the Board of Directors may
fix a record date for the determination of the holders of shares of Series A
Preferred Stock to be redeemed, in each case, not more than 30 days prior to the
date the Notice of Redemption is mailed. On or after the Redemption Date, each
holder of the shares called for redemption shall surrender the certificate
evidencing such shares to the Corporation at the place designated in such notice
and shall thereupon be entitled to receive payment of the Redemption Price. From
and after the Redemption Date, all dividends on shares of Series A Preferred
Stock shall cease to accumulate and all rights of the holders thereof as holders
of Series A Preferred Stock shall cease and
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terminate, except to the extent the Corporation shall default in payment thereof
on the Redemption Date. Prior to any Redemption Date that has been fixed by the
Company, other than in connection with the Mandatory Redemption, the Corporation
shall take all measures reasonably requested by the Investor to facilitate a
sale or other disposition of Series A Preferred Stock by the Investor or its
Affiliates prior to such Redemption Date, including, without limitation,
participation in due diligence sessions and provision of information about the
management, business and financial condition of the Corporation, preparation of
offering memoranda, private placement memoranda and other similar documents and
preparation and delivery of such other certificates or documents reasonably
requested by the Investor. For so long as the Investor or an Affiliate of the
Investor holds any shares of Series A Preferred Stock, no Notice of Redemption
in connection with a redemption pursuant to Section A or B of this Article V
shall be delivered unless (i) the Corporation's preferred stock is rated Baa or
better by Moody's or BBB or better by S&P, or in the event the Corporation's
preferred stock is not rated by Moody's and S&P, the Corporation's unsecured
debt is rated Baa or better by Moody's or BBB or better by S&P or (ii) the
Corporation has sufficient funds reasonably available under committed lines of
credit or other similar sources of financing established with financially sound
financing providers to pay, on the Redemption Date, the aggregate Redemption
Price in connection with such redemption (and shall reserve such funds or
availability for the payment of the aggregate Redemption Price); provided, that
the Corporation may deliver a Notice of Redemption without complying with the
foregoing conditions if prior to, or contemporaneously with, the delivery of
such notice the Corporation irrevocably deposits in accordance with Section F of
this Article V funds sufficient to pay the aggregate Redemption Price for the
Series A Preferred Stock.
D. Change of Control. In the event there occurs a Change of Control,
any holder of record of shares of Series A Preferred Stock, in accordance with
the procedures set forth in Section E hereof, may require the Corporation to
redeem any or all of the shares of Series A Preferred Stock held by such holder
at the Redemption Price therefor.
E. Change of Control Notice and Redemption Procedures. Notice of any
Change of Control shall be sent to the holders of record of the outstanding
shares of Series A Preferred Stock not more than five days following a Change of
Control, which notice (a "Change of Control Notice") shall describe the
transaction or transactions constituting such Change of Control and set forth
each holder's right to require the Corporation to redeem any or all shares of
Series A Preferred Stock held by him or her out of funds legally available
therefor, the Redemption Date (which date shall be not more than 30 days from
the date of such Change of Control Notice) and the procedures to be followed by
such holders in exercising his or her right to cause such redemption; provided,
however, that if shares of Series A Preferred Stock
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are owned by more than 50 holders or groups of Affiliated holders and if the
Series A Preferred Stock is listed on any national securities exchange or quoted
on any national quotation system, the Corporation shall give such Change of
Control Notice by publication in a newspaper of general circulation in the
Borough of Manhattan, The City of New York, within 30 days following such Change
of Control and, in any case, a similar notice shall be mailed concurrently to
each holder of shares of Series A Preferred Stock. Failure by the Corporation to
give the Change of Control Notice as prescribed by the preceding sentence, or
the formal insufficiency of any such Change of Control Notice, shall not
prejudice the rights of any holder of shares of Series A Preferred Stock to
cause the Corporation to redeem any such shares held by him or her. In the event
a holder of shares of Series A Preferred Stock shall elect to require the
Corporation to redeem any or all such shares of Series A Preferred Stock
pursuant to Section D hereof, such holder shall deliver, prior to the Redemption
Date as set forth in the Change of Control Notice, or, if the Change of Control
Notice is not given as required by this Section E, at any time following the
last day the Corporation was required to give the Change of Control Notice in
accordance with this Section E (in which case the Redemption Date shall be the
date which is the later of (x) 30 days following the last day the Corporation
was required to give the Change of Control Notice in accordance with this
Section E and (y) 15 days following the delivery of such election by such
holder), a written notice, in the form specified by the Corporation (if the
Corporation did in fact give the notice required by this Section E), to the
Corporation so stating, and specifying the number of shares to be redeemed
pursuant to Section D hereof; provided, however, that if all of the shares of
the Series A Preferred Stock are owned by 50 or fewer holders or groups of
affiliated holders, such holders or groups may deliver a notice or an election
to redeem at any time within 90 days following the occurrence of a Change of
Control without awaiting receipt of a Change of Control Notice or the expiration
of the time allowed for the delivery of a Change of Control Notice hereunder.
The Corporation shall redeem the number of shares so specified on the Redemption
Date fixed by the Corporation or as provided in the preceding sentence. The
Corporation shall comply with the requirements of Rules 13e-4 and 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the shares of Series A Preferred Stock as a result of a Change of
Control. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of this paragraph, the Corporation shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations hereunder by virtue thereof.
F. Deposit of Funds. The Corporation shall, on or prior to any
Redemption Date pursuant to this Article V, deposit with its transfer agent or
other redemption agent in the Borough of Manhattan, The City of New York having
a capital and surplus of at least $500,000,000 selected by the Board of
Directors, as a
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trust fund for the benefit of the holders of the shares of Series A Preferred
Stock to be redeemed, cash that is sufficient in amount to redeem the shares to
be redeemed in accordance with the Notice of Redemption or Change of Control
Notice, with irrevocable instructions and authority to such transfer agent or
other redemption agent to pay to the respective holders of such shares, as
evidenced by a list of such holders certified by an officer of the Corporation,
the Redemption Price upon surrender of their respective share certificates. Such
deposit shall be deemed to constitute full payment of such shares to the
holders, and from and after the date of such deposit, all rights of the holders
of the shares of Series A Preferred Stock that are to be redeemed as
stockholders of the Corporation with respect to such shares, except the right to
receive the Redemption Price upon the surrender of their respective
certificates, shall cease and terminate. No dividends shall accumulate on any
shares of Series A Preferred Stock after the Redemption Date for such shares
(unless the Corporation shall fail to deposit cash sufficient to redeem all such
shares). In case holders of any shares of Series A Preferred Stock called for
redemption shall not, within two years after such deposit, claim the cash
deposited for redemption thereof, such transfer agent or other redemption agent
shall, upon demand, pay over to the Corporation the balance so deposited.
Thereupon, such transfer agent or other redemption agent shall be relieved of
all responsibility to the holders thereof and the sole right of such holders,
with respect to shares to be redeemed, shall be to receive the Redemption Price
as general creditors of the Corporation. Any interest accrued on any funds so
deposited shall belong to the Corporation, and shall be paid to it from time to
time on demand.
VI. Exchange of Series A Preferred Stock
A. The Series A Preferred Stock shall be exchangeable, at any time,
at the option of the Corporation and to the extent permitted by applicable law,
in whole but not in part, on any Dividend Payment Date for Junior Subordinated
Debentures (issued pursuant to an indenture (the "Indenture") prepared in
accordance with the Investment Agreement), in principal amount of $1,000 per
share of Series A Preferred Stock (a "Debenture" and, collectively, the
"Debentures"), in accordance with this Article VI:
(i) Each share of Series A Preferred Stock shall be exchangeable at
the offices of the Corporation and at such other place or places, if any, as the
Board of Directors may designate. Except with the prior written consent of the
holders of all outstanding shares of Series A Preferred Stock, the Corporation
may not exchange any shares of Series A Preferred Stock if (a) full cumulative
dividends, to the extent payable or deemed payable through the date of exchange,
have not been paid or set aside for payment on all outstanding shares of the
Series A Preferred Stock, (b) the Corporation has failed to amend its
Certificate of Incorporation pursuant to Delaware
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law to confer the power to vote upon holders of the Debentures as shall be
contemplated by the Indenture or (c) such exchange could result in any tax
consequence to the Investor or any of its Affiliates which is materially
adverse.
(ii) Prior to giving notice of its intention to exchange, the
Corporation shall execute and deliver to a bank or trust company selected by the
Board of Directors and, if required by applicable law, qualify under the Trust
Indenture Act of 1939, as amended, the Indenture.
(iii) The Corporation shall mail written notice of its intention to
exchange Series A Preferred Stock for Debentures (the "Exchange Notice") to each
holder of record of shares of Series A Preferred Stock not less than 90 nor more
than 120 days prior to the date fixed for exchange.
(iv) Prior to effecting any exchange provided above, the Corporation
shall deliver to each holder of shares of Series A Preferred Stock an opinion of
nationally recognized legal counsel to the effect that: (i) each of the
Indenture and the Debentures have been duly authorized and executed by the
Corporation and, when delivered by the Corporation in exchange for shares of
Series A Preferred Stock, will constitute valid and legally binding obligations
of the Corporation enforceable against the Corporation in accordance with their
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and to general principles of equity; (ii) the
exchange of the Debentures for the shares of Series A Preferred Stock shall not
violate the provisions of this Article VI or of the Delaware General Corporation
Law, including Section 221 thereof; and (iii) the exchange of the Debentures for
the shares of Series A Preferred Stock is exempt from the registration
requirements of the Securities Act or, if no such exemption is available, that
the Debentures have been duly registered for such exchange under such Act.
(v) Upon the exchange of shares of Series A Preferred Stock for
Debentures, the rights of the holders of shares of Series A Preferred Stock as
stockholders of the Corporation shall terminate and such shares shall no longer
be deemed outstanding.
(vi) Before any holder of shares of Series A Preferred Stock shall
be entitled to receive Debentures, such holder shall surrender the certificate
or certificates therefor, at the office of the Corporation or at such other
place or places, if any, as the Board of Directors shall have designated, and
shall state in writing the name or names (with addresses) in which he or she
wishes the certificate or certificates for the Debentures to be issued. The
Corporation will, as soon as practicable thereafter, issue and deliver at said
office or place to such holder of shares
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of Series A Preferred Stock, or to his or her nominee or nominees, certificates
for the Debentures to which he or she shall be entitled as aforesaid. Shares of
Series A Preferred Stock shall be deemed to have been exchanged as of the close
of business on the date fixed for exchange as provided above, and the Person or
Persons entitled to receive the Debentures issuable upon such exchange shall be
treated for all purposes (including the accrual and payment of interest) as the
record holder or holders of such Debentures as of the close of business on such
date.
B. For purposes of clause (c) of paragraph (i) of Section A, an
exchange of shares of Series A Preferred Stock shall be deemed to be an exchange
that could result in a tax consequence to the Investor or any of its Affiliates
which is materially adverse only if the Investor or its Affiliate shall have
delivered to the Corporation a written notice to such effect on or before the
fifteenth day after its receipt of the Exchange Notice (an "Objection Notice"),
which Objection Notice shall be prepared in good faith and shall specify in
reasonable detail the nature of such tax consequences which could result from
the exchange (other than the difference between the tax treatment of
distributions on the Series A Preferred Stock and interest payments on the
Debentures); provided, that the Investor or its Affiliates shall not deliver an
Objection Notice unless the Investor and its Affiliates Beneficially Own, in the
aggregate, at least 1,000 shares of Series A Preferred Stock at the time of
delivery of such Objection Notice to the Corporation. If the Corporation
receives an Objection Notice, then the Corporation shall not exchange the shares
of Series A Preferred Stock of the Investor and its Affiliates and the
Corporation shall, within 15 days after its receipt of the Objection Notice mail
written notice to the effect that it is canceling the proposed exchange of
shares of Series A Preferred Stock to each holder of record of shares of Series
A Preferred Stock to which it mailed the Exchange Notice.
C. Shares of the Series A Preferred Stock may be exchanged for
Warrant Shares pursuant to Section 4 of the Warrants.
VII. Restrictions on Dividends
So long as any shares of the Series A Preferred Stock are
outstanding, the Board of Directors shall not declare, and the Corporation shall
not pay or set apart for payment any dividend on any Junior Securities or make
any payment on account of, or set apart for payment money for a sinking or other
similar fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
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shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities)
unless prior to or concurrently with such declaration, payment, setting apart
for payment, repurchase, redemption or other retirement or distribution, as the
case may be, all accumulated and unpaid dividends on shares of the Series A
Preferred Stock not paid on the dates provided for in paragraph A of Article III
hereof (including Arrearages and accumulated dividends thereon) shall have been
paid, except that when dividends are not paid in full as aforesaid upon the
shares of Series A Preferred Stock, all dividends declared on the Series A
Preferred Stock and any series of Parity Dividend Securities shall be declared
and paid pro rata so that the amount of dividends so declared and paid on Series
A Preferred Stock and such series of Parity Dividend Securities shall in all
cases bear to each other the same ratio that accumulated dividends (including
interest accrued on or additional dividends accumulated in respect of such
accumulated dividends) on the shares of Series A Preferred Stock and such Parity
Dividend Securities bear to each other. Notwithstanding the foregoing, this
paragraph shall not prohibit (i) the acquisition, repurchase, exchange,
conversion, redemption or other retirement for value of shares of Series A
Preferred Stock or any Parity Dividend Security by the Corporation in accordance
with the terms of such securities or of any shares of Trust Preferred Stock (as
defined in Section F of Article VIII) or (ii) the acquisition, repurchase,
exchange, conversion, redemption or other retirement for value by the
Corporation of any Junior Dividend Securities by the Corporation in accordance
with obligations in existence at the time of original issuance of the Series A
Preferred Stock.
VIII. Voting Rights
A. The holders of shares of Series A Preferred Stock shall have no
voting rights except as set forth below or as otherwise from time to time
required by law.
B. So long as any shares of the Series A Preferred Stock are
outstanding, each share of Series A Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock, and the
shares of Series A Preferred Stock shall vote together with shares of Common
Stock (and any shares of Series B Preferred Stock entitled to vote) as a single
class; provided, however, that upon register or transfer on the stock records of
the Corporation of a share of Series A Preferred Stock to any Person other than
the Investor or an Affiliate of the Investor,
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the transferee, and any subsequent transferee, shall not be entitled to such
voting rights. With respect to any such vote, the Investor (together with its
Affiliates) shall be entitled to a number of votes per share of Series A
Preferred Stock equal to the quotient of the Investor Aggregate Vote Number,
divided by the number of shares of Series A Preferred Stock held by such
Investor and its Affiliates as of the record date for such vote. The "Investor
Aggregate Vote Number" shall equal the number of Warrant Shares that would be
issuable upon the exercise of the Original Warrants (as defined below) by the
holders thereof (assuming all conditions precedent to such exercise have been
satisfied and that such exercise occurs as of the record date for such vote),
multiplied by the lesser of (x) the quotient of the number of Original Warrants
that are Beneficially Owned by members of the Investor Group, in the aggregate,
as of the record date for such vote (excluding for purposes of this calculation,
however, any Original Warrants that have been transferred on the books of the
Corporation by any member of the Investor Group to any Person other than a
member of the Investor Group, regardless of whether any such Original Warrants
are subsequently acquired by any member of the Investor Group), divided by the
number of Original Warrants, and (y) the quotient of the number of Original
Series A Preferred Shares (as defined below) that are Beneficially Owned by
members of the Investor Group, in the aggregate, as of the record date for such
vote (excluding for purposes of this calculation, however, any Original Series A
Preferred Shares transferred on the stock records of the Corporation by any
member of the Investor Group to any Person other than a member of the Investor
Group, regardless of whether any such Original Series A Preferred Shares are
subsequently acquired by any member of the Investor Group), divided by the
number of Original Series A Preferred Shares. The term "Original Warrants" means
those Warrants Beneficially Owned by members of the Investor Group, in the
aggregate, as of the Closing. The term "Original Series A Preferred Shares"
means those shares of Series A Preferred Stock Beneficially Owned by members of
the Investor Group, in the aggregate, as of the Closing.
C. If on any date (i) dividends payable on either the Series A
Preferred Stock or the Series B Preferred Stock shall have been in arrears and
not paid in full for four consecutive quarterly periods or if dividends shall
have been in arrears and not paid in full on the first or second annual
anniversary of the original issuance of the Series A Preferred Stock or Series B
Preferred Stock, as the case may be, or (ii) the Corporation shall have failed
to satisfy its obligation to redeem either shares of Series A Preferred Stock or
shares of Series B Preferred Stock pursuant to the relevant Certificate of
Designations, then the number of directors constituting the Board of Directors
shall, without further action, be increased by two, and the holders of a
majority of the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock shall have, in addition to the other voting rights set forth
herein, the exclusive right, voting together as a single class without regard to
series, to elect the
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two directors (the "Additional Directors") of the Corporation to fill such
newly-created directorships. Notwithstanding the foregoing, the Investor and its
Affiliates shall not be permitted to elect, pursuant to the preceding sentence,
more than the number of directors that would result in four directors designated
for nomination or elected by the Investor and its Affiliates then being on the
Board of Directors (including directors that the Investor has a right to
designate for nomination to the Board of Directors pursuant to the Investment
Agreement); provided, that if at the time holders of Series A Preferred Stock
and Series B Preferred Stock have the right to elect Additional Directors and
(i) the Investor and its Affiliates Beneficially Own, in the aggregate, a
majority of the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, taken together as a single class, and (ii) the Investor and its
Affiliates are not permitted to elect one or both of the Additional Directors as
aforesaid, then the holders of Series A Preferred Stock and Series B Preferred
Stock (other than the Investor and its Affiliates) shall have the right to
elect, voting together as a single class, one Additional Director pursuant to
this Section C. Additional Directors shall continue as directors and such
additional voting right shall continue until such time as (a) all dividends
accumulated on the Series A Preferred Stock and/or Series B Preferred Stock, as
the case may be, shall have been paid in full or (b) any redemption obligation
with respect to the Series A Preferred Stock and/or the Series B Preferred
Stock, as the case may be, that has become due shall have been satisfied or all
necessary funds shall have been set aside for payment, as the case may be, at
which time such Additional Directors shall cease to be directors and such
additional voting right of the holders of shares of Series A Preferred Stock
shall terminate subject to revesting in the event of each and every subsequent
event of the character indicated above and subject to any rights as to the
election of directors provided for the holders of any other series of Preferred
Stock of the Corporation.
D. In the event that one or more of the Investor Nominees required
to be designated for election to the Board of Directors pursuant to the
Investment Agreement are not so designated or are not elected to the Board of
Directors and the Investor or any of its Affiliates Beneficially Owns shares of
Series A Preferred Stock, then the number of directors constituting the Board of
Directors shall, without further action, be increased by the number of such
Investor Nominees not elected to the Board of Directors pursuant to the
Investment Agreement, and such holder or holders shall have, in addition to the
other voting rights set forth herein, the exclusive right, voting separately as
a single class, to elect a number of directors to the Board of Directors equal
to the number of such Investor Nominees not elected to the Board of Directors.
Directors elected pursuant to this Section D shall continue as directors and
such additional voting right shall continue until such time as the requisite
number of Investor Nominees are elected to the Board of Directors pursuant to
the Investment Agreement, at which time the directors elected by the Investor
and its Affiliates pursuant to this Section D shall cease to be directors
(unless elected as Investor
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<PAGE> 31
Nominees), and such additional voting rights shall terminate subject to
revesting in the event of each and every subsequent event of the character
indicated above.
E. (a) The foregoing rights of holders of shares of Series A
Preferred Stock to take any action as provided in this Article VIII may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action. So long as such right to vote continues (and unless such right has
been exercised by written consent of the minimum number of shares required to
take such action), the Chairman of the Board of Directors may call, and upon the
written request of holders of record of 20% of the outstanding shares of Series
A Preferred Stock, addressed to the Secretary of the Corporation at the
principal office of the Corporation, shall call, a special meeting of the
holders of shares entitled to vote as provided herein. Such meeting shall be
held within 60 days after delivery of such request to the Secretary, at the
place and upon the notice provided by law and in the Bylaws for the holding of
meetings of stockholders.
(b) Each director elected pursuant to Section C or D hereof shall
serve until the next annual meeting or until his or her successor shall be
elected and shall qualify, unless the director's term of office shall have
terminated pursuant to the provisions of Section C or D hereof, as the case may
be. In case any vacancy shall occur among the directors elected pursuant to
Section C or D hereof, such vacancy may be filled for the unexpired portion of
the term by vote of the remaining director or directors theretofore elected by
such holders (or such director's or directors' successor in office), if any. If
any such vacancy is not so filled within 20 days after the creation thereof or
if all of the directors so elected shall cease to serve as directors before
their term shall expire, the holders of the shares then outstanding and entitled
to vote for such director pursuant to the provisions of Section C or D hereof,
as the case may be, may elect successors to hold office for the unexpired terms
of any vacant directorships, by written consent as herein provided, or at a
special meeting of such holders called as provided herein. The holders of a
majority of the shares entitled to vote for directors pursuant to Section C or D
hereof, as the case may be, shall have the right to remove with or without cause
at any time and replace any directors such holders have elected pursuant to such
section, by written consent as herein provided, or at a special meeting of such
holders called as provided herein.
F. Without the consent or affirmative vote of the holders of at
least a majority of the outstanding shares of Series A Preferred Stock, voting
separately as a class, the Corporation shall not authorize, create or issue, or
increase the authorized amount of, (i) any Senior Securities or Parity
Securities (except Parity Securities to be issued in exchange for all
outstanding shares of Series B Preferred
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<PAGE> 32
Stock in connection with a simultaneous exchange of Parity Securities for all
outstanding shares of Series A Preferred Stock) or (ii) any class or series of
capital stock or any security convertible into or exercisable for any class or
series of capital stock, redeemable mandatorily or redeemable at the option of
the holder thereof at any time on or prior to the Mandatory Redemption Date
(whether or not only upon the occurrence of a specified event) (except Parity
Securities to be issued in exchange for all outstanding shares of Series B
Preferred Stock in connection with a simultaneous exchange of Parity Securities
for all outstanding shares of Series A Preferred Stock); provided, however, that
no consent or vote of the holders of the outstanding shares of the Series A
Preferred Stock shall be required for the creation or issuance by a trust formed
at the direction of the Corporation of any series of preferred securities of
such trust for financing purposes in an aggregate amount not to exceed
$250,000,000 ("Trust Preferred Stock"). No consent or vote of the holders of the
outstanding shares of Series A Preferred Stock shall be required to authorize,
create or issue, or increase the authorized amount of, any class or series of
Junior Securities, or any security convertible into a stock of any class or
series of Junior Securities, except to the extent such action would violate
Section H of this Article VIII.
G. Without the consent or affirmative vote of the holders of at
least a majority of the outstanding shares of Series A Preferred Stock, voting
separately as a class, the Corporation shall not (i) amend, alter or repeal any
provision of the Certificate of Incorporation or the Bylaws, if the amendment,
alteration or repeal alters or changes the powers, preferences or special rights
of the Series A Preferred Stock so as to affect them materially and adversely,
or (ii) authorize or take any other action if such action alters or changes any
of the rights of the Series A Preferred Stock in any respect or otherwise would
be inconsistent with the provisions of this Certificate of Designations and the
holders of any class or series of the capital stock of the Corporation is
entitled to vote thereon. The terms set forth in this Certificate of
Designations may be amended or modifies without the affirmative vote of the
stockholders of the Company (other than the holders of the Series A Preferred
Stock as provided in the preceding sentence); provided, that the Board of
Directors has determined that such amendment or modification will not have a
material adverse effect on the Corporation.
H. Other Securities. The Corporation shall not enter into any
agreement or issue any security that prohibits, conflicts or is inconsistent
with, or would be breached by, the Corporation's performance of its obligations
hereunder.
IX. Additional Definitions
For the purposes of this Certificate of Designations of Series A
Preferred Stock, the following terms shall have the meanings indicated:
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<PAGE> 33
"Affiliate" has the meaning set forth in Rule 12b-2 under the
Exchange Act. The term "Affiliated" has a correlative meaning. Notwithstanding
the foregoing, for all purposes hereof, TPG, and each Person controlled by,
controlling or under common control with TPG (each, a "TPG Person"), shall not
be deemed an "Affiliate" of any Designated Purchaser Person (as defined below),
and no designated Purchaser, and no Person controlled by, controlling or under
common control with such Designated Purchaser (each, a "Designated Purchaser
Person"), shall be deemed an "Affiliate" of any TPG Person or any other
Designated Purchaser Person, in any such case solely as a consequence of the
Investment Agreement and the transactions contemplated thereby.
"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings. Notwithstanding the foregoing, for all purposes hereof, no
TPG Person shall be deemed to Beneficially Own any securities that are held by
any Designated Purchaser Person, and no Designated Purchaser Person shall be
deemed to Beneficially Own any securities that are held by any TPG Person or
other Designated Purchaser Person, in any such case solely as a consequence of
the Investment Agreement or the transactions contemplated thereby.
"Business Day" means any day, other than a Saturday, Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Change of Control" means such time as:
(i) any Person or Group (other than the Investor, its Affiliates,
the Corporation or any Subsidiaries of the Corporation, or any Group composed of
such Persons) has become, directly or indirectly, the Beneficial Owner, by way
of merger, consolidation or otherwise, of a majority of the voting power of the
then-outstanding Voting Securities of the Corporation on a fully-diluted basis,
after giving effect to the conversion and exercise of all outstanding warrants,
options and other securities of the Corporation convertible into or exercisable
for Voting Securities of the Corporation (whether or not such securities are
then currently convertible or exercisable); or
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<PAGE> 34
(ii) the sale, lease, transfer or other disposition of all or
substantially all of the consolidated assets of the Corporation and its
Subsidiaries to any Person or Group; or
(iii) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted the Board of
Directors, together with any new members of such Board of Directors whose
election by such Board of Directors or whose nomination for election by the
stockholders of the Corporation was approved by a vote of at least a majority of
the members of such Board of Directors then still in office who either were
directors at the beginning of such period or whose election or nomination for
election was previously so approved or who were approved pursuant to Section
5.02 of the Investment Agreement or Article VIII, Section C, D or E of this
Certificate of Designations, cease for any reason to constitute a majority of
the directors of the Corporation then in office; or
(iv) the Corporation consolidates with or merges with or into
another Person or any Person consolidates with, or merges with or into, the
Corporation, in any such event pursuant to a transaction in which immediately
after the consummation thereof the Persons owning the then-outstanding Voting
Securities of the Corporation immediately prior to such consummation shall not
own a majority in the aggregate (by reason of such prior ownership) of the
then-outstanding Voting Securities of the Corporation or the surviving entity if
other than the Corporation; or
(v) the adoption of a plan relating to the liquidation or
dissolution of the Corporation, whether or not otherwise in compliance with the
provisions of this Series A Preferred Stock.
"Closing" shall have the meaning assigned to such term in the
Investment Agreement.
"Designated Purchaser" has the meaning assigned to such term in
the Investment Agreement.
"Designated Purchaser Person" has the meaning set forth in the
definition of "Affiliate."
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
"Group" has the meaning set forth in Rule 13d-5 under the Exchange
Act.
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<PAGE> 35
"Investment Agreement" means the Investment Agreement, dated as of
February 23, 1998, by and between the Investor and the Corporation, as amended,
supplemented or otherwise modified from time to time.
"Investor Group" means, collectively, the Investor, the Designated
Purchasers, if any, and the respective Affiliates of such Persons.
"Investor Nominee" means a person designated for election to the
Board of Directors by the Investor pursuant to the Investment Agreement.
"Investor" means TPG.
"Moody's" means Moody's Investors Service and its successors.
"Person" means any individual, corporation, company, association,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of February 23, 1998, by and between the Investor and the
Corporation, as amended, supplemented or otherwise modified from time to time.
"Second Anniversary Date" means the second anniversary of the
original issuance of the Series A Preferred Stock.
"Securities Act" means the U.S. Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder, from time to time.
"Series B Preferred Stock" has the meaning assigned to such term in
the Investment Agreement.
"S&P" means Standard and Poor's Ratings Group, a division of the
McGraw-Hill Companies, and its successors.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of voting stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or combination thereof) and (ii) any partnership (A) the sole general
partner of the managing general partner of which is such Person or a Subsidiary
of such Person or (B) the only general partners of which are such Person or of
one or more Subsidiaries of such Person (or any combination thereof).
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<PAGE> 36
"TPG" means TPG Oxford LLC, a Delaware limited liability company.
"TPG Person" has the meaning set forth in the definition of
"Affiliate."
"Voting Securities" means the shares of Common Stock and any other
securities of the Corporation entitled to vote generally for the election of
directors.
"Warrants" means the Series A Warrants issued by the Corporation on
pursuant to the Investment Agreement.
"Warrant Shares" has the meaning assigned to such term in the
Warrants.
X. Miscellaneous
A. Notices. Any notice referred to herein shall be in writing and,
unless first-class mail shall be specifically permitted for such notices under
the terms hereof, shall be deemed to have been given upon personal delivery
thereof, upon transmittal of such notice by telecopy (with confirmation of
receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
(i) if to the Corporation, to its office at 800 Connecticut
Avenue Norwalk, Connecticut 06854 (Attention: General Counsel) or to the
transfer agent for the Series A Preferred Stock;
(ii) if to a holder of the Series A Preferred Stock, to such holder
at the address of such holder as listed in the stock record books of the
Corporation (which may include the records of any transfer agent for the Series
A Preferred Stock); or
(iii) to such other address as the Corporation or such holder, as
the case may be, shall have designated by notice similarly given.
B. Reacquired Shares. Any shares of Series A Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation, directly or
indirectly, in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof (and shall not be deemed to be outstanding for any
purpose) and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the Delaware General
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<PAGE> 37
Corporation Law. All such shares of Series A Preferred Stock shall upon their
cancellation and upon the filing of an appropriate certificate with the
Secretary of State of the State of Delaware, become authorized but unissued
shares of Preferred Stock, par value $0.01 per share, of the Corporation and may
be reissued as part of another series of Preferred Stock, par value $0.01 per
share, of the Corporation subject to the conditions or restrictions on issuance
set forth herein.
C. Enforcement. Any registered holder of shares of Series A
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designations or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
D. Transfer Taxes. Except as otherwise agreed upon pursuant to the
terms of this Certificate of Designations, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Debentures on exchange of, or other securities or
property issued on account of, shares of Series A Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Debentures or other securities or property in a
name other than that in which the shares of Series A Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
E. Transfer Agent. The Corporation may appoint, and from time to
time discharge and change, a transfer agent for the Series A Preferred Stock.
Upon any such appointment or discharge of a transfer agent, the Corporation
shall send notice thereof by first-class mail, postage prepaid, to each holder
of record of shares of Series A Preferred Stock.
F. Record Dates. In the event that the Series A Preferred Stock
shall be registered under either the Securities Act or the Exchange Act, the
Corporation shall establish appropriate record dates with respect to payments
and other actions to be made with respect to the Series A Preferred Stock.
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<PAGE> 38
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Secretary and attested by its Controller, this
13th day of May, 1998.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
-----------------------------------
Jeffery H. Boyd, Executive Vice
President, General Counsel and
Secretary
[Corporate Seal]
ATTEST:
/s/ BRENDAN SHANAHAN
- ------------------------------------
Brendan Shanahan, Vice President and
Controller
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<PAGE> 39
Exhibit 3(b)
Part 6
Conformed
CERTIFICATE OF DESIGNATIONS
of
SERIES B CUMULATIVE PREFERRED STOCK
of
OXFORD HEALTH PLANS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Oxford Health Plans, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation (the "Board of Directors") pursuant to authority of
the Board of Directors as required by Section 151 of the Delaware General
Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the Second Amended
and Restated Certificate of Incorporation of the Corporation, as amended (the
"Certificate of Incorporation"), the Board of Directors hereby creates a series
of the Corporation's previously authorized preferred stock, par value $0.01 per
share (the "Preferred Stock"), and hereby states the designation and number
thereof, and fixes the voting powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, as follows:
Series B Cumulative Preferred Stock:
I. Designation and Amount
The designation of this series of shares shall be "Series B
Cumulative Preferred Stock" (the "Series B Preferred Stock"); the stated value
per share shall be $1,000 (the "Stated Value"); and the number of shares
constituting such series shall be 300,000. The number of shares of the Series B
Preferred Stock may be decreased from time to time by a resolution or
resolutions of the Board of Directors; provided, however, that such number shall
not be decreased below the aggregate number of shares of the
<PAGE> 40
Series B Preferred Stock then outstanding.
II. Rank
A. With respect to dividend rights, the Series B Preferred Stock
shall rank (i) junior to each other class or series of Preferred Stock which by
its terms ranks senior to the Series B Preferred Stock as to payment of
dividends, (ii) on a parity with each other class or series of Preferred Stock
which by its terms ranks on a parity with the Series B Preferred Stock as to
payment of dividends, including the Series A Preferred Stock, par value $0.01
per share, of the Corporation (the "Series A Preferred Stock") and (iii) prior
to the Corporation's Common Stock, par value $.01 per share (the "Common
Stock"), and, except as specified above, all other classes and series of capital
stock of the Corporation hereafter issued by the Corporation. With respect to
dividends, all equity securities of the Corporation to which the Series B
Preferred Stock ranks senior, including the Common Stock, are collectively
referred to herein as the "Junior Dividend Securities"; all equity securities of
the Corporation with which the Series B Preferred Stock ranks on a parity,
including the Series A Preferred Stock, are collectively referred to herein as
the "Parity Dividend Securities"; and all equity securities of the Corporation
(other than convertible debt securities) to which the Series B Preferred Stock
ranks junior, with respect to dividends, are collectively referred to herein as
the "Senior Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series B Preferred Stock shall rank (i) junior to each other class or series
of Preferred Stock which by its terms ranks senior to the Series B Preferred
Stock as to distribution of assets upon liquidation, dissolution or winding up,
(ii) on a parity with each other class or series of Preferred Stock which by its
terms ranks on a parity with the Series B Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation, including
the Series A Preferred Stock, and (iii) prior to the Common Stock, and, except
as specified above, all other classes and series of capital stock of the
Corporation hereinafter issued by the Corporation. With respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, all equity securities of the
Corporation to which the Series B Preferred Stock ranks senior, including the
Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series B Preferred Stock ranks on parity,
including the Series A Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series B Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series B Preferred Stock shall be subject to the creation of
<PAGE> 41
Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities") but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series A
Preferred Stock), or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof and the Investment Agreement, including, without limitation,
Article VIII, Section F hereof.
III. Dividends
A. Dividends. Prior to the Second Anniversary Date, shares of Series
B Preferred Stock shall accumulate dividends at a rate of 9.308332% per annum,
payment of which may be made in cash or by the issuance of additional shares of
Series B Preferred Stock (which, upon issuance, shall be fully paid and
nonassessable), at the option of the Company; provided that if any such dividend
is paid after the Second Anniversary Date, such dividend shall be paid in cash.
On and after the Second Anniversary Date, shares of Series B Preferred Stock
shall accumulate dividends at a rate of 9% per annum, which dividends shall be
paid in cash. On and prior to the Second Anniversary Date, dividends shall be
paid annually on the anniversary of the original issuance of Series B Preferred
Stock, and thereafter dividends shall be paid in four equal quarterly
installments on the last day of March, June, September and December of each
year, or if any such date is not a Business Day, the Business Day next preceding
such day (each such date, regardless of whether any dividends have been paid or
declared and set aside for payment on such date, a "Dividend Payment Date"), to
holders of record (the "Registered Holders") as they appear on the stock record
books of the Corporation on the fifteenth day prior to the relevant Dividend
Payment Date. Notwithstanding the foregoing, from and after the day on which the
Shareholder Approval occurs, dividends shall accumulate on the Series B
Preferred Stock (i) prior to the Second Anniversary Date, at a rate of 8.243216%
per annum, payment of which may be made in cash or by the issuance of additional
shares of Series B Preferred Stock (which upon issuance shall be fully paid and
nonassessable), at the option of the Company, provided that if any such dividend
is paid after the Second Anniversary Date, such dividend shall be paid in cash,
and (ii) on and after the Second Anniversary Date, at a rate of 8% per annum,
which dividends shall be paid in cash. Dividends shall be paid only when, as and
if declared by the Board of Directors out of funds at the time legally available
for the payment of dividends. Dividends shall begin to accumulate on outstanding
shares of Series B Preferred Stock from the date of issuance and shall be deemed
to accumulate from day to day whether or not earned or declared until paid.
Dividends shall accumulate on the basis of a 360-day year consisting of twelve
30-day months (four 90-day quarters) and the actual number of days elapsed in
the period for which payable. Dividends payable at more than one annual rate for
any dividend period or partial dividend period shall be pro rated on the basis
of the number of days in such dividend period or partial dividend period,
calculated as aforesaid, and the actual number of days elapsed for which
dividends are payable at each
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<PAGE> 42
such annual rate.
B. Accumulation. Dividends on the Series B Preferred Stock shall be
cumulative, and from and after any Dividend Payment Date on which any dividend
that has accumulated or been deemed to have accumulated through such date has
not been paid in full or any payment date set for a redemption on which such
redemption payment has not been paid in full, additional dividends shall
accumulate in respect of the amount of such unpaid dividends or unpaid
redemption payment (the "Arrearage") at the annual rate then in effect as
provided in Section A of this Article III (or such lesser rate as may be the
maximum rate that is then permitted by applicable law). Such additional
dividends in respect of any Arrearage shall be deemed to accumulate from day to
day whether or not earned or declared until the Arrearage is paid, shall be
calculated as of such successive Dividend Payment Date and shall constitute an
additional Arrearage from and after any Dividend Payment Date to the extent not
paid on such Dividend Payment Date. References in any Article herein to
dividends that have accumulated or that have been deemed to have accumulated
with respect to the Series B Preferred Stock shall include the amount, if any,
of any Arrearage together with any dividends accumulated or deemed to have
accumulated on such Arrearage pursuant to the immediately preceding two
sentences. Additional dividends in respect of any Arrearage may be declared and
paid at any time, in whole or in part, without reference to any regular Dividend
Payment Date, to Registered Holders as they appear on the stock record books of
the Corporation on such record date as may be fixed by the Board of Directors
(which record date shall be no less than 10 days prior to the corresponding
payment date). Dividends in respect of any Arrearage shall be paid in cash.
C. Method of Payment. Dividends paid on the shares of Series B
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on all outstanding shares of Series B Preferred
Stock shall be allocated pro rata on a share-by-share basis among all such
shares then outstanding. After the Second Anniversary Date, dividends that are
declared and paid in an amount less than the full amount of dividends
accumulated on the Series B Preferred Stock (and on any Arrearage) shall be
applied first to the earliest dividend which has not theretofore been paid. All
cash payments of dividends on the shares of Series B Preferred Stock shall be
made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
IV. Liquidation Preference
In the event of a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of then-outstanding
shares of Series B Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share equal to the sum of
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(i) the dividends, if any, accumulated or deemed to have accumulated thereon to
the date of final distribution to such holders, whether or not such dividends
are declared, and (ii) the Stated Value thereof, and no more, before any payment
shall be made or any assets distributed to the holders of any Junior Liquidation
Securities. After any such payment in full, the holders of Series B Preferred
Stock shall not, as such, be entitled to any further participation in any
distribution of assets of the Corporation. All the assets of the Corporation
available for distribution to stockholders after the liquidation preferences of
any Senior Liquidation Securities shall be distributed ratably (in proportion to
the full distributable amounts to which holders of Series B Preferred Stock and
Parity Liquidation Securities, if any, are respectively entitled upon such
dissolution, liquidation or winding up) among the holders of the
then-outstanding shares of Series B Preferred Stock and Parity Liquidation
Securities, if any, when such assets are not sufficient to pay in full the
aggregate amounts payable thereon.
Neither a consolidation or merger of the Corporation with or into
any other Person or Persons, nor a sale, conveyance, lease, exchange or transfer
of all or part of the Corporation's assets for cash, securities or other
property to a Person or Persons shall be deemed to be a liquidation, dissolution
or winding up of the Corporation for purposes of this Article IV, but the
holders of shares of Series B Preferred Stock shall nevertheless be entitled
from and after any such consolidation, merger or sale, conveyance, lease,
exchange or transfer of all or part of the Corporation's assets to the rights
provided by this Article IV following any such transaction. Notice of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, stating the payment date or dates when, and the place or places
where, the amounts distributable to each holder of shares of Series B Preferred
Stock in such circumstances shall be payable, shall be given by first-class
mail, postage prepaid, mailed not less than 30 days prior to any payment date
stated therein, to holders of record as they appear on the stock record books of
the Corporation as of the date such notices are first mailed.
V. Redemption
A. Optional Redemption. The Corporation shall not have any right to
redeem any shares of Series B Preferred Stock prior to the fifth anniversary of
the original issuance of the Series B Preferred Stock. On and after such date,
the Corporation shall have the right, at its option and election, to redeem all
the outstanding shares of Series B Preferred Stock, in whole but not in part, at
any time, in accordance with the provisions of this Article V. The redemption
price for such shares of Series B Preferred Stock shall be paid in cash out of
funds legally available therefor and shall be in an amount per share equal to
the sum of (i) the amount, if any, of all unpaid dividends accumulated thereon
to the date of actual payment of the Redemption Price, whether or not such
dividends have been declared, and (ii) the Stated Value thereof (the "Redemption
Price").
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B. Mandatory Redemption. On the tenth anniversary of the original
issuance of the Series B Preferred Stock (the "Mandatory Redemption Date"), the
Corporation shall redeem (the "Mandatory Redemption") all outstanding shares of
Series B Preferred Stock by paying the Redemption Price therefor in cash out of
funds legally available for such purpose.
C. Notice and Redemption Procedures. Notice of the redemption of
shares of Series B Preferred Stock pursuant to Section A or B hereof (a "Notice
of Redemption") shall be sent to the holders of record of the shares of Series B
Preferred Stock to be redeemed by first class mail, postage prepaid, at each
such holder's address as it appears on the stock record books of the Corporation
not more than 120 nor fewer than 90 days prior to the date fixed for redemption,
which date shall be set forth in such notice (the "Redemption Date"); provided
that failure to give such Notice of Redemption to any holder, or any defect in
such Notice of Redemption to any holder shall not affect the validity of the
proceedings for the redemption of any shares of Series B Preferred Stock held by
any other holder. Notwithstanding the foregoing, in the event that
contemporaneously with or prior to the delivery of a Notice of Redemption, the
Corporation irrevocably deposits, in accordance with Section F of this Article
V, funds sufficient to pay the aggregate Redemption Price for the Series B
Preferred Stock, such Notice of Redemption shall be delivered not more than 120
days nor fewer than 30 days prior to the Redemption Date; provided, however,
that, if such Notice of Redemption is delivered fewer than 60 days prior to the
Redemption Date and the Investor or any of its Affiliates Beneficially Owns
shares of Series B Preferred Stock as of the date of the Notice of Redemption
and uses its reasonable best efforts to consummate the sale of its shares of
Series B Preferred Stock prior to the stated Redemption Date but has not
completed the sale of all the Series B Preferred Stock Beneficially Owned by the
Investor and its Affiliates (or such other amount desired to be sold by the
Investor and its Affiliates), the Corporation shall, at the option of the
Investor (or any such Affiliate), delay such Redemption Date for a period not to
exceed 30 days as requested by such Investor (or any such Affiliate) in order to
complete such sale or sales, and shall notify the holders of Series B Preferred
Stock of such delay within five days of receiving the request therefor. Any
delay of the Redemption Date pursuant to the proviso to the preceding sentence
shall be requested by the Investor (or any such Affiliate) in writing no later
than the tenth day preceding the then-scheduled Redemption Date stated in the
Notice of Redemption. The Redemption Date stated in a Notice of Redemption shall
not be delayed more than once in connection with the redemption of shares of
Series B Preferred Stock pursuant to such Notice of Redemption. In order to
facilitate the redemption of shares of Series B Preferred Stock, the Board of
Directors may fix a record date for the determination of the holders of shares
of Series B Preferred Stock to be redeemed, in each case, not more than 30 days
prior to the date the Notice of Redemption is mailed. On or after the Redemption
Date, each holder of the shares called for redemption shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
such
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notice and shall thereupon be entitled to receive payment of the Redemption
Price. From and after the Redemption Date, all dividends on shares of Series B
Preferred Stock shall cease to accumulate and all rights of the holders thereof
as holders of Series B Preferred Stock shall cease and terminate, except to the
extent the Corporation shall default in payment thereof on the Redemption Date.
Prior to any Redemption Date that has been fixed by the Company, other than in
connection with the Mandatory Redemption, the Corporation shall take all
measures reasonably requested by the Investor to facilitate a sale or other
disposition of Series B Preferred Stock by the Investor or its Affiliates prior
to such Redemption Date, including, without limitation, participation in due
diligence sessions and provision of information about the management, business
and financial condition of the Corporation, preparation of offering memoranda,
private placement memoranda and other similar documents and preparation and
delivery of such other certificates or documents reasonably requested by the
Investor. For so long as the Investor or an Affiliate of the Investor holds any
shares of Series B Preferred Stock, no Notice of Redemption in connection with a
redemption pursuant to Section A or B of this Article V shall be delivered
unless (i) the Corporation's preferred stock is rated Baa or better by Moody's
or BBB or better by S&P, or in the event the Corporation's preferred stock is
not rated by Moody's and S&P, the Corporation's unsecured debt is rated Baa or
better by Moody's or BBB or better by S&P or (ii) the Corporation has sufficient
funds reasonably available under committed lines of credit or other similar
sources of financing established with financially sound financing providers to
pay, on the Redemption Date, the aggregate Redemption Price in connection with
such redemption (and shall reserve such funds or availability for the payment of
the aggregate Redemption Price); provided, that the Corporation may deliver a
Notice of Redemption without complying with the foregoing conditions if prior
to, or contemporaneously with, the delivery of such notice the Corporation
irrevocably deposits in accordance with Section F of this Article V funds
sufficient to pay the aggregate Redemption Price for the Series B Preferred
Stock.
D. Change of Control. In the event there occurs a Change of Control,
any holder of record of shares of Series B Preferred Stock, in accordance with
the procedures set forth in Section E hereof, may require the Corporation to
redeem any or all of the shares of Series B Preferred Stock held by such holder
at the Redemption Price therefor.
E. Change of Control Notice and Redemption Procedures. Notice of any
Change of Control shall be sent to the holders of record of the outstanding
shares of Series B Preferred Stock not more than five days following a Change of
Control, which notice (a "Change of Control Notice") shall describe the
transaction or transactions constituting such Change of Control and set forth
each holder's right to require the Corporation to redeem any or all shares of
Series B Preferred Stock held by him or her out of funds legally available
therefor, the Redemption Date (which date shall be not more than 30 days from
the date of such Change of Control Notice) and the procedures to
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be followed by such holders in exercising his or her right to cause such
redemption; provided, however, that if shares of Series B Preferred Stock are
owned by more than 50 holders or groups of Affiliated holders and if the Series
B Preferred Stock is listed on any national securities exchange or quoted on any
national quotation system, the Corporation shall give such Change of Control
Notice by publication in a newspaper of general circulation in the Borough of
Manhattan, The City of New York, within 30 days following such Change of Control
and, in any case, a similar notice shall be mailed concurrently to each holder
of shares of Series B Preferred Stock. Failure by the Corporation to give the
Change of Control Notice as prescribed by the preceding sentence, or the formal
insufficiency of any such Change of Control Notice, shall not prejudice the
rights of any holder of shares of Series B Preferred Stock to cause the
Corporation to redeem any such shares held by him or her. In the event a holder
of shares of Series B Preferred Stock shall elect to require the Corporation to
redeem any or all such shares of Series B Preferred Stock pursuant to Section D
hereof, such holder shall deliver, prior to the Redemption Date as set forth in
the Change of Control Notice, or, if the Change of Control Notice is not given
as required by this Section E, at any time following the last day the
Corporation was required to give the Change of Control Notice in accordance with
this Section E (in which case the Redemption Date shall be the date which is the
later of (x) 30 days following the last day the Corporation was required to give
the Change of Control Notice in accordance with this Section E and (y) 15 days
following the delivery of such election by such holder), a written notice, in
the form specified by the Corporation (if the Corporation did in fact give the
notice required by this Section E), to the Corporation so stating, and
specifying the number of shares to be redeemed pursuant to Section D hereof;
provided, however, that if all of the shares of the Series B Preferred Stock are
owned by 50 or fewer holders or groups of affiliated holders, such holders or
groups may deliver a notice or an election to redeem at any time within 90 days
following the occurrence of a Change of Control without awaiting receipt of a
Change of Control Notice or the expiration of the time allowed for the delivery
of a Change of Control Notice hereunder. The Corporation shall redeem the number
of shares so specified on the Redemption Date fixed by the Corporation or as
provided in the preceding sentence. The Corporation shall comply with the
requirements of Rules 13e-4 and 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the shares of
Series B Preferred Stock as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of this paragraph, the Corporation shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations hereunder by virtue thereof.
F. Deposit of Funds. The Corporation shall, on or prior to any
Redemption Date pursuant to this Article V, deposit with its transfer agent or
other redemption agent in the Borough of Manhattan, The City of New York having
a capital
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and surplus of at least $500,000,000 selected by the Board of Directors, as a
trust fund for the benefit of the holders of the shares of Series B Preferred
Stock to be redeemed, cash that is sufficient in amount to redeem the shares to
be redeemed in accordance with the Notice of Redemption or Change of Control
Notice, with irrevocable instructions and authority to such transfer agent or
other redemption agent to pay to the respective holders of such shares, as
evidenced by a list of such holders certified by an officer of the Corporation,
the Redemption Price upon surrender of their respective share certificates. Such
deposit shall be deemed to constitute full payment of such shares to the
holders, and from and after the date of such deposit, all rights of the holders
of the shares of Series B Preferred Stock that are to be redeemed as
stockholders of the Corporation with respect to such shares, except the right to
receive the Redemption Price upon the surrender of their respective
certificates, shall cease and terminate. No dividends shall accumulate on any
shares of Series B Preferred Stock after the Redemption Date for such shares
(unless the Corporation shall fail to deposit cash sufficient to redeem all such
shares). In case holders of any shares of Series B Preferred Stock called for
redemption shall not, within two years after such deposit, claim the cash
deposited for redemption thereof, such transfer agent or other redemption agent
shall, upon demand, pay over to the Corporation the balance so deposited.
Thereupon, such transfer agent or other redemption agent shall be relieved of
all responsibility to the holders thereof and the sole right of such holders,
with respect to shares to be redeemed, shall be to receive the Redemption Price
as general creditors of the Corporation. Any interest accrued on any funds so
deposited shall belong to the Corporation, and shall be paid to it from time to
time on demand.
VI. Exchange of Series B Preferred Stock
A. The Series B Preferred Stock shall be exchangeable, at any time,
at the option of the Corporation and to the extent permitted by applicable law,
in whole but not in part, on any Dividend Payment Date for Junior Subordinated
Debentures (issued pursuant to an indenture (the "Indenture") prepared in
accordance with the Investment Agreement) in principal amount of $1,000 per
share of Series B Preferred Stock (a "Debenture" and, collectively, the
"Debentures"), in accordance with this Article VI:
(1) Each share of Series B Preferred Stock shall be exchangeable at
the offices of the Corporation and at such other place or places, if any,
as the Board of Directors may designate. Except with the prior written
consent of the holders of all outstanding shares of Series B Preferred
Stock, the Corporation may not exchange any shares of Series B Preferred
Stock if (a) full cumulative dividends, to the extent payable or deemed
payable through the date of exchange, have not been paid or set aside for
payment on all outstanding shares of the Series B Preferred Stock, (b) the
Corporation has failed to amend its Certificate of Incorporation pursuant
to Delaware law to confer the power to vote upon holders of the Debentures
as shall be contemplated by the Indenture or (c) such exchange
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could result in any tax consequence to the Investor or any of its
Affiliates which is materially adverse.
(2) Prior to giving notice of its intention to exchange, the
Corporation shall execute and deliver to a bank or trust company selected
by the Board of Directors and, if required by applicable law, qualify
under the Trust Indenture Act of 1939, as amended, the Indenture.
(3) The Corporation shall mail written notice of its intention to
exchange Series B Preferred Stock for Debentures (the "Exchange Notice")
to each holder of record of shares of Series B Preferred Stock not less
than 90 nor more than 120 days prior to the date fixed for exchange.
(4) Prior to effecting any exchange provided above, the Corporation
shall deliver to each holder of shares of Series B Preferred Stock an
opinion of nationally recognized legal counsel to the effect that: (i)
each of the Indenture and the Debentures have been duly authorized and
executed by the Corporation and, when delivered by the Corporation in
exchange for shares of Series B Preferred Stock, will constitute valid and
legally binding obligations of the Corporation enforceable against the
Corporation in accordance with their terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights
generally and to general principles of equity; (ii) the exchange of the
Debentures for the shares of Series B Preferred Stock shall not violate
the provisions of this Article VI or of the Delaware General Corporation
Law, including Section 221 thereof; and (iii) the exchange of the
Debentures for the shares of Series B Preferred Stock is exempt from the
registration requirements of the Securities Act or, if no such exemption
is available, that the Debentures have been duly registered for such
exchange under such Act.
(5) Upon the exchange of shares of Series B Preferred Stock for
Debentures, the rights of the holders of shares of Series B Preferred
Stock as stockholders of the Corporation shall terminate and such shares
shall no longer be deemed outstanding.
(6) Before any holder of shares of Series B Preferred Stock shall be
entitled to receive Debentures, such holder shall surrender the
certificate or certificates therefor, at the office of the Corporation or
at such other place or places, if any, as the Board of Directors shall
have designated, and shall state in writing the name or names (with
addresses) in which he or she wishes the certificate or certificates for
the Debentures to be issued. The Corporation will, as soon as practicable
thereafter, issue and deliver at said office or place to such holder of
shares of Series B Preferred Stock, or to his or her nominee or
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nominees, certificates for the Debentures to which he or she shall be
entitled as aforesaid. Shares of Series B Preferred Stock shall be deemed
to have been exchanged as of the close of business on the date fixed for
exchange as provided above, and the Person or Persons entitled to receive
the Debentures issuable upon such exchange shall be treated for all
purposes (including the accrual and payment of interest) as the record
holder or holders of such Debentures as of the close of business on such
date.
B. For purposes of clause (c) of paragraph (i) of Section A, an
exchange of shares of Series B Preferred Stock shall be deemed to be an exchange
that could result in a tax consequence to the Investor or any of its Affiliates
which is materially adverse only if the Investor or its Affiliate shall have
delivered to the Corporation a written notice to such effect on or before the
fifteenth day after its receipt of the Exchange Notice (an "Objection Notice"),
which Objection Notice shall be prepared in good faith and shall specify in
reasonable detail the nature of such tax consequences which could result from
the exchange (other than the difference between the tax treatment of
distributions on the Series B Preferred Stock and interest payments on the
Debentures); provided, that the Investor or its Affiliates shall not deliver an
Objection Notice unless the Investor and its Affiliates Beneficially Own, in the
aggregate, at least 1,000 shares of Series B Preferred Stock at the time of
delivery of such Objection Notice to the Corporation. If the Corporation
receives an Objection Notice, then the Corporation shall not exchange the shares
of Series B Preferred Stock of the Investor and its Affiliates and the
Corporation shall, within 15 days after its receipt of the Objection Notice mail
written notice to the effect that it is canceling the proposed exchange of
shares of Series B Preferred Stock to each holder of record of shares of Series
B Preferred Stock to which it mailed the Exchange Notice.
C. Shares of the Series B Preferred Stock may be exchanged for
Warrant Shares pursuant to Section 4 of the Warrants.
VII. Restrictions on Dividends
So long as any shares of the Series B Preferred Stock are
outstanding, the Board of Directors shall not declare, and the Corporation shall
not pay or set apart for payment any dividend on any Junior Securities or make
any payment on account of, or set apart for payment money for a sinking or other
similar fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or
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other property (other than distributions or dividends in Junior Securities to
the holders of Junior Securities), and shall not permit any corporation or other
entity directly or indirectly controlled by the Corporation to purchase or
redeem any Junior Securities or Parity Securities or any warrants, rights, calls
or options exercisable for or convertible into any Junior Securities or Parity
Securities (other than the repurchase, redemption or other retirement of
debentures or other debt securities that are convertible or exchangeable into
any Junior Securities or Parity Securities) unless prior to or concurrently with
such declaration, payment, setting apart for payment, repurchase, redemption or
other retirement or distribution, as the case may be, all accumulated and unpaid
dividends on shares of the Series B Preferred Stock not paid on the dates
provided for in paragraph A of Article III hereof (including Arrearages and
accumulated dividends thereon) shall have been paid, except that when dividends
are not paid in full as aforesaid upon the shares of Series B Preferred Stock,
all dividends declared on the Series B Preferred Stock and any series of Parity
Dividend Securities shall be declared and paid pro rata so that the amount of
dividends so declared and paid on Series B Preferred Stock and such series of
Parity Dividend Securities shall in all cases bear to each other the same ratio
that accumulated dividends (including interest accrued on or additional
dividends accumulated in respect of such accumulated dividends) on the shares of
Series B Preferred Stock and such Parity Dividend Securities bear to each other.
Notwithstanding the foregoing, this paragraph shall not prohibit (i) the
acquisition, repurchase, exchange, conversion, redemption or other retirement
for value of shares of Series B Preferred Stock or any Parity Dividend Security
by the Corporation in accordance with the terms of such securities or of any
shares of Trust Preferred Stock (as defined in Section F of Article VIII) or
(ii) the acquisition, repurchase, exchange, conversion, redemption or other
retirement for value by the Corporation of any Junior Dividend Securities by the
Corporation in accordance with obligations in existence at the time of original
issuance of the Series B Preferred Stock.
VIII. Voting Rights
A. The holders of shares of Series B Preferred Stock shall have no
voting rights except as set forth below or as otherwise from time to time
required by law.
B. Through the Approval Date, shares of Series B Preferred Stock
shall have no voting rights except as set forth in Section C of this Article
VIII. After the Approval Date, so long as any shares of the Series B Preferred
Stock are outstanding, each share of Series B Preferred Stock shall entitle the
holder thereof to vote on all matters voted on by holders of Common Stock, and
the shares of Series B Preferred Stock shall vote together with shares of Common
Stock (and any shares of Series A Preferred Stock entitled to vote) as a single
class; provided, however, that upon register or transfer on the stock records of
the Corporation of a share of Series B Preferred Stock to any Person other than
the Investor or an Affiliate of the Investor, the transferee, and any
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subsequent transferee, shall not be entitled to such voting rights. With respect
to any such vote, the Investor (together with its Affiliates) shall be entitled
to a number of votes per share of Series B Preferred Stock equal to the quotient
of the Investor Aggregate Vote Number, divided by the number of shares of Series
B Preferred Stock held by such Investor and its Affiliates as of the record date
for such vote. The "Investor Aggregate Vote Number" shall equal the number of
Warrant Shares that would be issuable upon the exercise of Original Warrants (as
defined below) by the holders thereof (assuming all conditions precedent to such
exercise have been satisfied and that such exercise occurs as of the record date
for such vote), multiplied by the lesser of (x) the quotient of the number of
Original Warrants that are Beneficially Owned by members of the Investor Group,
in the aggregate, as of the record date for such vote (excluding for purposes of
this calculation, however, any Original Warrants that have been transferred on
the books of the Corporation by any member of the Investor Group to any Person
other than a member of the Investor Group, regardless of whether any such
Original Warrants are subsequently acquired by any member of the Investor
Group), divided by the number of Original Warrants, and (y) the quotient of the
number of Original Series B Preferred Shares (as defined below) that are
Beneficially Owned by members of the Investor Group, in the aggregate, as of the
record date for such vote (excluding for purposes of this calculation, however,
any Original Series A Preferred Shares transferred on the stock records of the
Corporation by any member of the Investor Group to any Person other than a
member of the Investor Group, regardless of whether any such Original Series B
Preferred Shares are subsequently acquired by any member of the Investor Group),
divided by the number of Original Series B Preferred Shares. The term "Original
Warrants" means those Warrants Beneficially Owned by members of the Investor
Group, in the aggregate, as of the Closing. The term "Original Series B
Preferred Shares" means those shares of Series B Preferred Stock Beneficially
Owned by members of the Investor Group, in the aggregate, as of the Closing.
C. If on any date (i) dividends payable on either the Series B
Preferred Stock or the Series A Preferred Stock shall have been in arrears and
not paid in full for four consecutive quarterly periods or if dividends shall
have been in arrears and not paid in full on the first or second annual
anniversary of the original issuance of the Series B Preferred Stock or Series A
Preferred Stock, as the case may be, or (ii) the Corporation shall have failed
to satisfy its obligation to redeem either shares of Series B Preferred Stock or
shares of Series A Preferred Stock pursuant to the relevant Certificate of
Designations, then the number of directors constituting the Board of Directors
shall, without further action, be increased by two, and the holders of a
majority of the outstanding shares of Series B Preferred Stock and Series A
Preferred Stock shall have, in addition to the other voting rights set forth
herein, the exclusive right, voting together as a single class without regard to
series, to elect the two directors (the "Additional Directors") of the
Corporation to fill such newly-created directorships. Notwithstanding the
foregoing, the Investor and its Affiliates shall not be permitted to elect,
pursuant to the
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preceding sentence, more than the number of directors that would result in four
directors designated for nomination or elected by the Investor and its
Affiliates then being on the Board of Directors (including directors that the
Investor has a right to designate for nomination to the Board of Directors
pursuant to the Investment Agreement); provided, that if at the time holders of
Series A Preferred Stock and Series B Preferred Stock have the right to elect
Additional Directors and (i) the Investor and its Affiliates Beneficially Own,
in the aggregate, a majority of the outstanding shares of Series B Preferred
Stock and Series A Preferred Stock, taken together as a single class, and (ii)
the Investor and its Affiliates are not permitted to elect one or both of the
Additional Directors as aforesaid, then the holders of Series B Preferred Stock
and Series A Preferred Stock (other than the Investor and its Affiliates) shall
have the right to elect, voting together as a single class, one Additional
Director pursuant to this Section C. Additional Directors shall continue as
directors and such additional voting right shall continue until such time as (a)
all dividends accumulated on the Series B Preferred Stock and/or Series A
Preferred Stock, as the case may be, shall have been paid in full or (b) any
redemption obligation with respect to the Series B Preferred Stock and/or Series
A Preferred Stock, as the case may be, that has become due shall have been
satisfied or all necessary funds shall have been set aside for payment, as the
case may be, at which time such Additional Directors shall cease to be directors
and such additional voting right of the holders of shares of Series B Preferred
Stock shall terminate subject to revesting in the event of each and every
subsequent event of the character indicated above and subject to any rights as
to the election of directors provided for the holders of any other series of
Preferred Stock of the Corporation.
D. [Reserved]
E. i. The foregoing rights of holders of shares of Series B
Preferred Stock to take any action as provided in this Article VIII may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action. So long as such right to vote continues (and unless such right has
been exercised by written consent of the minimum number of shares required to
take such action), the Chairman of the Board of Directors may call, and upon the
written request of holders of record of 20% of the outstanding shares of Series
B Preferred Stock, addressed to the Secretary of the Corporation at the
principal office of the Corporation, shall call, a special meeting of the
holders of shares entitled to vote as provided herein. Such meeting shall be
held within 60 days after delivery of such request to the Secretary, at the
place and upon the notice provided by law and in the Bylaws for the holding of
meetings of stockholders.
ii. Each director elected pursuant to Section C hereof shall serve
until
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the next annual meeting or until his or her successor shall be elected and shall
qualify, unless the director's term of office shall have terminated pursuant to
the provisions of Section C hereof, as the case may be. In case any vacancy
shall occur among the directors elected pursuant to Section C hereof, such
vacancy may be filled for the unexpired portion of the term by vote of the
remaining director or directors theretofore elected by such holders (or such
director's or directors' successor in office), if any. If any such vacancy is
not so filled within 20 days after the creation thereof or if all of the
directors so elected shall cease to serve as directors before their term shall
expire, the holders of the shares then outstanding and entitled to vote for such
director pursuant to the provisions of Section C hereof, as the case may be, may
elect successors to hold office for the unexpired terms of any vacant
directorships, by written consent as herein provided, or at a special meeting of
such holders called as provided herein. The holders of a majority of the shares
entitled to vote for directors pursuant to Section C hereof, as the case may be,
shall have the right to remove with or without cause at any time and replace any
directors such holders have elected pursuant to such section, by written consent
as herein provided, or at a special meeting of such holders called as provided
herein.
F. Without the consent or affirmative vote of the holders of at
least a majority of the outstanding shares of Series B Preferred Stock, voting
separately as a class, the Corporation shall not authorize, create or issue, or
increase the authorized amount of, (i) any Senior Securities keep "or" (except
Parity Securities to be issued in exchange for all outstanding shares of Series
A Preferred Stock in connection with a simultaneous exchange of Parity
Securities for all outstanding shares of Series B Preferred Stock) or (ii) any
class or series of capital stock or any security convertible into or exercisable
for any class or series of capital stock, redeemable mandatorily or redeemable
at the option of the holder thereof at any time on or prior to the Mandatory
Redemption Date (whether or not only upon the occurrence of a specified event)
(except Parity Securities to be issued in exchange for all outstanding shares of
Series A of Preferred Stock in connection with a simultaneous exchange of Parity
Securities for all outstanding shares of Series B Preferred Stock); provided,
however, that no consent or vote of the holders of the outstanding shares of the
Series B Preferred Stock shall be required for the creation or issuance by a
trust formed at the direction of the Corporation of any series of preferred
securities of such trust for financing purposes in an aggregate amount not to
exceed $250,000,000 ("Trust Preferred Stock"). No consent or vote of the holders
of the outstanding shares of Series B Preferred Stock shall be required to
authorize, create or issue, or increase the authorized amount of, any class or
series of Junior Securities, or any security convertible into a stock of any
class or series of Junior Securities, except to the extent such action would
violate Section H of this Article VIII.
G. Without the consent or affirmative vote of the holders of at
least a majority of the outstanding shares of Series B Preferred Stock, voting
separately as a class, the Corporation shall not (i) amend, alter or repeal any
provision of the Certificate
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<PAGE> 54
of Incorporation or the Bylaws, if the amendment, alteration or repeal alters or
changes the powers, preferences or special rights of the Series B Preferred
Stock so as to affect them materially and adversely, or (ii) authorize or take
any other action if such action alters or changes any of the rights of the
Series B Preferred Stock in any respect or otherwise would be inconsistent with
the provisions of this Certificate of Designations and the holders of any class
or series of the capital stock of the Corporation is entitled to vote thereon.
The terms set forth in this Certificate of Designations may be amended or
modified without the affirmative vote of the stockholders of the Corporation
(other than the holders of the Series B Preferred Stock as provided in the
preceding sentence); provided, that the Board of Directors has determined that
such amendment or modification will not have a material adverse effect on the
Corporation.
H. Other Securities. The Corporation shall not enter into any
agreement or issue any security that prohibits, conflicts or is inconsistent
with, or would be breached by, the Corporation's performance of its obligations
hereunder.
IX. Additional Definitions
For the purposes of this Certificate of Designations of Series B
Preferred Stock, the following terms shall have the meanings indicated:
"Affiliate" has the meaning set forth in Rule 12b-2 under the
Exchange Act. The term "Affiliated" has a correlative meaning. Notwithstanding
the foregoing, for all purposes hereof, TPG, and each Person controlled by,
controlling or under common control with TPG (each, a "TPG Person"), shall not
be deemed an "Affiliate" of any Designated Purchaser Person (as defined below),
and no Designated Purchaser, and no Person controlled by, controlling or under
common control with such Designated Purchaser (each, a "Designated Purchaser
Person"), shall be deemed an "Affiliate" of any TPG Person or any other
Designated Purchaser Person, in any such case solely as a consequence of the
Investment Agreement and the transactions contemplated thereby.
"Approval Date" shall have the meaning assigned to such term in the
Series B Warrant.
"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings. Notwithstanding the foregoing, for all purposes hereof, no
TPG Person shall be deemed to Beneficially Own any securities that are held by
any Designated Purchaser Person, and no Designated
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<PAGE> 55
Purchaser Person shall be deemed to Beneficially Own any securities that are
held by any TPG Person or other Designated Purchaser Person, in any such case
solely as a consequence of the Investment Agreement or the transactions
contemplated thereby.
"Business Day" means any day, other than a Saturday, Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Change of Control" means such time as:
(1) any Person or Group (other than the Investor, its Affiliates,
the Corporation or any Subsidiaries of the Corporation, or any Group
composed of such Persons) has become, directly or indirectly, the
Beneficial Owner, by way of merger, consolidation or otherwise, of a
majority of the voting power of the then-outstanding Voting Securities of
the Corporation on a fully-diluted basis, after giving effect to the
conversion and exercise of all outstanding warrants, options and other
securities of the Corporation convertible into or exercisable for Voting
Securities of the Corporation (whether or not such securities are then
currently convertible or exercisable); or
(2) the sale, lease, transfer or other disposition of all or
substantially all of the consolidated assets of the Corporation and its
Subsidiaries to any Person or Group; or
(3) during any period of two consecutive calendar years, individuals
who at the beginning of such period constituted the Board of Directors,
together with any new members of such Board of Directors whose election by
such Board of Directors or whose nomination for election by the
stockholders of the Corporation was approved by a vote of at least a
majority of the members of such Board of Directors then still in office
who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved or who were
approved pursuant to Section 5.02 of the Investment Agreement or Article
VIII, Section C, D or E of this Certificate of Designations, cease for any
reason to constitute a majority of the directors of the Corporation then
in office; or
(4) the Corporation consolidates with or merges with or into another
Person or any Person consolidates with, or merges with or into, the
Corporation, in any such event pursuant to a transaction in which
immediately after the consummation thereof the Persons owning the
then-outstanding Voting Securities
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<PAGE> 56
of the Corporation immediately prior to such consummation shall not own a
majority in the aggregate (by reason of such prior ownership) of the
then-outstanding Voting Securities of the Corporation or the surviving
entity if other than the Corporation; or
(5) the adoption of a plan relating to the liquidation or
dissolution of the Corporation, whether or not otherwise in compliance
with the provisions of this Series B Preferred Stock.
"Closing" shall have the meaning assigned to such term in
the Investment Agreement.
"Designated Purchaser" has the meaning assigned to such
term in the Investment Agreement.
"Designated Purchaser Person" has the meaning set forth in
the definition of "Affiliate."
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
"Group" has the meaning set forth in Rule 13d-5 under the
Exchange Act.
"Investment Agreement" means the Investment Agreement, dated as of
February 23, 1998, by and between the Investor and the Corporation, as amended,
supplemented or otherwise modified from time to time.
"Investor" means TPG.
"Investor Group" means, collectively, the Investor, the Designated
Purchasers, if any, and the respective Affiliates of such Persons.
"Investor Nominee" means a person designated for election to the
Board of Directors by an Investor pursuant to the Investment Agreement.
"Moody's" means Moody's Investors Service and its successors.
"Person" means any individual, corporation, company, association,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Registration Rights Agreement" means the Registration Rights
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Agreement, dated as of February 23, 1998, by and between the Investor and the
Corporation, as amended, supplemented or otherwise modified from time to time.
"Second Anniversary Date" means the second anniversary of the
original issuance of the Series B Preferred Stock.
"Securities Act" means the U.S. Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder, from time to time.
"Series A Preferred Stock" has the meaning assigned to such term in
the Investment Agreement.
"Shareholder Approval" shall have the meaning assigned to such term
in the Investment Agreement.
"S&P" means Standard and Poor's Ratings Group, a division of the
McGraw-Hill Companies, and its successors.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of voting stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or combination thereof) and (ii) any partnership (A) the sole general
partner of the managing general partner of which is such Person or a Subsidiary
of such Person or (B) the only general partners of which are such Person or of
one or more Subsidiaries of such Person (or any combination thereof).
"TPG" means TPG Oxford LLC, a Delaware limited liability company.
"TPG Person" has the meaning set forth in the definition of
"Affiliate."
"Voting Securities" means the shares of Common Stock and any other
securities of the Corporation entitled to vote generally for the election of
directors.
"Warrants" means the Series B Warrants issued by the Corporation on
pursuant to the Investment Agreement.
"Warrant Shares" has the meaning assigned to such term in
the Warrants.
X. Miscellaneous
A. Notices. Any notice referred to herein shall be in writing and,
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<PAGE> 58
unless first-class mail shall be specifically permitted for such notices under
the terms hereof, shall be deemed to have been given upon personal delivery
thereof, upon transmittal of such notice by telecopy (with confirmation of
receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
(1) if to the Corporation, to its office at 800 Connecticut Avenue
Norwalk, Connecticut 06854 (Attention: General Counsel) or to the transfer
agent for the Series B Preferred Stock;
(2) if to a holder of the Series B Preferred Stock, to such holder
at the address of such holder as listed in the stock record books of the
Corporation (which may include the records of any transfer agent for the
Series B Preferred Stock); or
(3) to such other address as the Corporation or such holder, as the
case may be, shall have designated by notice similarly given.
B. Reacquired Shares. Any shares of Series B Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation, directly or
indirectly, in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof (and shall not be deemed to be outstanding for any
purpose) and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the Delaware General Corporation Law. All such shares of Series
B Preferred Stock shall upon their cancellation and upon the filing of an
appropriate certificate with the Secretary of State of the State of Delaware,
become authorized but unissued shares of Preferred Stock, par value $0.01 per
share, of the Corporation and may be reissued as part of another series of
Preferred Stock, par value $0.01 per share, of the Corporation subject to the
conditions or restrictions on issuance set forth herein.
C. Enforcement. Any registered holder of shares of Series B
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designations or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
D. Transfer Taxes. Except as otherwise agreed upon pursuant to the
terms of this Certificate of Designations, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political
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<PAGE> 59
subdivision or taxing authority thereof or therein in respect of any issue or
delivery of Debentures on exchange of, or other securities or property issued on
account of, shares of Series B Preferred Stock pursuant hereto or certificates
representing such shares or securities. The Corporation shall not, however, be
required to pay any such tax or other charge that may be imposed in connection
with any transfer involved in the issue or transfer and delivery of any
certificate for Debentures or other securities or property in a name other than
that in which the shares of Series B Preferred Stock so exchanged, or on account
of which such securities were issued, were registered and no such issue or
delivery shall be made unless and until the Person requesting such issue has
paid to the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid or is not payable.
E. Transfer Agent. The Corporation may appoint, and from time to
time discharge and change, a transfer agent for the Series B Preferred Stock.
Upon any such appointment or discharge of a transfer agent, the Corporation
shall send notice thereof by first-class mail, postage prepaid, to each holder
of record of shares of Series B Preferred Stock.
F. Record Dates. In the event that the Series B Preferred Stock
shall be registered under either the Securities Act or the Exchange Act, the
Corporation shall establish appropriate record dates with respect to payments
and other actions to be made with respect to the Series B Preferred Stock.
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<PAGE> 60
IN WITNESS WHEREOF, this Certificate of Designations is
executed on behalf of the Corporation by its Secretary and attested by its
Controller, this 13th day of May, 1998.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
-----------------------------------------
Jeffery H. Boyd, Executive Vice President,
General Counsel and Secretary
[Corporate Seal]
ATTEST:
/s/ BRENDAN SHANAHAN
- ------------------------------------
Brendan Shanahan, Vice President and
Controller
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<PAGE> 61
Exhibit 3(b)
Part 7
Conformed
CERTIFICATE OF DESIGNATIONS
OF
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
OF
OXFORD HEALTH PLANS, INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
OXFORD HEALTH PLANS, INC., a corporation organized and existing
under the General Corporation Law of the State of Delaware (hereinafter called
the "Company"), hereby certifies that the following resolution was duly adopted
by the Board of Directors of the Company as required by Section 151 of the
General Corporation Law of the State of Delaware at a meeting duly called and
held on May 6, 1998:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors of the Company (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Company's
Certificate of Incorporation, as amended to date (hereinafter called the
"Certificate of Incorporation"), the Board of Directors hereby creates a series
of Preferred Stock, par value $.01 per share, of the Company and hereby states
the designation and number of shares, and fixes the relative rights, powers and
preferences thereof, and the limitations thereof, as follows:
Section 1. Designation and Amount. The shares of such series shall
be designated as "Series C Junior Participating Preferred Stock" (the "Series C
Preferred Stock") and the number of shares constituting the Series C Preferred
Stock shall be 6,730. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series C Preferred Stock to a number less than the
number of shares then outstanding.
<PAGE> 62
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock of the Company (the "Preferred Stock") (or any similar stock)
ranking prior and superior to the Series C Preferred Stock with respect to
dividends, the holders of shares of Series C Preferred Stock, in preference to
the holders of Common Stock, par value $.0l per share (the "Common Stock"), of
the Company and of any other stock of the Company ranking junior to the Series C
Preferred Stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, dividends and
other distributions, in an amount per share (rounded to the nearest cent) equal
to, subject to the provision for adjustment hereinafter set forth, 1000 times
the aggregate per share amount of all cash dividends, and 1000 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock, declared
on the Common Stock since the immediately preceding dividend or distribution
declared on the Series C Preferred Stock. In the event the Company shall at any
time after May 13 , 1998 declare or pay any dividend on the Common Stock payable
in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount per share to which holders of shares of Series C Preferred Stock were
entitled immediately prior to such event under the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Company shall declare a dividend or distribution on the
Series C Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) The Board of Directors may fix a record date for the
determination of holders of shares of Series C Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights. Except as set forth in Section 10, or as
otherwise from time to time required by law, holders of Series C Preferred Stock
shall have no voting rights and their consent shall not be required for taking
any corporate action.
<PAGE> 63
Section 4. Certain Restrictions.
(A) Whenever dividends or distributions payable on the Series C
Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all unpaid dividends and distributions, whether or not declared, on shares of
Series C Preferred Stock outstanding shall have been paid in full, the Company
shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (as to dividends) to the Series C
Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on
any shares of stock ranking on a parity (as to dividends) with the Series
C Preferred Stock, except dividends paid ratably on the Series C Preferred
Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred Stock,
provided that the Company may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any
stock of the Company ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Series C Preferred Stock or rights,
warrants or options to acquire such junior stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series C Preferred Stock, or any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding
up) with the Series C Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares of Series C Preferred
Stock, or shares of Series C Preferred Stock and parity stock, as the case
may be, upon such terms as the Board of Directors, after consideration of
the respective dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Company shall not redeem or purchase or otherwise acquire
shares of Common Stock (other than pursuant to any written agreement of the
Company in existence on May 13, 1998 and other than redemptions or purchases or
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other acquisitions for aggregate consideration not in excess of $10,000,000
since May 13, 1998), unless, in each case, the Company promptly (within five
business days) makes a purchase offer in writing or by publication (as
determined by the Board of Directors) to all holders of shares of Series C
Preferred Stock offering to purchase a number of shares of Series C Preferred
Stock equal to one one-thousandth of the number of shares of Common Stock
redeemed or purchased or otherwise acquired in such transaction at a price per
share equal to 1000 times the amount of consideration paid for one share of
Common Stock in such transaction and otherwise on terms and conditions no less
favorable to the holders than those applicable in such transaction (as
determined by the Board of Directors in good faith). In the event the Company
shall at any time after May 13, 1998 declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case (i)
the number of shares of Series C Preferred Stock which holders thereof were
entitled to have the Company offer to purchase immediately prior to such event
under the preceding sentence shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event, and (ii) the amount per share to which holders of shares of Series C
Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately after such event.
(C) The Company shall not, and shall not permit any subsidiary of
the Company to, enter into any agreement with any person providing for the
purchase or other acquisition by such person (or any other person), whether
pursuant to tender offer, exchange offer or otherwise, unless in each case such
person promptly (within five business days) makes a purchase offer in writing or
by publication (as determined by the Board of Directors) to all holders of
shares of Series C Preferred Stock offering to purchase a number of shares of
Series C Preferred Stock equal to one-one thousandth of the number of shares of
Common Stock purchased or otherwise acquired in such transaction at a price per
share equal to 1000 times the amount of consideration paid for one share of
Common Stock in such transaction and otherwise on terms and conditions no less
favorable to the holders than those applicable in such transaction (as
determined by the Board of Directors in good faith). In the event the Company
shall at any time after May 13, 1998 declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
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<PAGE> 65
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case (i) the number of shares of Series C Preferred Stock which holders
thereof were entitled to have redeemed or purchased or otherwise acquired
immediately prior to such event under the preceding sentence shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event, and (ii) the amount per share to
which holders of shares of Series C Preferred Stock were entitled immediately
prior to such event under the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately after such event.
(D) The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under paragraph (A) or (B) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series C Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Company, no distribution shall be
made (A) to the holders of the Common Stock or of shares of any other stock of
the Company ranking junior, upon liquidation, dissolution or winding up, to the
Series C Preferred Stock unless, prior thereto, the holders of shares of Series
C Preferred Stock shall have received (i) $1.00 per share, plus (ii) an amount
equal to declared and unpaid dividends and distributions thereon, to the date of
such payment, plus (iii) an aggregate amount per share, subject to the provision
for adjustment hereinafter set forth, equal to 1000 times the aggregate amount
to be distributed per share to holders of shares of Common Stock, or (B) to the
holders of shares of stock ranking on a parity upon liquidation, dissolution or
winding up with the Series C Preferred Stock, except distributions made ratably
on the Series C Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Company
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<PAGE> 66
shall at any time after May 13, 1998 declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount per share to which holders of shares of Series C Preferred
Stock were entitled immediately prior to such event under clause (A)(iii) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Company shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are converted into, exchanged for or changed into
other stock or securities, cash and/or any other property, then in any such case
each share of Series C Preferred Stock shall at the same time be similarly
converted into, exchanged for or changed into an amount per share (subject to
the provision for adjustment hereinafter set forth) equal to 1000 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common Stock
is converted, exchanged or changed. In the event the Company shall at any time
after May 13, 1998 declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the conversion, exchange or change of
shares of Series C Preferred Stock shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 8. No Redemption. The shares of Series C Preferred Stock
shall not be redeemable from any holder.
Section 9. Rank. The Series C Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up of the Company, junior to all other
series of Preferred Stock (unless the terms of any such series shall provide
otherwise) and senior to the Common Stock.
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<PAGE> 67
Section 10. Amendment. Without the consent or affirmative vote of
the holders of at least a majority of the outstanding shares of Series C
Preferred Stock, voting separately as a class, the Company shall not (i) amend,
alter or repeal any provision of the Certificate of Incorporation or the Bylaws,
if the amendment, alteration or repeal alters or changes the powers, preferences
or special rights of the Series C Preferred Stock so as to affect them
materially and adversely, or (ii) authorize or take any other action if such
action alters or changes any of the rights of the Series C Preferred Stock in
any respect or otherwise would be inconsistent with the provisions of this
Certificate of Designations and the holders of any class or series of the
capital stock of the Company is entitled to vote thereon.
Section 11. Fractional Shares. Series C Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series C Preferred Stock.
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<PAGE> 68
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Company by its Secretary and attested by its Controller this 13th
day of May, 1998.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
------------------------------------
Jeffery H. Boyd, Executive Vice
President, General Counsel and
Secretary
Corporate Seal
Attest:
/s/ BRENDAN SHANAHAN
- ---------------------------------
Brendan Shanahan, Vice President
and Controller
-8-
<PAGE> 69
Exhibit 3(b)
Part 8
Conformed
CERTIFICATE OF DESIGNATIONS
of
SERIES E CUMULATIVE PREFERRED STOCK
of
OXFORD HEALTH PLANS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
--------------
Oxford Health Plans, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation (the "Board of Directors") pursuant to authority of
the Board of Directors as required by Section 151 of the Delaware General
Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the Second Amended
and Restated Certificate of Incorporation of the Corporation, as amended (the
"Certificate of Incorporation"), the Board of Directors hereby creates a series
of the Corporation's previously authorized preferred stock, par value $0.01 per
share (the "Preferred Stock"), and hereby states the designation and number
thereof, and fixes the voting powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, as follows:
Series E Cumulative Preferred Stock:
I. Designation and Amount
The designation of this series of shares shall be "Series E
Cumulative Preferred Stock" (the "Series E Preferred Stock"); the stated value
per share shall be $1,000 (the "Stated Value"); and the number of shares
constituting such series shall be 300,000. The number of shares of the Series E
Preferred Stock may be decreased from time to time by a resolution or
resolutions of the Board of Directors; provided, however, that such number shall
not be decreased below the aggregate number of shares of the Series E Preferred
Stock then outstanding.
II. Rank
A. With respect to dividend rights, the Series E Preferred Stock
shall rank (i) junior to each other class or series of Preferred Stock which by
its terms ranks senior to the Series E Preferred Stock as to payment of
dividends, (ii) on a parity with each other class or
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series of Preferred Stock which by its terms ranks on a parity with the Series E
Preferred Stock as to payment of dividends, including the Series D Preferred
Stock, par value $0.01 per share, of the Corporation (the "Series D Preferred
Stock") and (iii) prior to the Corporation's Common Stock, par value $.01 per
share (the "Common Stock"), and, except as specified above, all other classes
and series of capital stock of the Corporation hereafter issued by the
Corporation. With respect to dividends, all equity securities of the Corporation
to which the Series E Preferred Stock ranks senior, including the Common Stock,
are collectively referred to herein as the "Junior Dividend Securities"; all
equity securities of the Corporation with which the Series E Preferred Stock
ranks on a parity, including the Series D Preferred Stock, are collectively
referred to herein as the "Parity Dividend Securities"; and all equity
securities of the Corporation (other than convertible debt securities) to which
the Series E Preferred Stock ranks junior, with respect to dividends, are
collectively referred to herein as the "Senior Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series E Preferred Stock shall rank (i) junior to each other class or series
of Preferred Stock which by its terms ranks senior to the Series E Preferred
Stock as to distribution of assets upon liquidation, dissolution or winding up,
(ii) on a parity with each other class or series of Preferred Stock which by its
terms ranks on a parity with the Series E Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation, including
the Series D Preferred Stock, and (iii) prior to the Common Stock and, except as
specified above, all other classes and series of capital stock of the
Corporation hereinafter issued by the Corporation. With respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, all equity securities of the
Corporation to which the Series E Preferred Stock ranks senior, including the
Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series E Preferred Stock ranks on parity,
including the Series D Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series E Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series E Preferred Stock shall be subject to the creation of
Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities") but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series D
Preferred Stock), or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof and the Investment Agreement, including, without limitation,
Section F of Article VIII of this Certificate of Designations.
III. Dividends
A. Dividends. Prior to May 13, 2000, shares of Series E Preferred
Stock shall accumulate dividends at a rate of 14.589214% per annum, payment of
which may be made in cash or by the issuance of additional shares of Series E
Preferred Stock (which, upon issuance, shall be fully paid and nonassessable),
at the option of the Corporation; provided that if any such dividend is paid
after May 13, 2000, such dividend shall be paid in cash. On and after May 13,
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2000, shares of Series E Preferred Stock shall accumulate dividends at a rate of
14% per annum, which dividends shall be paid in cash. On and prior to May 13,
2000, dividends shall be paid annually on May 13, 1999 and May 13, 2000, and
thereafter dividends shall be paid in four equal quarterly installments on the
last day of March, June, September and December of each year, or if any such
date is not a Business Day, the Business Day next preceding such day (each such
date, regardless of whether any dividends have been paid or declared and set
aside for payment on such date, a "Dividend Payment Date"), to holders of record
(the "Registered Holders") as they appear on the stock record books of the
Corporation on the fifteenth day prior to the relevant Dividend Payment Date.
Dividends shall be paid only when, as and if declared by the Board of Directors
out of funds at the time legally available for the payment of dividends.
Dividends shall begin to accumulate on outstanding shares of Series E Preferred
Stock from the date of issuance and shall be deemed to accumulate from day to
day whether or not earned or declared until paid. Dividends shall accumulate on
the basis of a 360-day year consisting of twelve 30-day months (four 90-day
quarters) and the actual number of days elapsed in the period for which payable.
Dividends payable at more than one annual rate for any dividend period or
partial dividend period shall be pro rated on the basis of the number of days in
such dividend period or partial dividend period, calculated as aforesaid, and
the actual number of days elapsed for which dividends are payable at each such
annual rate.
B. Accumulation. Dividends on the Series E Preferred Stock shall be
cumulative, and from and after any Dividend Payment Date on which any dividend
that has accumulated or been deemed to have accumulated through such date has
not been paid in full or any payment date set for a redemption on which such
redemption payment has not been paid in full, additional dividends shall
accumulate in respect of the amount of such unpaid dividends or unpaid
redemption payment (the "Arrearage") at the annual rate then in effect as
provided in Section A of this Article III (or such lesser rate as may be the
maximum rate that is then permitted by applicable law). Such additional
dividends in respect of any Arrearage shall be deemed to accumulate from day to
day whether or not earned or declared until the Arrearage is paid, shall be
calculated as of such successive Dividend Payment Date and shall constitute an
additional Arrearage from and after any Dividend Payment Date to the extent not
paid on such Dividend Payment Date. References in any Article herein to
dividends that have accumulated or that have been deemed to have accumulated
with respect to the Series E Preferred Stock shall include the amount, if any,
of any Arrearage together with any dividends accumulated or deemed to have
accumulated on such Arrearage pursuant to the immediately preceding two
sentences. Additional dividends in respect of any Arrearage may be declared and
paid at any time, in whole or in part, without reference to any regular Dividend
Payment Date, to Registered Holders as they appear on the stock record books of
the Corporation on such record date as may be fixed by the Board of Directors
(which record date shall be no less than 10 days prior to the corresponding
payment date). Dividends in respect of any Arrearage shall be paid in cash.
C. Method of Payment. Dividends paid on the shares of Series E
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on all outstanding shares of Series E Preferred
Stock shall be allocated pro rata on a share-by-share basis among all such
shares then outstanding. After May 13, 2000, dividends that are declared and
paid in an amount less than the full amount of dividends accumulated on the
Series
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E Preferred Stock (and on any Arrearage) shall be applied first to the earliest
dividend which has not theretofore been paid. All cash payments of dividends on
the shares of Series E Preferred Stock shall be made in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts.
IV. Liquidation Preference
In the event of a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of then-outstanding
shares of Series E Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share equal to the sum of (i) the dividends, if any,
accumulated or deemed to have accumulated thereon to the date of final
distribution to such holders, whether or not such dividends are declared, and
(ii) the Stated Value thereof, and no more, before any payment shall be made or
any assets distributed to the holders of any Junior Liquidation Securities.
After any such payment in full, the holders of Series E Preferred Stock shall
not, as such, be entitled to any further participation in any distribution of
assets of the Corporation. All the assets of the Corporation available for
distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series E Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series E Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
Neither a consolidation or merger of the Corporation with or into
any other Person or Persons, nor a sale, conveyance, lease, exchange or transfer
of all or part of the Corporation's assets for cash, securities or other
property to a Person or Persons shall be deemed to be a liquidation, dissolution
or winding up of the Corporation for purposes of this Article IV, but the
holders of shares of Series E Preferred Stock shall nevertheless be entitled
from and after any such consolidation, merger or sale, conveyance, lease,
exchange or transfer of all or part of the Corporation's assets to the rights
provided by this Article IV following any such transaction. Notice of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, stating the payment date or dates when, and the place or places
where, the amounts distributable to each holder of shares of Series E Preferred
Stock in such circumstances shall be payable, shall be given by first-class
mail, postage prepaid, mailed not less than 30 days prior to any payment date
stated therein, to holders of record as they appear on the stock record books of
the Corporation as of the date such notices are first mailed.
V. Redemption
A. Optional Redemption. The Corporation shall not have any right to
redeem any shares of Series E Preferred Stock prior to May 13, 2003. On and
after such date, the Corporation shall have the right, at its option and
election, to redeem all the outstanding shares of Series E Preferred Stock, in
whole but not in part, at any time, in accordance with the provisions of this
Article V. The redemption price for such shares of Series E Preferred Stock
shall be paid in cash out of funds legally available therefor and shall be in an
amount per share equal to the
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sum of (i) the amount, if any, of all unpaid dividends accumulated thereon to
the date of actual payment of the Redemption Price, whether or not such
dividends have been declared, and (ii) the Stated Value thereof (the "Redemption
Price").
B. Mandatory Redemption. On May 13, 2008, the Corporation shall
redeem (the "Mandatory Redemption") all outstanding shares of Series E Preferred
Stock by paying the Redemption Price therefor in cash out of funds legally
available for such purpose.
C. Notice and Redemption Procedures. Notice of the redemption of
shares of Series E Preferred Stock pursuant to Section A or B hereof (a "Notice
of Redemption") shall be sent to the holders of record of the shares of Series E
Preferred Stock to be redeemed by first class mail, postage prepaid, at each
such holder's address as it appears on the stock record books of the
Corporation, not more than 120 nor fewer than 90 days prior to the date fixed
for redemption, which date shall be set forth in such notice (the "Redemption
Date"); provided that failure to give such Notice of Redemption to any holder,
or any defect in such Notice of Redemption to any holder shall not affect the
validity of the proceedings for the redemption of any shares of Series E
Preferred Stock held by any other holder. Notwithstanding the foregoing, in the
event that contemporaneously with or prior to the delivery of a Notice of
Redemption, the Corporation irrevocably deposits, in accordance with Section F
of this Article V, funds sufficient to pay the aggregate Redemption Price for
the Series E Preferred Stock, such Notice of Redemption shall be delivered not
more than 120 days nor fewer than 30 days prior to the Redemption Date;
provided, however, that, if such Notice of Redemption is delivered fewer than 60
days prior to the Redemption Date and the Investor or any of its Affiliates
Beneficially Owns shares of Series E Preferred Stock as of the date of the
Notice of Redemption and uses its reasonable best efforts to consummate the sale
of its shares of Series E Preferred Stock prior to the stated Redemption Date
but has not completed the sale of all the Series E Preferred Stock Beneficially
Owned by the Investor and its Affiliates (or such other amount desired to be
sold by the Investor and its Affiliates), the Corporation shall, at the option
of the Investor (or any such Affiliate), delay such Redemption Date for a period
not to exceed 30 days as requested by such Investor (or any such Affiliate) in
order to complete such sale or sales, and shall notify the holders of Series E
Preferred Stock of such delay within five days of receiving the request
therefor. Any delay of the Redemption Date pursuant to the proviso to the
preceding sentence shall be requested by the Investor (or any such Affiliate) in
writing no later than the tenth day preceding the then-scheduled Redemption Date
stated in the Notice of Redemption. The Redemption Date stated in a Notice of
Redemption shall not be delayed more than once in connection with the redemption
of shares of Series E Preferred Stock pursuant to such Notice of Redemption. In
order to facilitate the redemption of shares of Series E Preferred Stock, the
Board of Directors may fix a record date for the determination of the holders of
shares of Series E Preferred Stock to be redeemed, in each case, not more than
30 days prior to the date the Notice of Redemption is mailed. On or after the
Redemption Date, each holder of the shares called for redemption shall surrender
the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price. From and after the Redemption Date, all dividends on
shares of Series E Preferred Stock shall cease to accumulate and all rights of
the holders thereof as holders of Series E Preferred Stock shall cease and
terminate, except to the extent the Corporation shall default in payment thereof
on the Redemption Date. Prior to any Redemption Date that has been fixed by
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the Corporation, other than in connection with the Mandatory Redemption, the
Corporation shall take all measures reasonably requested by the Investor to
facilitate a sale or other disposition of Series E Preferred Stock by the
Investor or its Affiliates prior to such Redemption Date, including, without
limitation, participation in due diligence sessions and provision of information
about the management, business and financial condition of the Corporation,
preparation of offering memoranda, private placement memoranda and other similar
documents and preparation and delivery of such other certificates or documents
reasonably requested by the Investor. For so long as the Investor or an
Affiliate of the Investor holds any shares of Series E Preferred Stock, no
Notice of Redemption in connection with a redemption pursuant to Section A or B
of this Article V shall be delivered unless (i) the Corporation's preferred
stock is rated Baa or better by Moody's or BBB or better by S&P, or in the event
the Corporation's preferred stock is not rated by Moody's and S&P, the
Corporation's unsecured debt is rated Baa or better by Moody's or BBB or better
by S&P or (ii) the Corporation has sufficient funds reasonably available under
committed lines of credit or other similar sources of financing established with
financially sound financing providers to pay, on the Redemption Date, the
aggregate Redemption Price in connection with such redemption (and shall reserve
such funds or availability for the payment of the aggregate Redemption Price);
provided, that the Corporation may deliver a Notice of Redemption without
complying with the foregoing conditions if prior to, or contemporaneously with,
the delivery of such notice the Corporation irrevocably deposits in accordance
with Section F of this Article V funds sufficient to pay the aggregate
Redemption Price for the Series E Preferred Stock.
D. Change of Control. In the event there occurs a Change of Control,
any holder of record of shares of Series E Preferred Stock, in accordance with
the procedures set forth in Section E of this Article V, may require the
Corporation to redeem any or all of the shares of Series E Preferred Stock held
by such holder at the Redemption Price therefor.
E. Change of Control Notice and Redemption Procedures. Notice of any
Change of Control shall be sent to the holders of record of the outstanding
shares of Series E Preferred Stock not more than five days following a Change of
Control, which notice (a "Change of Control Notice") shall describe the
transaction or transactions constituting such Change of Control and set forth
each holder's right to require the Corporation to redeem any or all shares of
Series E Preferred Stock held by him or her out of funds legally available
therefor, the Redemption Date (which date shall be not more than 30 days from
the date of such Change of Control Notice) and the procedures to be followed by
such holders in exercising his or her right to cause such redemption; provided,
however, that if shares of Series E Preferred Stock are owned by more than 50
holders or groups of Affiliated holders and if the Series E Preferred Stock is
listed on any national securities exchange or quoted on any national quotation
system, the Corporation shall give such Change of Control Notice by publication
in a newspaper of general circulation in the Borough of Manhattan, The City of
New York, within 30 days following such Change of Control and, in any case, a
similar notice shall be mailed concurrently to each holder of shares of
Series E Preferred Stock. Failure by the Corporation to give the Change of
Control Notice as prescribed by the preceding sentence, or the formal
insufficiency of any such Change of Control Notice, shall not prejudice the
rights of any holder of shares of Series E Preferred Stock to cause the
Corporation to redeem any such shares held by him or her. In the event a holder
of shares of
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Series E Preferred Stock shall elect to require the Corporation to redeem any or
all such shares of Series E Preferred Stock pursuant to Section D of this
Article V, such holder shall deliver, prior to the Redemption Date as set forth
in the Change of Control Notice, or, if the Change of Control Notice is not
given as required by this Section E, at any time following the last day the
Corporation was required to give the Change of Control Notice in accordance with
this Section E (in which case the Redemption Date shall be the date which is the
later of (x) 30 days following the last day the Corporation was required to give
the Change of Control Notice in accordance with this Section E and (y) 15 days
following the delivery of such election by such holder), a written notice, in
the form specified by the Corporation (if the Corporation did in fact give the
notice required by this Section E), to the Corporation so stating, and
specifying the number of shares to be redeemed pursuant to Section D of this
Article V; provided, however, that if all of the shares of the Series E
Preferred Stock are owned by 50 or fewer holders or groups of Affiliated
holders, such holders or groups may deliver a notice or an election to redeem at
any time within 90 days following the occurrence of a Change of Control without
awaiting receipt of a Change of Control Notice or the expiration of the time
allowed for the delivery of a Change of Control Notice hereunder. The
Corporation shall redeem the number of shares so specified on the Redemption
Date fixed by the Corporation or as provided in the preceding sentence. The
Corporation shall comply with the requirements of Rules 13e-4 and 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the shares of Series E Preferred Stock as a result of a Change of
Control. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of this paragraph, the Corporation shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations hereunder by virtue thereof.
F. Deposit of Funds. The Corporation shall, on or prior to any
Redemption Date pursuant to this Article V, deposit with its transfer agent or
other redemption agent in the Borough of Manhattan, The City of New York having
a capital and surplus of at least $500,000,000 selected by the Board of
Directors, as a trust fund for the benefit of the holders of the shares of
Series E Preferred Stock to be redeemed, cash that is sufficient in amount to
redeem the shares to be redeemed in accordance with the Notice of Redemption or
Change of Control Notice, with irrevocable instructions and authority to such
transfer agent or other redemption agent to pay to the respective holders of
such shares, as evidenced by a list of such holders certified by an officer of
the Corporation, the Redemption Price upon surrender of their respective share
certificates. Such deposit shall be deemed to constitute full payment of such
shares to the holders, and from and after the date of such deposit, all rights
of the holders of the shares of Series E Preferred Stock that are to be redeemed
as stockholders of the Corporation with respect to such shares, except the right
to receive the Redemption Price upon the surrender of their respective
certificates, shall cease and terminate. No dividends shall accumulate on any
shares of Series E Preferred Stock after the Redemption Date for such shares
(unless the Corporation shall fail to deposit cash sufficient to redeem all such
shares). In case holders of any shares of Series E Preferred Stock called for
redemption shall not, within two years after such deposit, claim the cash
deposited for redemption thereof, such transfer agent or other redemption agent
shall, upon demand, pay over to the Corporation the balance so deposited.
Thereupon,
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such transfer agent or other redemption agent shall be relieved of all
responsibility to the holders thereof and the sole right of such holders, with
respect to shares to be redeemed, shall be to receive the Redemption Price as
general creditors of the Corporation. Any interest accrued on any funds so
deposited shall belong to the Corporation, and shall be paid to it from time to
time on demand.
VI. Exchange of Series E Preferred Stock
A. The Series E Preferred Stock shall be exchangeable, at any time,
at the option of the Corporation and to the extent permitted by applicable law,
in whole but not in part, on any Dividend Payment Date for Junior Subordinated
Debentures (issued pursuant to an indenture (the "Indenture") prepared in
accordance with the Investment Agreement) in principal amount of $1,000 per
share of Series E Preferred Stock (a "Debenture" and, collectively, the
"Debentures"), in accordance with this Article VI:
(i) Each share of Series E Preferred Stock shall be exchangeable at
the offices of the Corporation and at such other place or places, if any,
as the Board of Directors may designate. Except with the prior written
consent of the holders of all outstanding shares of Series E Preferred
Stock, the Corporation may not exchange any shares of Series E Preferred
Stock if (a) full cumulative dividends, to the extent payable or deemed
payable through the date of exchange, have not been paid or set aside for
payment on all outstanding shares of the Series E Preferred Stock, (b) the
Corporation has failed to amend its Certificate of Incorporation pursuant
to Delaware law to confer the power to vote upon holders of the Debentures
as shall be contemplated by the Indenture or (c) such exchange could
result in any tax consequence to the Investor or any of its Affiliates
which is materially adverse.
(ii) Prior to giving notice of its intention to exchange, the
Corporation shall execute and deliver to a bank or trust company selected
by the Board of Directors and, if required by applicable law, qualify
under the Trust Indenture Act of 1939, as amended, the Indenture.
(iii) The Corporation shall mail written notice of its intention to
exchange Series E Preferred Stock for Debentures (the "Exchange Notice")
to each holder of record of shares of Series E Preferred Stock not less
than 90 nor more than 120 days prior to the date fixed for exchange.
(iv) Prior to effecting any exchange provided above, the Corporation
shall deliver to each holder of shares of Series E Preferred Stock an
opinion of nationally recognized legal counsel to the effect that: (i)
each of the Indenture and the Debentures have been duly authorized and
executed by the Corporation and, when delivered by the Corporation in
exchange for shares of Series E Preferred Stock, will constitute valid and
legally binding obligations of the Corporation enforceable against the
Corporation in accordance with their terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights
generally and to general principles of equity; (ii) the exchange of the
Debentures for the shares of Series E Preferred Stock shall not violate
the
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provisions of this Article VI or of the Delaware General Corporation Law,
including Section 221 thereof; and (iii) the exchange of the Debentures
for the shares of Series E Preferred Stock is exempt from the registration
requirements of the Securities Act or, if no such exemption is available,
that the Debentures have been duly registered for such exchange under such
Act.
(v) Upon the exchange of shares of Series E Preferred Stock for
Debentures, the rights of the holders of shares of Series E Preferred
Stock as stockholders of the Corporation shall terminate and such shares
shall no longer be deemed outstanding.
(vi) Before any holder of shares of Series E Preferred Stock shall
be entitled to receive Debentures, such holder shall surrender the
certificate or certificates therefor, at the office of the Corporation or
at such other place or places, if any, as the Board of Directors shall
have designated, and shall state in writing the name or names (with
addresses) in which he or she wishes the certificate or certificates for
the Debentures to be issued. The Corporation will, as soon as practicable
thereafter, issue and deliver at said office or place to such holder of
shares of Series E Preferred Stock, or to his or her nominee or nominees,
certificates for the Debentures to which he or she shall be entitled as
aforesaid. Shares of Series E Preferred Stock shall be deemed to have been
exchanged as of the close of business on the date fixed for exchange as
provided above, and the Person or Persons entitled to receive the
Debentures issuable upon such exchange shall be treated for all purposes
(including the accrual and payment of interest) as the record holder or
holders of such Debentures as of the close of business on such date.
B. For purposes of clause (c) of paragraph (i) of Section A of this
Article VI, an exchange of shares of Series E Preferred Stock shall be deemed to
be an exchange that could result in a tax consequence to the Investor or any of
its Affiliates which is materially adverse only if the Investor or its Affiliate
shall have delivered to the Corporation a written notice to such effect on or
before the fifteenth day after its receipt of the Exchange Notice (an "Objection
Notice"), which Objection Notice shall be prepared in good faith and shall
specify in reasonable detail the nature of such tax consequences which could
result from the exchange (other than the difference between the tax treatment of
distributions on the Series E Preferred Stock and interest payments on the
Debentures); provided, that the Investor or its Affiliates shall not deliver an
Objection Notice unless the Investor and its Affiliates Beneficially Own, in the
aggregate, at least 1,000 shares of Series E Preferred Stock at the time of
delivery of such Objection Notice to the Corporation. If the Corporation
receives an Objection Notice, then the Corporation shall not exchange the shares
of Series E Preferred Stock of the Investor and its Affiliates and the
Corporation shall, within 15 days after its receipt of the Objection Notice mail
written notice to the effect that it is canceling the proposed exchange of
shares of Series E Preferred Stock to each holder of record of shares of Series
E Preferred Stock to which it mailed the Exchange Notice.
C. Shares of the Series E Preferred Stock may be exchanged for
Warrant Shares pursuant to Section 4 of the Warrants.
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VII. Restrictions on Dividends
So long as any shares of the Series E Preferred Stock are
outstanding, the Board of Directors shall not declare, and the Corporation shall
not pay or set apart for payment any dividend on any Junior Securities or make
any payment on account of, or set apart for payment money for a sinking or other
similar fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible into or exchangeable for any Junior Securities
or Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible into or exchangeable for any Junior Securities or Parity Securities)
unless prior to or concurrently with such declaration, payment, setting apart
for payment, repurchase, redemption or other retirement or distribution, as the
case may be, all accumulated and unpaid dividends on shares of the Series E
Preferred Stock not paid on the dates provided for in Section A of Article III
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series E Preferred Stock, all dividends declared on the Series E Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series E Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series E Preferred Stock and such Parity Dividend Securities bear
to each other. Notwithstanding the foregoing, this paragraph shall not prohibit
(i) the acquisition, repurchase, exchange, conversion, redemption or other
retirement for value of shares of Series E Preferred Stock or any Parity
Dividend Security by the Corporation in accordance with the terms of such
securities or of any shares of Trust Preferred Stock (as defined in Section F of
Article VIII) or (ii) the acquisition, repurchase, exchange, conversion,
redemption or other retirement for value by the Corporation of any Junior
Dividend Securities by the Corporation in accordance with obligations in
existence at the time of original issuance of the Series E Preferred Stock.
VIII. Voting Rights
A. The holders of shares of Series E Preferred Stock shall have no
voting rights except as set forth below or as otherwise from time to time
required by law.
B. So long as any shares of the Series E Preferred Stock are
outstanding, each share of Series E Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock, and the
shares of Series E Preferred Stock shall vote together with shares of Common
Stock (and any shares of Series D Preferred Stock entitled to vote) as a single
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class; provided, however, that upon register or transfer on the stock records of
the Corporation of a share of Series E Preferred Stock to any Person other than
the Investor or an Affiliate of the Investor, such Person, and any subsequent
transferee, shall not be entitled to such voting rights. With respect to any
such vote, the Investor (together with its Affiliates) shall be entitled to a
number of votes per share of Series E Preferred Stock equal to the quotient of
the Investor Aggregate Vote Number, divided by the number of shares of Series E
Preferred Stock held by such Investor and its Affiliates as of the record date
for such vote. The "Investor Aggregate Vote Number" shall equal the number of
Warrant Shares that would be issuable upon the exercise of Original Warrants (as
defined below) by the holders thereof (assuming all conditions precedent to such
exercise have been satisfied and that such exercise occurs as of the record date
for such vote), multiplied by the lesser of (x) the quotient of the number of
Original Warrants that are Beneficially Owned by members of the Investor Group,
in the aggregate, as of the record date for such vote (excluding for purposes of
this calculation, however, any Original Warrants that have been transferred on
the books of the Corporation by any member of the Investor Group to any Person
other than a member of the Investor Group, regardless of whether any such
Original Warrants are subsequently acquired by any member of the Investor
Group), divided by the number of Original Warrants, and (y) the quotient of the
number of Original Series E Preferred Shares (as defined below) that are
Beneficially Owned by members of the Investor Group, in the aggregate, as of the
record date for such vote (excluding for purposes of this calculation, however,
any Original Series E Preferred Shares transferred on the stock records of the
Corporation by any member of the Investor Group to any Person other than a
member of the Investor Group, regardless of whether any such Original Series E
Preferred Shares are subsequently acquired by any member of the Investor Group),
divided by the number of Original Series E Preferred Shares. The term "Original
Warrants" means those Warrants Beneficially Owned by members of the Investor
Group, in the aggregate, as of the Closing. The term "Original Series E
Preferred Shares" means those shares of Series E Preferred Stock Beneficially
Owned by members of the Investor Group, in the aggregate, on the date of
original issuance of the Series E Preferred Stock.
C. If on any date (i) dividends payable on either the Series E
Preferred Stock or the Series D Preferred Stock shall have been in arrears and
not paid in full for four consecutive quarterly periods or if dividends shall
have been in arrears and not paid in full on May 13, 1999 or May 13, 2000 for
the Series E Preferred Stock or Series D Preferred Stock, as the case may be, or
(ii) the Corporation shall have failed to satisfy its obligation to redeem
either shares of Series E Preferred Stock or shares of Series D Preferred Stock
pursuant to the relevant Certificate of Designations, then the number of
directors constituting the Board of Directors shall, without further action, be
increased by two, and the holders of a majority of the outstanding shares of
Series E Preferred Stock and Series D Preferred Stock shall have, in addition to
the other voting rights set forth herein, the exclusive right, voting together
as a single class without regard to series, to elect the two directors (the
"Additional Directors") of the Corporation to fill such newly-created
directorships. Notwithstanding the foregoing, the Investor and its Affiliates
shall not be permitted to elect, pursuant to the preceding sentence, more than
the number of directors that would result in four directors designated for
nomination or elected by the Investor and its Affiliates then being on the Board
of Directors (including directors that the Investor has a right to designate for
nomination to the Board of Directors pursuant to the Investment Agreement);
11
<PAGE> 80
provided, that if at the time holders of Series D Preferred Stock and Series E
Preferred Stock have the right to elect Additional Directors and (i) the
Investor and its Affiliates Beneficially Own, in the aggregate, a majority of
the outstanding shares of Series E Preferred Stock and Series D Preferred Stock,
taken together as a single class, and (ii) the Investor and its Affiliates are
not permitted to elect one or both of the Additional Directors as aforesaid,
then the holders of Series E Preferred Stock and Series D Preferred Stock (other
than the Investor and its Affiliates) shall have the right to elect, voting
together as a single class, one Additional Director pursuant to this Section C.
Additional Directors shall continue as directors and such additional voting
right shall continue until such time as (a) all dividends accumulated on the
Series E Preferred Stock and/or Series D Preferred Stock, as the case may be,
shall have been paid in full or (b) any redemption obligation with respect to
the Series E Preferred Stock and/or Series D Preferred Stock, as the case may
be, that has become due shall have been satisfied or all necessary funds shall
have been set aside for payment, as the case may be, at which time such
Additional Directors shall cease to be directors and such additional voting
right of the holders of shares of Series E Preferred Stock shall terminate
subject to revesting in the event of each and every subsequent event of the
character indicated above and subject to any rights as to the election of
directors provided for the holders of any other series of Preferred Stock of the
Corporation.
D. [Reserved]
E. (a) The foregoing rights of holders of shares of Series E
Preferred Stock to take any action as provided in this Article VIII may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action. So long as such right to vote continues (and unless such right has
been exercised by written consent of the minimum number of shares required to
take such action), the Chairman of the Board of Directors may call, and upon the
written request of holders of record of 20% of the outstanding shares of Series
E Preferred Stock, addressed to the Secretary of the Corporation at the
principal office of the Corporation, shall call, a special meeting of the
holders of shares entitled to vote as provided herein. Such meeting shall be
held within 60 days after delivery of such request to the Secretary, at the
place and upon the notice provided by law and in the By-laws for the holding of
meetings of stockholders.
(b) Each director elected pursuant to Section C of this Article VIII
shall serve until the next annual meeting or until his or her successor shall be
elected and shall qualify, unless the director's term of office shall have
terminated pursuant to the provisions of Section C of this Article VIII, as the
case may be. In case any vacancy shall occur among the directors elected
pursuant to Section C of this Article VIII, such vacancy may be filled for the
unexpired portion of the term by vote of the remaining director or directors
theretofore elected by such holders (or such director's or directors' successor
in office), if any. If any such vacancy is not so filled within 20 days after
the creation thereof or if all of the directors so elected shall cease to serve
as directors before their term shall expire, the holders of the shares then
outstanding and entitled to vote for such director pursuant to the provisions of
Section C of this Article VIII, as the case may be, may elect successors to hold
office for the unexpired terms of any vacant directorships, by written consent
as herein provided, or at a special meeting of such holders
12
<PAGE> 81
called as provided herein. The holders of a majority of the shares entitled to
vote for directors pursuant to Section C of this Article VIII, as the case may
be, shall have the right to remove with or without cause at any time and replace
any directors such holders have elected pursuant to such section, by written
consent as herein provided, or at a special meeting of such holders called as
provided herein.
F. Without the consent or affirmative vote of the holders of at
least a majority of the outstanding shares of Series E Preferred Stock, voting
separately as a class, the Corporation shall not authorize, create or issue, or
increase the authorized amount of, (i) any Senior Securities or Parity
Securities or (ii) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof at any
time on or prior to May 13, 2008 (whether or not only upon the occurrence of a
specified event); provided, however, that no consent or vote of the holders of
the outstanding shares of the Series E Preferred Stock shall be required for the
creation or issuance by a trust formed at the direction of the Corporation of
any series of preferred securities of such trust for financing purposes in an
aggregate amount not to exceed $250,000,000 ("Trust Preferred Stock"). No
consent or vote of the holders of the outstanding shares of Series E Preferred
Stock shall be required to authorize, create or issue, or increase the
authorized amount of, any class or series of Junior Securities, or any security
convertible into a stock of any class or series of Junior Securities, except to
the extent such action would violate Section H of this Article VIII.
G. Without the consent or affirmative vote of the holders of at
least a majority of the outstanding shares of Series E Preferred Stock, voting
separately as a class, the Corporation shall not (i) amend, alter or repeal any
provision of the Certificate of Incorporation or the By-laws, if the amendment,
alteration or repeal alters or changes the powers, preferences or special rights
of the Series E Preferred Stock so as to affect them materially and adversely,
or (ii) authorize or take any other action if such action alters or changes any
of the rights of the Series E Preferred Stock in any respect or otherwise would
be inconsistent with the provisions of this Certificate of Designations and the
holders of any class or series of the capital stock of the Corporation are
entitled to vote thereon.
H. Other Securities. The Corporation shall not enter into any
agreement or issue any security that prohibits, conflicts or is inconsistent
with, or would be breached by, the Corporation's performance of its obligations
hereunder.
IX. Additional Definitions
For the purposes of this Certificate of Designations of Series E
Preferred Stock, the following terms shall have the meanings indicated:
"Affiliate" has the meaning set forth in Rule 12b-2 under the
Exchange Act. The term "Affiliated" has a correlative meaning. Notwithstanding
the foregoing, for all purposes hereof, TPG, and each Person controlled by,
controlling or under common control with TPG (each, a "TPG Person"), shall not
be deemed an "Affiliate" of any Designated Purchaser Person (as defined below),
and no Designated Purchaser, and no Person controlled by, controlling or
13
<PAGE> 82
under common control with such Designated Purchaser (each, a "Designated
Purchaser Person"), shall be deemed an "Affiliate" of any TPG Person or any
other Designated Purchaser Person, in any such case solely as a consequence of
the Investment Agreement and the transactions contemplated thereby.
"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings. Notwithstanding the foregoing, for all purposes hereof, no
TPG Person shall be deemed to Beneficially Own any securities that are held by
any Designated Purchaser Person, and no Designated Purchaser Person shall be
deemed to Beneficially Own any securities that are held by any TPG Person or
other Designated Purchaser Person, in any such case solely as a consequence of
the Investment Agreement or the transactions contemplated thereby.
"Business Day" means any day, other than a Saturday, Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"By-laws" means the By-laws of the Corporation, as amended.
"Change of Control" means such time as:
(i) any Person or Group (other than the Investor, its Affiliates,
the Corporation or any Subsidiaries of the Corporation, or any Group
composed of such Persons) has become, directly or indirectly, the
Beneficial Owner, by way of merger, consolidation or otherwise, of a
majority of the voting power of the then-outstanding Voting Securities of
the Corporation on a fully-diluted basis, after giving effect to the
conversion and exercise of all outstanding warrants, options and other
securities of the Corporation convertible into or exercisable for Voting
Securities of the Corporation (whether or not such securities are then
currently convertible or exercisable); or
(ii) the sale, lease, transfer or other disposition of all or
substantially all of the consolidated assets of the Corporation and its
Subsidiaries to any Person or Group; or
(iii) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted the Board of
Directors, together with any new members of such Board of Directors whose
election by such Board of Directors or whose nomination for election by
the stockholders of the Corporation was approved by a vote of at least a
majority of the members of such Board of Directors then still in office
who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved or who were
approved pursuant to Section 5.02 of the Investment Agreement or Section
C, D or E of Article VIII of this Certificate of Designations, cease for
any reason to constitute a majority of the directors of the Corporation
then in office; or
14
<PAGE> 83
(iv) the Corporation consolidates with or merges with or into
another Person or any Person consolidates with, or merges with or into,
the Corporation, in any such event pursuant to a transaction in which
immediately after the consummation thereof the Persons owning the
then-outstanding Voting Securities of the Corporation immediately prior to
such consummation shall not own a majority in the aggregate (by reason of
such prior ownership) of the then-outstanding Voting Securities of the
Corporation or the surviving entity if other than the Corporation; or
(v) the adoption of a plan relating to the liquidation or
dissolution of the Corporation, whether or not otherwise in compliance
with the provisions of this Certificate of Designations.
"Closing" has the meaning assigned to such term in the Investment
Agreement.
"Designated Purchaser" has the meaning assigned to such term in the
Investment Agreement.
"Designated Purchaser Person" has the meaning set forth in the
definition of "Affiliate."
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
"Group" has the meaning set forth in Rule 13d-5 under the Exchange
Act.
"Investment Agreement" means the Investment Agreement, dated as of
February 23, 1998, by and between the Investor and the Corporation, as amended,
supplemented or otherwise modified from time to time.
"Investor" means TPG.
"Investor Group" means, collectively, the Investor, the Designated
Purchasers, if any, and the respective Affiliates of such Persons.
"Investor Nominee" means a person designated for election to the
Board of Directors by an Investor pursuant to the Investment Agreement.
"Moody's" means Moody's Investors Service and its successors.
"Person" means any individual, corporation, company, association,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Securities Act" means the U.S. Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder, from time to time.
15
<PAGE> 84
"S&P" means Standard and Poor's Ratings Group, a division of the
McGraw-Hill Companies, and its successors.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of voting stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or combination thereof) and (ii) any partnership (A) the sole general
partner of the managing general partner of which is such Person or a Subsidiary
of such Person or (B) the only general partners of which are such Person or of
one or more Subsidiaries of such Person (or any combination thereof).
"TPG" means TPG Partners II, L.P., a Delaware limited partnership.
"TPG Person" has the meaning set forth in the definition of
"Affiliate."
"Voting Securities" means the shares of Common Stock and any other
securities of the Corporation entitled to vote generally for the election of
directors.
"Warrants" means the Series B Warrants issued by the Corporation on
pursuant to the Investment Agreement.
"Warrant Shares" has the meaning assigned to such term in the
Warrants.
X. Miscellaneous
A. Notices. Any notice referred to herein shall be in writing and,
unless first-class mail shall be specifically permitted for such notices under
the terms hereof, shall be deemed to have been given upon personal delivery
thereof, upon transmittal of such notice by telecopy (with confirmation of
receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
(i) if to the Corporation, to its office at 800 Connecticut Avenue
Norwalk, Connecticut 06854 (Attention: General Counsel) or to the transfer
agent for the Series E Preferred Stock;
(ii) if to a holder of the Series E Preferred Stock, to such holder
at the address of such holder as listed in the stock record books of the
Corporation (which may include the records of any transfer agent for the
Series E Preferred Stock); or
(iii) to such other address as the Corporation or such holder, as
the case may be, shall have designated by notice similarly given.
B. Reacquired Shares. Any shares of Series E Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation, directly or
indirectly, in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof (and shall not be deemed to be outstanding for any
purpose) and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance
16
<PAGE> 85
with the Delaware General Corporation Law. All such shares of Series E Preferred
Stock shall upon their cancellation and upon the filing of an appropriate
certificate with the Secretary of State of the State of Delaware, become
authorized but unissued shares of Preferred Stock, par value $0.01 per share, of
the Corporation and may be reissued as part of another series of Preferred
Stock, par value $0.01 per share, of the Corporation subject to the conditions
or restrictions on issuance set forth herein.
C. Enforcement. Any registered holder of shares of Series E
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designations or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
D. Transfer Taxes. Except as otherwise agreed upon pursuant to the
terms of this Certificate of Designations, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Debentures on exchange of, or other securities or
property issued on account of, shares of Series E Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Debentures or other securities or property in a
name other than that in which the shares of Series E Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
E. Transfer Agent. The Corporation may appoint, and from time to
time discharge and change, a transfer agent for the Series E Preferred Stock.
Upon any such appointment or discharge of a transfer agent, the Corporation
shall send notice thereof by first-class mail, postage prepaid, to each holder
of record of shares of Series E Preferred Stock.
F. Record Dates. In the event that the Series E Preferred Stock
shall be registered under either the Securities Act or the Exchange Act, the
Corporation shall establish appropriate record dates with respect to payments
and other actions to be made with respect to the Series E Preferred Stock.
17
<PAGE> 86
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Executive Vice President and General Counsel
and attested by its Vice President this 12th day of February, 1999.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
-----------------------------
Name: Jeffery H. Boyd
Title: Executive Vice
President and General
Counsel
[Corporate Seal]
ATTEST:
/s/ ROBERT J. MOSES
- -----------------------------
Name: Robert J. Moses
Title: Vice President
18
<PAGE> 87
Exhibit 3(b)
Part 9
Conformed
CERTIFICATE OF ELIMINATION
OF
SERIES B CUMULATIVE PREFERRED STOCK
OF
OXFORD HEALTH PLANS, INC.
(Pursuant to section 151(g)
of the General Corporation Law
of the State of Delaware)
Oxford Health Plans, Inc., a Delaware corporation (the
"Corporation"), hereby certifies that the following resolution was duly adopted
by the Board of Directors of the Corporation in anticipation of completing the
exchange of the Company's Series A Cumulative Preferred Stock and Series B
Cumulative Preferred Stock for Series D Preferred Stock and Series E Cumulative
Preferred Stock, respectively, (the "Share Exchange") which was completed on
February 13, 1999, and as required by Section 151(g) of the General Corporation
Law of the State of Delaware:
RESOLVED, FURTHER that pursuant to the authority granted to
and vested in the Board of Directors of this Corporation and
in accordance with the provisions of the Second Amended and
Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), the Board of Directors hereby
states and declares that following completion of the Share
Exchange none of the 300,000 authorized shares of the series
of stock designated "Series B Cumulative Preferred Stock" are
outstanding, and none will be issued subject to the
Certificate of Designations filed with respect to such series
on May 13, 1998; and when a certificate setting forth this
resolution becomes effective, it shall have the effect of
eliminating from the Certificate of Incorporation all matters
set forth in the Certificate of Designations with respect to
Series B Cumulative Preferred Stock.
<PAGE> 88
Exhibit 3(b)
Part 9
Conformed
IN WITNESS WHEREOF, this Certificate of Elimination has been
executed on behalf of the Corporation by its Secretary and attested by its
Assistant Secretary this first day of March, 1999.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
Jeffrey H. Boyd
Executive Vice President,
Secretary and General
Counsel
Attest:
/s/ JON RICHARDSON
Name: Jon Richardson
Title: Special Counsel to CEO, Assistant Secretary
-2-
<PAGE> 89
Exhibit 3(b)
Part 10
CERTIFICATE OF ELIMINATION
OF
SERIES A CUMULATIVE PREFERRED STOCK
OF
OXFORD HEALTH PLANS, INC.
(Pursuant to section 151(g)
of the General Corporation Law
of the State of Delaware)
Oxford Health Plans, Inc., a Delaware corporation (the
"Corporation"), hereby certifies that the following resolution was duly adopted
by the Board of Directors of the Corporation in anticipation of completing the
exchange of the Company's Series A Preferred Stock and Series B Preferred Stock
for Series D Preferred Stock and Series E Preferred Stock, respectively, (the
"Share Exchange") which was completed on February 13, 1999, and as required by
Section 151(g) of the General Corporation Law of the State of Delaware:
RESOLVED, FURTHER that pursuant to the authority granted to
and vested in the Board of Directors of this Corporation and
in accordance with the provisions of the Second Amended and
Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), the Board of Directors hereby
states and declares that following completion of the Share
Exchange none of the 300,000 authorized shares of the series
of stock designated "Series A Cumulative Preferred Stock" are
outstanding, and none will be issued subject to the
Certificate of Designations filed with respect to such series
on May 13, 1998; and when a certificate setting forth this
resolution becomes effective, it shall have the effect of
eliminating from the Certificate of Incorporation all
<PAGE> 90
Exhibit 3(b)
Part 10
matters set forth in the Certificate of Designations with
respect to Series A Cumulative Preferred Stock.
IN WITNESS WHEREOF, this Certificate of Elimination has been
executed on behalf of the Corporation by its Secretary and attested by its
Assistant Secretary this first day of March, 1999.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
Jeffrey H. Boyd
Executive Vice President,
Secretary and General
Counsel
Attest:
/s/ JON RICHARDSON
Name: Jon Richardson
Title: Special Counsel to CEO, Assistant Secretary
-2-
<PAGE> 1
Exhibit 10(ll)
conformed
AMENDMENT NO. 1 TO INVESTMENT AGREEMENT
Reference is hereby made to the Investment Agreement, dated as of February
23, 1998, as amended on May 13, 1998 (the "Agreement"), between TPG Oxford LLC
(the "Investor") and Oxford Health Plans, Inc. (the "Company"). Capitalized
terms used but not defined herein shall have the meanings ascribed to such terms
in the Agreement.
The Investor and Company, pursuant to and in accordance with Section 11.07
of the Agreement, hereby agree to amend the Agreement as follows:
1. Section 7.07 of the Agreement is hereby amended by replacing the words
"Prior to" at the beginning of the first sentence thereof with the words "As
soon as reasonably practicable after".
2. Section 8.13(a) of the Agreement is hereby amended by replacing the
words "May 13, 1998" with the words "July 31, 1998".
This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which together
constitutes one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of May
13, 1998.
TPG OXFORD LLC
By: /s/ Karl Peterson
----------------------------
Name: Karl Petersen
Title: Member
OXFORD HEALTH PLANS, INC.
By: /s/ Jeffery H. Boyd
----------------------------
Name: Jeffery H. Boyd
Title: Executive Vice President
and General Counsel
<PAGE> 1
Exhibit 10(mm)
conformed
AMENDMENT NO. 2 TO INVESTMENT AGREEMENT
Reference is hereby made to the Investment Agreement, dated as of February
23, 1998, as amended on May 13, 1998 (the "Agreement"), between TPG Partners II,
L.P. (the "Investor") and Oxford Health Plans, Inc. (the "Company"). Capitalized
terms used but not defined herein shall have the meanings ascribed to such terms
in the Agreement.
The Investor and Company, pursuant to and in accordance with Section 11.07
of the Agreement, hereby agree to amend the Agreement as follows:
1. Section 8.13(a) of the Agreement is hereby amended by replacing the
words "July 31, 1998" with the words "September 15, 1998".
This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which together
constitutes one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
August 27, 1998.
TPG PARTNERS II, L.P.
By: TPG GenPar II, L.P.
its General Partner
By: TPG Advisors II, Inc.
its General Partner
By: /s/ James O'Brien
----------------------------
Name: James O'Brien
Title: Vice President
OXFORD HEALTH PLANS, INC.
By: /s/ Jeffery H. Boyd
-----------------------------
Name: Jeffery H. Boyd
Title: Executive Vice President
and General Counsel
<PAGE> 1
Exhibit 10(nn)
conformed
AMENDMENT NUMBER 3 TO INVESTMENT AGREEMENT
Reference is hereby made to the Investment Agreement, dated as of
February 23, 1998 (the "Agreement"), between TPG Partners II, L.P. (the
"Investor") and Oxford Health Plans, Inc. (the "Company"), as such agreement has
been amended. Capitalized terms used but not defined herein shall have the
meaning ascribed to such terms in the Agreement.
The Investor and the Company, pursuant to, and in accordance with,
Section 11.07 and Section 6.01 (c)(iv) of the Agreement, hereby agree to amend
the Agreement by adding the following new subsection (e) to Section 6.01:
"(e) Nothing contained in this Section 6.01 shall prohibit any
individual who is an Affiliate of the Investor from acquiring Beneficial
Ownership of shares of Common Stock; provided, that the aggregate number of
shares of Common Stock acquired by all such individuals pursuant to this Section
6.01 (e) shall not exceed 2,000,000."
This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which constitute one and
the same instrument.
This Amendment shall become effective upon the receipt by the
Investor and the Company of all required approvals from state regulatory
agencies. The Company and the Investor shall use their best efforts to obtain
such approvals, and the Company shall promptly notify the Investor of the
receipt of such approvals.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as
of November 19, 1998.
TPG PARTNERS II, L.P.
By: /s/ Jonathan J. Coslet
--------------------------------
Name: Jonathan J. Coslet
Title: Principal
OXFORD HEALTH PLANS, INC.
By: /s/ Jeffery H. Boyd
--------------------------------
Name: Jeffery H. Boyd
Title: Executive Vice President,
General Counsel
<PAGE> 1
Exhibit 10(oo)
1996 MANAGEMENT INCENTIVE COMPENSATION PLAN
OF OXFORD HEALTH PLANS, INC.
1. Purpose. The purpose of the 1996 Management Incentive Compensation Plan of
Oxford Health Plans, Inc. (the "Plan") is to promote the financial interests and
growth of Oxford Health Plans, Inc. (the "Company") and its subsidiaries, by (i)
attracting and retaining executive officers possessing outstanding ability; (ii)
motivating such officers by means of performance-related incentives; and (iii)
providing incentive compensation opportunities which are competitive with those
of other major health care companies.
2. Definitions. The following definitions are applicable to the Plan:
(a) "Base Salary" means a Participant's annual rate of base salary
effective as of January 1 of the Plan Year (or, if later, a Participant's
first date of employment).
(b) "Board of Directors" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Compensation Committee of the Board of
Directors.
(e) "Participant" means each executive officer of the Company (including
officers of any subsidiaries of the Company who are treated as executive
officers of any subsidiaries of the Company) who is selected by the
Committee to participate in the Plan.
(f) "Plan Year" means the calendar year.
3. Administration. The Plan shall be administered by the Committee. Subject
to the express provisions of the Plan, the Committee shall have authority
to:
(i) select the Participants;
(ii) determine the size of awards to be made under the Plan, subject to
Section 6 hereof; and
(iii) establish from time to time regulations for the administration of
the Plan, interpret the Plan, and make all determinations deemed necessary
or advisable for the administration of the Plan.
4. Participation. Participants in the Plan shall be selected for each Plan
Year from those executive officers of the Company and its subsidiaries who
have contributed, or have the capacity for contributing, in a substantial
measure to the successful performance of the Company for that Plan Year.
No such officer shall at any time have a right to be selected as a
Participant in the Plan for any Plan Year, to be entitled automatically to
an award, nor, having been selected as a Participant for one Plan Year, to
be a Participant in any other Plan Year.
5. Performance Goals for Awards. The Committee shall establish performance
goals and target awards for each Participant prior to the beginning of
each Plan Year (or such later date as may be prescribed by the Internal
Revenue Service for purposes of satisfying the requirements of Section
162(m) of the Code). The performance goals for a Plan Year shall be
selected by the
<PAGE> 2
Committee form the following criteria: membership growth; revenue growth;
earnings per share; administrative and medical expenses; development of
private practice partnerships; establishment of case rate contracts;
return on equity; geographic expansion; stock price performance; and
increases in net income. The Committee shall select performance goals for
each Plan Year.
6. Awards. Each Participant shall receive a percentage of Base Salary for
each performance goal achieved during a Plan Year, with a maximum
aggregate amount of 400% of a Participant's Base Salary payable for any
Plan Year. In no event shall a Participant earn an award under the Plan in
excess of $4,000,000 for any Plan Year. In its discretion, the Committee
may reduce or eliminate awards earned by any Participant under the
foregoing sentence, the Committee shall consider (i) the Company's
performance for such Plan Year in delivery of high quality health care in
its health benefit plans and programs promoting preventative care, self
care and overall member wellness; (ii) the quality of service provided to
members of the Company's plans in such Plan Year; and (iii) overall levels
of customer well-being and satisfaction with the Company's plans. The
Committee shall consider such information as it deems appropriate in
connection with the foregoing, including rankings and reports issued by
the National Committee on Quality Assurance, independent survey
organizations and governmental authorities.
7. Payment of Awards. (a) Except as provided in (b) below, awards earned
under the Plan shall be paid as promptly as practicable after the close of
the applicable Plan Year, following certification by the Committee of the
achievement of performance goals and the amounts to be paid for the Plan
Year. Any such distribution shall be in cash.
(b) The Committee shall have the right to require that payment of
all or any portion of an earned award be deferred until such time or times
as the Committee, in its sole discretion, shall determine. In addition,
with Committee approval, a Participant may elect to defer the payment of
any award earned under the Plan. Deferral elections shall be made at such
time and in such manner as the Committee shall prescribe. The Committee
shall establish such terms, conditions, rules and regulations as it shall
deem necessary and advisable with respect to deferred awards including,
but not limited to, the time of payment (including acceleration), the
method of determining the additional amounts to be credited with respect
to a deferred award, the applicable methods of payment of deferred awards,
and any special rules that may apply in the
<PAGE> 1
Exhibit 10(pp)
December 10, 1998
Jeffery H. Boyd
34 Brookridge Drive
Greenwich, CT 06830
Dear Jeff:
This letter will serve to amend the letter agreement dated June 26, 1998,
between you and Oxford Health Plans, Inc. (the "Corporation") by deleting the
date "January 1, 1999" in the first and second, fourth and eighth lines of the
third paragraph thereof, and replacing such date in each such instance with the
date "January 1, 2000". A copy of the letter agreement is attached hereto for
reference.
We acknowledge that this letter is being entered into in consideration of
your continued employment with the Corporation and that your Employment
Agreement dated as of August 14, 1996, and amended as of February 23, 1998, and
the letter agreement dated June 26, 1998, as amended by this letter agreement,
shall remain in full force and effect.
Sincerely,
/s/ NORMAN C. PAYSON, M.D.
Norman C. Payson, M.D.
Chief Executive Officer
Agreed and Accepted:
/s/ JEFFERY H. BOYD
- -----------------------------
Jeffery H. Boyd
Date: December 10, 1998
NCP/bh
Attachment
<PAGE> 1
Exhibit 10(qq)
Amendment Number 1 to Employment Agreement
This Amendment Number 1 to Employment Agreement (the "Amendment") amends
that certain Employment Agreement by and between Oxford Health Plans, Inc. (the
"Company") and Norman C. Payson, M.D. ("Executive"), effective as of February
23, 1998 (the "Agreement"). Capitalized terms used but not defined herein shall
have the meanings ascribed thereto in the Agreement.
The Company and the Executive, pursuant to, and in accordance with,
Section 13 of the Agreement, hereby agree to amend the Agreement by replacing
the second sentence of Section 4(b)(i) in its entirety with the following
sentence:
"As promptly as practicable, and in any event no later than April 15,
1999, the Company shall, at its expense, cause all shares subject to the
Option to be registered under the Securities Act of 1933, as amended (the
"Securities Act"), and registered or qualified under applicable state
laws, to be freely resold."
This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which constitute one and
the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment this 19th
day of December, 1998.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
---------------------------------
Jeffery H. Boyd, Executive Vice
President and General Counsel
/s/ NORMAN C. PAYSON
---------------------------------
Norman C. Payson, M.D.
<PAGE> 1
Exhibit 10(rr)
conformed
SHARE EXCHANGE AGREEMENT
SHARE EXCHANGE AGREEMENT, dated as of February 13, 1999, by and
among TPG Partners II, L.P., a Delaware limited partnership ("TPG Partners"),
TPG Parallel II, L.P., a Delaware limited partnership ("TPG Parallel"), TPG
Investors II, L.P., a Delaware limited partnership ("TPG Investors", and
together with TPG Partners and TPG Parallel, "TPG"), Chase Equity Associates,
L.P., a Delaware limited partnership ("Chase"), Oxford Acquisition Corp., a
Delaware corporation ("Acquisition"), the entities listed as "DLJ Entities" on
the signature pages hereto (each, a "DLJ Entity," and together with TPG, Chase
and Acquisition, the "Investors") and Oxford Health Plans, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to exchange (i) newly-issued shares of
its Series D Cumulative Preferred Stock, par value $0.01 per share (the "Series
D Preferred Stock"), for all of the outstanding shares of its Series A
Cumulative Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), and (ii) newly-issued shares of its Series E Cumulative Preferred
Stock, par value $0.01 per share (the "Series E Preferred Stock," and together
with the Series D Preferred Stock, the "New Preferred Stock"), for all
outstanding shares of its Series B Cumulative Preferred Stock, par value $0.01
per share (the "Series B Preferred Stock," and together with the Series A
Preferred Stock, the "Existing Preferred Stock");
WHEREAS, the Investors desire to exchange all outstanding shares of
the Existing Preferred Stock for newly-issued shares of the New Preferred Stock;
and
WHEREAS, the Investors and the Company desire to amend the
Assignment Agreements (as defined below), the Investment Agreement (as defined
below), the Registration Rights Agreement (as defined below) and the Warrants
(as defined below) in connection with the transactions contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties hereto agree as follows:
Section 1. Series A Exchange. The Company shall issue, in the
aggregate, 260,146.909 shares of Series D Preferred Stock having the rights,
preferences, privileges and restrictions set forth in the form of Certificate of
Designations attached hereto as Exhibit A and shall exchange all such shares
with the Investors for all outstanding shares of Series A Preferred Stock. Each
Investor agrees to participate in the exchange described in the preceding
sentence by surrendering to the Company all outstanding shares of Series A
Preferred Stock held by such Investor at such place as the Company shall
designate in its reasonable discretion and upon such surrender to accept a
corresponding number of shares of Series D Preferred Stock in exchange therefor.
Section 2. Series B Exchange. The Company shall issue, in the
aggregate, 111,820.831 shares of Series E Preferred Stock having the rights,
preferences, privileges and restrictions set forth in the form of Certificate of
Designations attached hereto as Exhibit B and shall exchange all such shares
with the Investors for all outstanding shares of Series B Preferred Stock. Each
Investor agrees to participate in the exchange described in the preceding
sentence by
<PAGE> 2
surrendering to the Company all outstanding shares of Series B Preferred Stock
held by such Investor at such place as the Company shall designate in its
reasonable discretion and upon such surrender to accept a corresponding number
of shares of Series E Preferred Stock in exchange therefor.
Section 3. Time of Exchange. The share exchanges described in
Sections 1 and 2 hereof shall occur on February 13, 1999 (the "Exchange Date").
The obligation of any party hereto to participate in either of the exchanges
described in Sections 1 and 2 hereof shall be conditioned on the other exchange
occurring simultaneously.
Section 4. Effectiveness; Counterparts. This Share Exchange
Agreement shall become effective when executed by each of the parties hereto.
This Share Exchange Agreement may be executed in any number of separate
counterparts, each of which shall, collectively and separately, constitute one
agreement.
Section 5. Assignment Agreement Amendments. Reference is made to the
Assignment Agreement, dated April 23, 1998, among TPG Oxford LLC, a Delaware
limited liability company ("TPG Oxford") and the DLJ Entities, the Assignment
Agreement, dated April 28, 1998, between TPG Oxford and Acquisition, and the
Assignment Agreement, dated April 28, 1998, between TPG Oxford and Chase
(collectively, the "Assignment Agreements"). Each Investor agrees with respect
to the Assignment Agreement or Assignment Agreements to which such Investor is a
party that from and after the consummation of the exchanges referred to in
Sections 1 and 2 hereof:
(a) All references in such Agreement or Agreements relating to the
"Series A Preferred Stock" and "Series B Preferred Stock" shall be deemed to be
references to the Series D Preferred Stock and Series E Preferred Stock,
respectively.
(b) An additional section shall be added to such Agreement or
Agreements which states: "Each party hereto agrees that prior to May 13, 2000
such party and its transferees, successors and assigns shall not use shares of
Series D Preferred Stock as consideration in connection with the exercise of the
Series A Warrants or Series B Warrants; provided, that such party and its
transferees, successors and assigns in the aggregate may do so with respect to a
percentage of the total number of shares of the Series D Preferred Stock
originally issued by the Company to such party on the Exchange Date that does
not exceed the percentage of the total number of shares of Series E Preferred
Stock issued by the Company on the Exchange Date that have been (A) redeemed by
the Company, (B) repurchased by the Company as a result of a Change of Control
(as defined in the Certificate of Designations for the Series E Preferred Stock)
or otherwise, (C) used as consideration in connection with the exercise of the
Company's Series A Warrants or Series B Warrants, or (D) otherwise retired by
the Company.
Section 6. Investment Agreement, Registration Rights Agreement and
Warrant Amendments. (a) Reference is made to the Investment Agreement, dated as
of February 23, 1998 (the "Investment Agreement"), by and between TPG Oxford and
the Company. From and after the consummation of the exchanges referred to in
Sections 1 and 2 hereof, all references set forth in the Investment Agreement to
the "Series A Cumulative Preferred Stock, par value $0.01
<PAGE> 3
per share", "Series A Preferred Stock" and the "Series A Certificate of
Designations" shall be deemed to be references to the Series D Cumulative
Preferred Stock, par value $0.01 share, Series D Preferred Stock and the
Certificate of Designations filed with the Secretary of State of the State of
Delaware with respect to the Series D Preferred Stock, respectively. From and
after the consummation of the exchanges referred to in Sections 1 and 2 hereof,
all references set forth in the Investment Agreement to the "Series B Cumulative
Preferred Stock, par value $0.01 per share", "Series B Preferred Stock" and the
"Series B Certificate of Designations" shall be deemed to be references to the
Series E Cumulative Preferred Stock, par value $0.01 per share, Series E
Preferred Stock and the Certificate of Designations filed with the Secretary of
State of the State of Delaware with respect to the Series E Preferred Stock,
respectively.
(b) Reference is made to the Registration Rights Agreement, dated as
of February 23, 1998 by and between the Company and TPG Oxford (the
"Registration Rights Agreement"). From and after the consummation of the
exchanges referred to in Sections 1 and 2 hereof, all references set forth in
the Registration Rights Agreement to the "Series A Cumulative Preferred Stock,
par value $0.01 per share" and the "Series A Preferred Stock" shall be deemed to
be references to the Series D Cumulative Preferred Stock, par value $0.01 per
share and the Series D Preferred Stock, respectively. From and after the
consummation of the exchanges referred to in Sections 1 and 2 hereof, all
references set forth in the Registration Rights Agreement to the "Series B
Cumulative Preferred Stock, par value $0.01 per share" and the "Series B
Preferred Stock" shall be deemed to be references to the Series E Cumulative
Preferred Stock, par value $0.01 per share and the Series E Preferred Stock,
respectively.
(c) Reference is made to the Series A Warrants and Series B Warrants
of the Company, dated May 13, 1998 (collectively, the "Warrants"). As of the
date hereof, all outstanding Warrants are held by the Investors. From and after
the consummation of the exchanges referred to in Sections 1 and 2 hereof, all
references set forth in the Warrants to the "Series A Cumulative Preferred
Stock, par value $0.01 per share", "Series A Preferred Stock" and the
"Certificate of Designations for the Series A Preferred Stock filed by the
Company with the Secretary of State of the State of Delaware" shall be deemed to
be references to the Series D Cumulative Preferred Stock, par value $0.01 per
share, Series D Preferred Stock and the Certificate of Designations filed with
the Secretary of State of the State of Delaware with respect to the Series D
Preferred Stock, respectively. From and after the consummation of the exchanges
referred to in Sections 1 and 2 hereof, all references set forth in the Warrants
to the "Series B Cumulative Preferred Stock, par value $0.01 per share", "Series
B Preferred Stock" and the "Certificate of Designations for the Series B
Preferred Stock filed by the Company with the Secretary of State of the State of
Delaware" shall be deemed to be references to the Series E Cumulative Preferred
Stock, par value $0.01 per share, Series E Preferred Stock and the Certificate
of Designations filed with the Secretary of State of the State of Delaware with
respect to the Series E Preferred Stock, respectively.
Section 7. Binding Effect; Transfers. Each Investor agrees that this
Agreement and the obligations hereunder shall attach to all of such Investor's
shares of Existing Preferred Stock and shall be binding upon any person or
entity to which legal or beneficial ownership of such shares shall pass, whether
by operation of law or otherwise, including, without limitation, such Investor's
heirs, guardians, administrators or successors.
3
<PAGE> 4
Section 8. Governing Law. This Share Exchange Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of New York, without regard to the principles thereof regarding conflicts
of law.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Share
Exchange Agreement to be executed by their respective officers or partners
thereunto duly authorized, as of the date first above written.
OXFORD HEALTH PLANS, INC.
By: /s/ Jeffery H. Boyd
-----------------------------
Name: Jeffery H. Boyd
Title: EVP, General Counsel
TPG PARTNERS II, L.P.
By: TPG GenPar II, L.P.
General Partner
By: TPG Advisors II, Inc.
General Partner
By: /s/ James O'Brien
-----------------------------------
Name: James J. O'Brien
Title: Vice President
5
<PAGE> 6
TPG PARALLEL II, L.P.
By: TPG GenPar II, L.P.
General Partner
By: TPG Advisors II, Inc.
General Partner
By: /s/ James O'Brien
---------------------------
Name: James J. O'Brien
Title: Vice President
TPG INVESTORS II, L.P.
By: TPG GenPar II, L.P.
General Partner
By: TPG Advisors II, Inc.
General Partner
By: /s/ James O'Brien
---------------------------
Name: James J. O'Brien
Title: Vice President
CHASE EQUITY ASSOCIATES, L.P.
By: Chase Capital Partners
General Partner
By: /s/ Mitchell J. Butt
-----------------------------
Name: Mitchell J. Butt
Title: Executive Partner
OXFORD ACQUISITION CORP.
By: John D. Howard
-----------------------------
Name: John D. Howard
Title: Executive Vice President
6
<PAGE> 7
DLJ ENTITIES:
DLJMB FUNDING II, INC.
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
DLJMB FUNDING II, INC.
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
DLJ MERCHANT BANKING PARTNERS II-A, L.P.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ Diversified Partners, L.P.
Managing General Partner
/s/ Ivy Dodes
-------------------------
Name: Ivy Dodes
Title: Vice President
7
<PAGE> 8
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ Diversified Partners, L.P.
Managing General Partner
/s/ Ivy Dodes
------------------------
Name: Ivy Dodes
Title: Vice President
DLJ MILLENIUM Partners, L.P.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
DLJ MILLENIUM Partners-A, L.P.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
DLJ FIRST ESC L.P.
By: DLJ LBO Plans Management
Corporation
General Partner
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
8
<PAGE> 9
DLJ OFFSHORE PARTNERS II, C.V.
By: DLJ Merchants Banking II, Inc.
Managing General Partner
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
DLJ EAB PARTNERS, L.P.
By: DLJ LBO Plans Management
Corporation
General Partner
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
UK INVESTMENT PLAN 1997 PARTNERS
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
By: UK Investment Plan 1997 Partners, Inc.
Managing General Partner
/s/ Ivy Dodes
------------------
Name: Ivy Dodes
Title: Vice President
9
<PAGE> 10
DLJ ESC II L.P.
By: DLJ LBO Plans Management
Corporation
Manager
/s/ Ivy Dodes
--------------------------
Name: Ivy Dodes
Title: Vice President
DLJ CAPITAL CORPORATION
/s/ Ivy Dodes
--------------------------
Name: Ivy Dodes
Title: Vice President
SPROUT GROWTH II, L.P.
By: DLJ Capital Corporation
Managing General Partner
/s/ Arthur S. Zuckerman
--------------------------
Name: Arthur S. Zuckerman
Title: Vice President
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
General Partner
/s/ Arthur S. Zuckerman
--------------------------
Name: Arthur S. Zuckerman
Title: Vice President
10
<PAGE> 11
SPROUT CAPITAL VIII, L.P.
By: DLJ Capital Corporation
Managing General Partner
/s/ Arthur S. Zuckerman
--------------------------
Name: Arthur S. Zuckerman
Title: Vice President
SPROUT VENTURE CAPITAL, L.P.
By: DLJ Capital Corporation
General Partner
/s/ Arthur S. Zuckerman
--------------------------
Name: Arthur S. Zuckerman
Title: Vice President
11
<PAGE> 1
Exhibit 10(v)
conformed
AMENDMENT NUMBER 1 TO EMPLOYMENT AGREEMENT
This Amendment Number 1 to Employment Agreement (the "Amendment") amends
that certain Employment Agreement by and between Oxford Health Plans, Inc. (the
"Company") and Norman C. Payson, M.D. ("Executive"), effective as of February
23, 1998 (the "Agreement"). Capitalized terms used but not defined herein shall
have the meanings ascribed thereto in the Agreement.
The Company and the Executive, pursuant to, and in accordance with,
Section 13 of the Agreement, hereby agree to amend the Agreement by replacing
the second sentence of Section 4(b)(i) in its entirety with the following
sentence:
"As promptly as practicable, and in any event no later than April 15,
1999, the Company shall, at its expense, cause all shares subject to the
Option to be registered under the Securities Act of 1933, as amended (the
"Securities Act"), and registered or qualified under applicable state
laws, to be freely resold."
This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which constitute one and
the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment this
9th day of December, 1998.
OXFORD HEALTH PLANS, INC.
By: /s/ JEFFERY H. BOYD
--------------------------------
Jeffery H. Boyd, Executive Vice
President and General Counsel
/s/ NORMAN C. PAYSON, M.D.
--------------------------------
Norman C. Payson, M.D.
<PAGE> 1
EXHIBIT 21
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
State of
Company Incorporation
- ---------------------------------------------------------------------
Oxford Health Plans, Inc. Delaware
Oxford Health Plans (NY), Inc. New York
Oxford Health Insurance, Inc. New York
Oxford Health Plans (NJ), Inc. New Jersey
89
<PAGE> 1
EXHIBIT 23(a)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Oxford Health Plans, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 33-49738, 33-70908, 333-988, 333-28109, 333-35693 and 33-94242) on Form
S-8 of Oxford Health Plans, Inc. of our report dated March 9, 1999, relating to
the consolidated balance sheet of Oxford Health Plans, Inc. and subsidiaries as
of December 31, 1998 and the related consolidated statements of operations,
shareholders' equity (deficit) and comprehensive earnings (loss) and cash flows
for the year then ended, which report appears in the December 31, 1998 annual
report on Form 10-K of Oxford Health Plans, Inc.
Ernst & Young LLP
Stamford, Connecticut
March 19, 1999
90
<PAGE> 1
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Oxford Health Plans, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-49738, 33-70908, 333-988, 333-28109, 333-35693 and 33-94242) on Form S-8 of
Oxford Health Plans, Inc. of our report dated February 23, 1998, relating to the
consolidated balance sheets of Oxford Health Plans, Inc. and subsidiaries as of
December 31, 1997 and the related consolidated statements of operations,
shareholders' equity (deficit) and comprehensive earnings (loss), and cash flows
for each of the years in the two-year period ended December 31, 1997, and the
related consolidated financial statement schedules, which reports appear in the
December 31, 1998 annual report on Form 10-K of Oxford Health Plans, Inc.
KPMG LLP
Stamford, Connecticut
March 19, 1999
91
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865084
<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 237,717
<SECURITIES> 922,990
<RECEIVABLES> 110,254
<ALLOWANCES> 37,759
<INVENTORY> 0
<CURRENT-ASSETS> 1,360,632
<PP&E> 273,372
<DEPRECIATION> 160,431
<TOTAL-ASSETS> 1,637,750
<CURRENT-LIABILITIES> 1,151,189
<BONDS> 368,850
298,816
0
<COMMON> 805
<OTHER-SE> (181,910)
<TOTAL-LIABILITY-AND-EQUITY> 1,637,750
<SALES> 0
<TOTAL-REVENUES> 4,719,411
<CGS> 0
<TOTAL-COSTS> 4,321,737
<OTHER-EXPENSES> 183,798
<LOSS-PROVISION> 60,209
<INTEREST-EXPENSE> 57,090
<INCOME-PRETAX> (615,229)
<INCOME-TAX> (18,437)
<INCOME-CONTINUING> (596,792)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (596,792)
<EPS-PRIMARY> (7.79)
<EPS-DILUTED> (7.79)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000865084
<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,141
<SECURITIES> 635,743
<RECEIVABLES> 275,646
<ALLOWANCES> 6,514
<INVENTORY> 0
<CURRENT-ASSETS> 1,126,675
<PP&E> 273,019
<DEPRECIATION> 125,926
<TOTAL-ASSETS> 1,390,101
<CURRENT-LIABILITIES> 1,040,885
<BONDS> 0
0
0
<COMMON> 795
<OTHER-SE> 348,421
<TOTAL-LIABILITY-AND-EQUITY> 1,390,101
<SALES> 0
<TOTAL-REVENUES> 4,251,264
<CGS> 0
<TOTAL-COSTS> 3,916,742
<OTHER-EXPENSES> 41,618
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 11,118
<INCOME-PRETAX> (431,611)
<INCOME-TAX> (140,323)
<INCOME-CONTINUING> (291,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (291,288)
<EPS-PRIMARY> (3.70)
<EPS-DILUTED> (3.70)
</TABLE>
