<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant (x )
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, For use of the Commission Only (as permitted by Rule
14a-6(e) (2))
(X ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
OXFORD HEALTH PLANS, INC.
------------------------------------
(Name of Registrant as Specified in Its Charter)
-------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
(X ) No fee required.
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed: April 2, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
April 2, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting of
Stockholders (the "Meeting") of Oxford Health Plans, Inc. (the "Company") to be
held on May 13, 1999 at 10:00 a.m., local time, at the Stamford Marriott Hotel,
Two Stamford Forum, 243 Tresser Boulevard, Stamford, Connecticut 06901.
This year, three directors are nominated for election to the Board. At
the Meeting you will be asked to elect three Class II Directors to serve until
the 2002 Annual Meeting and to consider a proposal to ratify the appointment of
Ernst & Young LLP as the Company's independent auditors for the fiscal year
1999.
The accompanying Proxy Statement provides a detailed description of
these proposals. You are urged to read the accompanying materials so that you
may be informed about the business to come before the Meeting.
It is important that your shares be represented at the Meeting.
Accordingly, we urge you, whether or not you plan to attend the Meeting, to
complete, sign and date your proxy and return it to us promptly in the enclosed
envelope or to otherwise vote in accordance with the instructions on your proxy
card. If you attend the Meeting, you may vote in person, even if you have
previously mailed in your proxy. However, if you hold your shares in brokerage
accounts ("street name"), you will need to provide a broker's power of attorney
to be able to vote by ballot at the Meeting.
We look forward to seeing you at the Meeting.
IF YOU PLAN TO ATTEND THE MEETING:
Please note that space limitations make it necessary to limit
attendance to stockholders and one guest. Admission to the meeting will be on a
first-come, first-served basis. Registration and seating will begin at 9:00 a.m.
Stockholders may be asked to present valid picture identification. Stockholders
holding stock in street name will need to bring a copy of a brokerage statement
reflecting stock ownership as of the record date.
Sincerely,
/s/ Norman C. Payson, M.D.
Norman C. Payson, M.D.
Chief Executive Officer
<PAGE> 3
OXFORD HEALTH PLANS, INC.
800 CONNECTICUT AVENUE
NORWALK, CONNECTICUT 06854
----------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 13, 1999
-----------------------------------------
To the Stockholders of Oxford Health Plans, Inc.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders (the
"Meeting") of Oxford Health Plans, Inc. (the "Company") will be held on May 13,
1999 at 10:00 a.m., local time, at the Stamford Marriott Hotel, Two Stamford
Forum, 243 Tresser Boulevard, Stamford, Connecticut 06901, for the following
purposes:
1. To elect three directors to serve as Class II
Directors of the Company for a term ending at the
2002 Annual Meeting;
2. To ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for fiscal year 1999;
and
3. To transact such other business as may properly come
before the Meeting or any adjournment or postponement
thereof.
Only holders of record of outstanding shares of the Company's Common
Stock, Series D Cumulative Preferred Stock and Series E Cumulative Preferred
Stock at the close of business on March 26, 1999 will be entitled to notice of,
and to vote at, the Meeting or any adjournment or postponement thereof.
By Order of the Board of Directors
/s/ Jeffery H. Boyd
JEFFERY H. BOYD
Executive Vice President, General Counsel
and Secretary
Norwalk, Connecticut
April 2, 1999
--------------------------
YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE REFER TO THE INSTRUCTIONS
INCLUDED ON THE ENCLOSED PROXY CARD. THE PROXY CARD WILL INDICATE IF YOU MAY
VOTE BY RETURNING THE PROXY CARD IN THE ENVELOPE PROVIDED, BY INTERNET OR BY
TELEPHONE.
<PAGE> 4
OXFORD HEALTH PLANS, INC.
800 CONNECTICUT AVENUE
NORWALK, CONNECTICUT 06854
----------------------------------
PROXY STATEMENT FOR ANNUAL MEETING
TO BE HELD MAY 13, 1999
-----------------------------------
INTRODUCTION
This Proxy Statement is being furnished to stockholders of Oxford
Health Plans, Inc., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company for use at
the Annual Meeting of Stockholders to be held on May 13, 1999, at 10:00 a.m.,
local time, at the Stamford Marriott Hotel, Two Stamford Forum, 243 Tresser
Boulevard, Stamford, Connecticut 06901 and any adjournment or postponement
thereof (the "Meeting").
At the Meeting, stockholders will be asked to consider and vote upon
two proposals: (1) to elect three directors to serve as Class II Directors of
the Company until the 2002 Annual Meeting ("Proposal Number One"); and (2) to
ratify the appointment of Ernst & Young LLP as the Company's independent
auditors for the calendar year 1999 ("Proposal Number Two").
This Proxy Statement is dated April 2, 1999 and is first being mailed
to stockholders along with the related form of proxy on or about April 2, 1999.
If a proxy in the accompanying form is properly executed and returned
to the Company in time for the Meeting or the proxy is otherwise voted in
accordance with the instructions on the proxy card, and such proxy is not
revoked prior to the time it is exercised, the shares represented by the proxy
will be voted in accordance with the directions specified therein for the
matters listed on the proxy card. You will save the Company expense when voting
your shares by following the instructions on your proxy card and voting by
internet or telephone. Unless the proxy specifies otherwise, proxies will be
voted (a) FOR Proposal Number One and Proposal Number Two and (b) otherwise in
the discretion of the proxy holders as to any other matter that may come before
the Meeting.
Votes are counted by tellers of the Company's transfer agent. These
tellers will canvas the stockholders present at the Meeting, count their votes
and count the votes represented by proxies presented. Abstentions and broker
nonvotes are counted for purposes of determining the number of shares
represented at the Meeting, but are deemed not to have voted on the proposal.
Broker nonvotes occur when a broker nominee, holding shares in street name for
the beneficial owner thereof, has not received voting instructions from the
beneficial owner and does not have discretionary authority to vote.
REVOCABILITY OF PROXY
Any stockholder of the Company who has given a proxy has the power to
revoke such proxy at any time before it is voted either (i) by filing a written
revocation or a duly executed proxy bearing a later date with Jeffery H. Boyd,
Executive Vice President, General Counsel and Secretary of the Company, at
Oxford Health Plans, Inc., 800 Connecticut Avenue, Norwalk, Connecticut 06854,
or (ii) by appearing at the Meeting and voting in person. Attendance at the
Meeting will not in and of itself constitute the revocation of a proxy. Voting
by those present during the conduct of the Meeting will be by ballot.
Stockholders whose shares are held by a broker in street name and who wish to
vote by ballot at the Meeting, must attach a broker power of attorney to such
ballot to evidence ownership and voting rights.
RECORD DATE, OUTSTANDING SECURITIES AND VOTES REQUIRED
The Board of Directors of the Company has fixed the close of business
on March 26, 1999 as the record date (the "Record Date") for determining holders
of outstanding shares of the Company's Common Stock, par value $.01 par value
("Common Stock"), Series D Cumulative Preferred Stock, par value $0.01 per share
("Series D Preferred Stock"), and Series E Cumulative Preferred Stock, par value
$0.01 per share ("Series E Preferred Stock") who are entitled to notice of and
to vote at the Meeting. As of the Record Date, there were 1,910 holders of
record of Common Stock and 80,819,323 shares of Common Stock issued and
outstanding, 22 holders of record of Series D Preferred Stock and 260,146.909
shares of Series D Preferred Stock issued and
1
<PAGE> 5
outstanding, and 22 holders of record of Series E Preferred Stock and
111,820.831 shares of Series E Preferred Stock issued and outstanding. As of the
Record Date, each share of Common Stock is entitled to one vote, the shares of
Series D Preferred Stock, in the aggregate, are entitled to 15,800,000 votes,
and the shares of Series E Preferred Stock, in the aggregate, are entitled to
6,730,000 votes.
The approval of Proposal Number One requires the affirmative vote of a
plurality of the votes attributable to shares of Common Stock, Series D
Preferred Stock and Series E Preferred Stock which are present in person or by
proxy at the Meeting. The approval of Proposal Number Two requires the
affirmative vote of a majority of the votes cast by the shares of Common Stock,
Series D Preferred Stock and Series E Preferred Stock which are present in
person or by proxy at the Meeting.
The Company expects that the officers and directors of the Company will
vote the shares of Common Stock held by them (representing approximately 5.6% of
the shares of Common Stock issued and outstanding as of March 1, 1999) in favor
of Proposal Number One and Proposal Number Two.
2
<PAGE> 6
PROPOSAL NUMBER ONE
ELECTION OF DIRECTORS
The Company's Second Amended and Restated Certificate of Incorporation,
as amended, provides for a Board of Directors divided into three classes, as
nearly equal in number as the then total number of directors constituting the
entire Board permits, with the term of office of one class expiring each year at
the Annual Meeting. Each class of directors is elected for a term of three years
except in the case of elections to fill vacancies or newly created
directorships.
The Board of Directors presently consists of eleven persons: Fred N.
Nazem, Norman C. Payson, M.D., David Bonderman, Jonathan J. Coslet, James G.
Coulter, Robert B. Milligan, Jr., Marcia J. Radosevich, Ph.D., Benjamin H.
Safirstein, M.D., Thomas A. Scully, Kent J. Thiry and Stephen F. Wiggins. The
proxies cannot be voted for a greater number of persons than the three nominees
named.
Three individuals are to be elected to serve as Class II Directors for
a term of three years and until the election and qualification of their
successor. Unless a stockholder WITHHOLDS AUTHORITY, the holders of proxies
representing shares of Common Stock, Series D Preferred Stock and Series E
Preferred Stock will vote FOR the election of Fred F. Nazem, James G. Coulter
and Thomas A. Scully. The Board of Directors has no reason to believe that any
nominee will decline or be unable to serve as a Director of the Company.
However, if a nominee shall be unavailable for any reason, then the proxies may
be voted for the election of such person as may be recommended by the Board of
Directors. Messrs. Thiry, Bonderman and Coslet and Dr. Safirstein serve as Class
I Directors whose terms expire in 2001, and Drs. Payson and Radosevich and
Messrs. Wiggins and Milligan serve as Class III Directors whose terms expire in
2000. These directors are not standing for reelection because their terms as
directors extend past the Meeting.
Pursuant to the terms of the Investment Agreement dated as of February
23, 1998, as amended (the "Investment Agreement"), by and between the Company
and TPG Partners II, L.P. ("TPG Partners"), an affiliate of Texas Pacific Group
("TPG"), certain affiliates of TPG Partners and certain assignees of TPG
Partners purchased $350 million in shares of senior preferred stock and warrants
to purchase Common Stock. In the Investment Agreement, the Company agreed to
increase the number of directors to a minimum of 11 directors and a maximum of
13 directors and to appoint Dr. Payson as its Chief Executive Officer and as a
Director and agreed that TPG would be entitled to nominate four additional
directors. Dr. Payson was elected Chief Executive Officer and joined the Board
of Directors in May 1998. Messrs. Bonderman, Coslet and Coulter were nominated
by TPG pursuant to the Investment Agreement and joined the Board of Directors in
May 1998. Mr. Thiry was also nominated by TPG pursuant to the Investment
Agreement and joined the Board of Directors in August 1998.
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
and in the United States District Courts for the Southern District of New York
and the District of Connecticut against the Company's directors and certain of
its officers (and the Company itself as a nominal defendant). These derivative
complaints generally alleged that defendants breached their fiduciary
obligations to the Company, mismanaged the Company and wasted its assets in
planning and implementing certain changes to the Company's computer system, by
making misrepresentations concerning the status of those changes in the
Company's computer system, by failing to design and to implement adequate
financial controls and information systems for the Company, and by making
misrepresentations concerning the Company's membership enrollment, revenues,
profits and medical costs in the Company'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 the
Company's 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 the Company 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.
3
<PAGE> 7
The following table sets forth the age and title of each nominee
director, each director continuing in office and each executive officer of the
Company who is not a director, followed by descriptions of such person's
additional business experience during the past five years.
<TABLE>
<CAPTION>
NOMINEES FOR ELECTION AS CLASS II DIRECTORS
Name Age Position
<S> <C> <C>
Fred F. Nazem 58 Chairman of the Board of Directors
James G. Coulter 39 Director
Thomas A. Scully 41 Director
</TABLE>
<TABLE>
<CAPTION>
DIRECTORS WHOSE TERMS HAVE NOT EXPIRED
Name Age Position
<S> <C> <C>
Norman C. Payson, M.D. 50 Chief Executive Officer, Director
David Bonderman 56 Director
Jonathan J. Coslet 34 Director
Robert B. Milligan, Jr. 49 Director
Marcia J. Radosevich, Ph.D. 46 Director
Benjamin H. Safirstein, M.D. 60 Director
Kent J. Thiry 43 Director
Stephen F. Wiggins 42 Director
</TABLE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Name Age Position
<S> <C> <C>
William M. Sullivan 35 President
Jeffery H. Boyd 42 Executive Vice President, General Counsel and Secretary
Yon Y. Jorden 44 Executive Vice President, Chief Financial Officer
Alan Muney, M.D., M.H.A. 45 Executive Vice President, Chief Medical Officer
Marvin P. Rich 53 Executive Vice President, Chief Administrative Officer
</TABLE>
Fred F. Nazem has served as a Director of the Company since June 1990.
He was elected non-executive Chairman of the Board in February 1998. Since 1981,
Mr. Nazem has been President of Nazem, Inc. and Managing General Partner of the
general partner of several Nazem & Company limited partnerships that are
affiliated venture capital funds. Mr. Nazem is a director of two public
companies, Tegal Corporation and Spatial Technologies, Inc., as well as a number
of privately held firms.
Norman C. Payson, M.D. became the Chief Executive Officer and a
Director of the Company in May 1998. Dr. Payson co-founded Healthsource, Inc. in
1985, a health maintenance organization in Hooksett, New Hampshire, and served
as President and Chief Executive Officer of Healthsource until its sale to Cigna
Corporation in August of 1997. From 1980 until 1984, Dr. Payson was the Chief
Executive Officer of the Hawthorne Community Medical Group, Inc., a
multi-specialty physician group with a primary HMO practice of approximately
100,000 members. From 1975 to 1980, Dr. Payson was a family practitioner and
involved in HMOs.
David Bonderman joined the Board of Directors in May 1998. Mr.
Bonderman is a principal of TPG, a partnership he co-founded in 1992. Mr.
Bonderman serves on the Boards of Directors of J. Crew Group, Inc., Continental
Airlines, Inc., Bell & Howell Company, Virgin Entertainment, Beringer Wine
Estates, Inc., Denbury Resources, Inc., Ducati Motor Holdings, S.p.A. and
Washington Mutual, Inc. and is Chairman of the Board of Ryanair, PLC. Mr.
Bonderman also serves in general partner advisory board roles for Newbridge
Investment Partners, L.P., Newbridge Latin America, L.P. and Aqua International,
L.P.
Jonathan J. Coslet joined the Board of Directors in May 1998. Mr.
Coslet has been an executive of TPG since 1993. Prior to joining TPG, Mr. Coslet
was in the Investment Banking Department of Donaldson, Lufkin & Jenrette,
specializing in leveraged acquisitions and high yield finance from September
1991 to February 1993. Mr. Coslet serves on the Board of Directors of PPOM, L.P.
and Genesis ElderCare Corp.
4
<PAGE> 8
James G. Coulter joined the Board of Directors in May 1998. Mr. Coulter
is a principal of TPG, a partnership he co-founded in 1992. Mr. Coulter serves
on the Boards of Directors of J. Crew Group, Inc., America West Airlines, Inc.,
Virgin Entertainment, Beringer Wine Estates, Inc., Genesis ElderCare Corp. and
Paradyne Partners, L.P. and was formerly on the Board of Directors of Allied
Waste Industries, Inc. and Continental Airlines, Inc. Mr. Coulter also serves in
general partner advisory board roles for Newbridge Investment Partners, L.P.,
Newbridge Latin America, L.P. and Aqua International, L.P.
Robert B. Milligan, Jr. has been a Director of the Company since July
1992. Mr. Milligan was Chairman of Wyndam Capital, L.P., a registered
broker-dealer, from 1995 through 1998 and, through December 1997, was Director,
President and Chief Executive Officer of Verigen Inc., a biopharmaceutical
company. From 1989 through 1995, Mr. Milligan was the managing general partner
of Madison Group, L.P., a private equity fund. Mr. Milligan currently engages in
business and financial consulting as President and Chief Executive Officer of
Fairchester, Inc. Mr. Milligan has been an officer and, in the past, has served
on the boards of several private and public companies.
Marcia J. Radosevich, Ph.D. has been a Director since July 1994. Dr.
Radosevich has been acting as a consultant to Boston University's Health Policy
Institute since March 1998. From April 1992 until December 1997, Dr. Radosevich
was the Chairman, President and Chief Executive Officer of HPR Inc. (formerly,
Health Payment Review, Inc.), a software company headquartered in Cambridge,
Massachusetts, which develops and markets cost management, provider profiling
and information systems for the health care industry. From December 1997 until
March 1998, Dr. Radosevich worked as a consultant to HPR Inc.
Benjamin H. Safirstein, M.D. has been a Director since 1985. Dr.
Safirstein was Oxford's New York Regional Vice President and Medical Director
from January 1996 until July 1998. Dr. Safirstein served as the Senior Medical
Director of the Company from 1985 to September 1992. Dr. Safirstein is a
Clinical Associate Professor of Medicine. He is board certified in internal
medicine and pulmonary medicine. Dr. Safirstein also is in private practice with
the Montclair Medical Group, Montclair, New Jersey. Dr. Safirstein is a graduate
of the Chicago Medical School and the Mount Sinai Hospital residency program,
where he was Chief Resident of Medicine.
Thomas A. Scully has been a Director since September 1993. Since
January 1995, he has been President of the Federation of American Health Systems
in Washington, D.C. From 1992 until the end of 1994, he was a partner in the
Washington D. C. law firm of Patton, Boggs & Blow. Prior to that, Mr. Scully
served for four years on the White House staff. During 1992, he was Deputy
Assistant for Domestic Policy to President Bush.
Kent J. Thiry has been a Director of the Company since August 1998. Mr.
Thiry has been President and Chief Executive Officer of Vivra Holdings, Inc., a
specialty healthcare services company, since June 1997. Prior thereto, Mr. Thiry
was Chief Executive Officer of Vivra Incorporated from November 1992 and
President and Chief Operating Officer of Vivra Incorporated from September 1991.
Stephen F. Wiggins, the founder of the Company, served as Chairman of
the Board of Directors and Chief Executive Officer of the Company since its
formation in 1984 until August 1997. He retained the title of Chairman of the
Board until February 1998. Since February 1998, Mr. Wiggins has been a Director
of the Company.
William M. Sullivan joined the Company as Director of Sales in August
of 1988, was appointed Vice President, Sales in January 1990, was elected
Executive Vice President in December 1994 and was appointed to the additional
position of Chief Executive Officer of the Company's New York region in October
1995. He was appointed President and Chief Operating Officer in July 1996 and
was elected Chief Executive Officer of the Company in August 1997. In May 1998,
Mr. Sullivan became President of the Company.
Jeffery H. Boyd joined the Company as Executive Vice President and
General Counsel in June 1995. Prior to joining the Company, Mr. Boyd was
Assistant General Counsel of Lord, Abbett & Co., a private investment management
firm, from July 1994 to May 1995. From March 1988 to June 1994, Mr. Boyd was a
partner with the law firm of Robinson & Cole.
Yon Y. Jorden joined the Company as Chief Financial Officer effective
June 22, 1998. Prior to joining the Company, Ms. Jorden had been Senior Vice
President of Aera Energy LLC, a joint venture of Shell Oil Company and Mobil
Corporation since June 1997. Prior thereto, Ms. Jorden worked for Wellpoint
Health Networks, Inc. and Blue Cross of California as Senior Vice President and
Chief Financial Officer from September 1993 until June 1997 and as Vice
President and Controller from October 1990 until September 1993.
5
<PAGE> 9
Alan Muney, M.D., M.H.A. joined the Company as Vice President/Chief
Medical Officer in April 1998. Prior thereto, Dr. Muney was the Senior Vice
President of Medical Affairs/Chief Medical Officer of Avanti Health Systems and
NYLCare Health Plans from December 1995 until April 1998. From 1988 until 1995,
Dr. Muney held a number of positions with Mulliken Managed Care, his most recent
position being Regional Medical Director.
Marvin P. Rich joined the Company as Executive Vice President and Chief
Administrative Officer in March 1998. Previously, Mr. Rich was Executive Vice
President, Strategic Planning, Finance & Administration for Kmart Corporation
from October 1994 to March 1998. From 1989 through 1994, Mr. Rich was Executive
Vice President at Wellpoint Health Networks, Inc. in charge of specialty
companies and financial and information services.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, the current
members of which are Messrs. Nazem (Chairman), Coslet, Milligan and Scully, a
Compensation Committee currently comprised of Messrs. Milligan (Chairman),
Coulter, Scully and Thiry, a Nominating Committee currently comprised of Messrs.
Bonderman (Chairman), Milligan and Nazem and Dr. Payson, an Ethics and Business
Practices Committee, the current members of which are Messrs. Coslet (Chairman),
Nazem and Scully and Dr. Radosevich, and a Special Litigation Committee, the
current members of which are Messrs. Bonderman (Chairman) and Coslet and Dr.
Payson. On January 6, 1998, the Board of Directors established an Executive
Committee, the members of which were Messrs. Nazem, Adamson and Wiggins. The
Executive Committee was disbanded on February 23, 1998.
The functions of the Audit Committee are to recommend annually to the
Board of Directors the appointment of the independent auditors for the Company,
discuss and review the scope and the fees of the prospective annual audit and
review the results thereof with the independent auditors, review and approve
nonaudit services of the independent certified public accountants, review
compliance with existing major accounting and financial policies of the Company,
review the adequacy of the financial organization of the Company, and review
management's procedures and policies relative to the adequacy of the Company's
internal accounting controls and compliance with federal and state laws relating
to accounting practices.
The Compensation Committee consists entirely of independent directors
and administers the Oxford Health Plans, Inc. 1991 Stock Option Plan (the "1991
Stock Option Plans"), the Oxford Health Plans, Inc. 1997 Independent Contractor
Plan (the "Independent Contractor Plan") and the 1996 Management Incentive
Compensation Plan of Oxford Health Plans, Inc. (the "Incentive Compensation
Plan") and oversees administration of the Company's 401(k) Plan. The Committee
also reviews and recommends from time to time amendments to compensation plans
and new compensation plans. The Compensation Committee also considers and makes
recommendations with respect to the compensation of the Company's Chief
Executive Officer and other members of senior management and makes
recommendations to the Board of Directors generally on organization, succession,
salary and incentive compensation, and other grants and awards under the
Company's compensation and benefit plans.
The Nominating Committee consists of a majority of independent
directors and was established in 1995 to consider and make recommendations on
nominations for membership in the Company's Board of Directors. The Committee
will consider nominees recommended by stockholders upon submission in writing to
the Secretary of the Company of the names of such nominees, together with their
qualifications for service as a director of the Company.
The Ethics and Business Practices Committee was established in 1997 to
supervise the development of comprehensive programs to promote and monitor the
Company's compliance with applicable legal and regulatory requirements and the
development of value-based business practice guidelines for the Company. The
Committee works directly with the Company's Vice President - Compliance and also
oversees the Company's responses to regulatory examinations and inquiries.
In May 1998, the Board of Directors established a Special Litigation
Committee to oversee and direct the Company's position and responses with
respect to pending class action and derivative litigation and related regulatory
investigations and proceedings. All of the members of the Special Litigation
Committee were appointed to the Board of Directors after the events which have
given rise to the litigation.
In January 1998, the Board of Directors established an Executive
Committee to supervise certain aspects of the Company's operations, the members
of which were Fred F. Nazem, Stephen F. Wiggins and James B. Adamson, a former
member of the Board of Directors, with Mr. Nazem acting as Chairman of the
Committee. The Executive Committee was disbanded in February 1998.
6
<PAGE> 10
During 1998, the Board of Directors held sixteen meetings, the Audit
Committee held five meetings, the Compensation Committee held seven meetings and
the Ethics and Business Practices Committee held three meetings. The Nominating
Committee did not hold any meetings in 1998. During 1998, each Director of the
Company attended at least 75% of the meetings of the Board of Directors and 75%
of the meetings of any committees upon which he or she served which occurred
while each Director was a member of the Board and such committees, with the
exception of the following: (i) Mr. Coulter attended 50% of the meetings of the
Compensation Committee which occurred while he was a member of such committee;
and (ii) Ms. Radosevich attended 66% of the meetings of the Ethics and Business
Practices Committee which occurred while she was a member of such committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
its Common Stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission") and the National
Association of Securities Dealers, Inc. Officers, directors and greater than ten
percent stockholders are required by the Commission to furnish the Company with
copies of all Section 16(a) forms that they file.
Based on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no reports on Form 5
or Form 4 were required for those persons, the Company believes all filing
requirements applicable to its officers, directors and greater than ten percent
stockholders were complied with in 1998.
7
<PAGE> 11
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth the cash
compensation and certain other components of the compensation of Norman C.
Payson, M.D. and William M. Sullivan, each of whom served as Chief Executive
Officer of the Company during 1998, and the four most highly compensated
executive officers of the Company in 1998.
<TABLE>
<CAPTION>
LONG
TERM
ANNUAL COMPENSATION COMPEN- ALL OTHER
NAME AND PRINCIPAL ------------------- SATION AWARDS- COMPENSA-
POSITION YEAR SALARY(1) BONUS OTHER(2) OPTIONS(3) TION(4)
-------- ---- --------- ----- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
NORMAN C. PAYSON, M.D. 1998 $350,000 $350,000 $2,571,784 3,000,000 $ -
CHIEF EXECUTIVE OFFICER (5) 1997 - - - - -
1996 - - - - -
WILLIAM M. SULLIVAN 1998 600,000 500,000 29,112 400,000 28,004
PRESIDENT(6) 1997 492,692 - 6,075 100,000 27,888
1996 259,616 250,000 5,850 35,000 28,610
JEFFERY H. BOYD 1998 325,000 250,000 6,600 275,000 30,610
EXECUTIVE VICE PRESIDENT 1997 320,567 250,000 6,854 70,000 29,944
AND GENERAL COUNSEL 1996 259,616 130,000 6,600 35,000 30,348
YON Y. JORDEN 1998 215,385 300,000 142,271 300,000 -
EXECUTIVE VICE PRESIDENT 1997 - - - - -
AND CHIEF FINANCIAL OFFICER 1996 - - - - -
(7)
MARVIN P. RICH 1998 450,000 300,000 213,037 800,000 2,077
EXECUTIVE VICE PRESIDENT 1997 - - - - -
AND CHIEF ADMINISTRATIVE OFFICER 1996 - - - - -
(8)
THOMAS A. BEAUCHAMP 1998 259,616 150,000 2,700 200,000 -
SENIOR VICE PRESIDENT, 1997 - - - - -
INFORMATION SYSTEMS (9) 1996 - - - - -
</TABLE>
(1) Includes amounts of compensation deferred by the named officers
pursuant to the Company's qualified defined contribution plan (the
"Savings Plan").
(2) Includes payment by the Company of certain personal expenses, including
moving, living, transportation and financial planning expenses, and,
for Dr. Payson only, the value of a below market purchase of 644,330
shares of Common Stock of $2,065,464. This value is based on the
difference between the purchase price of $15.52 per share and the
average market price of the Company's Common Stock on May 13, 1998,
when Dr. Payson actually purchased the shares, of $18.73. Dr. Payson
became obligated to purchase these shares on February 23, 1998 when he
entered into his employment agreement and the purchase price was
determined based on the trading value of the Company's Common Stock
during the time the agreement was being negotiated. The amounts paid by
the Company for Mr. Sullivan and Mr. Boyd represent payment of
automobile allowances. The Company paid $9,183 and $129,488 for Ms.
Jorden's financial planning and moving expenses, respectively, and
$208,086 for Mr. Rich's moving expenses.
(3) All option grants have been adjusted for the Company's two-for-one
stock split effective March 1996. (4) Includes matching contributions
made by the Company pursuant to the Savings Plan and premiums paid by
the Company for certain life insurance policies.
(5) Dr. Payson became Chief Executive Officer in May 1998.
(6) Mr. Sullivan served as Chief Executive Officer until May 1998.
Thereafter he has served as President of the Company.
(7) Ms. Jorden commenced employment with the Company on June 22, 1998.
(8) Mr. Rich commenced employment with the Company on March 31, 1998.
(9) Mr. Beauchamp commenced employment with the Company on June 29, 1998.
8
<PAGE> 12
OPTIONS GRANTED IN 1998
The following table sets forth certain information regarding stock
options granted in 1998 to the six individuals named in the Summary Compensation
Table. In addition, in accordance with the Commission's rules, the table also
shows the present value of such grants at the date of grant under the
Black-Scholes option pricing model using the assumptions specified in the
footnotes thereto. It should be noted that this model is only one method of
valuing options and the Company's use of the model should not be interpreted as
an endorsement of its accuracy. The actual value of the options may be
significantly different and the value actually realized, if any, will depend
upon the excess of the market value of the Common Stock over the exercise price
at the time of exercise.
<TABLE>
<CAPTION>
% OF TOTAL
# OF SECURITIES OPTIONS MARKET
UNDERLYING GRANTED TO EXERCISE PRICE PRICE GRANT DATE
OPTIONS EMPLOYEES IN PER SHARE ON DATE EXPIRATION PRESENT VALUE
NAME GRANTED (1) FISCAL YEAR ($/SHARE) (2) OF GRANT DATE ($)(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NORMAN C. PAYSON 2,000,000(4) 17.6% $15.5200 $19.937 2/23/08 $7,394,000
1,000,000 8.8% $6.0625 8/28/05 $1,433,000
WILLIAM M. SULLIVAN 200,000 1.8% $15.3750 3/30/03 $ 890,000
200,000 1.8% $6.0625 8/28/03 $ 374,000
JEFFERY H. BOYD 200,000 1.8% $15.3750 3/30/03 $ 890,000
75,000 0.7% $6.0625 8/28/03 $ 131,000
YON Y. JORDEN 200,000 1.8% $15.3750 6/22/03 $ 888,000
100,000 0.9% $6.0625 8/28/03 $ 175,000
MARVIN P. RICH 800,000 7.0% $15.3750 3/30/03 $3,560,000
THOMAS A. BEAUCHAMP 200,000 1.8% $15.625 6/29/03 $ 902,000
</TABLE>
(1) All options granted and reported in this table, except for the grant of
2,000,000 options to Dr. Payson and 800,000 granted to Mr. Rich, were
made pursuant to the Oxford Health Plans, Inc. 1991 Stock Option Plan,
as amended (the "1991 Stock Option Plan"). Except for the options
granted to Dr. Payson, all of the options granted under the 1991 Sock
Option Plan and reported in this table have the following material
terms: options may be either (i) "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986 or (ii) nonqualified
stock options; all options expire five years from the date of grant;
and the aggregate fair market value (determined at the time of grant)
of shares issuable pursuant to incentive stock options which become
exercisable in any calendar year by an employee may not exceed
$100,000. The options granted to Mr. Rich are nonqualified and expire
five years from the date of grant. Except for the options granted to
Dr. Payson and Mr. Sullivan, 25% of the above listed options vest on
each of the first four anniversaries following the date of grant. On
March 3, 1999, the vesting schedules of Mr. Sullivan's 1998 option
grants were amended to provide that (i) 25% of the options from each
grant vest on the first anniversary of such grant; (ii) an additional
25% of the options from each grant vest on March 31, 2000 and (iii) the
remaining options from each grant vest on a pro rata basis over the
next twelve months. The Committee may provide for accelerated
exercisability of options upon the optionee's death, retirement,
disability (or other events), upon a Change of Control (as defined in
the 1991 Stock Option Plan) or the reasonable possibility of a Change
of Control during the succeeding six-month period. The Committee has
determined that all of the above named officers' options shall vest
upon a Change of Control. The grant of 1,000,000 options to Dr. Payson
under the 1991 Stock Option Plan vest annually over a period of four
years beginning February 23, 1999 and expire seven years from the date
of grant.
(2) Exercise price is the fair market value of the Common Stock at the date
of grant except for the grant of 2,000,000 options to Dr. Payson (see
note 4 below).
(3) The amounts shown are based on the Black-Scholes option pricing model
which uses certain assumptions to estimate the value of employee stock
options. The material assumptions used include the following: expected
volatility of 31%; expected term of four years from the date of grant;
no expected dividends; and risk-free interest rates of 5.30% for
options granted February 23, 1998, 5.25% for options granted March 30,
1998, 5.18% for options granted June 22, 1998 and June 29, 1998 and
5.15% for options granted August 28, 1998. The Black-Scholes valuation
was discounted 3% per year of vesting to account for risk of forfeiture
and lack of transferability. Dr. Payson's options are discounted
further to reflect
9
<PAGE> 13
material restrictions on sale and transfer of shares acquired upon
exercise imposed pursuant to Dr. Payson's employment agreement. The
application of a different assumption for expected volatility would
result in different values for options granted. The expected future
volatility applied in determining grant date present value is less than
the Company's historical volatility because the Company believes that
its historical volatility was unusually high. An increase in the
volatility assumption would result in an increase in the grant date
present value. The Company believes that no option pricing model can
accurately predict the future value of employee stock options. Such
options' value, if any, will depend on the market price of the
Company's Common Stock on the date of exercise.
(4) On February 23, 1998, Dr. Payson was granted a nonqualified stock
option (the "Option") to purchase 2,000,000 shares of Common Stock at
an exercise price of $15.52 per share, which price was established in
connection with the negotiation of Dr. Payson's employment agreement
and the Investment Agreement with TPG based on the trading range of the
Company's Common Stock during the negotiations. The closing market
price on the actual grant date was $19.937. The Option provides that
800,000 shares vested on February 23, 1999, and that the remaining
1,200,000 shares will vest ratably on a monthly basis over the 36-month
period ending February 23, 2002, provided in each case that Dr. Payson
is employed by the Company on the applicable vesting date. The Option
expires ten years from the date of grant. The Option also provides for
acceleration of vesting and extended exercisability periods in certain
circumstances, including certain terminations of employment and a
Change of Control (as defined in the 1991 Stock Option Plan). The
Option is subject to material restrictions on sale and transfer of
shares acquired upon exercise imposed pursuant to Dr. Payson's
employment agreement despite meeting the vesting requirements of the
Option.
AGGREGATED OPTION EXERCISES IN 1998
AND OPTION VALUES AT DECEMBER 31, 1998
The six individuals named in the Summary Compensation Table effected no
stock option exercises during 1998 and therefore recognized no gains on the
exercise of stock options during 1998. The following table indicates the number
of shares covered by both exercisable and nonexercisable stock options as of
December 31, 1998 and the values for "in-the-money" options which represent the
excess of the closing market price of the Common Stock at December 31, 1998 over
the exercise price of any such existing stock options. All values have been
adjusted for the Company's two-for-one stock splits effected in 1993, 1995 and
1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options(1) In-The-Money Options
At December 31, 1998(#) At December 31, 1998($)
Shares Acquired Value ------------------------ -------------------------
Name On Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
NORMAN C. PAYSON - $ - - / 3,000,000 - / 8,813,000
WILLIAM M. SULLIVAN - - 421,132 / 507,500 2,426,000 / 1,763,000
JEFFERY H. BOYD - - 140,148 / 390,000 - / 661,000
YON Y. JORDEN - - - / 300,000 - / 882,000
MARVIN P. RICH - - - / 800,000 - / -
THOMAS A. BEAUCHAMP - - - / 200,000 - / -
</TABLE>
(1) All of the above listed options vest upon the occurrence of a change of
control.
DIRECTORS' COMPENSATION
Each member of the Company's Board of Directors who is not a current
employee of the Company ("Non-Employee Director") receives an annual retainer of
$38,000. In addition, each Non-Employee Director is entitled to receive $1,000
plus expenses for each meeting of the Board of Directors and for each committee
meeting attended in person and $500 for each meeting attended by telephone
conference. Non-Employee Directors who are not former employees of the Company
may participate in the Non-Employee Directors Stock Option Plan, as amended (the
"Plan"), and be awarded nonqualified stock options. The Plan currently provides
that each year, on the first Friday following the Company's annual meeting of
stockholders, each individual elected, reelected or continuing as a Non-Employee
Director and who are not former employees of the Company will automatically
receive a nonqualified stock option for 5,000 shares of the Company's Common
Stock. The exercise price for such options is either
10
<PAGE> 14
the average of the high and low prices at which the Common Stock traded on the
Nasdaq National Market on the date of grant or the last sale price of Common
Stock on the Nasdaq National Market on the date of grant, whichever is higher.
The Plan 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 first, second and third
Annual Meeting of Stockholders following the date of grant. Pursuant to the
Plan, on September 4, 1998, Dr. Radosevich and Messrs. Bonderman, Coulter,
Coslet, Milligan, Scully and Thiry were each granted options to purchase 5,000
shares of the Company's Common Stock at an exercise price of $6.9375 per share
under the Plan. On September 4, 1998, Dr. Safirstein was granted an option to
purchase 10,000 shares of the Company's Common Stock at an exercise price of
$6.9375 under the 1991 Stock Option Plan. These options are nonqualified, vest
25% a year beginning on the first anniversary of the date of grant and expire
five years from the date of grant.
In January 1998, the Board of Directors established an Executive
Committee to supervise certain aspects of the Company's operations the members
of which were Messrs. Adamson, Nazem and Wiggins, with Mr. Nazem acting as
Chairman of the Executive Committee. The Executive Committee was disbanded in
February 1998. In recognition of the responsibilities assumed by Mr. Adamson and
Mr. Nazem in serving on the Executive Committee, the Compensation Committee
recommended, and the Board determined, that Mr. Adamson and Mr. Nazem be awarded
cash compensation of $100,000 and $125,000, respectively, and options to acquire
20,000 and 75,000 shares, respectively, of the Company's Common Stock.
In the first quarter of 1998, Mr. Milligan, Mr. Scully and Dr.
Radosevich each received a payment of $30,000 in lieu of Board and Committee
meeting fees for a substantial number of meetings and telephone conferences held
through February 1998. Mr. Milligan received an additional payment of $70,000 as
compensation for substantial time devoted by Mr. Milligan in recruiting new
management personnel and preparation and negotiations relating to agreements
with management personnel. Effective February 23, 1998, Mr. Nazem agreed to
serve as Chairman of the Board of Directors. As compensation for his service as
such, the Board of Directors approved payment of an annual retainer of $250,000
and a grant of options to acquire 250,000 shares of the Company's Common Stock.
125,000 of these options were granted on March 30, 1998 with an exercise price
of $15.375, 100,000 of which vested on May 13, 1998 and 25,000 of which vest
upon the earlier of (i) the date on which the average closing price of the
Company's Common Stock for any 20 day period preceding the second anniversary of
the grant is equal to or greater than twice the exercise price or (ii) May 13,
2003. The vesting of these 25,000 options would be accelerated upon a Change of
Control or upon Mr. Nazem's ceasing to act as Chairman. The remaining 125,000
options were granted on August 28, 1998 at an exercise price of $6.0625 and
vested on January 6, 1999 upon the Company's Common Stock achieving an average
closing price of $12.125 for a 20 day period. In addition, on September 28,
1998, the Company entered into a consulting agreement with Mr. Nazem pursuant to
which the Company agreed to pay and grant to Mr. Nazem the above described
compensation and stock options and to retain Mr. Nazem as a consultant until the
earlier to occur of Mr. Nazem ceasing to have any unexercised stock options or
August 28, 2005.
On July 24, 1998, the Company entered into a letter agreement with Dr.
Safirstein pursuant to which Dr. Safirstein and the Company agreed that Dr.
Safirstein would no longer be an employee of the Company and that the Company
would pay him, in twelve equal installments, an amount equal to his base salary
earned during the twelve-month period preceding his termination and a lump sum
bonus in an amount equal to 50% his base salary as of December 31, 1997. The
Company also agreed to retain Dr. Safirstein as a consultant for a period of one
year for a fee of $100,000, payable quarterly. During the consulting period, Dr.
Safirstein continues to receive welfare benefits and his stock options continue
to vest.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In February 1998, Dr. Payson entered into an employment agreement with the
Company (the "Payson Agreement") for an initial four-year term, with an
automatic one year renewal on the fourth anniversary of the effective date and
on each anniversary thereafter, unless one year's prior notice not to renew is
given. Pursuant to the Payson Agreement, Dr. Payson served the Company initially
in a consulting capacity and, as of May 13, 1998, the closing date (the
"Financing Effective Date") of the financings pursuant to the Investment
Agreement (the "TPG Financing"), he became Chief Executive Officer (and was also
appointed a director) of the Company. Dr. Payson receives a base salary of
$350,000 and is eligible to receive an annual incentive award under the
Company's incentive compensation plans. Dr. Payson's base salary may be
increased at the discretion of the Compensation Committee. Upon consummation of
the Payson Agreement, Dr. Payson received a nonrefundable payment of $700,000
that offset any payments of base salary and bonus for 1998.
In addition, Dr. Payson was granted 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 a nonqualified stock option (the "Additional Option") 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
11
<PAGE> 15
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 of Control (as defined in the
1991 Stock Option Plan) of the Company. The Additional Option was granted on
August 28, 1998, has an exercise price of $6.0625, will generally vest ratably
over the four years commencing February 23, 1999, and will otherwise be subject
to the terms and conditions of the 1991 Stock Option Plan. The Additional Option
also provides for accelerated vesting following a Change of Control.
Pursuant to the Payson Agreement, upon the Financing Effective Date,
Dr. Payson purchased 644,330 shares of Common Stock (the "Purchased Shares") at
a cost of $10 million based on a purchase price of $15.52 per share. The
Purchased Shares and the shares acquired pursuant to exercise of the Option and
the Additional Option are subject to material restrictions on transfer and
disposition during the term of the Payson Agreement, which restrictions lapse
upon a Change of Control.
Pursuant to the Payson Agreement, if Dr. Payson is terminated by the
Company for Cause (as defined in the Payson Agreement) or if he voluntarily
terminates other than for Good Reason (as defined in the Payson Agreement), he
has agreed (i) not to compete with the Company for a period of six months
following such termination, if such termination occurs before the first
anniversary of the Payson Agreement, or for a period of one year following such
termination, if such termination occurs after the first anniversary of the
Payson Agreement, and (ii) not to solicit the Company's employees, customers and
providers for a period of six months following such termination. The
noncompetition and nonsolicitation covenants cease to apply following a change
of control of the Company.
In 1996, Mr. Sullivan and Mr. Boyd entered into employment agreements
with the Company both of which were amended in 1998. The agreements are for
initial two-year terms and automatically renew for an additional two years upon
each second anniversary of their effective dates, unless prior notice to not
renew is given. Upon a Change of Control of the Company (as defined in the
agreements), the agreements automatically extend to a two-year term. Mr.
Sullivan's annual base salary is $600,000. In addition, Mr. Sullivan is eligible
to receive an annual bonus which is set at a target level equal to 100% of his
base salary and shall be payable in the event certain performance criteria are
met. Mr. Sullivan's base salary and annual bonus shall be as recommended by the
Chief Executive Officer and approved by the Compensation Committee. Under the
terms of the 1998 amendments, Mr. Sullivan received cash payments of $250,000 on
each of March 31, 1998 and May 31, 1998. In addition, Mr. Sullivan received a
loan of $750,000 which accrued interest at 7% per annum. Pursuant to the terms
of the 1998 amendment, principal and interest thereon was waived on March 1,
1999. The total amount of principal and interest as of March 1, 1999 was
$775,304. In addition, Mr. Sullivan received a payment of $46,474.71
representing the amount of interest and income tax on the interest which Mr.
Sullivan incurred as the result of the forgiveness of the interest on the loan.
Mr. Boyd's base salary is subject to annual review by the Company's Compensation
Committee, and may be increased at the discretion of the Compensation Committee.
In addition, under the terms of the 1998 amendments, on March 31, 1998, Mr. Boyd
received a cash payment of $250,000. If prior to (or more than two years
following) a Change of Control, Mr. Sullivan or Mr. Boyd is terminated without
"Cause" or terminates employment for "Good Reason" (as such terms are defined in
the agreements), or if Mr. Sullivan's or Mr. Boyd's agreement is not renewed,
then Mr. Sullivan would receive a cash payment equal to two times the sum of his
target bonus for the year in which his employment is terminated plus his base
salary for the twelve month period prior to the date of termination and Mr. Boyd
would receive a lump sum payment equal to two times the sum of his highest
annual bonus earned in respect of the two fiscal years prior to the date of
termination and his base salary during the prior twelve months. If Mr. Boyd
terminates his employment under certain circumstances for Good Reason (as
defined in his agreement) in 1999, he would receive a lump sum payment of
$1,200,000.
If during the two-year period following a Change of Control, Mr.
Sullivan or Mr. Boyd is terminated without Cause or terminates employment for
Good Reason, he would receive a lump sum payment equal to two times the sum of
his highest annual rate of base salary during the thirty-six-month period
immediately prior to the date of termination and his highest annual bonus earned
during the three fiscal years immediately preceding the date of termination, and
continued welfare benefits for two years.
If any payments made to Mr. Sullivan or Mr. Boyd pursuant to the
agreements or otherwise would be subject to any excise tax under Section 4999 of
the Internal Revenue Code, the Company will provide him with an additional
payment such that he retains a net amount equal to the payments he would have
retained if such excise tax had not applied.
Each of Mr. Sullivan and Mr. Boyd is subject to a one-year non-compete
provision if he voluntarily terminates employment prior to the end of the
employment term, unless such termination is approved by the Board of Directors
or is within the two-year period following a Change in Control. If Mr.
Sullivan's agreement terminates prior to a Change in Control or following the
two-year period immediately subsequent to a Change in Control as the result of
termination for Good Reason, termination
12
<PAGE> 16
without Cause or the Company's failure to renew his agreement, Mr. Sullivan is
subject to a two-year non-compete provision.
The respective agreements also provide that in the event that Mr.
Sullivan's or Mr. Boyd's employment with the Company terminates as a result of
(i) a termination for Good Reason or (ii) a termination by the Company without
Cause (other than for Retirement or Disability), he will continue to act as a
consultant to the Company until the first anniversary of his date of termination
and receive compensation at a per diem rate and service as a consultant will be
treated as service with the Company for purposes of determining the vested
percentage of stock options and other equity awards granted as of such
termination of employment. In addition, while a consultant to the Company, Mr.
Boyd will continue to participate in the Company's group health plan (or if such
participation is not permitted, the Company will provide such benefit on the
same after-tax basis as if continued participation had been permitted). The
respective agreements further provide that Mr. Sullivan and Mr. Boyd will
receive no less favorable director and officer indemnification and insurance
coverage than such coverage in effect from time to time for the directors and
officers of the Company. In addition, the Compensation Committee has determined
that Mr. Sullivan's and Mr. Boyd's options shall vest upon a Change of Control
(as defined in the 1991 Stock Option Plan).
In June 1998, Ms. Jorden entered into an employment agreement with the
Company to serve as Chief Financial Officer. Ms. Jorden's agreement provides for
an initial four-year term and for automatic renewal for an additional two years
upon each second anniversary of its effective date, unless prior notice to not
renew is given. Under the terms of her agreement, Ms. Jorden receives an annual
base salary of $400,000 and a minimum annual performance bonus (in an amount no
greater than 100% of her base salary) consistent with the Company's management
incentive program, provided, however, that for the years 1998, 1999, 2000 and
2001 such bonus shall be guaranteed in an amount equal to 100% of her base
salary. Ms. Jorden also received a sign-on bonus of $300,000 and options to
acquire 300,000 shares of Common Stock under the 1991 Stock Option Plan. In
addition, the Company agreed to provide Ms. Jorden with a $400,000 secured loan
(the "Loan") upon the following terms: (i) interest at the lowest rate to avoid
imputed income (currently 5.8%); (ii) repayable in four equal installments of
principal, together with accrued interest (or earlier at Ms. Jorden's option);
and (iii) the Loan will be forgiven if Ms. Jorden is terminated without Cause
following a Change of Control (as both terms are defined in her agreement). As
of March 1, 1999, the total amount of principal and interest outstanding on the
Loan was $411,950, which is the largest aggregate amount outstanding to date.
The agreement provides that Ms. Jorden's base salary is subject to annual review
by the Company's Compensation Committee, and may be increased at the discretion
of the Compensation Committee and that upon a Change of Control of the Company,
the agreement automatically extends to a two-year term from the date of such
Change of Control.
If prior to (or more than two years following) a Change of Control, Ms.
Jorden's employment with the Company is terminated without Cause, for Good
Reason (each as defined in her agreement) or by notice of non-renewal, then Ms.
Jorden would receive a payment (payable in 24 equal monthly installments) equal
to two times the sum of her base salary during the twelve-month period
immediately preceding the date of termination plus her annual bonus during the
fiscal year prior to the date of termination, provided that such amount shall
not be less than $1.6 million. If, during the two-year period following a Change
in Control, Ms. Jorden is terminated without Cause or terminates employment for
Good Reason, the Company will pay her a lump sum payment equal to two times the
sum of (i) her highest annual base salary during the three-year period
immediately preceding her termination date and (ii) her highest annual bonus
earned in respect of the three fiscal years of the Corporation preceding the
year in which the termination occurs, provide continued welfare benefits for two
years and cause Ms. Jorden's options to immediately vest and become exercisable
in full. The agreement also provides that if any payments made to Ms. Jorden
pursuant to the agreement or otherwise would be subject to any excise tax under
Section 4999 of the Internal Revenue Code, the Company will provide her with an
additional payment such that she retains a net amount equal to the payments she
would have retained if such excise tax had not applied. The agreement further
provides that Ms. Jorden agrees not to compete with the Company for a period of
one year if she voluntarily terminates employment prior to the end of the
employment term, unless such termination is for Good Reason, is approved by the
Company Board of Directors or is within the two-year period following a Change
in Control.
In March 1998, the Company entered into an employment agreement with
Mr. Rich for Mr. Rich to serve as the Company's Chief Administrative Officer.
The agreement provides for an initial four-year term and automatic renewal for
an additional two years upon each second anniversary (initially, on the fourth
anniversary) of its effective date, unless prior notice to not renew is given.
Under the terms of the agreement, Mr. Rich receives an annual base salary of
$600,000 and a minimum annual performance bonus of $600,000. In 1998, Mr. Rich
was also granted an option to acquire 800,000 shares of Company Common Stock and
received a sign-on bonus of $300,000. In addition, the Company agreed to loan
Mr. Rich $600,000 upon the following terms: (i) interest at the lowest rate to
avoid imputed income (currently 6.1%); (ii) four-year term; (iii) interest only
annually; and (iv) principal only at the end of the term or earlier at Mr.
Rich's option or upon termination of Mr. Rich's employment with the Company. As
of March 7, 1999, the total amount of principal and interest outstanding under
Mr. Rich's loan was $630,500, which is the largest aggregate amount outstanding
to date. Mr. Rich's base salary is subject to annual review by the Company's
13
<PAGE> 17
Compensation Committee, and may be increased at the discretion of the
Compensation Committee. Upon a Change in Control (as defined in the agreement),
the agreement automatically extends to at least a two-year term. If prior to (or
more than two years following) a Change in Control, Mr. Rich is terminated
without "Cause" or terminates employment for "Good Reason" (as such terms are
defined in the agreement), or if Mr. Rich's agreement is not renewed, he would
receive a payment equal to the sum of his annual bonus during the fiscal year
prior to the date of termination and two times his base salary during the prior
twelve months, but no less than $2,400,000 to be paid over twenty-four months.
The agreement further provides that if, during the two-year period following a
Change in Control, Mr. Rich is terminated without Cause or terminates employment
for Good Reason, he would receive a lump sum payment equal to two times the sum
of his highest annual rate of base salary during the thirty-six month period
immediately prior to the date of termination and his highest annual bonus earned
during the three fiscal years immediately preceding the date of termination,
continued welfare benefits for one year and full vesting of his outstanding
stock options. The agreement also provides that if any payments made to Mr. Rich
pursuant to the agreement or otherwise would be subject to any excise tax under
Section 4999 of the Internal Revenue Code, the Company will provide him with an
additional payment such that he retains a net amount equal to the payments he
would have retained if such excise tax had not applied. The agreement further
provides that Mr. Rich agrees not to compete with the Company for a period of
one year if he voluntarily terminates employment prior to the end of the
employment term, unless such termination is for Good Reason, is approved by the
Company's Board of Directors or is within the two-year period following a Change
in Control.
The Company has entered into an employment agreement with Mr. Beauchamp
for Mr. Beauchamp to serve as Senior Vice President, Information Systems
effective June 29, 1998 for an initial two-year term and for automatic renewals
for an additional two years upon each second anniversary of the effective date
of the agreement unless prior notice not to renew is given. The agreement
further provides that Mr. Beauchamp shall receive an annual base salary of
$500,000 and an annual discretionary performance bonus ranging from zero to 50%
of his base salary, provided, however, that his 1998 bonus payments shall be no
less than $250,000. In addition, Mr. Beauchamp received a sign-on bonus of
$150,000 and options to acquire 200,000 shares of Common Stock under the 1991
Stock Option Plan. In addition, the Company agreed to provide Mr. Beauchamp with
a relocation package of up to $50,000 which must be repaid if Mr. Beauchamp
leaves the employ of the Company for any reason within one year of relocating.
Under the agreement, if Mr. Beauchamp is terminated without cause, the
Company shall pay him an amount equal to his base salary earned during the
preceding twelve months plus the annual bonus in respect of the fiscal year
immediately preceding such date of termination. If Mr. Beauchamp is terminated
within two years following a change of control, without cause or for good
reason, then the Company shall: (i) pay Mr. Beauchamp an amount equal to two
times the sum of his highest annual base salary and bonus payments earned during
the preceding three-year period; (ii) cause Mr. Beauchamp's options to
immediately vest and become fully exercisable; and (iii) provide health and
welfare benefits for one year thereafter. The agreement further provides that
Mr. Beauchamp forfeits all rights to payment under the agreement if he competes
with the Company either during his employment with the Company or during the
one-year period following his termination of employment.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 23, 1998, Mr. Wiggins and the Company entered into a three
year Retirement, Consulting and Non-Competition Agreement (the "Retirement
Agreement") pursuant to which Mr. Wiggins retired from his position as Chairman
of the Board and agreed to continue to act as a consultant to the Company for a
period of three years. Under the terms of the Retirement Agreement, the Company
agreed to pay Mr. Wiggins a lump sum cash payment of $3,600,000 and, during the
term of the Retirement Agreement, an annual amount of $1,800,000, payable
monthly. In addition, the Retirement Agreement provides that all of Mr. Wiggins'
options vested immediately upon the effective date of the Retirement Agreement
and that the expiration dates of the options are extended and shall continue to
be exercisable until February 2002. The Retirement Agreement also provides that
Mr. Wiggins will be provided certain fringe benefits and reimbursements of
expenses, and that Mr. Wiggins and his dependents will be entitled to continue
to participate in the Company's group health plan (or equivalent arrangements).
The Retirement Agreement provides that during the term, Mr. Wiggins will not be
employed by, or have a significant ownership interest in, any business which is
principally and directly engaged in the operation of health maintenance
organizations or the health insurance business in the United States, and will
not solicit for employment any person who is at such time (or was within the
one-month period prior to such solicitation) employed by the Company or any of
its affiliates.
Following disclosure of the terms of the Retirement Agreement, certain
regulators, including the New York State Insurance Department, expressed concern
that the cost of the Retirement Agreement would raise costs for the Company's
policyholders. The Company has confirmed that the cost of the Retirement
Agreement will be paid by the Company and will not
14
<PAGE> 18
be allocated directly or indirectly to its regulated subsidiaries and will have
no impact on premiums for employer groups and members. The Company has suspended
payments under the Retirement Agreement pending further discussions with these
officials.
The above notwithstanding, the Board of Directors carefully considered
the need for a smooth management transition (including Mr. Wiggins' standing
with employees as founder of the Company), Mr. Wiggins' pre-existing contractual
rights and the value of an ongoing non-competition and non-solicitation
agreement with Mr. Wiggins. The Board's assessment, with the advice of outside
experts, was that the aforementioned agreements were reasonable. These
agreements were structured not to affect the regulated subsidiaries and
individual consumers and were in the best interests of the Company, its
policyholders and its shareholders.
The Company has entered into an employment agreement with Dr. Muney
which provides for an initial two-year term and automatically renews for an
additional two years upon each second anniversary of its effective date, unless
prior notice to not renew is given. Under the terms of Dr. Muney's agreement,
Dr. Muney receives an annual base salary of $350,000 and is eligible for an
annual performance bonus of a minimum of 50 percent of his annual base salary.
In 1998, Dr. Muney was also granted options to acquire 100,000 shares of Company
Common Stock under the 1991 Stock Option Plan and received a sign-on bonus of
$60,000 pursuant to his agreement. Under the agreement, Dr. Muney's base salary
is subject to annual review by the Company's Compensation Committee, and may be
increased at the discretion of the Compensation Committee. Upon a Change in
Control (as defined in the agreement), the agreement automatically extends to a
two-year term. If prior to (or more than two years following) a Change in
Control, Dr. Muney is terminated without "Cause" or terminates employment for
"Good Reason" (as such terms are defined in the agreement), or if Dr. Muney's
agreement is not renewed, he would receive a payment equal to the sum of his
annual bonus during the fiscal year prior to the date of termination and his
base salary during the prior twelve months to be paid over twelve months. The
agreement further provides that if, during the two-year period following a
Change in Control, Dr. Muney is terminated without Cause or terminates
employment for Good Reason, he would receive a lump sum payment equal to two
times the sum of his highest annual rate of base salary during the thirty-six
month period immediately prior to the date of termination and his highest annual
bonus earned during the three fiscal years immediately preceding the date of
termination, and continued welfare benefits for two years. The agreement also
provides that if any payments made to Dr. Muney pursuant to the agreement or
otherwise would be subject to any excise tax under Section 4999 of the Internal
Revenue Code, the Company will provide him with an additional payment such that
he retains a net amount equal to the payments he would have retained if such
excise tax had not applied. The agreement further provides that Dr. Muney agrees
not to compete with the Company for a period of one year if he voluntarily
terminates employment prior to the end of the employment term, unless such
termination is for Good Reason, is approved by the Company's Board of Directors
or is within the two-year period following a Change in Control.
Pursuant to the terms of the Investment Agreement dated as of February
23, 1998 (the "Investment Agreement") by and between the Company and TPG
Partners II, L.P. ("TPG Partners"), certain affiliates of TPG Partners and
certain assignees of TPG Partners (together, the "Investors") purchased $350
million in 245,000 shares of Series A Cumulative Preferred Stock (the "Series A
Preferred Stock") and 105,000 shares of Series B Cumulative Preferred Stock (the
"Series B Preferred Stock") and warrants to purchase Common Stock which enables
TPG to acquire up to approximately 21.8% of Common Stock. In the Investment
Agreement, the Company agreed to appoint Norman C. Payson, M.D. as its Chief
Executive Officer and as a director and agreed that TPG would be entitled to
nominate four additional directors. Messrs. Bonderman, Coslet, Coulter and Thiry
were nominated by TPG pursuant to the Investment Agreement. In November 1998,
the Company entered into an amendment to the Investment Agreement to permit
certain individual affiliates of TPG Partners, including Messrs. Bonderman,
Coslet and Coulter, to purchase up to 2,000,000 shares of Common Stock of the
Company. On February 13, 1999, the Investors exchanged (1) each share of Series
A Preferred Stock for one share of Series D Cumulative Preferred Stock (the
"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 the date of the exchange and (2) each share of Series B Preferred Stock
for one share of Series E Cumulative Preferred Stock (the "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 the date of
the exchange. 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 Series E Preferred Stock except that the Series E Preferred
Stock accumulates cash dividends at the 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
15
<PAGE> 19
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 exercise of warrants by the holders thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of December 31, 1997, the members of the Company's Compensation
Committee were Messrs. Milligan, Scully and Adamson. On May 20, 1998, Mr.
Coulter was elected to the Compensation Committee. On August 28, 1998, Mr.
Adamson resigned from and Mr. Thiry was elected to the Compensation Committee.
Mr. Coulter is a principal of TPG. In the Investment Agreement
(described above), pursuant to which certain affiliates of TPG Partners, an
affiliate of TPG, and certain assignees of TPG Partners purchased $350 million
in shares of senior preferred stock and warrants to purchase Common Stock, the
Company agreed to appoint Dr. Payson as its Chief Executive Officer and as a
director and agreed that TPG would be entitled to nominate four additional
directors. Messrs. Bonderman, Coslet, Coulter and Thiry were nominated by TPG
pursuant to the Investment Agreement. In November 1998, the Company entered into
an amendment to the Investment Agreement to permit certain individual affiliates
of TPG, including Messrs. Bonderman, Coslet and Coulter, to purchase up to
2,000,000 shares of Common Stock of the Company.
16
<PAGE> 20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with regard to the beneficial
ownership of the Company's Common Stock, Series D Preferred Stock and Series E
Preferred Stock as of March 1, 1999, unless otherwise indicated, by (i) each
stockholder who is known by the Company to beneficially own in excess of 5% of
the outstanding shares of Common Stock, Series D Preferred Stock or Series E
Preferred Stock, (ii) each director and the nominees for director, (iii) each of
the executive officers named in the Summary Compensation Table and (iv) the
directors and all executive officers as a group.
<TABLE>
<CAPTION>
OWNERSHIP(1)
------------
NAME COMMON PERCENT SERIES D PREFERRED PERCENT SERIES E PERCENT
STOCK STOCK PREFERRED STOCK
----- -------- ----- --------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
TPG Partners II, L.P., et. al.(2) 18,024,002 16.2% 208,117.5272 80% 89,456.6648 80%
201 Main Street
Fort Worth, TX 76102
Donaldson, Lufkin & Jenrette (3) 3,218,571 2.9% 37,163.84414286 14.29% 15,974.4044857 14.29%
277 Park Avenue
New York, NY 10172
Norman C. Payson, M.D. (4) 3,760,998 3.4% - - - -
William M. Sullivan (5) 658,917 * - - - -
Jeffery H. Boyd (6) 197,704 * - - - -
Yon Y. Jorden (7) - * - - - -
Marvin P. Rich (8) 200,000 * - - - -
Thomas A. Beauchamp (9) - * - - - -
Fred F. Nazem (10) 440,750 * - - - -
David Bonderman (11) 18,025,252 16.2% 208,117.5272 80% 89,456.6648 80%
Jonathan J. Coslet (12) 4,650 * - - - -
James G. Coulter (13) 18,025,252 16.2% 208,117.5272 80% 89,456.6648 80%
Robert B. Milligan, Jr. (14) 9,375 * - - - -
Marcia J. Radosevich, Ph.D. (15) 38,750 * - - - -
Benjamin H. Safirstein, M.D. (16) 138,069 * - - - -
Thomas A. Scully (17) 57,750 * - - - -
Kent J. Thiry (18) 9,250 * - - - -
Stephen F. Wiggins (19) 3,005,840 2.7% - - - -
All Executive Officers and Directors 8,554,553 7.7% - - - -
as a Group
(16 persons) (20)
</TABLE>
- ----------
*Less than one percent.
(1) Includes shares which such persons have the right to acquire
beneficial ownership of within 60 days from March 1, 1999.
17
<PAGE> 21
(2) On May 13, 1998, TPG Partners II, L.P. ("TPG Partners"), TPG Parallel
II, L.P. ("TPG Parallel") and TPG Investors II, L.P. ("TPG Investors,
together with TPG Partners and TPG Parallel, the "TPG Entities")
acquired, in the aggregate, 196,000 shares of Series A Preferred Stock
and 84,000 shares of Series B Preferred Stock with warrants to acquire,
in the aggregate, 18,024,002 shares of Common Stock. On February 13,
1999, the Series A Preferred Stock owned by the TPG Entities was
exchanged for 208,117.5272 shares of a new Series D Preferred Stock and
the Series B Preferred Stock owned by the TPG Entities was exchanged
for 89,456.6648 shares of a new Series E Preferred Stock.
(3) On May 13, 1998, certain affiliates of Donaldson, Lufkin & Jenrette
Securities Corporation (the "DLJ Entities") acquired, in the aggregate,
35,000 shares of Series A Preferred Stock and 15,000 shares of Series B
Preferred Stock with warrants to acquire, in the aggregate, 3,218,571
shares of Common Stock. On February 13, 1999, the Series A Preferred
Stock owned by the DLJ Entities was exchanged for 37,163.84414283
shares of a new Series D Preferred Stock and the Series B Preferred
Stock owned by the DLJ Entities was exchanged for 15,974.40442859
shares of a new Series E Preferred Stock.
(4) Includes 1,116,668 shares of Common Stock issuable upon exercise of
stock options. Dr. Payson currently holds unvested options to purchase
1,883,332 additional shares of Common Stock.
(5) Includes 471,132 shares of Common Stock issuable upon exercise of stock
options and 6,450 shares of Common Stock held by the Sullivan Family
Foundation. Mr. Sullivan disclaims beneficial ownership of the shares
of Common Stock held by the Sullivan Family Foundation. Mr. Sullivan
currently holds unvested options to purchase 457,000 additional shares
of Common Stock.
(6) Includes 190,148 shares of Common Stock issuable upon exercise of
options and shares held in the Savings Plan. Mr. Boyd currently holds
unvested options to purchase 340,000 additional shares of Common Stock.
(7) Ms. Jorden currently holds unvested options to purchase 300,000 shares
of Common Stock.
(8) Mr. Rich currently holds unvested options to purchase 600,000
additional shares of Common Stock.
(9) Mr. Beauchamp currently holds unvested options to purchase 200,000
shares of Common Stock.
(10) Includes 418,750 shares of Common Stock issuable upon exercise of
stock options. Mr. Nazem currently holds unvested options to purchase
31,250 additional shares of Common Stock.
(11) Includes 1,250 shares of Common Stock issuable upon exercise of
options, 18,024,002 shares Common Stock issuable upon the exercise of
warrants currently owned by the TPG Entities, 208,117.5272 shares of
Series D Preferred Stock currently owned by the TPG Entities and
89,456.6648 shares of Series E Preferred Stock currently owned by the
TPG Entities. Mr. Bonderman, a director of the Company, is a director,
executive officer and stockholder of TPG Advisors II, Inc. ("TPG
Advisors"). TPG Advisors is the general partner of TPG GenPar II, L.P.,
which is, in turn, the general partner of each of TPG Partners, TPG
Parallel and TPG Investors. Mr. Bonderman currently holds unvested
options to purchase 3,750 additional shares of Common Stock.
(12) Includes 1,250 shares of Common Stock issuable upon exercise of
options. Mr. Coslet currently holds unvested options to purchase 3,750
additional shares of Common Stock.
(13) Includes 1,250 shares of Common Stock issuable upon exercise of
options, 18,024,002 shares Common Stock issuable upon the exercise of
warrants currently owned by the TPG Entities, 208,117.5272 shares of
Series D Preferred Stock currently owned by the TPG Entities and
89,456.6648 shares of Series E Preferred Stock currently owned by the
TPG Entities. Mr. Coulter, a director of the Company, is a director,
executive officer and stockholder of TPG Advisors II, Inc. ("TPG
Advisors"). TPG Advisors is the general partner of TPG GenPar II, L.P.,
which is, in turn, the general partner of each of TPG Partners, TPG
Parallel and TPG Investors. Mr. Coulter currently holds unvested
options to purchase 3,750 additional shares of Common Stock
(14) Includes 9,375 shares of Common Stock issuable upon exercise of
options. Mr. Milligan currently holds unvested options to purchase
6,250 additional shares of Common Stock.
(15) Includes 38,750 shares of Common Stock issuable upon exercise of
options. Dr. Radosevich currently holds unvested options to purchase
6,250 additional shares of Common Stock.
(16) Includes 91,250 shares of Common Stock issuable upon exercise of
options, 18,937 shares of Common Stock held by Dr. Safirstein's spouse
and children and 3,664 shares of Common Stock held by the Safirstein
Family Trust. Dr. Safirstein disclaims beneficial ownership of the
shares of Common Stock held by his spouse and children and the
Safirstein Family Trust. Dr. Safirstein currently holds unvested
options to purchase 33,750 additional shares of Common Stock.
(17) Includes 57,750 shares of Common Stock issuable upon exercise of
options. Mr. Scully currently holds unvested options to purchase 6,250
additional shares of Common Stock.
(18) Includes 1,250 shares of Common Stock issuable upon exercise of
options. Mr. Thiry currently holds unvested options to purchase 3,750
additional shares of Common Stock.
(19) Includes 1,356,040 shares of Common Stock issuable upon exercise of
options.
(20) These numbers include 3,979,863 shares of Common Stock issuable upon
exercise of options but do not include shares of
18
<PAGE> 22
Common Stock, Series D Preferred Stock or Series E Preferred Stock
attributable to Messrs. Bonderman and Coulter as a result of their
relationship to TPG Advisors described above.
19
<PAGE> 23
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
REPORT OF COMPENSATION COMMITTEE
Compensation Philosophy
The Compensation Committee of the Board is responsible for reviewing
the Company's executive compensation program and policies each year and
determining the compensation of the Company's executive officers. The Company's
compensation programs and policies are designed to provide incentives that
account for value delivered to the Company's stockholders and that attract and
retain individuals of outstanding ability in key positions. The Committee
recognizes (i) individual performance and the performance of the Company in
addressing immediate financial and operational challenges, (ii) the Company's
performance relative to the performance of other companies of comparable size,
complexity and quality, and (iii) performance that supports both the short-term
and long-term goals of the Company. In 1998, the Compensation Committee sought
to establish compensation programs which would aid in the recruitment of
experienced managers and retention of key managers to help develop and implement
plans to improve the Company's financial and operating performance ("turnaround
plan"). This required providing incentives tied to enhancing shareholder value
and mitigating the risks associated with the Company's ongoing financial losses.
In addition to exercising its business judgment, the Committee has also sought
the advice of nationally recognized consultants in developing its executive
compensation policies and agreements. The Committee believes that the executive
compensation program includes elements which, taken together, constitute an
appropriate method of establishing total compensation for senior management
given the circumstances applicable to the Company.
The compensation of the Company's executive officers, including the
executives named herein and the Chief Executive Officer, consists of four key
components: (i) base salary; (ii) annual incentive bonus; (iii) amounts deferred
and matching contributions by the Company under a long-term deferred
compensation plan; and (iv) stock options. The compensation packages are
designed to set total compensation at levels comparable to total compensation
paid to similarly positioned executives at peer companies selected and reviewed
by the Committee and its consultants. An executive's total compensation relative
to the range paid by the peer companies depends upon the executive's experience,
level and scope of responsibility within the Company and individual performance.
The majority of the Company's executive officers have employment agreements that
establish base salary and bonus opportunities and that were entered into
following arm's length negotiations with the respective executive officers.
Compensation of Chief Executive Officers
During 1998, two individuals served as the Company's Chief Executive
Officer. Mr. Sullivan served as the Company's Chief Executive Officer from the
beginning of the year until May 13, 1998 when Dr. Payson assumed the role. Mr.
Sullivan continues to serve as the President of the Company.
Compensation for Dr. Payson was principally determined with reference
to Dr. Payson's Employment Agreement (the "Payson Agreement"), which was the
subject of arm's length negotiations between representatives of the Committee
and Dr. Payson. In arriving at the terms of the Payson Agreement, the Committee
considered the need to provide incentives which would encourage an executive
with Dr. Payson's experience and background to join the Company as Chief
Executive Officer and align his personal interests with those of the Company's
shareholders. Accordingly, Dr. Payson's compensation principally consists of
3,000,000 stock options, which provide value to Dr. Payson only if there is
appreciation in the price of the Company's Common Stock. The options vest over a
four-year period. In addition, the Payson Agreement required that Dr. Payson
personally invest $10 million through purchase of the Company's Common Stock and
provides substantial transfer restrictions on both the purchased and option
shares. In the Committee's view, these provisions should provide significant
incentives for Dr. Payson to work to enhance shareholder value given the extent
of his personal investment in the Company's Common Stock. The Payson Agreement
also provided for salary and bonus payments aggregating $700,000 in 1998.
In 1998, Mr. Sullivan's employment agreement was amended to compensate
Mr. Sullivan for his efforts in connection with development and implementation
of the Company's turnaround plan. Mr. Sullivan's cash compensation in 1998 was
determined pursuant to the amended agreement and consisted primarily of base
salary, which was increased to $600,000 per annum, bonus compensation totaling
$500,000 and a loan of $750,000 (principal and interest on the loan was forgiven
on March 1, 1999 pursuant to the agreement). In addition, Mr. Sullivan was
granted options to purchase 400,000 shares of the Company's Common Stock. The
Committee increased Mr. Sullivan's salary to be commensurate with that paid to
executives with similar responsibilities in peer companies. The bonus and loan
payments were designed to retain Mr. Sullivan during the transition of the
20
<PAGE> 24
Company's management in connection with the turnaround plan. Stock option grants
to Mr. Sullivan were intended to align Mr. Sullivan's interests with those of
the Company's stockholders and provide Mr. Sullivan with increased long-term
incentives to promote enhancement of shareholder value. In determining the
amount of stock options to be granted to Mr. Sullivan, the Committee considered
the value of Mr. Sullivan's existing stock options and amounts of stock options
granted to executives with similar responsibilities at peer companies. In
addition, Mr. Sullivan's employment agreement was amended to reflect the
transition of his role from Chief Executive Officer to President of the Company.
Compensation of Executive Officers
In 1998, the Company entered into employment agreements with several
new executive officers, including Messrs. Muney, Rich and Beauchamp and Ms.
Jorden. The compensation to these executives under their employment agreements
consists primarily of base salary, bonus compensation and grants of stock
options at the time of joining the Company. Certain of the agreements for newly
hired executive officers provide for guaranteed bonuses as an inducement to join
the Company, to mitigate the risks associated with the Company's financial
losses and to compensate for lost bonus opportunities at previous employers.
Several of the newly hired executives were also given loans or cash payments, in
part, to assist in relocation or in lieu of compensation foregone from a
previous employer. Stock option grants were determined by the Committee based on
grants to similarly positioned executives at peer companies and a determination
of the level of grant needed to provide adequate incentives to join the Company
and promote enhancement of shareholder value. The Committee's evaluation of such
awards was also based on several other factors, including (i) the ability of the
officer to contribute to enhancement of the value of the Company's Common Stock
and (ii) the long-term compensation opportunities available to the officer at
his or her prior employer and the extent to which such officer had to forfeit
any such opportunities by accepting employment with the Company.
In 1998, Mr. Boyd was paid a bonus of $250,000 under an amendment to
his employment agreement which was intended to compensate him for his efforts in
connection with negotiating and completing the Company's bridge financing and
recapitalization in early 1998 and to encourage retention of Mr. Boyd during the
Company's management transition. Stock option grants to Mr. Boyd were intended
to provide him with long-term incentives to promote enhancement of shareholder
value. In determining the amount of stock options to be granted to Mr. Boyd, the
Committee considered the value of Mr. Boyd's existing stock options and amounts
of stock options granted to executives with similar responsibilities at peer
companies.
Report on Repricing of Stock Options
Stock options were granted under the 1991 Stock Option Plan to all
employees of the Company in August 1997 with an exercise price of $74.00 per
share. Subsequent to this grant, the market price of the Common Stock suffered a
significant decline. In order to ensure that the options granted in August would
provide a meaningful incentive to motivate and retain employees, Company
employees were given the opportunity to cancel such options and receive in
exchange a like number of options granted as of January 2, 1998 with an exercise
price of $17.125. All of the Directors and executive officers named herein were
excluded from the reissuance grant. For the same reason, as of October 1, 1998,
the Company offered holders of stock options which were granted in 1995-1997 and
had exercise prices between $20 and $85 the right to exchange such options for
new options granted at the then current market value of $9.875 per share on the
basis of two old options for one new option. The new options vest over a period
of three years. The Directors and executive officers named herein were not
permitted to participate in this exchange.
In connection with the ongoing compensation plans, the Committee
intends to continue to promote compensation structures which, in the Committee's
opinion, provide features which properly align the Company's executive
compensation with corporate performance and the interest of its shareholders and
which offer competitive compensation relevant to comparable opportunities in the
marketplace.
The Compensation Committee
Robert B. Milligan, Jr.
James G. Coulter
Thomas A. Scully
Kent J. Thiry
21
<PAGE> 25
PERFORMANCE GRAPH
The following graph compares the change in the Company's cumulative
total return on its Common Stock to (a) the change in the cumulative total
return on the stocks included in the NASDAQ Composite Index for U.S. Companies
and (b) the change in the cumulative total return on the stocks included in
NASDAQ Health Services Index assuming an investment of $100 made on December 31,
1992 and comparing relative values on December 31, 1993, 1994, 1995, 1996, 1997
and 1998. All of these cumulative total returns are computed assuming the
reinvestment of dividends at the frequency with which dividends were paid during
the period. Note that the Common Stock price performance shown below should not
be viewed as being indicative of future performance.
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Oxford Health Plans, Inc. $100.00 187.60 280.52 522.98 829.15 220.35 210.61
NASDAQ Stock Market Index $100.00 114.79 112.20 158.70 195.15 239.46 336.56
NASDAQ Health Services Stock Index $100.00 115.38 123.79 157.04 156.79 159.79 137.03
</TABLE>
22
<PAGE> 26
PROPOSAL NUMBER TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Following the recommendation of its Audit Committee, the Company's
Board of Directors has appointed and recommends shareholder approval of Ernst &
Young LLP as the Company's independent auditors for the current fiscal year.
Representatives of Ernst & Young LLP will be present at the Meeting to respond
to appropriate questions and to make such statements as they may desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT
AUDITORS FOR FISCAL YEAR 1999.
23
<PAGE> 27
GENERAL INFORMATION
INDEPENDENT AUDITORS
KPMG LLP was the Company's independent auditors for the year ended
December 31, 1997. On June 9, 1998, the Company appointed Ernst & Young LLP as
the Company's independent auditors. Representatives of Ernst & Young LLP are
expected to be present at the Meeting. They will be given an opportunity to make
a statement and will be available to respond to appropriate questions.
The Company dismissed KPMG LLP as the independent auditors of the
Company, effective June 2, 1998. The Company selected the firm of Ernst & Young
LLP to serve as the independent auditors of the Company, commencing June 9,
1998. 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 accountants 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 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.
STOCKHOLDER PROPOSALS
In order to be considered for inclusion in the Company's proxy statement
and form of proxy relating to the 2000 annual meeting of stockholders, any
proposal by a record holder of Common Stock must be received by the Company at
its principal offices in Norwalk, Connecticut on or before December 3, 1999. In
addition, under the Company's bylaws, any proposal for consideration at the 2000
annual meeting of stockholders submitted by a stockholder outside of the
processes of Rule 14a-8 under the Securities Exchange Act of 1934 will be
considered untimely unless it is received by the Company on or before February
28, 2000 and is otherwise in compliance with the requirements set forth in the
Company's bylaws.
SOLICITATION
All costs and expenses associated with soliciting proxies will be borne by
the Company. In addition to the use of the mails, proxies may be solicited by
the directors, officers and employees of the Company by personal interview,
telephone or telegram. Such directors, officers and employees will not be
additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses incurred in connection therewith. Arrangements will also
be made with custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of Common Stock held of record by
such persons, and the Company will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses incurred in connection
therewith. In addition, the Company has retained Georgeson & Company Inc., a
proxy soliciting firm, to assist in the solicitation of proxies and will pay
such firm a fee, estimated not to exceed $7,500 plus expenses. The total amount
of such expenses will be borne by the Company.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors is not
aware of any other business or matters to be presented for consideration at the
Meeting other than as set forth in the Notice of Meeting attached to this Proxy
Statement. However, if any other business shall come before the Meeting or any
adjournment or postponement thereof and be voted upon, the enclosed proxy shall
be deemed to confer discretionary authority on the individuals named to vote the
shares represented by such proxy as to any such matters.
24
<PAGE> 28
ANNUAL REPORT ON FORM 10-K/A NO. 1
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH BENEFICIAL HOLDER OF ITS
COMMON STOCK ON THE RECORD DATE, UPON THE WRITTEN REQUEST OF ANY SUCH PERSON,
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A NO. 1 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998, AS FILED WITH THE COMMISSION. ANY SUCH REQUEST SHOULD
BE MADE IN WRITING TO INVESTOR RELATIONS DEPARTMENT, OXFORD HEALTH PLANS, INC.,
800 CONNECTICUT AVENUE, NORWALK, CONNECTICUT 06854.
25
<PAGE> 29
PROXY OXFORD HEALTH PLANS, INC. PROXY
PROXY FOR 1999 ANNUAL MEETING ON MAY 13, 1999
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Norman C. Payson, M.D., Chief Executive Officer,
and Jeffery H. Boyd, Executive Vice President and General Counsel, and each of
them, attorneys with full power of substitution, to vote as directed below all
shares of Common Stock of Oxford Health Plans, Inc. registered in the name of
the undersigned, or which the undersigned may be entitled to vote, at the 1999
Annual Meeting to be held at the Stamford Marriott, Two Stamford Forum, 243
Tresser Boulevard, Stamford, CT 06901, on May 13, 1999, 10:00 a.m. and at any
adjournment or postponement thereof.
1. ELECTION OF DIRECTORS
____ FOR Fred F. Nazom ____ WITHHOLD AUTHORITY to vote for Fred F. Nazom
____ FOR Thomas A. Scully ____ WITHHOLD AUTHORITY to vote for Thomas A. Scully
____ FOR James G. Coulter ____ WITHHOLD AUTHORITY to vote for James G. Coulter
2. RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS
FOR FISCAL YEAR 1999.
____ FOR ____ AGAINST ____ ABSTAIN
3. AS SUCH PROXIES MAY IN THEIR DISCRETION DETERMINE IN RESPECT OF ANY
OTHER BUSINESS PROPERLY TO COME BEFORE SAID MEETING (THE BOARD OF DIRECTORS
KNOWING OF NO SUCH OTHER BUSINESS).
THE DIRECTORS RECOMMEND A VOTE FOR ITEMS 1 AND 2.
(Continued on reverse side)
<PAGE> 30
(Continued from other side)
UNLESS THE SHAREHOLDER DIRECTS
OTHERWISE, THIS PROXY WILL BE VOTED FOR
ITEMS 1 AND 2.
VOTE BY PROXY CARD: DATE, SIGN AND
RETURN TO PROXY SERVICES, EQUISERVE, PO
BOX 8040, BOSTON, MA 02266-8040.
Dated ____________________________, 1999
________________________________________
________________________________________
Signature of Shareholder(s)
(Please sign in the same form as name
appears hereon. Executors and other
fiduciaries should indicate their
titles. If signed on behalf of a
corporation, give title of officer
signing.)
______ I plan on attending the Meeting
