UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-19442
-------------------------------------------------------
OXFORD HEALTH PLANS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1118515
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
800 Connecticut Avenue, Norwalk, Connecticut 06854
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 852-1442
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of common
stock, par value $.01 per share, outstanding on August 4, 1999 was 81,316,194.
1
<PAGE>
OXFORD HEALTH PLANS, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 Financial Statements
Consolidated Balance Sheets at June 30, 1999 and December 31,
1998.................................................................3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1999 and 1998..........................4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 ........................................5
Notes to Consolidated Financial Statements ..........................6
Independent Auditor's Report ........................................9
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................11
ITEM 3 Quantitative and Qualitative Disclosures About
Market Risk ........................................................25
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings ..................................................26
ITEM 2 Changes in Securities and Use of Proceeds ..........................35
ITEM 4 Submission of Matters to a Vote of Security Holders.................35
ITEM 5 Other Information ..................................................36
ITEM 6 Exhibits and Reports on Form 8-K ...................................37
SIGNATURES
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
June 30, Dec. 31,
Current assets: 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $150,907 $237,717
Investments - available-for-sale, at market value 816,008 922,990
Premiums receivable, net 113,680 110,254
Other receivables 34,632 36,540
Prepaid expenses and other current assets 11,988 9,746
Deferred income taxes 40,529 43,385
- ---------------------------------------------------------------------------------------------------
Total current assets 1,167,744 1,360,632
Property and equipment, net of accumulated depreciation and
amortization of $183,174 in 1999 and $160,431 in 1998 85,059 112,941
Deferred income taxes 88,134 94,182
Restricted cash and investments 71,814 56,493
Other noncurrent assets 22,253 13,502
==================================================================================================
Total assets $1,435,004 $1,637,750
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical costs payable $741,410 $850,197
Trade accounts payable and accrued expenses 145,980 176,833
Unearned premiums 45,294 105,993
Current portion of capital lease obligations 12,029 15,938
Deferred income taxes - 2,228
- --------------------------------------------------------------------------------------------------
Total current liabilities 944,713 1,151,189
Long-term debt 350,000 350,000
Obligations under capital leases 10,779 18,850
Redeemable preferred stock 321,275 298,816
Shareholders' equity (deficit):
Preferred stock, $.01 par value, authorized 2,000,000 shares - -
Common stock, $.01 par value, authorized 400,000,000
shares; issued and outstanding 81,315,284 shares in 1999 and 813 805
80,515,872 shares in 1998
Additional paid-in capital 494,812 506,243
Accumulated deficit (679,994) (692,290)
Accumulated other comprehensive earnings (loss) (7,394) 4,137
==================================================================================================
Total liabilities and shareholders' equity (deficit) $1,435,004 $1,637,750
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
Revenues: 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $1,033,670 $1,155,952 $2,060,256 $2,369,037
Third-party administration, net 4,091 4,311 7,701 9,313
Investment and other income, net 13,020 30,849 43,129 42,385
- -----------------------------------------------------------------------------------------------------------------
Total revenues 1,050,781 1,191,112 2,111,086 2,420,735
- -----------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 886,836 1,307,214 1,758,709 2,373,651
Marketing, general and administrative 155,210 227,968 304,947 429,001
Interest and other financing charges 12,180 20,752 26,230 27,601
Restructuring charges - 98,500 - 123,500
Write-downs of strategic investments (see note) - 38,341 - 38,341
- -----------------------------------------------------------------------------------------------------------------
Total expenses 1,054,226 1,692,775 2,089,886 2,992,094
- -----------------------------------------------------------------------------------------------------------------
Operating earnings (loss) before income taxes (3,445) (501,663) 21,200 (571,359)
Income tax expense (benefit) (1,446) 5,957 8,904 (18,437)
- -----------------------------------------------------------------------------------------------------------------
Net earnings (loss) (1,999) (507,620) 12,296 (552,922)
Less preferred dividends and amortization (11,377) (5,718) (22,459) (5,718)
- -----------------------------------------------------------------------------------------------------------------
Net loss attributable to common shares $(13,376) $(513,338) $(10,163) $(558,640)
=================================================================================================================
Loss per common share-basic and diluted $(.16) $(6.41) $(.13) $(7.00)
- -----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding-basic and 81,162 80,131 80,970 79,817
diluted
<FN>
See accompanying rates to consolidated financial statements.
Note: Write-downs of strategic investments was previously titled "unusual charges".
</FN>
</TABLE>
4
<PAGE>
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
- -------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 12,296 $ (552,922)
Adjustments to reconcile net earnings (loss) to net cash used by operating
activities:
Depreciation and amortization 29,068 35,362
Noncash restructuring charges - 107,246
Deferred income taxes 8,904 (29,156)
Provision for doubtful accounts - 13,209
Realized loss (gain) on sale of investments 3,395 (2,121)
Other, net 1,271 11,272
Changes in assets and liabilities:
Premiums receivable (3,426) 54,734
Other receivables 1,908 (1,780)
Prepaid expenses and other current assets (2,242) (1,404)
Medical costs payable (108,787) 153,368
Trade accounts payable and accrued expenses (25,814) 75,184
Income taxes payable/refundable - 117,380
Unearned premiums (60,699) (70,140)
Other, net (10,293) 4,693
- -------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (154,419) (85,075)
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,147) (36,646)
Purchases of investments (597,917) (500,271)
Sales and maturities of investments 683,077 416,140
Other, net (11,189) (3,318)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 69,824 (124,095)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 9,765 1,323
Proceeds from sale of redeemable preferred stock, net of expenses - 271,148
Proceeds from sale of warrants - 67,000
Proceeds from sale of common stock - 10,000
Proceeds of notes and loans payable - 550,000
Redemption of notes payable - (200,000)
Debt issuance expenses - (11,251)
Payments under capital leases (11,980) (1,570)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (2,215) 686,650
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (86,810) 477,480
Cash and cash equivalents at beginning of period 237,717 4,141
=================================================================================================================
Cash and cash equivalents at end of period $150,907 $481,621
=================================================================================================================
Supplemental cash flow information:
Cash payments (refunds) for income taxes, net $(1,444) $(107,877)
Cash payments for interest expense 28,404 10,332
Supplemental schedule of noncash investing and financing activities:
Unrealized appreciation (depreciation) of investments (13,759) (7,773)
Capital lease obligations incurred - 21,707
Preferred stock dividends and amortization $22,459 $ 5,718
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by Oxford Health Plans, Inc. ("Oxford") and subsidiaries (collectively,
the "Company") without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been omitted
pursuant to SEC rules and regulations; nevertheless, management of the Company
believes that the disclosures herein are adequate to make the information
presented not misleading. The financial statements include amounts that are
based on management's best estimates and judgments. The most significant
estimates relate to medical costs payable and other policy liabilities and
liabilities and asset impairments related to operational restructuring
activities. These estimates may be adjusted as more current information becomes
available, and any adjustments could be significant. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position and results of
operations of the Company with respect to the interim consolidated financial
statements have been made. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year.
The consolidated financial statements and notes should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of and for each of the years in the three-year period ended December 31,
1998, included in the Company's Form 10-K/A filed with the SEC for the fiscal
year ended December 31, 1998, as amended.
(2) RESTRUCTURING CHARGES
During the first half of 1998, the Company recorded restructuring charges
primarily associated with implementation of the Company's plan ("Turnaround
Plan") to restore the Company's profitability. These restructuring charges
totaled $98.5 million, or $1.23 per share, for the three months ended June 30,
1998 and $123.5 million ($114.8 million after income taxes), or $1.44 per share,
for the six months ended June 30, 1998. The table below presents the activity in
the first six months of 1999 related to the restructuring charge reserves
established in the first and second quarters of 1998 as part of the Turnaround
Plan. As of June 30, 1999, the Turnaround Plan is proceeding in all material
respects as expected and the activity during the first six months of 1999 is
consistent with the Company's estimates prepared at December 31, 1998. The
Company believes that the reserves as of June 30, 1999 are adequate and that no
revisions of estimates are necessary at this time.
<TABLE>
<CAPTION>
Beginning Ending
Restructuring Cash Noncash Restructuring
(In thousands) Reserves Activity Activity Reserves
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provisions for loss on noncore businesses $13,805 $(3,217) $(4,874) $5,714
Severance and related costs 9,354 (1,764) - 7,590
Costs of consolidating operations 17,685 (11,924) - 5,761
=============================================================
$40,844 $(16,905) $(4,874) $19,065
=============================================================
</TABLE>
Cash expenses charged against the reserve for loss on noncore businesses
amounted to $3.2 million during the first six months of 1999. These charges
include payments of $3.0 million related to premium deficiencies and $.2 million
related to professional fees and other incremental exit costs. Noncash charges
against the reserve of $4.9 million relate to the specific write-off of assets
of the HMO and insurance businesses in the noncore markets, net of proceeds
received.
6
<PAGE>
The reduction in the reserve for severance and related costs reflects
contractual payments of approximately $1.8 million to former executives of the
Company.
The reduction in the reserve for costs of consolidating operations reflects
lease payments and occupancy costs of approximately $11.9 million, net of
sublease income, related to vacated office space.
(3) WRITE-DOWNS OF STRATEGIC INVESTMENTS
In October 1997, the Company disposed of its 47% interest in Health
Partners, Inc. ("Health Partners"), and received 2,090,109 shares of common
stock of FPA Medical Management, Inc. ("FPAM") stock with a market value of
approximately $76.4 million, resulting in a pretax gain of approximately $63.1
million. As of December 31, 1997, the market value of the FPAM stock had dropped
to approximately $38.4 million, and the Company wrote down its investment and
reduced its gain by approximately $38.0 million. During the second quarter of
1998, the Company sold 540,000 shares of FPAM and recognized a loss of $8.1
million. In July 1998, FPAM filed for protection under Chapter 11 of the U.S.
Bankruptcy Code and the market value per share of its common stock fell below
one dollar. The Company wrote its remaining investment in FPAM down to nominal
value and recognized a loss in the second quarter of 1998 of $30.2 million. The
total 1998 recognized loss and write-down of $38.3 million, or $.49 per share,
have been recognized as write-downs of strategic investments in the accompanying
financial statements.
(4) REDEEMABLE PREFERRED STOCK
On February 13, 1999, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with Texas Pacific Group, its affiliates and others
to make an adjustment of the dividends payable on the shares of Series A
Cumulative Preferred Stock (the "Series A Preferred Stock") and Series B
Cumulative Preferred Stock (the "Series B Preferred Stock") in connection with
the possible sale of shares of Preferred Stock by the holders thereof to
institutional holders. Pursuant to the Exchange Agreement, the 245,000 shares of
Series A Preferred Stock were exchanged for 260,146.909 shares of a new Series D
Cumulative Preferred Stock (the "Series D Preferred Stock"), and the 105,000
shares of Series B Preferred Stock were exchanged for 111,820.831 shares of a
new Series E Cumulative Preferred Stock (the "Series E Preferred Stock"). In the
exchange, (1) a holder received in exchange for each share of Series A Preferred
Stock, one share of Series D Preferred Stock, plus 0.061824118367 share of
Series D Preferred Stock representing dividends on the Series A Preferred Stock
accrued and unpaid through February 13, 1999, and (2) a holder received in
exchange for each share of Series B Preferred Stock, one share of Series E
Preferred Stock, plus 0.064960295238 share of Series E Preferred Stock
representing dividends on the Series B Preferred Stock accrued and unpaid
through February 13, 1999. As a result of the exchange, the holders hold only
Series D Preferred Stock and Series E Preferred Stock. On March 9, 1999, the
Company filed Certificates of Elimination for the Series A Preferred Stock and
the Series B Preferred Stock that have the effect of eliminating from the
Certificate of Incorporation all matters set forth in the Certificates of
Designations with respect to the Series A Preferred Stock and the Series B
Preferred Stock. The terms of the shares of the Series D Preferred Stock are
identical to the terms of the Series A Preferred Stock, except that the Series D
Preferred Stock accumulates cash dividends at the rate of 5.12981% per annum,
payable quarterly, provided that prior to May 13, 2000, the Series D Preferred
Stock accumulates dividends at a rate of 5.319521% per annum, payable annually
in cash or additional shares of Series D Preferred Stock, at the option of the
Company. The terms of the shares of the Series E Preferred Stock are identical
to the terms of the shares of the Series B Preferred Stock, except that the
Series E Preferred Stock accumulates cash dividends at a rate of 14% per annum,
payable quarterly, provided that prior to May 13, 2000, the Series E Preferred
Stock accumulates dividends at a rate of 14.589214% per annum, payable annually
in cash or additional shares of Series E Preferred Stock, at the option of the
Company. In addition, prior to May 13, 2001, the holders of the Series D
Preferred Stock may not use the Series D Preferred Stock in connection with the
exercise of the Company's Series A Warrants or Series B Warrants unless they use
a percentage of the total amount of Series D Preferred Stock issued on February
13, 1999 that does not exceed the percentage of the total number of shares of
Series E Preferred Stock issued on February 13, 1999 that have been redeemed,
repurchased or retired by the Company, or used as consideration in connection
with the exercise of the Company's Series A Warrants or
7
<PAGE>
Series B Warrants by the holders. With respect to dividend rights, the Series D
Preferred Stock and Series E Preferred Stock rank on a parity with each other
and prior to the Company's common stock.
The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock. The exchange had no effect on the consolidated balance sheet as
the issuance of additional redeemable preferred stock effected the in-kind
payment of the accrued redeemable preferred stock dividend which had previously
been credited to redeemable preferred stock. In the Company's view, there was no
difference in the aggregate fair value between the redeemable preferred stock
issued in the exchange and the redeemable preferred stock canceled in the
exchange.
Pursuant to the provisions of the Series D Preferred Stock and Series E
Preferred Stock, on May 13, 1999, the Company issued (a) a dividend in the
amount of $13.29880250 per share of Series D Preferred Stock in the form of
shares of such Series D Preferred Stock to the holders of record as of April 28,
1999 and (b) a dividend in the amount of $36.4730350 per share of Series E
Preferred Stock in the form of shares of such Series E Preferred Stock to the
holders of record as of April 28, 1999.
(5) SUBSEQUENT EVENTS
In July 1999, the Company disposed of its investment in Ralin Medical,
Inc., a company that provides ambulatory outpatient cardiac monitoring and
disease management services, resulting in a third quarter 1999 pretax gain of
$2.5 million. In early August, the Company executed a definitive agreement to
sell the assets of its mail order pharmacy and upon closing will realize a
pretax gain of approximately $7 million. The closing is scheduled for the third
quarter of 1999 and is subject to the satisfaction of certain closing
conditions.
In addition, since the end of the second quarter the Company has taken and
intends to take additional steps to reduce its administrative expenses in light
of improvements in service performance and reductions in claims and
correspondence inventories. These reductions are intended to reduce the
Company's administrative loss ratio and enhance its competitive position over
the next 12 months, particularly in view of expected reductions in membership in
the Company's Medicare and certain other rationalized businesses. These steps
include reductions in workforce, and the Company's future results will reflect
charges for associated severance and other costs.
(6) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statement amounts to conform to the 1999 presentation. Certain nonrecurring
items that were previously classified as write-downs of strategic investments
charges (formerly "unusual charges") and restructuring charges in the second
quarter of 1998 have been reclassified to operating and income tax captions in
the 1998 statement of operations. The charges previously reported as unusual
charges are herein referred to as write-downs of strategic investments. A
reclassification of write-downs of strategic investments aggregating
approximately $73.5 million was made related to charges taken for strengthening
medical claim reserves, establishing reserves for losses on provider advances,
and certain other asset impairment losses. A reclassification of restructuring
charges aggregating $18.8 million was made related to the write-down of
government program accounts receivable and accruals of certain litigation
defense costs and other expenses. In addition, restructuring charges of $51.0
million relating to premium deficiency reserves for government contracts have
been reclassified to health care services expense. These reclassifications do
not affect the reported net loss for the second quarter of 1998 or for the first
six months of 1998, but do have the effect of increasing the second quarter
medical loss ratio and administrative loss ratio from the levels previously
reported, and the first six months ratios are also higher. In addition, a
reclassification of restructuring charges approximating $6.0 million was made
related to certain deferred tax assets, which charges are
8
<PAGE>
now included in the 1998 statement of operations as income tax expense. The
effects of these reclassifications are summarized as follows.
<TABLE>
<CAPTION>
Before After
Three months ended June 30, 1998 (dollars in thousands) Reclassification Reclassification
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $1,191,112 $1,191,112
Health care services expenses 1,188,265 1,307,214
Marketing, general and administrative expenses 203,659 227,968
Restructuring charges 174,266 98,500
Write-downs of strategic investments* 111,790 38,341
Income tax expense - 5,957
Medical loss ratio 102.8% 113.1%
Administrative loss ratio 17.6% 19.6%
Six months ended June 30, 1998 (dollars in thousands)
- ------------------------------------------------------------------------------------------------------
Total revenues $2,420,735 $2,420,735
Health care services expenses 2,254,705 2,373,651
Marketing, general and administrative expenses 404,692 429,001
Restructuring charges 199,266 123,500
Write-downs of strategic investments* 111,790 38,341
Income tax benefit 24,394 18,437
Medical loss ratio 95.2% 100.2%
Administrative loss ratio 17.0% 18.0%
<FN>
- ----------------------
* Previously shown under the caption "Unusual charges."
</FN>
</TABLE>
9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Oxford Health Plans, Inc.
We have reviewed the accompanying consolidated balance sheet of Oxford
Health Plans, Inc. and subsidiaries (the "Company") as of June 30, 1999 and the
related consolidated statements of operations for the three-month and six-month
periods ended June 30, 1999 and 1998, and the consolidated statement of cash
flows for the six-month periods ended June 30, 1999 and 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Stamford, Connecticut
August 6, 1999
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows membership by product:
<TABLE>
<CAPTION>
As of June 30 Increase (Decrease)
---------------------- ---------------------
1999 1998 Amount %
--------- --------- --------- -------
Membership:
<S> <C> <C> <C> <C>
Freedom and Liberty Plans 1,269,400 1,362,300 (92,900) (6.8%)
HMO 242,100 276,300 (34,200) (12.4%)
-----------------------------------------------------------------------------------------------
Total commercial 1,511,500 1,638,600 (127,100) (7.8%)
-----------------------------------------------------------------------------------------------
Medicare 103,800 159,500 (55,700) (34.9%)
Medicaid - 140,600 (140,600) (100.0%)
-----------------------------------------------------------------------------------------------
Total government programs 103,800 300,100 (196,300) (65.4%)
-----------------------------------------------------------------------------------------------
Total fully insured membership 1,615,300 1,938,700 (323,400) (16.7%)
Third-party administration 53,400 66,000 (12,600) (19.1%)
-------------------------------------------------------------------------------------------------------
Total 1,668,700 2,004,700 (336,000) (16.8%)
=======================================================================================================
</TABLE>
The following table provides certain statement of operations data expressed as a
percentage of total revenues for the three month and six month periods ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Six Month
Ended June 30 Ended June 30
----------------- -----------------
1999 1998 1999 1998
Revenues: ---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums earned 98.4% 97.0% 97.6% 97.9%
Third-party administration, net .4% .4% .4% .4%
Investment and other income, net 1.2% 2.6% 2.0% 1.7%
-----------------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
-----------------------------------------------------------------------------------------------------
Expenses:
Health care services 84.3% 109.8% 83.4% 98.2%
Marketing, general and administrative 14.8% 19.1% 14.4% 17.7%
Interest and other financing charges 1.2% 1.7% 1.2% 1.1%
Restructuring charges - 8.3% - 5.1%
Write-downs of strategic investments - 3.2% - 1.6%
-----------------------------------------------------------------------------------------------------
Total expenses 100.3% 142.1% 99.0% 123.7%
-----------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (.3%) (42.1%) 1.0% (23.7%)
Income tax expense (benefit) (.1%) .5% .4% (.8%)
------------------------------------------------------------------------------------------------------
Net earnings (loss) (.2%) (42.6%) .6% (22.9%)
Less preferred dividends and amortization (1.1%) (.5%) (1.1%) (.2%)
======================================================================================================
Net loss attributable to common shares (1.3%) (43.1%) (.5%) (23.1%)
======================================================================================================
Medical loss ratio 85.8% 113.1% 85.4% 100.2%
Administrative loss ratio 15.0% 19.6% 14.7% 18.0%
PMPM premium revenue $212.11 $197.00 $208.39 $198.44
PMPM medical expense $181.98 $222.78 $177.89 $198.83
Fully insured member month (000's) 4,873.2 5,867.7 9,886.5 11,938.3
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
Overview
The Company's revenues consist primarily of commercial premiums derived
from its Freedom Plan and Liberty Plan, health maintenance organization ("HMO"),
preferred provider organizations ("PPOs") and reimbursements under government
contracts relating to its Medicare+Choice ("Medicare") programs (and, prior to
1999, its Medicaid programs), third-party administration fee revenue for its
self-funded plan services (which is stated net of direct expenses such as
third-party reinsurance premiums) and investment income.
Health care services expense primarily comprises payments to physicians,
hospitals and other health care providers under fully insured health care
business and includes an estimated amount for incurred but not reported or paid
claims ("IBNR"). The Company estimates IBNR expense based on a number of
factors, including prior claims experience. The actual expense for claims
attributable to any period may be more or less than the amount of IBNR reported.
See "Liquidity and Capital Resources". The Company's results for the six months
ended June 30, 1998 and the year ended December 31, 1998 were also adversely
affected by significant restructuring charges and write-downs of strategic
investments.
Since it began operations in 1986 and through 1997, the Company experienced
substantial growth in membership and revenues. The membership and revenue growth
has been accompanied by increases in the cost of providing health care in the
Company's service areas. The Company experienced declines in membership and
revenue during 1998 and such declines are expected to continue through 1999 and
beyond. The Company does not intend to promote significant membership or revenue
growth in 1999 because the Company through strategic initiatives has redirected
its efforts to establish profitability. Since the Company provides services on a
prepaid basis, with premium levels fixed for one-year periods, unexpected cost
increases during the annual contract period cannot be passed on to employer
groups or members.
Software and hardware problems experienced in the conversion of a portion
of the Company's computer system in September 1996 resulted in significant
delays in the Company's billing of group and individual customers. The Company's
revenues were adversely affected by adjustments of approximately $218.2 million
in 1998 and $173.5 million in 1997 related to estimates for terminations of
group and individual members and for nonpaying group and individual members. In
1998, approximately $135.6 million of these adjustments related to termination
of members, approximately $65.2 million of these adjustments related to
nonpaying members, and approximately $17.4 million of these adjustments related
to other manual billing adjustments posted during the year. A similar breakout
for 1997 is not available since, prior to January 1, 1998, source documents for
the adjustments did not specify whether the adjustment related to group and
member terminations, nonpaying members or other manual billing adjustments.
Retroactive terminations occur when a group notifies Oxford that an employee is
no longer eligible for coverage and there is a lag between the effective date of
the termination and the receipt or posting of the notice of termination by
Oxford. Reserves for retroactivity in 1998 and 1997 are estimated based on
historical experience and are affected by the time it takes to process
enrollment and termination forms. Retroactivity can also arise when employer
groups terminate coverage without providing notice to Oxford. The Company has
taken steps to attempt to improve billing timeliness, reduce billing errors,
reduce lags in recording enrollment and disenrollment notifications, and improve
the Company's collection processes and is attempting to make requisite
improvements in management information systems concerning the value and aging of
outstanding accounts receivable. The Company continues to experience significant
levels of retroactive member and group terminations impacting revenue. In
addition, the Company continues to show significant aged receivable balances
from certain large group customers which remain uncollected. The Company
believes it has made adequate provision in its estimates for group and
individual member terminations and for nonpaying groups and individual members
as of June 30, 1999. Adjustments to the estimates may be necessary, however, and
any such adjustments would be included in the results of operations for the
period in which such adjustments were made. The Company's results of operations
could also be adversely affected if efforts to collect overdue balances result
in terminations of such groups.
12
<PAGE>
RESTRUCTURING CHARGES
During the first half of 1998, the Company recorded restructuring charges
and write-downs of strategic investments primarily associated with
implementation of the Company's plan ("Turnaround Plan") to restore the
Company's profitability. The Turnaround Plan has included: focusing on the
Company's core commercial and selected Medicare markets in the New York
tri-state area; disposing or restructuring of noncore businesses; reducing
administrative costs; reducing payments to physicians and other providers;
completing and operationalizing risk transfer agreements and other alternative
provider arrangements; reducing unnecessary utilization of hospital and other
services; strengthening commercial underwriting; increasing commercial group
premiums; and improving service levels and strengthening operations.
The table below presents the activity in the first six months of 1999
related to the restructuring charge reserves established in the first and second
quarters of 1998 as part of the Turnaround Plan. As of June 30, 1999, the
Turnaround Plan is proceeding in all material respects as expected and the
activity during the first six months of 1999 is consistent with the Company's
estimates prepared at December 31, 1998. The Company believes that the reserves
as of June 30, 1999 are adequate and that no revisions of estimates are
necessary at this time.
<TABLE>
<CAPTION>
Beginning Ending
Restructuring Cash Noncash Restructuring
(In thousands) Reserves Activity Activity Reserves
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provisions for loss on noncore businesses $13,805 $(3,217) $4,874 $ 5,714
Severance and related costs 9,354 (1,764) - 7,590
Costs of consolidating operations 17,685 (11,924) - 5,761
===========================================================
$40,844 $(16,905) $4,874 $19,065
===========================================================
</TABLE>
Cash expenses charged against the reserve for loss on noncore businesses
amounted to $3.2 million during the first six months of 1999. These charges
include payments of $3.0 million related to premium deficiencies and $.2 million
related to professional fees and other incremental exit costs. Noncash charges
against the reserve of $4.9 million relate to the specific write-off of assets
of the HMO and insurance businesses in the noncore markets, net of proceeds
received.
The reduction in the reserve for severance and related costs reflects
contractual payments of approximately $1.8 million to former executives of the
Company.
The reduction in the reserve for costs of consolidating operations reflects
lease payments and occupancy costs of approximately $11.9 million, net of
sublease income, related to vacated office space.
Three months ended June 30, 1999 compared with three months ended June 30,
1998
Total revenues for the quarter ended June 30, 1999 were $1.05 billion, down
12% from $1.19 billion during the same period in the prior year. The net loss
attributable to common stock for the second quarter of 1999 totaled $13.4
million, or 16 cents per share, compared with a net loss of $513.3 million, or
$6.41 per share, for the second quarter of 1998. Results of operations for the
second quarter of 1998 were adversely affected by (i) significantly higher
medical costs, (ii) premium deficiency reserves aggregating $51.0 million
relating to government contracts and reserves of $48 million and $20 million,
respectively, established for medical claims and losses on provider advances,
(iii) approximately $98.5 million of charges for severance and other costs
expected to be incurred in connection with the restructuring of certain
administrative and management functions, (iv) write-downs of strategic
investments and other asset impairments and (v) accruals of certain litigation
defense and other costs.
Membership in the Company's fully insured health care programs as of June
30, 1999 decreased by approximately 323,000 members (17%) from the level of such
membership as of June 30, 1998 and by 210,000 members (11%) since year-end 1998.
Membership in government programs decreased by
13
<PAGE>
approximately 196,000 members (65%) compared with June 30, 1998, reflecting the
exit of the Company from the Medicaid market in total and from the withdrawal or
restructuring of the Medicare business in several markets. The balance of the
decline from June 30, 1998, is due to reductions in members in noncore states
and in the Company's core commercial markets. The decline since year-end 1998 is
primarily due to reductions in noncore and core commercial members. The Company
recently announced its withdrawal from the Medicare market in Suffolk County,
New York and intends to reduce the benefits offered in New Jersey and certain
other counties. These steps are expected to result in a significant decrease in
Medicare membership and revenue by January 1, 2000. The Company also has ceased
offering certain benefit designs in its commercial small group business and has
reduced available rate options in an effort to ensure that new and renewing
small groups are charged appropriate rates. While the Company expects that these
steps will improve the underwriting results for the groups affected, it expects
that certain small group membership and revenue will be reduced over the next 12
months as a result of price increases received by new and renewing groups. The
extent of the reduction in membership cannot be predicted at this time.
Total commercial premiums earned for the three months ended June 30, 1999
increased 1.6% to $843.2 million compared with $830.3 million in the same period
in the prior year. The prior year quarter was adversely affected by a $52.9
million adjustment related to estimates for termination of group and individual
members and for nonpaying groups and individual members. Absent this adjustment,
commercial premiums earned decreased by 4.5%. Premiums earned in the second
quarter of 1999 benefited from reduced levels of retroactivity approximating $15
million compared with prior periods as a result of improvements in billing and
collection operations. The year to year decrease in premiums earned is
attributable to a 7.9% decrease in member months in the Company's commercial
health care programs, partially offset by a 3.6% increase in average premium
yield. Average premium rates for the full year 1999 are expected to be
approximately 9% higher in the Company's core commercial business than in the
full year 1998, but the increase in premium yields is expected to be lower due
to changing business mix and benefit designs and other factors.
Premiums earned from Medicare programs decreased 28% to $188.7 million in
the second quarter of 1999 from $260.6 million in the second quarter of 1998.
The revenue decline was caused by membership declines as member months of
Medicare programs decreased 35% when compared with the prior year second
quarter, partially offset by increases in average premium yields of Medicare
programs of 12% over the level of the prior year second quarter. This yield
increase exceeded the average rate increase granted by the Health Care Financing
Administration ("HCFA") as membership losses occurred primarily in lower
reimbursement counties. Premiums earned from Medicaid programs were nominal in
the second quarter of 1999 compared with $65.1 million in the second quarter of
1998, reflecting the Company's total withdrawal from the Medicaid market during
1998 and 1999.
Investment and other income, net for the three months ended June 30, 1999,
decreased 58% to $13.0 million from $30.8 million for the same period last year.
The 1999 second quarter included realized capital losses of $2.9 million while
the 1998 second quarter included realized capital gains of $9.0 million and a
$4.5 million gain on the sale of the Company's New Jersey Medicaid business. In
July 1999, the Company disposed of its investment in Ralin Medical, Inc., a
company that provides ambulatory outpatient cardiac monitoring and disease
management services, resulting in a third quarter 1999 pretax gain of $2.5
million. In early August, the Company executed a definitive agreement to sell
the assets of its mail order pharmacy and upon closing will realize a pretax
gain of approximately $7 million. The closing is scheduled for the third quarter
of 1999 and is subject to the satisfaction of certain closing conditions.
The medical loss ratio (health care services expense stated as a percentage
of premium revenues) was 85.8% for the second quarter of 1999 compared with
113.1% for the second quarter of 1998. The improvement in the second quarter of
1999 over the second quarter of 1998 reflects a 7.7% increase in average overall
premium yield and an 18% decrease in per member per month medical costs when
compared to the prior year second quarter. The reduction in medical costs is
primarily the result of a significant change in the Company's membership
composition (for example, a reduction in the number of members in government
programs), significant nonrecurring charges incurred in the second quarter of
14
<PAGE>
1998 as described above and initiatives to improve health care utilization and
costs. Health care services expense was adversely affected in the second quarter
of 1999 by a provision for loss on claims advances totaling $13.8 million and
$8.0 million for additional reserves related to the unwinding of a Medicare risk
transfer agreement in New Jersey. The unwinding of the agreement is expected to
increase the Company's medical and administrative costs for this business by
approximately $2 million per quarter for the remainder of 1999. See "Liquidity
and Capital Resources." The Company believes it has made adequate provision for
medical costs as of June 30, 1999. There can be no assurance, however, that
additional reserve additions will not be necessary as the Company continues to
review and reconcile delayed claims and claims paid or denied in error.
Additions to reserves could also result as a consequence of regulatory
examinations, and such additions would also be included in the results of
operations for the period in which such adjustments are made.
Marketing, general and administrative expenses totaled $155.2 million in
the second quarter of 1999 compared with $228.0 million in the second quarter of
1998. The decrease when compared with the second quarter of 1998 is primarily
attributable to a $12.8 million decrease in payroll and benefits due to reduced
staffing and a $19.2 million decrease in consulting fees as the prior year
quarter reflects significant expenses related to enhancements to management
information systems. In addition, depreciation, occupancy and telephone expenses
and equipment rental and maintenance were $18.3 million lower in the aggregate
in the second quarter of 1999 due to the implementation of the Company's
Turnaround Plan. Administrative expenses in the second quarter 1998 included
approximately $24 million related to the write-down of government program
accounts receivable and accruals of litigation defense costs and other expenses
associated with the Company's Turnaround Plan. Administrative expenses as a
percent of operating revenue were 15.0% during the second quarter of 1999
compared with 19.6% during the second quarter of 1998 and 16.7% for the full
year 1998. Since the end of the second quarter, the Company has taken and
intends to take additional steps to reduce its administrative expenses in light
of improvements in service performance and reductions in claims and
correspondence inventories. These reductions are intended to reduce the
Company's administrative loss ratio and enhance its competitive position over
the next 12 months, particularly in view of expected reductions in membership in
the Company's Medicare and certain other rationalized businesses. These steps
include reductions in workforce, and the Company's future results will reflect
charges for associated severance and other costs, but such costs currently are
not expected to prevent the Company from achieving its financial objectives.
Administrative costs in future periods may also be adversely affected by costs
associated with responding to regulatory inquiries and investigations and
defending pending litigation.
The Company incurred interest and other financing charges of $10.1 million
in the second quarter of 1999 related to its outstanding debt and capital lease
obligations, compared with $19.0 million in the second quarter of 1998. The
second quarter of 1998 included $7.7 million in charges related to the issuance
in February and March of 1998 and subsequent repayment in May of 1998 of certain
bridge financing notes. Interest expense on delayed claims totaled $2.1 million
in the second quarter of 1999 compared with $1.8 million in the second quarter
of 1998 and $3.9 million in the first quarter of 1999. Interest payments have
been made in accordance with the Company's interest payment policy and
applicable law. The Company's future results will continue to reflect interest
payments by the Company on delayed claims as well as interest expense on
outstanding indebtedness and capital lease obligations.
The Company had an income tax benefit of $1.4 million for the second
quarter of 1999 reflecting an effective tax rate of 42%. The Company performed
detailed analyses to assess the realizability of the Company's deferred tax
assets. These analyses included an evaluation of the results of operations for
1998 and prior periods, the progress to date in its Turnaround Plan and
projections of future results of operations, including the estimated impact of
the Turnaround Plan. Based on these analyses, the Company does not currently
believe it is more likely than not that all of its deferred tax assets will be
fully realizable, and the Company continues to carry a valuation allowance of
$282.6 million in order to reflect deferred tax assets related to net operating
loss carryforwards and other net tax deductible temporary differences at their
currently estimated realizable value. The Company will continue to evaluate the
realizablity of its net deferred tax assets in future periods and will make
adjustments to the valuation allowances when facts and circumstances indicate
that a change is necessary. The amounts of future
15
<PAGE>
taxable income necessary during the carryforward period to utilize the
unreserved net deferred tax assets is approximately $300 million.
Six months ended June 30, 1999 compared with six months ended June 30, 1998
Total revenues for the six months ended June 30, 1999 were $2.11 billion,
down 13% from $2.42 billion during the same period in the prior year. The net
loss attributable to common stock for the first six months of 1999 totaled $10.2
million, or 13 cents per share, compared with $558.6 million, or $7.00 per
share, for the first six months of 1998. Results of operations for the first six
months of 1998 were adversely affected by (i) significantly higher medical
costs, (ii) premium deficiency reserves aggregating $51.0 million relating to
government contracts and reserves of $48 million and $20 million, respectively,
established for medical claims and losses on provider advances, (iii)
approximately $123.5 million of charges for severance and other costs expected
to be incurred in connection with the restructuring of certain administrative
and management functions, (iv) write-downs of strategic investments and other
asset impairments and (v) accruals of certain litigation defense and other
costs.
Total commercial premiums earned for the six months ended June 30, 1999
decreased 1.8% to $1.67 billion compared with $1.70 billion in the same period
in the prior year. The prior year period was adversely affected by a $52.9
million adjustment related to estimates for termination of group and individual
members and for nonpaying groups and individual members. Absent this adjustment,
commercial premiums earned decreased by 4.7%. Premiums earned in the first six
months of 1999 benefited from reduced levels of retroactivity approximating $15
million compared with prior periods as a result of improvements in billing and
collection operations. The year to year decrease in premiums earned is
attributable to a 7.1% decrease in member months in the Company's commercial
health care programs, partially offset by a 3.4% increase in average premium
yield. Average premium rates for the full year 1999 are expected to be
approximately 9% higher in the Company's core commercial business than in the
full year 1998, but the increase in premium yields is expected to be lower due
to changing business mix and benefit designs and other factors.
Premiums earned from Medicare programs decreased 28% to $375.6 million in
the first six months of 1999 from $521.5 million in the first six months of
1998. The revenue decline was caused by membership declines as member months of
Medicare programs decreased 34% when compared with the prior year period,
partially offset by increases in average premium yields of Medicare programs of
9.4% over the level of the prior year period. This yield increase exceeded the
average rate increase granted by HCFA as membership losses occurred primarily in
lower reimbursement counties. Premiums earned from Medicaid programs decreased
92% to $11.9 million in the first six months of 1999 compared with $144.7
million in the first six months of 1998. The decline reflects the Company's
total withdrawal from the Medicaid market during 1998 and 1999.
Investment and other income, net for the first six months of 1999, included
a $13.5 million gain from the sale of the Company's New York Medicaid business,
while the first six months of 1998 included a gain of $4.5 million from the sale
of the Company's New Jersey Medicaid business. In addition, net investment
income for the six months ended June 30, 1999 decreased 17% to $29.2 million
from $35.2 million for the same period last year. The decline is primarily due
to a $13.8 million decrease in capital gains realized in the first six months of
1999 compared with the prior year period, partially offset by an increase in
average invested balances in the first half of 1999 compared with the first half
of 1998. The higher invested balances are primarily attributable to the funds
received in the Company's May 1998 financing transaction.
The medical loss ratio (health care services expense stated as a percentage
of premium revenues) was 85.4% for the first six months of 1999 compared with
100.2% for the first six months of 1998. The improvement in the first six months
of 1999 over the first six months of 1998 reflects a 5.0% increase in average
overall premium yield and a 11% decrease in per member per month medical costs
when compared to the prior year period. The reduction in medical costs is
primarily the result of a significant change in the Company's membership
composition (for example, a reduction in the number of members in government
programs), significant nonrecurring charges incurred in the second quarter of
1998 as
16
<PAGE>
described above and initiatives to improve health care utilization and costs.
Health care services expense was adversely affected in the first six months of
1999 by a provision for loss on claims advances totaling $13.8 million and $8.0
million for additional reserves related to the unwinding of a Medicare risk
transfer agreement in New Jersey. The unwinding of the agreement is expected to
increase the Company's medical and administrative costs for this business by
approximately $2 million per quarter for the remainder of 1999. See "Liquidity
and Capital Resources." The Company believes it has made adequate provision for
medical costs as of June 30, 1999. There can be no assurance, however, that
additional reserve additions will not be necessary as the Company continues to
review and reconcile delayed claims and claims paid or denied in error.
Additions to reserves could also result as a consequence of regulatory
examinations, and such additions would also be included in the results of
operations for the period in which such adjustments are made.
Marketing, general and administrative expenses totaled $304.9 million in
the first six months of 1999 compared with $429.0 million in the first six
months of 1998. The decrease when compared to the prior year period is primarily
attributable to a $33.7 million decrease in payroll and benefits due to reduced
staffing and a $33.3 million decrease in consulting fees as the prior year
period reflects significant expenses related to enhancements to management
information systems. In addition, depreciation, occupancy and telephone expenses
and equipment rental and maintenance were $23.6 million lower in the aggregate
due to the implementation of the Company's Turnaround Plan. Administrative
expenses in the first six months of 1998 included approximately $24 million
related to the write-down of government program accounts receivable and accruals
of litigation defense costs and other expenses associated with the Company's
Turnaround Plan. Administrative expenses as a percent of operating revenue were
14.7% during the first six months of 1999 compared with 18.0% during the first
six months of 1998 and 16.7% for the full year 1998. Since the end of the second
quarter, the Company has taken and intends to take additional steps to reduce
its administrative expenses in light of improvements in service performance and
reductions in claims and correspondence inventories. These reductions are
intended to reduce the Company's administrative loss ratio and enhance its
competitive position over the next 12 months, particularly in view of expected
reductions in membership in the Company's Medicare and certain other
rationalized businesses. These steps include reductions in workforce, and the
Company's future results will reflect charges for associated severance and other
costs, but such costs currently are not expected to prevent the Company from
achieving its financial objectives. Administrative costs in future periods also
may be adversely affected by costs associated with responding to regulatory
inquiries and investigations and defending pending litigation.
The Company incurred interest and other financing charges of $20.2 million
in the first six months of 1999 related to its outstanding debt and capital
lease obligations, compared with $22.7 million in the first six months of 1998.
The first six months of 1998 included $7.7 million in charges related to the
issuance in February and March of 1998 and subsequent repayment in May of 1998
of the bridge financing notes. Absent the charge-off of the issuance expenses,
interest expense on indebtedness for the first six months of 1999 was $5.2
million higher than in the first six months of 1998, primarily attributable to
the issuance of $350 million of long-term debt in May 1998 at which time the
bridge financing notes of $200 million were repaid. Interest expense on delayed
claims totaled $6.0 million in the first six months of 1999, compared with $4.9
million in the first six months of 1998. The Company's future results will
continue to reflect interest payments by the Company on delayed claims as well
as interest expense on outstanding indebtedness and capital lease obligations.
The Company had income tax expense of $8.9 million for the first six months
of 1999 reflecting an effective tax rate of 42%.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during the first six months of 1999 aggregated
$154.4 million, compared with $85.1 million for the first six months of 1998.
The $69.3 million decline in cash flow occurred despite a $565.2 million
improvement in net earnings as the prior year period included noncash
restructuring charges of $107.2 million and noncash additions to reserves of
$66.1 million and was favorably affected by tax
17
<PAGE>
refunds of approximately $117.3 million. In addition, cash flow for the first
six months of 1999 was negatively affected by the runoff of claims reserves
relating to discontinued or restructured businesses of approximately $80 million
and reductions of claim inventories. The Company expects cash flow from
operations will continue to be adversely affected by runoff of reserves for
restructured or discontinued business and efforts to reduce claims backlogs.
Cash flows from operations for the first six months of 1999 and 1998 included
only five months of Medicare premiums because the January 1999 and January 1998
premiums of $68.4 million and $85.9 million, respectively, were each received in
the preceding December.
The Company's capital expenditures for the first six months of 1999 totaled
$4.1 million. Except for anticipated capital expenditures and requirements to
provide the required levels of capital to its operating subsidiaries, including
any requirement arising from nonadmissibility of provider advances (as discussed
below) or other assets or from operating losses, the Company currently has no
definitive commitments for use of material cash.
As of June 30, 1999, cash and investments aggregating $71.8 million have
been segregated in the accompanying balance sheet as restricted investments to
comply with federal and state regulatory requirements. In May 1999, the Company
set aside $15 million as collateral for certain advances made by the Company's
New Jersey subsidiary (see below). The Company's subsidiaries are also subject
to certain restrictions on their abilities to make dividend payments, loans or
other transfers of cash to the parent company, which limit the ability of the
Company to use cash generated by subsidiary operations to pay the obligations of
the parent, including debt service and other financing costs.
In September 1998, the National Association of Insurance Commissioners
("NAIC") adopted new minimum capitalization requirements, known as risk-based
capital ("RBC") rules, for health care coverage provided by HMOs and other
risk-bearing health care entities. Depending on the nature and extent of the new
minimum capitalization requirements ultimately adopted by each state, there
could be an increase in the capital required for certain of the Company's
regulated subsidiaries. Connecticut has enacted legislation allowing the
Connecticut Department of Insurance ("CTDOI") to promulgate regulations based on
the NAIC model. The New York State Insurance Department ("NYSID") has proposed
legislation similar to the NAIC model rules. The New Jersey Department of
Banking and Insurance ("NJDBI") has not proposed similar legislation. However,
NJDBI has published solvency regulations that it estimates will result in
additional capital requirements for many New Jersey health care plans. The
Governor of New York has proposed legislation to strengthen current solvency
regulations to allow the NYSID to take over failing health plans without a court
order. Furthermore, legislation has been proposed in both New York and New
Jersey to establish an HMO guaranty fund association which, in the event a plan
becomes insolvent, would have the power of assessing plans a premium tax to
cover the insolvent plan's medical losses. The Company intends to fund any
required increase in statutory capital in regulated subsidiaries from available
parent company cash reserves; however, there can be no assurance that such cash
reserves will be sufficient to fund these minimum capitalization requirements.
As a result of delays in claims payments during the fourth quarter of 1996
and the first quarter of 1997, the Company experienced a significant increase in
medical claims payable, but such increase was mitigated, in part, by progress in
paying backlogged claims and making advance payments to providers during the
first quarter of 1997 and thereafter. Outstanding advances aggregated
approximately $106.0 million at June 30, 1999, net of a valuation reserve of
$48.8 million, and have been netted against medical costs payable in the
Company's consolidated balance sheet. The Company believes that it will be able
to recover net outstanding advance payments, either through repayment by the
provider or application against future claims, but any failure to recover funds
advanced in excess of the reserve would adversely affect the Company's results
of operations. There can be no assurance that insurance regulators will continue
to recognize such advances as admissible assets and the New Jersey Department of
Banking and Insurance has required the Company to provide collateral for
repayment of the advances by setting aside $15 million in trust at the parent
company. If all or a portion of the advances were deemed nonadmitted, the
capital of the Company's operating subsidiaries would be impaired and additional
capital contributions would be required for the subsidiaries to meet statutory
requirements.
18
<PAGE>
The Company's medical costs payable was $847.4 million as of June 30, 1999
(including $728.7 million for IBNR and before netting advance claim payments of
$106.0 million) compared with $989.7 million as of December 31, 1998 (including
$864.5 million for IBNR and before netting advance claim payments of $139.5
million). The decrease reflects runoff of claims reserves for discontinued or
restructured business and progress in paying backlogged claims. The Company
estimates the amount of its reserves primarily using standard actuarial
methodologies based upon historical data, including the average interval between
the date services are rendered and the date claims are paid and between the date
services are rendered and the date claims are received by the Company, expected
medical cost inflation, seasonality patterns and changes in membership.
The liability for medical costs payable is also affected by shared risk
arrangements, including arrangements related to the Company's Medicare business
in certain counties and Private Practice Partnerships ("Partnerships"). In
determining the liability for medical costs payable, the Company accounts for
the financial impact of the transfer of risk for certain Medicare members and
experience of risk-sharing Partnership providers (who may be entitled to credits
from Oxford for favorable experience or subject to deductions for accrued
deficits).
In September 1998, the Company's New Jersey HMO subsidiary, Oxford Health
Plans (NJ), Inc., entered into an agreement with Heritage New Jersey Medical
Group, P.C. ("Heritage") to provide network management services for individual
Oxford Medicare Advantage members who reside in New Jersey. In view of
uncertainties in the regulatory environment and other considerations, in July
1999, the Company decided to wind down the network management agreement with
Heritage. The wind-down of the Heritage agreement resulted in an increase in the
Company's health care costs for this business for the second quarter of 1999
resulting from the establishment of a reserve of $8 million applicable to the
second quarter of 1999 and prior quarters and is expected to result in
additional health care services and administrative costs for this business of
approximately $2 million per quarter for the remainder of the year. The Company
also expects that there will be a significant decrease in New Jersey Medicare
membership going into next year.
In the case of Partnership providers subject to deficits, the Company has
established reserves to account for delays or other impediments to recovery of
those deficits. The Company has reviewed its partnership program and has
terminated most of its partnership arrangements as a result of difficulties and
expense associated with administering the program as well as other
considerations. The Company recognized estimated costs in taking these actions
in the second quarter of 1998. The Company believes that its reserves for IBNR
are adequate to satisfy its ultimate claim liabilities. However, the Company's
prior rapid growth, delays in paying claims, paying or denying claims in error
and changing speed of payment may affect the Company's ability to rely on
historical information in making IBNR reserve estimates.
During the first six months of 1999, the Company made cash contributions to
the capital of two of its HMO subsidiaries aggregating $4,455,000. The capital
contributions were made to ensure that each subsidiary had sufficient surplus
under applicable regulations after giving effect to operating losses and
reductions to surplus resulting from the nonadmissibility of certain assets. The
Company does not expect that any significant additional capital contributions to
the subsidiaries will be required during the remainder of 1999.
On February 13, 1999, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with Texas Pacific Group, its affiliates and others
to make an adjustment of the dividends payable on the shares of Series A
Cumulative Preferred Stock (the "Series A Preferred Stock") and Series B
Cumulative Preferred Stock (the "Series B Preferred Stock") in connection with
the possible sale of shares of Preferred Stock by the holders thereof to
institutional holders. Pursuant to the Exchange Agreement, the 245,000 shares of
Series A Preferred Stock were exchanged for 260,146.909 shares of a new Series D
Cumulative Preferred Stock (the "Series D Preferred Stock"), and the 105,000
shares of Series B Preferred Stock were exchanged for 111,820.831 shares of a
new Series E Cumulative Preferred Stock (the "Series E Preferred Stock"). In the
exchange, (1) a holder received in exchange for each share
19
<PAGE>
of Series A Preferred Stock, one share of Series D Preferred Stock, plus
0.061824118367 share of Series D Preferred Stock representing dividends on the
Series A Preferred Stock accrued and unpaid through February 13, 1999, and (2) a
holder received in exchange for each share of Series B Preferred Stock, one
share of Series E Preferred Stock, plus 0.064960295238 share of Series E
Preferred Stock representing dividends on the Series B Preferred Stock accrued
and unpaid through February 13, 1999. As a result of the exchange, the holders
hold only Series D Preferred Stock and Series E Preferred Stock. On March 9,
1999, the Company filed Certificates of Elimination for the Series A Preferred
Stock and the Series B Preferred Stock that have the effect of eliminating from
the Certificate of Incorporation all matters set forth in the Certificates of
Designations with respect to the Series A Preferred Stock and the Series B
Preferred Stock. The terms of the shares of the Series D Preferred Stock are
identical to the terms of the Series A Preferred Stock, except that the Series D
Preferred Stock accumulates cash dividends at the rate of 5.12981% per annum,
payable quarterly, provided that prior to May 13, 2000, the Series D Preferred
Stock accumulates dividends at a rate of 5.319521% per annum, payable annually
in cash or additional shares of Series D Preferred Stock, at the option of the
Company. The terms of the shares of the Series E Preferred Stock are identical
to the terms of the shares of the Series B Preferred Stock, except that the
Series E Preferred Stock accumulates cash dividends at a rate of 14% per annum,
payable quarterly, provided that prior to May 13, 2000, the Series E Preferred
Stock accumulates dividends at a rate of 14.589214% per annum, payable annually
in cash or additional shares of Series E Preferred Stock, at the option of the
Company. In addition, prior to May 13, 2001, the holders of the Series D
Preferred Stock may not use the Series D Preferred Stock in connection with the
exercise of the Company's Series A Warrants or Series B Warrants unless they use
a percentage of the total amount of Series D Preferred Stock issued on February
13, 1999 that does not exceed the percentage of the total number of shares of
Series E Preferred Stock issued on February 13, 1999 that have been redeemed,
repurchased or retired by the Company, or used as consideration in connection
with the exercise of the Company's Series A Warrants or Series B Warrants by the
holders. With respect to dividend rights, the Series D Preferred Stock and
Series E Preferred Stock rank on a parity with each other and prior to the
Company's common stock.
The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock. The exchange had no effect on the consolidated balance sheet as
the issuance of additional redeemable preferred stock effected the in-kind
payment of the accrued redeemable preferred stock dividend which had previously
been credited to redeemable preferred stock. In the Company's view, there was no
difference in the aggregate fair value between the redeemable preferred stock
issued in the exchange and the redeemable preferred stock canceled in the
exchange.
Pursuant to the provisions of the Series D Preferred Stock and Series E
Preferred Stock, on May 13, 1999, the Company issued (a) a dividend in the
amount of $13.29880250 per share of Series D Preferred Stock in the form of
shares of such Series D Preferred Stock to the holders of record as of April 28,
1999 and (b) a dividend in the amount of $36.4730350 per share of Series E
Preferred Stock in the form of shares of such Series E Preferred Stock to the
holders of record as of April 28, 1999.
MARKET RISK DISCLOSURES
The Company's consolidated balance sheet as of June 30, 1999 includes a
significant amount of assets whose fair value is subject to market risk. Since
the substantial portion of the Company's investments are in fixed income
securities, interest rate fluctuations represent the largest market risk factor
affecting the Company's consolidated financial position. Interest rates are
managed within a tight duration band, 2.25 to 2.5 years, and credit risk is
managed by investing in U.S. government obligations and in corporate debt
securities with high average quality ratings and maintaining a diversified
sector exposure within the debt securities portfolio. The Company's investment
in equity securities as of June 30, 1999 was not significant.
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In order to determine the sensitivity of the Company's investment portfolio
to changes in market risk, valuation estimates were made on each security in the
portfolio using a duration model. Duration models measure the expected change in
security market prices arising from hypothetical movements in market interest
rates. Convexity further adjusts the estimated price change by mathematically
"correcting" the changes in duration as market interest rates shift. The model
used industry standard calculations of security duration and convexity as
provided by third party vendors such as Bloomberg and Yield Book. For certain
structured notes, callable corporate notes, and callable agency bonds, the
duration calculation utilized an option-adjusted approach, which helps to ensure
that hypothetical interest rate movements are applied in a consistent way to
securities that have embedded call and put features. The model assumed that
changes in interest rates were the result of parallel shifts in the yield curve.
Therefore, the same basis point change was applied to all maturities in the
portfolio. The change in valuation was tested using positive and negative
adjustments in yield of 100 and 200 basis points. A hypothetical immediate
increase of 100 basis points in market interest rates would decrease the fair
value of the Company's investments in debt securities as of June 30, 1999 by
approximately $20.2 million, while a 200 basis point increase in rates would
decrease the value of such investments by approximately $39.8 million. A
hypothetical immediate decrease of 100 basis points in market interest rates
would increase the fair value of the Company's investments in debt securities as
of June 30, 1999 by approximately $20.5 million, while a 200 basis point
decrease in rates would increase the value of such investments by approximately
$41.0 million. Because duration and convexity are estimated rather than known
quantities for certain securities, there can be no assurance that the Company's
portfolio would perform in line with the estimated values.
YEAR 2000 READINESS
The Company has completed its assessment, planning, remediation and testing
of its computer codes associated with its mission critical systems that could be
affected by the "Year 2000" date issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize the date "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations. The Company completed
certification testing of its mission critical systems during the second quarter
of 1999. The Company's Year 2000 compliance program requires remediation of
certain programs within particular time frames in order to avoid disruption of
the Company's operations. These time frames include certain dates throughout
1999. Although the Company believes it has completed the remediation of these
programs within the applicable time frames, there can be no assurance that the
Company's operations will not be disrupted to some degree.
The Company is communicating with certain material vendors to determine the
extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting project plans, status reports and Year 2000
compliance certifications or written assurances from its material vendors,
including certain software vendors, business partners, landlords and suppliers.
The effect of such vendors' noncompliance, if any, is not reasonably estimable
at this time. The inability of other companies with which the Company does
business to complete their Year 2000 modifications on a timely basis could
adversely affect the Company's operations.
The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities that regulate its business.
The Company is in compliance with such Year 2000 reporting requirements. Such
regulatory authorities have also asked the Company to submit to certain reviews
regarding its Year 2000 compliance.
The Company has incurred associated expenses of approximately $4 million in
1999 and expects that the remaining costs for 1999 related to the project will
not be material. Through June 30, 1999, the Company had cumulatively incurred
approximately $14 million of expenses in connection with its Year 2000
compliance efforts. The costs of the project are based on management's best
estimate, which
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include assumptions of future events. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
estimated results.
The Company has completed detailed plans to support its Year 2000
contingency strategy. The plans will be reviewed and updated throughout the
remainder of 1999. There can be no assurance that these plans will protect the
Company from experiencing a material adverse effect on its financial condition
or results of operations.
Potential consequences of the Company's failure to timely resolve its Year
2000 issues could include, among others: (i) the inability to accurately and
timely process claims, enroll and bill groups and members, pay providers, record
and disclose accurate data and perform other core functions; (ii) increased
scrutiny by regulators and breach of contractual obligations; and (iii)
litigation in connection therewith.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations", including statements
concerning future results of operations or financial position, future liquidity,
future health care and administrative costs, future premium rates and yields for
commercial and Medicare business, the employer renewal process, future growth or
reductions in membership and membership composition, future health care
benefits, future provider network, future provider utilization rates, future
medical loss ratio levels, future claims payment, service performance and other
operations matters, future administrative loss ratio levels, the Company's
information systems and readiness for Year 2000, proposed efforts to control
health care and administrative costs, future dispositions of certain businesses
and assets, future provider payment and risk-sharing agreements with health care
providers, the Turnaround Plan, future enrollment levels, future government
regulation and relations and the impact of new laws and regulations, the future
of the health care industry, and the impact on the Company of recent events,
legal proceedings and regulatory investigations and examinations, and other
statements contained herein regarding matters that are not historical facts, are
forward-looking statements (as such term is defined in the Securities Exchange
Act of 1934, as amended). Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
below.
Net losses; restructuring charges and write-downs of strategic investments
The Company incurred net losses attributable to common stock of $624
million in 1998 and $291 million in 1997. As a result of losses at certain of
its HMO and insurance subsidiaries in 1998 and 1997, the Company has had to make
capital contributions to these subsidiaries and expects that additional capital
contributions may be required to be made by the Company in 1999. The Company has
also made significant additions to its reserves for medical claims, and has
experienced significant levels of retroactive member and group terminations as
well as difficulties with collection of premium receivables.
A significant portion of the loss incurred by the Company in 1998 was
associated with restructuring charges and write-downs of strategic investments
(previously reported as unusual charges) relating to the Company's Turnaround
Plan. These restructuring charges and write-downs of strategic investments are
based on estimates of the anticipated costs to the Company of taking the actions
contemplated by the Turnaround Plan, including disposition of certain businesses
and assets. There can be no assurance that these estimates correctly reflect the
ultimate costs that the Company will incur in implementing the Turnaround Plan.
The Company's ability to control net losses depends, to a large extent, on
the success of its Turnaround Plan. There can be no assurance that the
Turnaround Plan will be implemented in the manner described herein, or that it
will be successful or that other efforts by the Company to control net losses
will be successful. Furthermore, despite the Company's efforts to the contrary,
implementation of the Turnaround
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Plan could adversely affect members and employer groups, or physicians,
hospitals and other health care providers and ultimately sales and renewals of
the Company's health plans. The Turnaround Plan also calls for increasing
commercial premiums to appropriately reflect the Company's healthcare and
administrative costs. There can be no assurance that the Company will be
successful in achieving appropriate premium increases or that recent or future
regulatory changes will not adversely affect its premium pricing. Moreover, the
Company cannot predict the impact of adverse publicity, legal and regulatory
proceedings or other future events on the Company's membership, operations and
financial results, including ongoing financial losses. Reductions in membership
associated with the above factors would adversely affect the Company's future
results.
Inability to control, and unpredictability of, health care costs
Oxford's future results of operations depend, in part, on its ability to
predict and maintain influence over health care costs (through, among other
things, appropriate benefit design, utilization review and case management
programs and risk-sharing and other payment arrangements with providers) while
providing members with coverage for the health care benefits provided under
their contracts. However, Oxford's ability to influence such costs may be
affected by various factors, including: new technologies and health care
practices, hospital costs, changes in demographics and trends, new legally
mandated benefits or practices, selection biases, increases in unit costs paid
to providers, major epidemics, catastrophes, inability to establish acceptable
compensation arrangements with providers, operational and regulatory issues
which could delay, prevent or impede those arrangements, and higher utilization
of medical services, including higher out-of-network utilization under point of
service plans. There can be no assurance that Oxford will be successful in
mitigating the effect of any or all of the above-listed or other factors.
Medical costs payable in Oxford's financial statements include reserves for
incurred but not reported or paid claims ("IBNR") which are estimated by Oxford.
Oxford estimates the amount of such reserves primarily using standard actuarial
methodologies based upon historical data including the average interval between
the date services are rendered and the date claims are paid and between the date
services are rendered and the date claims are received by the Company, expected
medical cost inflation, seasonality patterns and changes in membership. The
estimates for submitted claims and IBNR are made on an accrual basis and
adjusted in future periods as required. Oxford believes that its reserves for
IBNR are adequate in order to satisfy its ultimate claim liability. However,
Oxford's prior rapid growth, delays in paying claims, paying or denying claims
in error and changing speed of payment affect the Company's ability to rely on
historical information in making IBNR reserve estimates. There can be no
assurances as to the ultimate accuracy of such estimates. Any adjustments to
such estimates could adversely affect Oxford's results of operations in future
periods.
The effect of high administrative costs on results
The Company expects that results in 1999 may continue to be adversely
affected by high administrative costs associated with the Company's efforts to
strengthen its operations and service levels and address systems issues,
including those related to Year 2000 readiness. Although a key element of the
Company's Turnaround Plan is a reduction in administrative expenses, no
assurance can be given that the Company will not continue to experience
significant service and systems infrastructure problems in 1999 and beyond which
could have a significant impact on administrative costs. Further, the Company
has been adversely affected by high administrative costs in connection with
increased levels of employee attrition over the last several quarters, and the
Company expects to continue to experience employee attrition in the remainder of
1999.
Changes in laws and regulations could adversely impact operations,
financial condition and prospects
The health care industry in general, and HMOs and health insurance
companies in particular, are subject to substantial federal and state government
regulation, including, but not limited to, regulation relating to cash reserves,
minimum net worth, licensing requirements, approval of policy language and
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benefits, mandatory products and benefits, provider compensation arrangements,
member disclosure, premium rates and periodic examinations by state and federal
agencies. State regulations require the Company's HMO and insurance subsidiaries
to maintain restricted cash or available cash reserves and restrict their
ability to make dividend payments, loans or other transfers of cash to the
Company.
In recent years, significant federal and state legislation affecting the
Company's business was enacted. For example, New York State implemented a
requirement that health plans pay interest on delayed payment of claims at a
rate of 12% per annum, effective January 1998, and that managed care members
have a right to an external appeal of certain final adverse determinations,
effective July 1999. In addition, Connecticut and New Jersey enacted legislation
in 1999 concerning prompt payment of claims, mental health parity and other
mandated benefits and practices. State and federal government authorities are
continually considering changes to laws and regulations applicable to Oxford and
are currently considering regulations relating to mandatory benefits and
products, defining medical necessity, provider compensation, health plan
liability to members who fail to receive appropriate care, disclosure and
composition of physician networks, all of which would apply to the Company. New
York State is currently considering regulation concerning the Health Care Reform
Act, individual and small group risk pools and subsidies and managed care
mandates and practices. In addition, Congress is considering significant changes
to Medicare legislation and has in the past considered, and may in the future
consider, proposals relating to health care reform. Changes in federal and state
laws or regulations, if enacted, could increase health care costs and
administrative expenses, and reductions could be made in Medicare reimbursement
rates. Oxford is unable to predict the ultimate impact on the Company of
recently enacted and future legislation and regulations, but such legislation
and regulations, particularly in New York where much of the Company's business
is located, could have a material adverse impact on the Company's operations,
financial condition and prospects.
Premiums for Oxford's Medicare programs are determined through formulas
established by HCFA for Oxford's Medicare contracts. Federal legislation enacted
in 1997 provides for future adjustment of Medicare reimbursement by HCFA which
could reduce the reimbursement received by the Company. Premium reductions, or
premium rate increases in a particular region that are lower than the rate of
increase in health care service expenses for Oxford's Medicare members in such
region, could adversely affect Oxford's results of operations. Risk transfer
provider agreements entered into by Oxford could be adversely affected by
regulatory actions or by the failure of the providers to comply with the terms
of such agreements. Such agreements could also have an adverse effect on the
Company's membership or its relationship with its other providers. Oxford's
Medicare programs are subject to certain additional risks compared to commercial
programs, such as higher comparative medical costs and higher levels of
utilization. Oxford's Medicare programs are subject to higher marketing and
advertising costs associated with selling to individuals rather than to groups.
Further, there can be no assurance that the Company will be successful in
completing or operationalizing such risk transfer and other provider
arrangements.
Service and systems infrastructure problems
The Company experienced rapid growth in its business and in its staff in
the period from 1986, when the Company began operations, through 1997. The
Company has been affected and will continue to be affected by its ability to
manage such growth effectively, including its ability to continue to develop
processes and systems to support its operations. In September 1996, the Company
converted a significant part of its business operations to a new computer
operating system. Unanticipated software and hardware problems arising in
connection with the conversion resulted in significant delays in the Company's
claims payments and group and individual billing and adversely affected claims
payment and billing. See "Results of Operations" above. The Company does not
intend to promote significant membership or revenue growth in 1999 because the
Company's priority in 1999 will continue to be to attempt to strengthen its
service and systems infrastructure, reduce medical and administrative spending
and increase premium rates. No assurance can be given that, in the remainder of
1999 and beyond, the Company will not continue to experience significant service
and systems infrastructure problems, high levels of medical and administrative
spending and difficulties in obtaining premium rate increases. In addition, the
Company has experienced attrition of its Medicare and commercial business in
1998
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and 1999 and expects additional attrition. There can be no assurance that the
Company will be successful in the future in promoting membership growth and will
not continue to experience membership attrition.
Health care provider network
The Company is subject to the risk of disruption in its health care
provider network. The network physicians, hospitals and other health care
providers could terminate their contracts with the Company, demand higher
payments or take other actions which could have a material adverse effect on the
Company's ability to market its products and service its membership.
Furthermore, the effect of mergers and consolidations of health care providers
or potential unionization of, or concerted action by, physicians in the
Company's service areas could enhance the providers' bargaining power with
respect to demands for higher reimbursement levels and changes to the Company's
utilization review and administrative procedures.
Management of information systems
There can be no assurance that the Company will be successful in mitigating
the existing system problems that have resulted in payment delays and claims
processing errors, in developing processes and systems to support its operations
and in improving its service levels. Moreover, operating and other issues can
lead to data problems that affect performance of important functions, including,
but not limited to, claims payment and group and individual billing. There can
also be no assurance that the process of improving existing systems, developing
processes and systems to support the Company's operations and improving service
levels will not be delayed or that additional systems issues will not arise in
the future. See "Other Information - Status of Information Systems".
Year 2000 readiness
The Company's failure to timely resolve its own Year 2000 issues or the
failure of the Company's external vendors to resolve their Year 2000 issues
could have a material adverse effect on the Company's results of operations,
liquidity and financial condition. Further, the Company's estimates for the
future costs and timely and successful completion of its Year 2000 program are
subject to uncertainties that could cause actual results to differ from those
currently projected by the Company. See "Year 2000 Readiness" above.
Recent events and related publicity
Certain events at the Company over the course of the last two years have
resulted in adverse publicity. Such events and related publicity may adversely
affect the Company's provider network, the employer renewal process and future
enrollment in the Company's health benefit plans.
In addition, the managed care industry, in general, receives significant
negative publicity. This publicity has led to increased legislation, regulation
and review of industry practices. These factors may adversely affect the
Company's ability to market its products and services, may require it to change
its products and services and may increase the regulatory burdens under which
the Company operates, further increasing the costs of doing business and
adversely affecting the Company's results of operations.
Collectibility of advances
As part of its attempts to ameliorate delays in processing claims for
payment in 1997, the Company advanced approximately $276 million to providers
pending the Company's disposition of claims for payment. As of June 30, 1999,
approximately $106.0 million, net of allowances, remained outstanding. See
"Liquidity and Capital Resources" above. The NYSID is requiring the Company to
obtain written acknowledgments of such advances from the recipients of the
advances, and the New Jersey Department of Banking and Insurance has required
the Company to provide collateral for repayment of the advances by setting aside
$15 million in trust at the parent company. If the Company is unable to receive
such written
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acknowledgments there can be no assurance that the insurance regulators will
continue to recognize such advances as admissible assets for regulatory
purposes. If the insurance regulators do not recognize such advances as
admissible assets, the capital of certain of the Company's regulated
subsidiaries could be impaired. The Company may be required to make additional
capital contributions to compensate for any such impairment. Although the
Company believes that the advances will be repaid, there can be no assurance
that this will occur.
Concentration of business
The Company's commercial and Medicare business is concentrated in New York,
New Jersey and Connecticut, with more than 80% of its tri-state premium revenues
received from New York business. As a result, changes in regulatory, market or
health care provider conditions in any of these states, particularly New York,
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's revenue under
its contracts with HCFA represented 21.9% of its premiums earned during the year
1998 and 18.8% of premiums earned during the first six months of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under "Market Risk Disclosures."
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SECURITIES CLASS ACTION LITIGATION
As previously reported by the Company, following the October 27, 1997
decline in the price per share of the Company's common stock, purported
securities class action lawsuits were filed on October 28, 29, and 30, 1997
against the Company and certain of its officers in the United States District
Courts for the Eastern District of New York, the Southern District of New York
and the District of Connecticut. Since that time, plaintiffs have filed
additional securities class actions (see below) against Oxford and certain of
its directors and officers in the United States District Courts for the Southern
District of New York, the Eastern District of New York, the Eastern District of
Arkansas, and the District of Connecticut.
The complaints in these lawsuits purport to be class actions on behalf of
purchasers of Oxford's securities during varying periods beginning on February
6, 1996 through December 9, 1997. The complaints generally allege that
defendants violated Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") and Rule 10b-5 thereunder by making false and misleading
statements and by failing to disclose certain allegedly material information
regarding changes in Oxford's computer system, and the Company's membership
enrollment, revenues, medical expenses, and ability to collect on its accounts
receivable. Certain of the complaints also assert claims against the individual
defendants alleging violations of Section 20(a) of the Exchange Act and claims
against all of the defendants for negligent misrepresentation. The complaints
also allege that in violation of Section 20A of the Exchange Act certain of the
individual defendants disposed of Oxford's common stock while the price of that
stock was artificially inflated by allegedly false and misleading statements and
omissions. The complaints seek unspecified damages, attorneys' and experts' fees
and costs, and such other relief as the court deems proper.
The purported class actions commenced in the United States District Court
for the Southern District of New York are Metro Services, Inc., et al. v. Oxford
Health Plans, Inc., et al., No. 97 Civ. 08023 (filed Oct. 29, 1997); Worldco,
LLC, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ. 8494 (filed Nov.
14, 1997); Jerovsek, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ.
8882 (filed Dec. 2, 1997); North River Trading Co., LLC v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 9372 (filed Dec. 22, 1997); National Industry Pension
Fund v. Oxford Health Plans, Inc., et al., No. 97 Civ. 9566 (filed Dec. 31,
1997); Scheinfeld v. Oxford Health Plans, Inc., et al., No. 98 Civ. 1399
(originally filed Dec. 31, 1997 in the United States District Court for the
District of Connecticut and transferred); Paskowitz v. Oxford Health Plans,
Inc., et al., No. 98 Civ. 1991 (filed March 19, 1998); and Sapirstein v. Oxford
Health Plans, Inc., et al., No. 98 Civ. 4137 (filed September 11, 1998).
The purported class actions commenced in the United States District Court
for the Eastern District of New York are Koenig v. Oxford Health Plans, et al.,
No. 97 Civ. 6188 (filed Oct. 29, 1997); Wolper v. Oxford Health Plans, Inc., et
al., No. 97 Civ. 6299 (filed Oct. 29, 1997); Tawil v. Oxford Health Plans, Inc.,
et al., No. 97 Civ. 7289 (filed Dec. 11, 1997); Winters, et al. v. Oxford Health
Plans, Inc., et al., No. 97 Civ. 7449 (filed Dec. 18, 1997); and Krim v. Oxford
Health Plans, Inc., et al., No. 98 Civ. 4032 (filed September 5, 1998).
The purported class actions commenced in the United States District Court
for the District of Connecticut are Heller v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02295 (filed Oct. 28, 1997); Fanning v. Oxford Health Plans, Inc., et
al., No. 397 CV 02300 (filed Oct. 29, 1997); Lowrie, IRA v. Oxford Health Plans,
Inc., et al., No. 397 CV 02299 (filed Oct. 29, 1997); Barton v. Oxford Health
Plans, Inc., et al., No. 397 CV 02306 (filed Oct. 30, 1997); Sager v. Oxford
Health Plans, Inc., et al., No. 397 CV 02310 (filed Oct. 30, 1997); Cohen v.
Oxford Health Plans, Inc., et al., No. 397 CV 02316 (filed Oct. 31, 1997);
Katzman v. Oxford Health Plans, Inc., et al., No. 397 CV 02317 (filed Oct. 31,
1997); Shapiro v. Oxford Health Plans,
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Inc., et al., No. 397 CV 02324 (filed Oct. 31, 1997); Willis v. Oxford Health
Plans, Inc., et al., No. 397 CV 02326 (filed Oct. 31, 1997); Saura v. Oxford
Health Plans, Inc., et al., No. 397 CV 02329 (filed Nov. 3, 1997); Selig v.
Oxford Health Plans, Inc., et al., No. 397 CV 02337 (filed Nov. 4, 1997);
Brandes v. Oxford Health Plans, Inc., et al., No. 397 CV 02343 (filed Nov. 4,
1997); Ross v. Oxford Health Plans, Inc., et al., No. 397 CV 02344 (filed Nov.
4, 1997); Sole v. Oxford Health Plans, Inc., et al., No. 397 CV 02345 (filed
Nov. 4, 1997); Henricks v. Wiggins, et al., No. 397 CV 02346 (filed Nov. 4
1997); Williams v. Oxford Health Plans, Inc., et al., No. 397 CV 02348 (filed
Nov. 5, 1997); Direct Marketing Day in New York, Inc. v. Oxford Health Plans,
Inc., et al., No. 397 CV 02349 (filed Nov. 5, 1997); Howard Vogel Retirement
Plans, Inc., et al. v. Oxford Health Plans, Inc., et al., No. 397 CV 02325
(filed Oct. 31, 1997 and amended Dec. 17, 1997); Serbin v. Oxford Health Plans,
Inc., et al., No. 397 CV 02426 (filed Nov. 18, 1997); Hoffman v. Oxford Health
Plans, Inc., et al., No. 397 CV 02458 (filed Nov. 24, 1997); Armstrong v. Oxford
Health Plans, Inc., et al., No. 397 CV 02470 (filed Nov. 25, 1997); Roeder, et
al. v. Oxford Health Plans, Inc., et al., No. 397 CV 02496 (filed Nov. 26,
1997); Braun v. Oxford Health Plans, Inc., et al., No. 397 CV 02510 (filed Dec.
1, 1997); Blauvelt, et al. v. Oxford Health Plans, Inc., et al., No. 397 CV
02512 (filed Dec. 2, 1997); Hobler et al. v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02535 (filed Dec. 3, 1997); Bergman v. Oxford Health Plans, Inc., et
al., No. 397 CV 02564 (filed Dec. 8, 1997); Pasternak v. Oxford Health Plans,
Inc., et al., No. 397 CV 02567 (filed Dec. 8, 1997); Perkins Partners I, Ltd. v.
Oxford Health Plans, Inc., et al., No. 397 CV 02573 (filed Dec. 9, 1997);
N.I.D.D., Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02584 (filed
Dec. 9, 1997); Burch v. Oxford Health Plans, Inc., et al., No. 397 CV 02585
(filed Dec. 9, 1997); Mark v. Oxford Health Plans, Inc., et al., No. 397 CV
02594 (filed Dec. 11, 1997); Ross, et al. v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02613 (filed Dec. 12, 1997); Lerchbacker v. Oxford Health Plans,
Inc., et al., No. 397 CV 02670 (filed Dec. 22, 1997); State Board of
Administration of Florida v. Oxford Health Plans, Inc., et al., No. 397 CV 02709
(filed Dec. 29, 1997) (the complaint, although purportedly not brought on behalf
of a class of shareholders, invites similarly situated persons to join as
plaintiffs); and Ceisler v. Oxford Health Plans, Inc., et al., No. 397 CV 02729
(filed Dec. 31, 1997).
The purported class actions commenced in the United States District Court
for the Eastern District of Arkansas is Rudish v. Oxford Health Plans, Inc., et
al., No. LR-C-97-1053 (filed Dec. 29, 1997).
The Company anticipates that additional class action complaints containing
similar allegations may be filed in the future.
On January 6, 1998, certain plaintiffs filed an application with the
Judicial Panel on Multidistrict Litigation ("JPML") to transfer most of these
actions for consolidated or coordinated pretrial proceedings before Judge
Charles L. Brieant of the United States District Court for the Southern District
of New York. The Oxford defendants subsequently filed a similar application with
the JPML seeking the transfer of all of these actions for consolidated or
coordinated pretrial proceedings, together with the shareholder derivative
actions discussed below, before Judge Brieant. On April 28, 1998, the JPML
entered an order transferring substantially all of these actions for
consolidated or coordinated pretrial proceedings, together with the federal
shareholder derivative actions discussed below, before Judge Brieant.
On July 15, 1998, Judge Brieant appointed the Public Employees Retirement
Associates of Colorado ("ColPERA"), three individual shareholders (the "Vogel
plaintiffs") and The PBHG Funds, Inc. ("PBHG"), as co-lead plaintiffs and
ColPERA's counsel (Grant & Eisenhofer), the Vogel plaintiffs' counsel (Milberg
Weiss Hynes Lerach & Bershad), and PBHG's counsel (Chitwood & Harley), as
co-lead counsel. ColPERA appealed this decision. On October 15, 1998 the United
States Court of Appeals for the Second Circuit dismissed the appeal.
On October 2, 1998, the co-lead plaintiffs filed a consolidated amended
complaint ("Amended Complaint") in the securities class actions. The Amended
Complaint (which has since been further amended by stipulation) names as
defendants Oxford, Oxford Health Plans (NY), Inc., KPMG LLP (which was Oxford's
outside independent auditor during 1996 and 1997) and several current or former
Oxford directors and officers (Stephen F. Wiggins, William M. Sullivan, Andrew
B. Cassidy, Brendan R. Shanahan, Benjamin H. Safirstein, Robert M. Smoler,
Robert B. Milligan, David A. Finkel, Jeffery H. Boyd, and Thomas A. Travers).
The Amended Complaint purports to be brought on behalf of purchasers of Oxford's
common
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stock during the period from November 6, 1996 through December 9, 1997 ("Class
Period"), purchasers of Oxford call options or sellers of Oxford put options
during the Class Period and on behalf of persons who, during the Class Period,
purchased Oxford's securities contemporaneously with sales of Oxford's
securities by one or more of the individual defendants. The Amended Complaint
alleges that defendants violated Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder by making false and misleading statements and
failing to disclose certain allegedly material information regarding changes in
Oxford's computer system and the Company's membership, enrollment, revenues,
medical expenses and ability to collect on its accounts receivable. The Amended
Complaint also asserts claims against the individual defendants alleging
"controlling person" liability under Section 20(a) of the Exchange Act. The
Amended complaint also alleges violations of Section 20A of the Exchange Act by
virtue of the individual defendants' sales of shares of Oxford's common stock
while the price of that common stock was allegedly artificially inflated by
allegedly false and misleading statements and omissions. The Amended Complaint
seeks unspecified damages, attorneys' and experts' fees and costs, and such
other relief as the court deems proper.
On December 18, 1998, Oxford, the individual defendants and, separately,
KPMG LLP, moved to dismiss the Amended Complaint. On May 25, 1999 and June 8,
1999, Judge Brieant issued decisions denying the motions to dismiss. On June 10,
1999, KPMG LLP moved for reconsideration of the decision denying its motion to
dismiss. On July 9, 1999, Judge Brieant granted KPMG LLP's motion for
reconsideration, and on reconsideration adhered to the prior disposition.
By order dated July 9, 1999, the Court approved a Case Management Plan
submitted by counsel for both plaintiffs and defendants, which Plan provides,
inter alia, that (1) discovery and briefing of class certification issues be
completed by December 10, 1999, (2) the parties shall attempt to complete all
merits discovery in the case by September 15, 2000, and (3) summary judgment
motions shall be filed by August 17, 2001.
The State Board of Administration of Florida (the "SBAF") has stipulated,
and Judge Brieant has ordered, that in the action brought by it individually
(the "SBAF Action"), it will be bound by the dismissal of any claims it has that
are asserted in the Amended Complaint. In addition, the parties have stipulated
that SBAF may file an amended complaint ("Amended SBAF Complaint") by September
23, 1999 and that Oxford has until November 25, 1999 to answer or move to
dismiss the Amended SBAF Complaint. A stipulation memorializing these agreements
will be filed with the court shortly. The Amended SBAF Complaint likely will
assert claims similar to those asserted in the Amended Complaint in the
purported class actions (see above). The Amended SBAF Complaint may also assert
claims against all of the defendants alleging: (i) violations of Section 18(a)
of the Exchange Act, by virtue of alleged false and misleading information
disseminated in the 10-K report Oxford filed for the year ended December 31,
1996; (ii) violations of the Florida Blue Sky laws; and (iii) common law fraud
and negligent misrepresentation. The Amended SBAF Complaint likely will seek
unspecified damages, attorneys' and experts' fees and costs, and such other
relief as the court deems proper. Defendants intend to move to dismiss the SBAF
Action, to the extent it includes claims not precluded by Judge Brieant's
decision on the motions to dismiss the Amended Complaint.
The outcomes of these actions cannot be predicted at this time, although
the Company believes that it and the individual defendants have substantial
defenses to the claims asserted and intends to defend the actions vigorously.
SHAREHOLDER DERIVATIVE LITIGATION
As previously reported by the Company, in the months following the October
27, 1997 decline in the price per share of the Company's common stock, ten
purported shareholder derivative actions were commenced on behalf of the Company
in Connecticut Superior Court (the "Connecticut derivative actions") and in the
United States District Courts for the Southern District of New York and the
District of Connecticut (the "federal derivative actions") against the Company's
directors and certain of its officers (and the Company itself as a nominal
defendant).
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These derivative complaints generally alleged that defendants breached
their fiduciary obligations to the Company, mismanaged the Company and wasted
its assets in planning and implementing certain changes to Oxford's computer
system, by making misrepresentations concerning the status of those changes in
Oxford's computer system, by failing to design and to implement adequate
financial controls and information systems for the Company, and by making
misrepresentations concerning Oxford's membership enrollment, revenues, profits
and medical costs in Oxford's financial statements and other public
representations. The complaints further allege that certain of the defendants
breached their fiduciary obligations to the Company by disposing of Oxford
common stock while the price of that common stock was artificially inflated by
their alleged misstatements and omissions. The complaints seek unspecified
damages, attorneys' and experts' fees and costs and such other relief as the
court deems proper. None of the plaintiffs has made a demand on the Company's
Board of Directors that Oxford pursue the causes of action alleged in the
complaint. Each complaint alleges that plaintiff's duty to make such a demand
was excused by the directors' alleged conflict of interest with respect to the
matters alleged therein.
The purported shareholder derivative actions commenced in Connecticut
Superior Court are Reich v. Wiggins, et al., No. CV 97-485145 (filed on or about
Dec. 12, 1997); Gorelkin v. Wiggins, et al., No. CV98-0163665 S (filed on or
about Dec. 24, 1997); and Kellmer v. Wiggins, et al., No. CV 98-0163664 S HAS
(filed on or about Jan. 28, 1998).
The purported shareholder derivative actions commenced in the United States
District Court for the Southern District of New York are Roth v. Wiggins, et
al., No. 98 Civ. 0153 (filed Jan. 12, 1998); Plevy v. Wiggins, et al., No. 98
Civ. 0165 (filed Jan. 12, 1998); Mosson v. Wiggins, et al., No. 98 Civ. 0219
(filed Jan. 13, 1998); Boyd, et al. v. Wiggins, et al., No. 98 Civ. 0277 (filed
Jan. 16, 1998); and Glick v. Wiggins, et al., No. 98 Civ. 0345 (filed Jan. 21,
1998).
The purported shareholder derivative actions commenced in the United States
District Court for the District of Connecticut are Mosson v. Wiggins, et al.,
No. 397 CV 02651 (filed Dec. 22, 1997), and Fisher, et al. v. Wiggins, et al.,
No. 397 CV 02742 (filed Dec. 31, 1997).
In March 1998, Oxford and certain of the individual defendants moved to
dismiss or, alternatively, to stay the Connecticut derivative actions. Since
then, the parties to the Connecticut derivative actions have stipulated, under
certain conditions, to hold all pretrial proceedings in those actions in
abeyance during the pretrial proceedings in the federal derivative actions, and
to allow the plaintiffs in the Connecticut derivative actions to participate to
a limited extent in any discovery that is ultimately ordered in the federal
derivative actions. Stipulations memorializing this agreement have been entered
in the Connecticut derivative actions. On February 19, 1999, Judge Brieant
entered an order in the federal derivative actions permitting the plaintiffs in
the Connecticut derivative actions to participate to a limited extent in any
discovery that ultimately occurs in the federal derivative actions.
In addition, on January 27, 1998, defendants filed an application with the
JPML to transfer the federal derivative actions for consolidated or coordinated
pretrial proceedings before Judge Charles L. Brieant of the Southern District of
New York. On April 28, 1998, the JPML entered an order transferring all of these
actions for consolidated or coordinated pretrial proceedings, together with the
securities class actions discussed above, before Judge Brieant.
The parties to the federal derivative actions have agreed to suspend
discovery in those actions until the filing of a consolidated amended derivative
complaint in those actions and during the pendency of any motion to dismiss or
to stay the federal derivative actions or the securities class actions. A
stipulation memorializing this agreement, consolidating the federal derivative
actions under the caption In re Oxford Health Plans, Inc. Derivative Litigation,
MDL-1222-D, and appointing lead counsel for the federal derivative plaintiffs,
was entered and so ordered by Judge Brieant on September 26, 1998.
On October 2, 1998, the federal derivative plaintiffs filed an amended
complaint. On January 29, 1999, the plaintiffs filed a second amended derivative
complaint (the "Amended Derivative Complaint"). The Amended Derivative Complaint
names as defendants certain of Oxford's directors and a former director
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(Stephen F. Wiggins, James B. Adamson, Robert B. Milligan, Fred F. Nazem, Marcia
J. Radosevich, Benjamin H. Safirstein and Thomas A. Scully) and the Company's
former auditors KPMG LLP, together with the Company itself as a nominal
defendant. The Amended Derivative Complaint alleges that the individual
defendants breached their fiduciary obligations to the Company, mismanaged the
Company and wasted its assets in planning and implementing certain changes to
Oxford's computer system, by making misrepresentations concerning the status of
those changes to Oxford's computer system, by failing to design and implement
adequate financial controls and information systems for the Company and by
making misrepresentations concerning Oxford's membership, enrollment, revenues,
profits and medical costs in Oxford's financial statements and other public
representations. The Amended Derivative Complaint further alleges that certain
of the individual defendants breached their fiduciary obligations to the Company
by selling shares of Oxford common stock while the price of the common stock was
allegedly artificially inflated by their alleged misstatements and omissions.
The Amended Derivative Complaint seeks declaratory relief, unspecified damages,
attorneys' and experts' fees and costs and such other relief as the court deems
proper. No demand has been made upon the Company's Board of Directors that
Oxford pursue the causes of action alleged in the Amended Derivative Complaint.
The Amended Derivative Complaint alleges that the federal derivative plaintiffs'
duty to make such a demand was excused by the individual defendants' alleged
conflict of interest with respect to the matters alleged therein.
On March 15, 1999, Oxford, the individual defendants and, separately, KPMG
LLP, moved to dismiss the Amended Derivative Complaint, and oral argument on
defendants' motion was heard on June 24, 1999. Pursuant to stipulations entered
into and filed by the parties and so ordered by Judge Brieant, proceedings in
the federal derivative actions are stayed during the pendency of the motions to
dismiss those actions, unless any of the parties provides written notice of
their desire to terminate this stay, in which case defendants will have 60 days
from such notice to move to stay the federal derivative actions pending
resolution of the securities class actions (see above), and except that the
federal derivative plaintiffs (and the Connecticut derivative plaintiffs) will
be permitted to attend depositions that occur in the consolidated securities
class action, and to review documents that are produced in that action.
Although the outcome of the federal and Connecticut derivative actions
cannot be predicted at this time, the Company believes that the defendants have
substantial defenses to the claims asserted in the complaints.
STATE INSURANCE DEPARTMENTS
On August 10, 1998, the New York State Insurance Department ("NYSID")
completed its triennial examination and market conduct examination of Oxford's
New York HMO and insurance subsidiaries. In the Reports on Examination (the
"Reports") the NYSID, based on information available through July 1998,
determined that certain assets on the December 31, 1997 balance sheets of the
Company's New York subsidiaries should not be admitted for statutory reporting
purposes and NYSID actuaries recorded additional reserves totaling approximately
$81.3 million for both subsidiaries on the balance sheet as determined by the
examiners. The Company contributed $152 million to the capital of its New York
HMO and insurance subsidiaries in satisfaction of the issues raised in the
Reports relating to the subsidiaries' financial statements, and maintaining such
subsidiaries' compliance with statutory capital requirements as of June 30,
1998. The Reports also made certain recommendations relating to financial
record-keeping, settlement of intercompany accounts and compliance with certain
NYSID regulations. The Company has agreed to address the recommendations in the
Reports. As previously reported, in December 1997, the Company made additions of
$164 million to the reserves of its New York subsidiaries at the direction of
the NYSID. The NYSID issued a Market Conduct Report identifying several alleged
violations of state law and NYSID regulations. On December 22, 1997, the NYSID
and Oxford entered into a stipulation under which Oxford promised to take
certain corrective measures and to pay restitution and a $3 million fine. The
stipulation provides that the NYSID will not impose any other fines for Oxford's
conduct up to November 1, 1997. The NYSID has directed the Company's New York
subsidiaries to obtain notes or other written evidence of agreements to repay
from each provider who has received an advance. The NYSID has continued to
review market conduct issues, including, among others, those relating to claims
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processing and continues to express concern with the Company's claims turnaround
and performance. The Company has agreed to take certain other corrective actions
with respect to certain of these market conduct issues, but additional
corrective action may be required and such actions could adversely affect the
Company's results of operations.
On January 5, 1999, March 29, 1999 and July 14, 1999, the Company agreed to
pay fines of $40,900, $51,900 and $30,200, respectively, to the NYSID in
connection with certain alleged violations of New York's prompt payment law. The
NYSID has also requested additional information concerning delayed claim
payments and has informed Oxford that it will continue to review complaints on
an ongoing basis to establish violations of the prompt pay statute, and that
such violations would result in additional fines. Fines for similar alleged
violations have also been imposed on other health plans in New York.
The NYSID has also raised certain issues relating to the Company's
methodology for determining premium rates for the Company's large group
business. On May 26, 1999, the NYSID issued rule interpretations in Circular
Letter 13, effective February 1, 2000, which requires the Company and competing
health plans to fully community-rate all HMO-based point-of-service ("POS")
products. This policy will impact the current methodology for determining
premium rates for Company's large group business. In order to maintain a
substantially similar pricing methodology, the Company plans to offer its large
group Freedom Plan product through its health insurance subsidiary. The offering
is subject to NYSID approval of forms and rates and there can be no assurance
approval will be timely received. The approval process may also give rise to
regulatory issues, which could affect the terms of the products to be offered or
the terms of arrangements between the Company and healthcare providers.
At this time, the Company cannot predict the outcome of continuing market
conduct reviews by the NYSID, enforcement of the New York prompt payment law or
recent changes in premium pricing practices.
By letter dated June 15, 1999, the New Jersey Department of Health and
Senior Services (NJDHSS) notified Oxford that its review of complaints from
Oxford providers indicated that Oxford may be in violation of New Jersey's
Prompt Pay Statute and associated regulations, and that these alleged violations
could result in the imposition of a fine. Since that date Oxford has submitted
information to the NJDHSS regarding the alleged violations and will continue to
work with the Department to resolve these issues. At this time, Oxford cannot
predict the outcome of this matter.
The NJDBI is nearing completion of its market conduct and financial
examinations of the Company's New Jersey HMO subsidiary. The market conduct
examination relates to the subsidiary's activities in 1997 and the first half of
1998 and is expected to assert deficiencies relating to, among others, claims
processing and handling of complaints. The NJDBI is likely to seek imposition of
a fine in connection with completion of the examination. In connection with the
financial examination, the NJDBI is requiring the Company to provide certain
collateral for repayment of advances made in 1997 to providers in respect of
delayed claims by setting aside in trust at the parent company funds equal to
the admitted portions of the advances on the New Jersey subsidiary's statutory
financial statements.
An agreement with the Heritage New Jersey Medical Group ("Heritage") covers
all of the Company's approximately 13,000 Medicare members in New Jersey as of
June 30, 1999. The NJDBI has recently advised the Company that the risk-sharing
aspects of the agreement with Heritage should be suspended pending NJDBI's
review of the need for additional regulation of risk-sharing arrangements. In
view of uncertainties in the regulatory environment and other considerations,
the Company, in July 1999, decided to wind down the network management agreement
with Heritage.
The Company is also subject to ongoing examinations with respect to
financial condition and market conduct for its HMO and insurance subsidiaries in
other states where it conducts business. The outcome of these examinations
cannot be predicted at this time.
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NEW YORK STATE ATTORNEY GENERAL
As previously reported, on November 6, 1997, the New York State Attorney
General served a subpoena duces tecum on the Company requiring the production of
various documents, records and materials "in regard to matters relating to the
practices of the Company and others in the offering, issuance, sale, promotion,
negotiation, advertisement, distribution or purchase of securities in or from
the State of New York." Since then, Oxford has produced a substantial number of
documents in response to the subpoena, and expects to produce additional
documents. In addition, some of Oxford's present and former directors and
officers have provided testimony to the Attorney General's staff.
In addition, as previously reported, the Company entered into an Assurance
of Discontinuance, effective July 25, 1997, with the Attorney General under
which the Company agreed to pay interest at 9% per annum on provider clean
claims not paid by Oxford within 30 days on its New York commercial and Medicaid
lines of business until January 22, 1998. Since that time, the Company's
obligations to make prompt payments have been governed by applicable New York
law. In addition, contemporaneously, the Company agreed to pay varying interest
rates to providers in Connecticut, New Jersey, New Hampshire and Pennsylvania.
The Company has subsequently responded to a number of inquiries by the
Attorney General with respect to Oxford's compliance with the Assurance of
Discontinuance. On February 2, 1998, the Attorney General served a subpoena
duces tecum on Oxford seeking production of certain documents relating to
complaints from providers and subscribers regarding nonpayment or untimely
payment of claims, interest paid under the Assurance, accounts payable, provider
claims processing, and suspended accounts payable. Oxford has produced documents
in response to the subpoena.
On April 12, 1999, the Attorney General served a subpoena duces tecum on
Oxford seeking production of certain documents relating to Oxford's handling of
inquiries, claims and complaints regarding emergency medical services. The
subpoena was accompanied by a letter stating that, based on an examination of
materials relating to Oxford's individual New York plans, Oxford appeared to be
in violation of certain provisions of the Managed Care Reform Act of 1996 that
relate to the provision and disclosure of emergency medical services. By letter
dated April 20, 1999, Oxford submitted a response to the Attorney General's
letter outlining the steps it has taken to comply with the relevant provisions
of the Managed Care Reform Act.
The Attorney General recently served another subpoena duces tecum, dated
July 20, 1999, on Oxford. This subpoena was served on Oxford and other New York
health care plans as part of an investigation by the Attorney General. The
subpoena seeks production of certain documents relating to Oxford's utilization
review process. Utilization review is the review undertaken by a health care
plan to determine whether a requested health care service that has been, will be
or is being provided to an Oxford member is medically necessary. Oxford is in
the process of compiling its response to the subpoena.
The Attorney General's Health Care Bureau also periodically inquires of the
Company with respect to hospital and provider payment issues and member
complaints.
The Company intends to cooperate fully with the Attorney General's
inquiries, the outcome of which cannot be predicted at this time.
SECURITIES AND EXCHANGE COMMISSION
As previously reported, the Company received an informal request on
December 9, 1997 from the Securities and Exchange Commission's Northeast
Regional Office seeking production of certain documents and information
concerning a number of subjects, including disclosures made in the Company's
October 27, 1997 press release announcing a loss in the third quarter. Oxford
has produced documents and has provided information in response to this informal
request.
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The Commission has served the Company and certain of its current and former
officers and directors with several subpoenae duces tecum requesting documents
concerning a number of subjects, including, but not limited to, the Company's
public disclosure of internal and external audits, uncollectible premium
receivables, timing of and reserves with respect to payments to vendors, doctors
and hospitals, payments and advances to medical providers, adjustments related
to terminations of group and individual members and for nonpaying group and
individual members, computer system problems, agreements with the New York State
Attorney General, employment records of former employees, and the sale of Oxford
securities by officers and directors. Oxford and certain of its current and
former officers and directors have produced and are continuing to produce
documents in response to these subpoenae. Some of Oxford's present and former
directors, officers and employees have provided testimony to the Commission, and
others are expected to do so.
Oxford intends to cooperate fully with the Commission and cannot predict
the outcome of the Commission's investigation at this time.
HEALTH CARE FINANCING ADMINISTRATION
From February 9, 1998 through February 13, 1998, HCFA conducted an enhanced
site visit at Oxford to assess Oxford's compliance with federal regulatory
requirements for HMO eligibility and Oxford's compliance with its obligations
under its contract with HCFA. During the visit, HCFA monitored, among other
things, Oxford's administrative and managerial arrangements, Oxford's quality
assurance program, Oxford's health services delivery program, and all aspects of
Oxford's implementation of its Medicare programs. On May 20, 1998, the Company
received a final report from HCFA and on June 10, 1998, the Company voluntarily
suspended marketing and most enrollment of new members under its Medicare
programs in New York, New Jersey, Connecticut and Pennsylvania. This action was
taken by the Company in order to provide the Company with an opportunity to
strengthen its operations and institute certain corrective actions required by
HCFA as a result of its visit. This action, however, did not apply to potential
enrollees of the Company's Medicare group accounts. On January 6, 1999, HCFA
notified the Company that it was satisfied that the necessary corrective actions
had been taken, permitting reinstitution of marketing and enrollment of
individual enrollees into the Company's Medicare programs. HCFA will continue to
monitor the Company's operations to ensure that the Company complies with its
corrective action plans and improves its operating performance in key areas,
including claims payment. In February 1999, the Company reinstituted marketing
to and enrollment of Medicare beneficiaries. However, there can be no assurance
that administrative or systems issues or the Company's current or future
provider arrangements will not result in adverse action by HCFA.
ARBITRATION PROCEEDINGS
As previously reported by the Company, on February 3, 1998, the New York
County Medical Society ("NYCMS") initiated an arbitration proceeding before the
American Arbitration Association ("AAA") in New York against Oxford alleging
breach of the written agreements between Oxford and some NYCMS physician members
and failure to adopt standards and practices consistent with the intent of those
agreements. The notice of intention to arbitrate was subsequently amended to
join thirteen additional New York medical associations as co-claimants. NYCMS
and the other claimants seek declaratory and injunctive relief requiring various
changes to Oxford's internal practices and policies, including practices in the
processing and payment of claims submitted by physicians. Oxford has petitioned
the New York State Supreme Court for a permanent stay of this proceeding; the
outcome of this motion cannot be predicted at this time.
Also, some individual physicians claiming that payments under their
contracts with Oxford were delayed have announced their intention to commence
arbitration proceedings against Oxford. Oxford has been served with notices of
intent to arbitrate, on behalf of more than twenty individual physicians. More
than ten arbitration proceedings have been filed by individual physicians, one
of which has been withdrawn. On
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or about September 9, 1998, the NYCMS announced that it was breaking off
settlement negotiations with Oxford, and that individual physicians would resume
active arbitration against Oxford.
In November 1998, various individual physicians purported to amend their
demands for arbitration by adding a claim for punitive damages. These claims all
allege that Oxford's failure to develop the computer systems and personnel
necessary for the prompt and efficient processing of claims was reckless and
intentional, and that Oxford's failure to pay claims was arbitrary, capricious
and without good faith basis.
In addition, on March 30, 1998, Oxford received a demand for arbitration
from two physicians purporting to commence a class action arbitration before the
AAA in Connecticut against Oxford alleging breach of contract and violation of
the Connecticut Unfair Insurance Practices Act.
On May 14, 1999, Oxford filed a motion to dismiss the punitive damages
claim in one of the individual arbitration cases, Ritch v. Oxford, on the
grounds that, inter alia, that plaintiff had failed to allege any tort claim and
that a complaint for breach of contract will not support punitive damages. The
decision with respect to the punitive damages motion is expected to be followed
in the other individual arbitration cases. After briefing and oral argument on
this issue in the Ritch case, plaintiff was permitted to amend his complaint on
June 17, 1999 to add a cause of action for fraud. Oxford has subsequently
renewed its motion to dismiss the punitive damages claim, which motion is still
pending.
The outcome and settlement prospects of the various arbitration proceedings
cannot be predicted at this time although the Company believes that it has
substantial defenses to the claims asserted and intends to defend the
arbitrations vigorously.
JEFFREY S. OPPENHEIM, M.D., ET AL. V. OXFORD HEALTH PLANS, INC., ET AL.,
INDEX NO. 97/109088
As previously reported by the Company, on May 19, 1997, Oxford was served
with a purported "Class Action Complaint" filed in the New York State Supreme
Court, New York County by two physicians and a medical association of five
physicians. Plaintiffs alleged that Oxford (i) failed to make timely payments to
plaintiffs for claims submitted for health care services and (ii) improperly
withheld from plaintiffs a portion of plaintiffs' agreed compensation.
Plaintiffs alleged causes of action for common law fraud and deceit, negligent
misrepresentation, breach of fiduciary duty, breach of implied covenants and
breach of contract. The complaint sought an award of an unspecified amount of
compensatory and exemplary damages, an accounting, and equitable relief.
On July 24, 1997, Oxford and plaintiffs reached a settlement in principle
of the class claims wherein Oxford agreed to pay, from September 1, 1997 to
January 1, 2000, interest at certain specified rates to physicians who did not
receive payments from Oxford within certain specified time periods after
submitting "clean claims" (a term that was to be applied in a manner consistent
with certain industry guidelines). Moreover, Oxford agreed to provide to
plaintiffs' counsel, on a confidential basis, certain financial information that
Oxford believed would demonstrate that Oxford acted within its contractual
rights in making decisions on payments withheld from plaintiffs and members of
the alleged class. The settlement in principle provided that, if plaintiffs'
counsel reasonably does not agree with Oxford's belief in this regard,
plaintiffs retain the right to proceed individually (but not as a class) against
Oxford by way of arbitration. Oxford has supplied financial information to
plaintiffs' counsel and has exchanged draft settlement papers with plaintiffs'
counsel.
OTHER
On May 18, 1998, a purported "Class Action Complaint" was brought against
Oxford and other unnamed defendant plan administrators filed in the United
States District Court for the Eastern District of New York by four plaintiffs
who claim to be beneficiaries of defendants' health insurance plans seeking
declaratory and other relief from defendants for alleged wrongful denial of
insurance coverage for the drug Viagra. On September 8, 1998, Oxford moved to
dismiss the complaint based on plaintiffs' failure to exhaust their
administrative remedies; the outcome of this motion cannot be predicted this
time.
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On October 26, 1998, Complete Medical Care, P.C. ("CMC"), United Medical
Care, P.C. ("UMC"), Comprehensive Health Care Corp. ("CHC") and Oscar Fukilman,
M.D. commenced actions in the Supreme Court of the State of New York for New
York County against Oxford and certain of its officers. The complaints in United
Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No. 605176/98, and
Complete Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No.
605178/98, generally allege that Oxford and the individual defendants: (i)
breached, and have announced their intention to breach, certain agreements with
CMC and UMC for the delivery of health care services to certain of Oxford's
members; (ii) breached an implied covenant of good faith and fair dealing with
UMC and CMC; (iii) fraudulently induced CMC and UMC to enter into their
respective agreements with Oxford; (iv) tortiously interfered with CMC's and
UMC's current and prospective contractual relations with certain physicians; and
(v) defamed CMC and UMC. The complaints each seek at least $165 million in
damages, at least $500 million in punitive damages, unspecified interest, costs
and disbursements, and such other relief as the court deems proper. The
complaint in the Complete Medical Care action also alleges that Oxford has
unjustly enriched itself by withholding from CMC certain funds to which CMC
claims it is entitled, and seeks the imposition of a constructive trust with
respect to those funds. The complaint in Oscar Fukilman, M.D. et al v. Oxford
Health Plans, Inc. et al., Index No. 604177/98, alleges that Oxford and certain
officers defamed, and conspired to defame, Dr. Fukilman and CHC, and seeks at
least $25 million in damages and unspecified costs and disbursements and such
other relief as the court deems proper.
On January 8, 1999, defendants: (1) served an answer and counterclaims in
the Complete Medical Care case; (2) filed a motion to compel arbitration and
dismiss the United Medical Care complaint; and (3) moved to dismiss the Fukilman
v. Oxford complaint.
Although the outcome of these actions cannot be predicted at this time, the
Company believes that it and the individual defendants have substantial defenses
to the claims asserted and intends to defend the actions vigorously.
Oxford, like HMOs and health insurers generally, excludes certain health
care services from coverage under its POS, HMO, PPO and other plans. In the
ordinary course of business, the Company is subject to legal claims asserted by
its members for damages arising from decisions to restrict reimbursement for
certain treatments. The loss of even one such claim, if it were to result in a
significant punitive damage award, could have a material adverse effect on the
Company's financial condition or results of operations. In addition, the risk of
potential liability under punitive damages theories may significantly increase
the difficulty of obtaining reasonable settlements of coverage claims. The
financial and operational impact that such evolving theories of recovery may
have on the managed care industry generally, or Oxford in particular, is
presently unknown.
In the ordinary course of its business, the Company also is subject to
claims and legal actions by members in connection with benefit coverage
determinations and alleged acts by network providers and by health care
providers and others.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See information contained in note 4 of "Notes to Consolidated Financial
Statements" and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on May 13, 1999
in connection with which proxies were solicited pursuant to Regulation 14A under
the Securities Exchange Act of 1934. At the meeting, stockholders were asked to
consider and vote upon (a) the election of three directors; and (b) the
ratification of Ernst & Young LLP as the Company's independent auditors for
fiscal year 1999 (the "Proposal").
36
<PAGE>
At the meeting, Fred F. Nazem, James G. Coulter and Thomas A. Scully were
each elected a director of the Company for a term to expire in 2002. Continuing
directors whose terms expire in 2000 are Norman C. Payson, M.D., Robert B.
Milligan, Jr., Marcia J. Radosevich, Ph.D. and Stephen F. Wiggins. Continuing
directors whose terms expire in 2001 are David Bonderman, Jonathan J. Coslet,
Benjamin H. Safirstein, M.D. and Kent J. Thiry. A total of 95,147,862 votes were
cast in favor of, and 1,135,777 votes were cast to withhold authority for, Mr.
Nazem's election. A total of 91,971,090 votes were cast in favor of, and
4,312,549 votes were cast to withhold authority for, Mr. Coulter's election. A
total of 95,198,873 votes were cast in favor of, and 1,084,766 votes were cast
to withhold authority for, Mr. Scully's election. The Proposal was adopted with
95,892,255 votes cast for, and 242,279 votes cast against the Proposal. In
addition, there were 149,105 abstentions. There were no broker nonvotes related
to the Proposal.
ITEM 5. OTHER INFORMATION
STATUS OF INFORMATION SYSTEMS
In September 1996, the Company converted a significant part of its business
operations to a new computer operating system developed at Oxford. From
September 1996, most business functions at the Company were operated on the new
system, with the exception of the processing of claims, which continued to
operate on the previous system. Since the conversion, the Company must operate
both systems and reconcile the two systems on an ongoing basis by a process
known as "backbridging".
Unanticipated software and hardware problems arising in connection with the
conversion resulted in significant delays in the Company's claims payments and
group and individual billing and adversely affected claims payment and billing
accuracy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The Company implemented a number of systems and
operational improvements during 1996, 1997 and 1998 in an effort to improve
claims turnaround times and claims backlogs and claims and billing errors.
However, the backbridging process continues to create issues relating to
transfer of data, which continues to cause delays for certain claims, and there
have been delays in delivering all needed functionality under the new system.
Moreover, the Company's claims turnaround times and accuracy still need
improvement to reach acceptable levels. The Company is continuing to seek
improvements in the processes referred to above and to add needed functionality.
The Company has undertaken a review of its information systems needs and
capabilities. As a result of this review, the Company has decided to continue
operations on its current claims processing systems and continue to work on
requisite modifications and enhancements.
Although the Company made certain modifications and enhancements to attempt
to improve systems controls and processing efficiencies during 1998 and the
first half of 1999, the Company continues to review its long-term information
system strategy. The Company's resources are currently focused on (i) Year 2000
readiness, (ii) making requisite modifications and enhancements to the existing
information systems and (iii) establishing improved performance and management
information.
There can be no assurance that the Company will be successful in mitigating
the existing system problems that have resulted in payment delays and claims
processing errors. Moreover, operating and other issues can lead to data
problems that affect performance of important functions, including claims
payment and group and individual billing. There can also be no assurance that
the process of improving existing systems will not be delayed or that additional
systems issues will not arise in the future.
For information as to the "Year 2000" readiness, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Readiness."
37
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description of Document
---------- -----------------------
3(a) Second Amended and Restated Certificate of
Incorporation, as amended, of the Registrant
3(b) Amended and Restated By-laws of the Registrant
4(a) Certificate of Designations of Series D
Cumulative Preferred Stock
4(b) Certificate of Designations of Series E
Cumulative Preferred Stock
(b) Reports on Form 8-K
In a report on Form 8-K dated and filed on April 29, 1999, the
Company reported under Item 5. "Other Events" its first quarter
1999 earnings press release.
In a report on Form 8-K dated May 12, 1999, and filed on May 13,
1999, the Company reported, under Item 5. "Other Events," the
election of Norman C. Payson, M.D. as the Company's Chairman of
the Board of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OXFORD HEALTH PLANS, INC.
------------------------------------
(Registrant)
August 16, 1999 /s/ NORMAN C. PAYSON, M.D.
- ------------------------------- ------------------------------------
Date NORMAN C. PAYSON, M.D.,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
August 16, 1999 /s/ YON Y. JORDEN
- ------------------------------- ------------------------------------
Date YON Y. JORDEN,
CHIEF FINANCIAL OFFICER
38
<PAGE>
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------- -----------------------
3(a) Second Amended and Restated Certificate of Incorporation,
as amended, of the Registrant, incorporated by reference
to Exhibit 3(a) of the Registrant's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1998 (File
No. 0-19442)
3(b) Amended and Restated By-laws of the Registrant,
incorporated by reference to Exhibit 3(ii) of the
Registrant's Form 10-Q for the quarterly period ended
September 30, 1998 (File No. 0-19442)
4(a) Certificate of Designations of Series D Cumulative
Preferred Stock, incorporated by reference to Exhibit
3(a) of the Registrant's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1998 (File No.
0-19442)
4(b) Certificate of Designations of Series E Cumulative
Preferred Stock, incorporated by reference to Exhibit
3(a) of the Registrant's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1998 (File No.
0-19442)
- --------------------
* Filed herewith
39
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