<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------------------------------------
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
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OXFORD HEALTH PLANS, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 06-1118515
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
48 Monroe Turnpike, Trumbull, Connecticut 06611
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(203) 459-6000
--------------------------------------------------------------------------------
(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 October 24, 2000 was 86,149,196.
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OXFORD HEALTH PLANS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1 Financial Statements
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999.................................3
Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 2000 and 1999.......................................................................4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 ............5
Notes to Consolidated Financial Statements .............................................................6
Report of Independent Accountants .....................................................................10
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................................................11
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk ............................................23
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings .....................................................................................24
ITEM 2 Changes in Securities and Use of Proceeds .............................................................25
ITEM 5 Other..................................................................................................25
ITEM 6 Exhibits and Reports on Form 8-K ......................................................................25
SIGNATURES .....................................................................................................27
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
Current assets: 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 325,579 $ 332,882
Investments - available-for-sale, at market value 805,807 829,054
Premiums receivable, net 62,552 64,071
Other receivables 27,717 32,588
Prepaid expenses and other current assets 6,119 3,862
Deferred income taxes 63,587 68,266
---------------------------------------------------------------------------------------------------------------
Total current assets 1,291,361 1,330,723
Property and equipment, net 31,830 49,519
Deferred income taxes 132,108 231,512
Restricted cash and investments 57,558 61,603
Other noncurrent assets 24,349 13,531
---------------------------------------------------------------------------------------------------------------
Total assets $ 1,537,206 $1,686,888
===============================================================================================================
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Medical costs payable $ 614,767 $ 656,063
Trade accounts payable and accrued expenses 123,092 122,345
Unearned premiums 38,438 97,155
Current portion of capital lease obligations 7,757 12,467
---------------------------------------------------------------------------------------------------------------
Total current liabilities 784,054 888,030
Long-term debt 198,700 350,000
Obligations under capital leases 473 5,787
Redeemable preferred stock 232,241 344,316
Shareholders' equity:
Preferred stock, $.01 par value, authorized 2,000,000 shares - -
Common stock, $.01 par value, authorized 400,000,000
shares; issued and outstanding 86,119,849 shares in 2000 and
81,986,457 shares in 1999 861 820
Additional paid-in capital 526,743 488,030
Accumulated deficit (197,962) (372,350)
Accumulated other comprehensive loss (7,904) (17,745)
---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 321,738 98,755
---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,537,206 $1,686,888
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Revenues: 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $1,012,570 $1,025,518 $3,004,006 $3,085,774
Third-party administration, net 4,266 4,419 11,997 12,120
Investment and other income, net 21,233 22,512 57,244 65,641
--------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,038,069 1,052,449 3,073,247 3,163,535
--------------------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 758,557 809,219 2,377,063 2,567,928
Marketing, general and administrative 119,926 142,578 361,719 447,525
Interest and other financing charges 7,460 12,009 27,548 38,239
Restructuring charges -- 19,963 -- 19,963
--------------------------------------------------------------------------------------------------------------------------------
Total expenses 885,943 983,769 2,766,330 3,073,655
--------------------------------------------------------------------------------------------------------------------------------
Operating earnings before income taxes
and extraordinary item 152,126 68,680 306,917 89,880
Income tax expense 63,892 28,846 128,905 37,750
--------------------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary item 88,234 39,834 178,012 52,130
Extraordinary item - Loss on early retirement of
debt, net of income tax benefit of $2,624 -- -- (3,624) --
--------------------------------------------------------------------------------------------------------------------------------
Net earnings 88,234 39,834 174,388 52,130
Less - preferred dividends and amortization (7,638) (11,503) (27,989) (33,962)
--------------------------------------------------------------------------------------------------------------------------------
Net earnings attributable to common shares $ 80,596 $ 28,331 $ 146,399 $ 18,168
================================================================================================================================
Earnings per common share - basic:
Earnings before extraordinary item $ 0.94 $ 0.35 $ 1.80 $ 0.22
Extraordinary item -- -- (0.04) --
--------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share - basic $ 0.94 $ 0.35 $ 1.76 $ 0.22
================================================================================================================================
Earnings per common share - diluted:
Earnings before extraordinary item $ 0.81 $ 0.34 $ 1.66 $ 0.22
Extraordinary item -- -- (0.04) --
--------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share - diluted $ 0.81 $ 0.34 $ 1.62 $ 0.22
================================================================================================================================
Weighted-average common shares outstanding-basic 85,370 81,354 83,197 81,098
Effect of dilutive securities:
Stock options 5,915 2,867 3,921 3,057
Warrants 8,074 -- 3,154 --
--------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding-diluted 99,359 84,221 90,272 84,155
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $174,388 $ 52,130
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation and amortization 26,952 43,301
Noncash restructuring charges and write-downs - 15,060
Deferred income taxes 121,996 37,750
Provision for doubtful accounts and advances - 13,800
Realized loss on sale of investments 67 4,462
Extraordinary item - loss on early retirement of debt 3,624 -
Gain on sale of Direct Script - (9,500)
Other, net 1,420 1,751
Changes in assets and liabilities:
Premiums receivable 1,519 24,375
Other receivables 3,239 11,289
Prepaid expenses and other current assets (2,257) (865)
Medical costs payable (41,296) (175,573)
Trade accounts payable and accrued expenses 747 (12,298)
Unearned premiums (58,717) (61,819)
Other, net 1,780 (8,119)
-------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 233,462 (64,256)
-------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (9,849) (7,443)
Purchases of available-for-sale investments (346,093) (706,221)
Sales and maturities of available-for-sale investments 380,583 815,182
Proceeds from sale of Direct Script - 12,450
Other, net (10,621) 5,460
-------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 14,020 119,428
-------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 50,003 10,673
Cash dividends paid (10,064) -
Redemption of notes payable (154,700) -
Redemption of preferred stock (130,000) -
Payments under capital leases (10,024) (14,153)
-------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (254,785) (3,480)
-------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,303) 51,692
Cash and cash equivalents at beginning of period 332,882 237,717
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $325,579 $289,409
=============================================================================================================
Supplemental schedule of noncash investing and financing activities:
Cash payments (refunds) for income taxes, net $ 5,899 $ (851)
Cash payments for interest 21,197 35,488
Supplemental schedule of noncash investing and financing activities:
Unrealized appreciation (depreciation) of short-term investments 9,841 (16,836)
Preferred stock dividends and amortization 27,989 33,962
</TABLE>
See accompanying notes to consolidated financial statements.
5
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OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by Oxford Health Plans, Inc. ("Oxford") and subsidiaries (collectively,
the "Company") without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been omitted
pursuant to SEC rules and regulations; nevertheless, management of the Company
believes that the disclosures herein are adequate to make the information
presented not misleading. The 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 as well
as liabilities and asset impairments related to operational restructuring
activities. These estimates may be adjusted as more current information becomes
available. 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 December 31, 1999 and 1998 and for each of the years in the three-year
period ended December 31, 1999, included in the Company's Form 10-K filed with
the SEC for the fiscal year ended December 31, 1999.
(2) RESTRUCTURING CHARGES
During the first half of 1998 and the third quarter of 1999, the
Company recorded restructuring charges and write-downs of strategic investments
primarily associated with implementation of the Company's plan ("Turnaround
Plan") to improve operations and restore the Company's profitability. The table
below presents the activity in the first nine months of 2000 related to the
restructuring charge reserves. As of September 30, 2000, the Turnaround Plan is
proceeding in all material respects as expected and the activity during the
first nine months of 2000 is consistent with the Company's estimates. The
Company believes that the reserves as of September 30, 2000 are adequate and
that no revisions of estimates are necessary at this time.
<TABLE>
<CAPTION>
12/31/99 9/30/00
Restructuring Cash Noncash Restructuring
(In thousands) Reserves Used Activity Reserves
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provisions for loss on noncore businesses $ 2,065 $ (218) $(16) $ 1,831
Severance and related costs 7,724 (2,054) - 5,670
Costs of consolidating operations 8,006 (3,729) - 4,277
-------------------------------------------------------------
$17,795 $(6,001) $(16) $11,778
=============================================================
</TABLE>
Cash expenses charged against the reserve for loss on noncore
businesses amounted to $0.2 million during the first nine months of 2000 and
were primarily related to premium deficiencies, professional fees and other
incremental costs associated with exiting such businesses. As of September 30,
2000, the ending reserve balance of $1.8 million represents a full valuation
allowance for noncore assets yet to be disposed of and an estimate of remaining
legal costs related to the disposition of the related noncore businesses.
The reduction in the reserve for severance and related costs reflects
contractual payments of approximately $2.1 million to former employees of the
Company in accordance with their respective
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<PAGE> 7
severance arrangements. The September 30, 2000 balance represents contracted
amounts payable through the first half of 2001 and is related to individuals no
longer employed by the Company.
The reduction in the reserve for costs of consolidating operations
reflects lease payments and occupancy costs of approximately $3.7 million, net
of sublease income, related to vacated office space. The remaining costs of the
operations consolidations reserve at September 30, 2000 is comprised of future
minimum lease rentals and estimated lease termination fees and other costs, net
of sublease income. The Company's related lease obligations for these properties
extend to July 2005.
(3) REDEEMABLE PREFERRED STOCK
As of September 30, 2000, the Company had outstanding 247,318.20 shares
of Series D Cumulative Preferred Stock ("Series D Preferred Stock") and
26,283.27 shares of Series E Cumulative Preferred Stock ("Series E Preferred
Stock", the Series D Preferred Stock and the Series E Preferred Stock, together,
being the "Preferred Stock").
The Series D Preferred Stock accumulates dividends at a rate of 5.129810%
per year, payable quarterly in cash provided that prior to May 13, 2000, the
Series D Preferred Stock accumulated dividends at the rate of 5.319521% per
year, payable annually in cash or additional shares of Series D Preferred Stock,
at the option of the Company. The Series E Preferred Stock accumulates dividends
at a rate of 14% per year, payable quarterly in cash, provided that prior to May
13, 2000, the Series E Preferred Stock accumulated dividends at the rate of
14.589214% per year, payable annually in cash or additional shares of Series E
Preferred Stock, at the option of the Company. The Company must redeem all of
the outstanding shares of Preferred Stock on May 13, 2008 and may redeem all
(but not less than all) of the outstanding shares of either series of Preferred
Stock on or after May 13, 2003. In addition, the holders of the Preferred Stock
may require the Company to redeem any or all of the shares of the Preferred
Stock upon the occurrence of a change of control. The redemption price for each
share of Preferred Stock is equal to all unpaid dividends accumulated to the
date of payment of the redemption price, plus the stated value of $1,000 per
share. 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.
Under certain circumstances, the Company has the right to exchange the
Series D Preferred Stock or the Series E Preferred Stock on any dividend payment
date for junior subordinated debentures issued pursuant to an indenture. The
indenture that would govern the junior subordinated debentures would have terms
comparable to the terms of the series of Preferred Stock that is exchanged,
including an interest rate that is the same as the dividend rate on that series
of Preferred Stock.
As required by the certificates of designations governing the Preferred
Stock, the Company made the following dividend payments on each series of
Preferred Stock during the first nine months of 2000. On May 13, 2000, the
Company (a) issued a dividend in the amount of $53.20 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, 2000 and (b) paid a cash dividend in the
amount of $145.89 per share of Series E Preferred Stock to the holders of record
as of April 28, 2000. The total amount of the May 13, 2000 cash dividend paid
was approximately $3.8 million. On June 30, 2000, the Company paid cash
dividends on the Series D Preferred Stock and Series E Preferred Stock in the
amounts of $6.70 and $18.28 per share, respectively, to the holders of record as
of June 16, 2000. The total amount of the June 30, 2000 cash dividends paid was
approximately $2.1 million. On September 30, 2000, the Company paid cash
dividends on the Series D Preferred Stock and Series E Preferred Stock in the
amounts of $12.82 and $35.00 per share, respectively, to the holders of record
as of September 15, 2000. The total amount of the September 30, 2000 cash
dividends paid was approximately $4.1 million.
See Note (8), Subsequent Events, for additional discussion concerning the
redeemable preferred stock.
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(4) COMPREHENSIVE INCOME (LOSS)
For the three months ended September 30, 2000 and 1999, the changes in
value of available-for-sale securities included in other comprehensive loss
include unrealized holding gains (losses) of $8.1 million and $(2.0) million,
respectively, and reclassification adjustments of $0.3 million and $(1.1)
million, respectively. For the nine months ended September 30, 2000 and 1999,
the changes in value of available-for-sale securities included in other
comprehensive loss include unrealized holding gains (losses) of $9.9 million and
$(10.1) million, respectively, and reclassification adjustments of $(0.1)
million and $(4.5) million, respectively.
(5) REGULATORY MATTERS
In April 2000, the Company provided notice to the New York State
regulatory authorities that it would pay a dividend from its New York health
plan ("Oxford NY") to the parent company. In May 2000, a dividend of
approximately $84.2 million was received by the parent company from Oxford NY.
Additionally, New York State regulatory authorities authorized the repayment of
a $38 million surplus note plus $6 million in accrued interest by Oxford NY to
the parent company. Such amounts were received by the parent company in May
2000. In addition, a dividend of approximately $6 million was received in May
2000 by the parent company from its Connecticut health plan.
In July 2000 and September 2000, the Company received regulatory
approvals from New York State authorizing dividends of $40 million and $80
million, respectively from Oxford NY to the parent company. The dividend
payments were received in the third quarter of 2000.
(6) CONTINGENCIES
Following the October 27, 1997 decline in the price per share of the
Company's common stock, more than fifty purported securities class action
lawsuits were filed against the Company and certain of its officers and
directors in the United States District Courts for the Southern and Eastern
Districts of New York, the District of Connecticut and the District of Arkansas.
In addition, purported shareholder derivative actions were filed against the
Company, its directors and certain of its officers in the United States District
Courts for the Southern District of New York and the District of Connecticut,
and Connecticut Superior Court. The purported securities class and derivative
actions assert claims arising out of the October 27 decline in the price per
share of the Company's common stock. The purported class actions are now all
consolidated before Judge Charles L. Brieant of the United States District Court
for the Southern District of New York. The purported federal derivative actions
have been consolidated before Judge Brieant for all purposes, and any discovery
in the Connecticut derivative actions will be coordinated with discovery in the
federal derivative actions under the supervision of Judge Brieant. The State
Board of Administration of Florida has filed an individual action against the
Company and certain of its officers and directors, which is also now pending in
the United States District Court for the Southern District of New York,
asserting claims arising from the October 27 decline in the price per share of
the Company's common stock. Additional purported securities class, shareholder
derivative, and individual actions may be filed against the Company and certain
of its officers and directors asserting claims arising from the October 27
decline in the price per share of the Company's common stock. Although the
outcome of these actions cannot be predicted at this time, the Company believes
that the defendants have substantial defenses to the claims asserted in the
complaints and intends to defend the actions vigorously. In addition, the
Company is currently being investigated and is undergoing examinations by
various state and federal agencies, including the Securities and Exchange
Commission, various state insurance departments, and the New York State Attorney
General. The outcome of these investigations and examinations cannot be
predicted at this time.
On September 7, 2000, the Connecticut Attorney General filed suit
against four HMOs, including the Company, in a federal district court in
Connecticut, on behalf of a putative class consisting of all Connecticut members
of the defendant HMOs who are enrolled in plans governed by ERISA. The suit
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<PAGE> 9
alleges that the named HMOs breached their disclosure obligations and fiduciary
duties under ERISA by, inter alia, (i) failing to timely pay claims; (ii) the
use of inappropriate and arbitrary coverage guidelines as the basis for denials;
(iii) the inappropriate use of drug formularies; (iv) failing to respond to
member communications and complaints; and (v) failing to disclose essential
coverage and appeal information. The suit seeks preliminary and permanent
injunctions enjoining the defendants from pursuing the complained of acts and
practices. Also, on September 7, 2000, a group of plaintiffs' law firms
commenced an action in federal district court in Connecticut against the Company
and four other HMOs on behalf of a putative national class consisting of all
members of the defendant HMOs who are or have been enrolled in plans governed by
ERISA within the past six years. The substantive allegations of this complaint,
which also claims violations of ERISA, are nearly identical to that filed by the
Connecticut Attorney General. The complaint seeks the restitution of premiums
paid and/or the disgorgement of profits, in addition to injunctive relief.
Although the outcome of these actions cannot be predicted at this time, the
Company believes that the claims asserted are without merit and intends to
defend the actions vigorously.
The Company also is involved in other legal actions in the normal course
of its business, some of which seek monetary damages, including claims for
punitive damages, which may not be covered by insurance. The Company believes
any ultimate liability associated with these other legal actions would not have
a material adverse effect on the Company's consolidated financial position or
results of operations.
(7) EXTRAORDINARY ITEM
During the second quarter of 2000, the Company redeemed $136 million
outstanding under the Term Loan Agreement, dated as of May 13, 1998 (the "Term
Loan"), prior to maturity. Proceeds from dividend and surplus note repayments
received from Oxford NY were used to redeem the Term Loan. In connection with
the redemption, the Company recorded an extraordinary charge of approximately
$3.6 million or $0.04 per diluted share, net of income tax benefits of
approximately $2.6 million. The extraordinary charge represents the payment of a
redemption premium and the write-off of deferred finance costs, net of related
tax benefits.
(8) SUBSEQUENT EVENTS
In October 2000, the Company redeemed approximately $5.2 million
principal amount of Senior Notes at a cost, before income tax benefits, of
approximately $5.8 million, including redemption premium and the write-off of
deferred finance costs.
Proposed Capital and Financing Arrangements
On October 25, 2000, the Company announced that it had entered into an
exchange and repurchase agreement (the "Agreement") with the holders of its
redeemable Preferred Stock and warrants (the "Investors") whereby (a) the
Company will repurchase approximately $78.6 million face value of outstanding
Preferred Stock and warrants for approximately 11.5 million shares at a total
cost of approximately $220 million, and (b) the Investors will exchange their
remaining approximately $195 million face value of outstanding Preferred Stock
and their remaining warrants for approximately 11 million shares of common
stock. The transaction includes an agreement to terminate the investment
agreement dated February 23, 1998 between the Company and Investors, as amended.
In connection with the Agreement, the Company will write off
approximately $38 million of unamortized discount and issuance expenses related
to the Preferred Stock upon the closing of the transaction. Among other things,
the Agreement is contingent upon the Company completing a successful tender
offer for its outstanding 11% Senior Notes due 2005 (the "Senior Notes") and
obtaining a new term loan and revolving credit facility by January 16, 2001. In
connection with the tender offer for the Senior Notes, the Company anticipates
that it will record an extraordinary charge of approximately $16 million, net of
income tax benefits, upon completion of the tender offer. All such transactions
are anticipated to close in the fourth quarter of 2000.
9
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Oxford Health Plans, Inc.
Trumbull, Connecticut
We have reviewed the accompanying consolidated balance sheets of Oxford
Health Plans, Inc. and subsidiaries (the "Company") as of September 30, 2000,
the consolidated statements of earnings for the three-month and nine-month
periods ended September 30, 2000 and 1999, and the consolidated statements of
cash flows for the nine-month periods ended September 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our reviews 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 auditing standards generally accepted in the United States,
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 financial statements at September 30, 2000, and for
the three-month and nine-month periods ended September 30, 2000 for them to be
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
New York, New York
October 25, 2000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table shows membership by product:
<TABLE>
<CAPTION>
As of September 30, Increase (Decrease)
------------------- -------------------
Membership: 2000 1999 Amount %
---- ---- ------ ------
<S> <C> <C> <C> <C>
Freedom, Liberty and Other Plans 1,111,300 1,238,900 (127,600) (10.3%)
HMOs 222,300 238,400 (16,100) (6.8%)
--------------------------------------------------------------------------------------------------
Total commercial membership 1,333,600 1,477,300 (143,700) (9.7%)
Medicare 90,300 101,100 (10,800) (10.7%)
--------------------------------------------------------------------------------------------------
Total fully insured membership 1,423,900 1,578,400 (154,500) (9.8%)
Third-party administration 62,000 50,700 11,300 22.3%
--------------------------------------------------------------------------------------------------
Total membership 1,485,900 1,629,100 (143,200) (8.8%)
======================================================================================================== =====
</TABLE>
The following table provides certain statement of operations data
expressed as a percentage of total revenues for the three month and
nine month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
Revenues: 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Premiums earned 97.5% 97.4% 97.7% 97.5%
Third-party administration, net 0.4% 0.4% 0.4% 0.4%
Investment and other income, net 2.1% 2.2% 1.9% 2.1%
--------------------------------------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
--------------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 73.1% 76.9% 77.3% 81.2%
Marketing, general and administrative 11.5% 13.5% 11.8% 14.1%
Interest and other financing charges 0.7% 1.2% 0.9% 1.3%
Restructuring charges - 1.9% - 0.6%
--------------------------------------------------------------------------------------------------------------------------
Total expenses 85.3% 93.5% 90.0% 97.2%
--------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and
extraordinary item 14.7% 6.5% 10.0% 2.8%
Income tax expense 6.2% 2.7% 4.2% 1.2%
--------------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary item 8.5% 3.8% 5.8% 1.6%
Extraordinary item - Loss on early retirement of
debt, net of income tax benefits - - (0.1%) -
--------------------------------------------------------------------------------------------------------------------------
Net earnings 8.5% 3.8% 5.7% 1.6%
Less - preferred dividends and amortization (0.7%) (1.1%) (0.9%) (1.1%)
--------------------------------------------------------------------------------------------------------------------------
Net earnings attributable to common shares 7.8% 2.7% 4.8% 0.5%
==========================================================================================================================
Selected Information:
Medical loss ratio 74.9% 78.9% 79.1% 83.2%
Administrative loss ratio 11.8% 13.8% 12.0% 14.4%
PMPM premium revenue $ 236.87 $ 214.70 $ 229.95 $ 210.44
PMPM medical expense $ 177.45 $ 169.41 $ 181.96 $ 175.13
Fully insured member months (000's) 4,274.8 4,776.6 13,063.8 14,663.1
</TABLE>
11
<PAGE> 12
RESULTS OF OPERATIONS
Overview
The Company's revenues consist primarily of commercial premiums derived
from its Freedom Plan, Liberty Plan and health maintenance organizations
("HMOs"), and reimbursements under government contracts relating to its
Medicare+Choice ("Medicare") 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 "Cautionary Statement Regarding Forward-Looking Statements".
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 beginning in 1998 and into the third quarter of 2000 and
may experience additional declines in membership for the remainder of 2000,
although to a much lesser extent. 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.
Restructuring Charges
During the first half of 1998 and the third quarter of 1999, the Company
recorded restructuring charges and write-downs of strategic investments
primarily associated with implementation of the Company's plan ("Turnaround
Plan") to improve operations and restore the Company's profitability. The table
below presents the activity in the first nine months of 2000 related to the
restructuring charge reserves. As of September 30, 2000, the Turnaround Plan is
proceeding in all material respects as expected and the activity during the
first nine months of 2000 is consistent with the Company's estimates. The
Company believes that the reserves as of September 30, 2000 are adequate and
that no revisions of estimates are necessary at this time.
<TABLE>
<CAPTION>
12/31/99 9/30/00
Restructuring Cash Noncash Restructuring
(In thousands) Reserves Used Activity Reserves
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provisions for loss on noncore businesses $ 2,065 $ (218) $(16) $ 1,831
Severance and related costs 7,724 (2,054) - 5,670
Costs of consolidating operations 8,006 (3,729) - 4,277
--------------------------------------------------------------
$17,795 $(6,001) $(16) $11,778
==============================================================
</TABLE>
Cash expenses charged against the reserve for loss on noncore businesses
amounted to $0.2 million during the first nine months of 2000 and were primarily
related to premium deficiencies, professional fees and other incremental costs
associated with exiting such businesses. As of September 30, 2000, the ending
reserve balance of $1.8 million represents a full valuation allowance for
noncore assets yet to be disposed of and an estimate of remaining legal costs
related to the disposition of the related noncore businesses.
The reduction in the reserve for severance and related costs reflects
contractual payments of approximately $2.1 million to former employees of the
Company in accordance with their respective
12
<PAGE> 13
severance arrangements. The September 30, 2000 balance represents contracted
amounts payable through the first half of 2001 and is related to individuals no
longer employed by the Company.
The reduction in the reserve for costs of consolidating operations
reflects lease payments and occupancy costs of approximately $3.7 million, net
of sublease income, related to vacated office space. The remaining costs of the
operations consolidations reserve at September 30, 2000 is comprised of future
minimum lease rentals and estimated lease termination fees and other costs, net
of sublease income. The Company's related lease obligations for these properties
extends to July 2005.
Three months ended September 30, 2000 compared with three months ended
September 30, 1999
Total revenues for the quarter ended September 30, 2000 were $1.04
billion, down 1.4% from $1.05 billion during the same period in the prior year.
Net earnings attributable to common shares for the third quarter of 2000 totaled
$80.6 million, or $0.81 per diluted common share, compared with $28.3 million,
or $0.34 per diluted common share, for the third quarter of 1999.
Membership in the Company's fully insured health care programs as of
September 30, 2000 decreased by approximately 155,000 members from the level of
such membership as of September 30, 1999 and by approximately 120,000 members
since year-end 1999. Such membership attrition is a result of the Company's
continued efforts to rationalize its product lines, particularly certain small
group product offerings, by not renewing groups or products where underwriting
margins are unacceptable. Membership in Medicare programs decreased by
approximately 11,000 members compared with September 30, 1999 and by
approximately 7,000 members since year-end 1999. The overall decline in Medicare
membership is primarily due to the Company's withdrawal or restructuring,
including changes in provider arrangements and benefit plans, of the Medicare
business in several markets, including the withdrawal from the Medicare market
in Suffolk County, New York during the first quarter of 2000. The Company has
announced that it will withdraw from the Medicare market in 8 counties within
New Jersey at the end of 2000, resulting in the loss of approximately 8,000
additional Medicare members. The Company believes that future Medicare premiums
may be adversely affected by the implementation of risk adjustment mechanisms
announced by the Health Care Financing Administration ("HCFA").
Total commercial premiums earned for the three months ended September 30,
2000 increased 0.2% to $842.3 million compared with $840.6 million in the same
period in the prior year. The increase in premiums earned is attributable to an
11.8% increase in average premium yield over the third quarter of 1999,
partially offset by a 10.4% decrease in member months in the Company's
commercial health care programs. Average premium rates for the full year 2000
are expected to be approximately 10% higher in the Company's core commercial
business than in the full year 1999.
Premiums earned from Medicare programs decreased 7.9% to $170.3 million
in the third quarter of 2000 compared with $184.9 million in the third quarter
of 1999. The revenue decline was caused by membership declines as member months
of Medicare programs decreased 12% when compared with the prior year third
quarter, partially offset by increases in average premium yields of Medicare
programs of 4.6% over the level of the prior year third quarter. This yield
increase exceeded the average rate increase granted by HCFA as membership losses
occurred primarily in lower reimbursement counties. The Company withdrew from
Medicaid programs in the first quarter of 1999.
Investment and other income decreased 5.7% to $21.2 million for the three
months ended September 30, 2000 compared with $22.5 million for the same period
last year. Net investment income increased 26.8% to $19.4 million due to higher
investment yields and higher average invested balances during the third quarter
of 2000 compared with the third quarter of 1999. Other income decreased by $5.4
million to $1.8 million in the 2000 third quarter compared with 1999. Included
in other income for the three months ended September 30, 1999 is a gain on the
sale of Direct Script of approximately $7 million.
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<PAGE> 14
Health care services expense stated as a percentage of premium revenues
(the "medical loss ratio") was 74.9% for the third quarter of 2000 compared with
78.9% for the third quarter of 1999. The improvement in the third quarter of
2000 over the third quarter of 1999 reflects a 10.3% increase in average overall
premium yield offset in part by a 4.7% increase in per member per month medical
costs, net of favorable prior period development of medical cost estimates.
Included in medical costs for the three months ended September 30, 2000 are
favorable developments of prior year estimates of medical costs of approximately
$30.7 million. Health care services expense in the third quarter of 1999 was
favorably impacted by net changes in prior period estimates of medical costs
aggregating approximately $19.6 million. Excluding the favorable development of
prior year estimates of medical costs in the third quarter of 2000, the medical
loss ratio would have been 77.9%. The increase in per member per month medical
costs is primarily the result of medical cost inflation partially offset by a
significant change in the Company's membership composition (for example, a
reduction in the number of members in government programs) and initiatives to
improve health care utilization and costs. The Company believes it has made
adequate provision for medical costs as of September 30, 2000. There can be no
assurance, however, that additional reserve additions will not be necessary as
the Company continues to review and reconcile provider claims. Additions to
reserves could also result as a consequence of regulatory examinations. Such
additions would be included in the results of operations for the period in which
the adjustments are made.
Marketing, general and administrative expenses totaled $119.9 million in
the third quarter of 2000 compared with $142.6 million in the third quarter of
1999. The decrease when compared with the third quarter of 1999 is primarily
attributable to a $11.7 million decrease in payroll and benefits due to reduced
staffing and $4.5 million in lower depreciation expense. Administrative expenses
as a percent of operating revenue were 11.8% during the third quarter of 2000
compared with 13.8% during the third quarter of 1999 and 14.6% for the full year
1999. Included in marketing, general and administrative expense for the three
months ended September 30, 2000 are severance costs of approximately $2.5
million related to changes in operating management structure and reporting
responsibilities.
Interest expense decreased 37.9% or $4.5 million to $7.5 million in the
third quarter of 2000 compared with $12 million in the third quarter of 1999.
The Company incurred interest and other financing charges of $6 million in the
third quarter of 2000 related to its outstanding debt and capital lease
obligations, compared with $10 million in the comparable 1999 period. Interest
expense on delayed claims declined in the third quarter of 2000 compared with
the third quarter of 1999. Interest expense on debt and capital lease
obligations decreased due to the repayment of the term loan during the second
quarter of 2000. The decrease in interest expense on delayed claims is a result
of more timely claim payments and lower levels of older claims outstanding.
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, although to a lesser
extent than in prior years, as well as interest expense on its outstanding
senior notes or new bank financings (see Liquidity and Capital Resources) as
well as capital lease obligations.
The Company recorded income tax expense of $63.9 million for the third
quarter of 2000 compared with $28.8 million for the third quarter of 1999,
reflecting an effective tax rate of 42% for 2000. The Company's periodic
analysis to assess the realizability of the deferred tax assets includes an
evaluation of the results of operations for the current 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. 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. At September 30, 2000,
the Company had deferred tax assets of approximately $195.7 million (net of
valuation allowances of approximately $42.5 million). The valuation allowance
relates primarily to capital loss carryforwards and state net operating loss
carryforwards. The amounts of future taxable income necessary during the
carryforward period to utilize the unreserved net deferred tax assets is
approximately $466 million.
14
<PAGE> 15
Net earnings attributable to common shares for the three months ended
September 30, 2000 and 1999 were reduced by preferred dividends and amortization
of approximately $7.6 million and $11.5 million, respectively.
Nine months ended September 30, 2000 compared with nine months ended
September 30, 1999
Total revenues for the nine months ended September 30, 2000 were $3.07
billion, down 2.9% from $3.16 billion during the same period in the prior year.
Net earnings before extraordinary item attributable to common stock for the
first nine months of 2000 totaled $150 million, or $1.66 per diluted common
share, compared with $18.2 million, or $0.22 per diluted common share, for the
first nine months of 1999.
Total commercial premiums earned for the nine months ended September 30,
2000 decreased 0.6% to $2.5 billion compared with $2.51 billion in the same
period in the prior year. The year to year decrease in premiums earned is
attributable to a 10.7% increase in average premium yield compared with the
first nine months of 1999 offset by a 10.3% decrease in member months in the
Company's commercial health care programs. Average premium rates for the full
year 2000 are expected to be approximately 10% higher in the Company's core
commercial business than in the full year 1999.
Premiums earned from Medicare programs decreased 9.7% to $506.4 million
in the first nine months of 2000 from $560.6 million in the first nine months of
1999. The revenue decline was caused by membership declines as member months of
Medicare programs decreased 14.3% when compared with the prior year period,
partially offset by increases in average premium yields of Medicare programs of
5.5% 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. The Company withdrew from Medicaid programs in the
first quarter of 1999. Premiums earned from Medicaid programs were $11.9 million
in the first nine months of 1999.
Investment and other income decreased 12.8% to $57.2 million for the
first nine months of 2000 compared with $65.6 million in the comparable 1999
period. Net investment income for the nine months ended September 30, 2000
increased 26.5% to $56.3 million from $44.5 million for the same period last
year. The improvement is primarily due to a $4.5 million decrease in capital
losses realized in the first nine months of 2000 compared with the prior year
period and an increase in average investment yields during the first nine months
of 2000 compared with the comparable 1999 period. Included in other income for
the nine months ended September 30, 1999 is a $13.5 million gain from the sale
of the Company's New York Medicaid business and $7 million related to the sale
of Direct Script for the nine months ended September 30, 1999.
Health care services expense stated as a percentage of premium revenues
(the "medical loss ratio") was 79.1% for the first nine months of 2000 compared
with 83.2% for the first nine months of 1999. The improvement in the first nine
months of 2000 over the first nine months of 1999 reflects an 9.3% increase in
average overall premium yield offset in part by a 3.9% increase in per member
per month medical costs, net of favorable prior period development of medical
cost estimates, when compared to the prior year period. Included in medical
costs for the nine months ended September 30, 2000 are favorable developments of
prior period medical costs of approximately $54.1 million. Excluding the
favorable development of prior year estimates of medical costs in the first nine
months of 2000, the medical loss ratio would have been 80.9%. Medical costs were
adversely affected during the first nine months of 1999 by a provision for loss
on claims advances totaling $13.8 million and $8 million for additional reserves
related to the unwinding of a Medicare risk transfer agreement in New Jersey.
See "Liquidity and Capital Resources." The increase in per member per month
medical costs is primarily the result of medical cost inflation partially offset
by a significant change in the Company's membership composition (for example, a
reduction in the number of members in government programs) and initiatives to
improve health care utilization and costs. The Company believes it has made
adequate provision for medical costs as of September 30, 2000. There can be no
assurance, however, that additional reserve additions will not be necessary as
the Company continues to review and reconcile provider claims. Additions to
reserves could
15
<PAGE> 16
also result as a consequence of regulatory examinations. Such additions would be
included in the results of operations for the period in which the adjustments
are made.
Marketing, general and administrative expenses totaled $361.7 million in
the first nine months of 2000 compared with $447.5 million in the first nine
months of 1999. The decrease when compared to the prior year period is primarily
attributable to a $37.1 million decrease in payroll, benefits and occupancy
costs due to reduced staffing, an $11.2 million decrease in consulting fees and
temporary help, an $8.4 million decrease in marketing and related expenses and
$13.3 million in lower depreciation expense. These expenses as a percent of
operating revenue were 12% during the first nine months of 2000 compared with
14.4% during the first nine months of 1999. Included in marketing, general and
administrative expense for the first nine months of 2000 are severance costs of
approximately $7.5 million related to changes in operating management structure
and reporting responsibilities.
Interest expense decreased $10.7 million to $27.5 million in the first
nine months of 2000 compared with $38.2 million in the comparable prior year
period. The Company incurred interest and other financing charges of $24.5
million in the first nine months of 2000 related to its outstanding debt and
capital lease obligations, compared with $30.2 million in the first nine months
of 1999. Interest expense on delayed claims totaled $3.1 million in the first
nine months of 2000 compared with $8 million in the first nine months of 1999.
Interest expense on debt and capital lease obligations decreased due to the
repayment of the $150 million term loan during the second quarter of 2000. The
decrease in interest expense on delayed claims is a result of more timely claim
payments and lower levels of older claims outstanding. 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, although to a lesser extent than in
prior years, as well as interest expense on its outstanding senior notes or new
bank financings (see Liquidity and Capital Resources) together with capital
lease obligations.
The Company recorded income tax expense of $128.9 million for the first
nine months of 2000 reflecting an effective tax rate of 42% for 2000, compared
with $37.8 million for the 1999 period.
Net earnings before extraordinary item attributable to common shares for
the nine months ended September 30, 2000 and 1999 were reduced by preferred
dividends and amortization of approximately $28 million and $34 million,
respectively. Preferred dividends and amortization for the nine months ended
September 30, 2000 include a charge of approximately $2.6 million of issue costs
relating to the Company's repurchase of approximately $130 million of preferred
stock in February 2000. During the second quarter of 2000, the Company prepaid
its outstanding term loan and incurred an extraordinary charge of $3.6 million
or $0.04 per diluted common share, net of $2.6 million of income tax benefits.
The extraordinary charge represents the payment of a redemption premium and the
write off of deferred finance costs, net of related tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the first nine months of 2000
approximated $233.5 million, compared with cash used of $64.3 million for the
first nine months of 1999. The $297.8 million improvement in cash flow was the
result of increased net earnings and improved working capital management,
particularly in the area of medical costs and other payables. In addition, cash
flow for the first nine months of 1999 was negatively affected by the runoff of
claims reserves relating to discontinued or restructured businesses of
approximately $98 million and reductions of claim inventories.
The Company's capital expenditures for the first nine months of 2000
totaled $9.8 million compared with $7.4 million for the first nine months of
1999. Amounts were principally for certain leasehold improvements, computer
equipment and software. Net investment proceeds were $34.5 million in 2000
compared with $109 million in 1999. The Company was able to use cash generated
by operations and stock option proceeds to fund current year financing
activities thereby necessitating less drawdowns on investments. Also included in
1999 cash flow is $12.4 million attributable to the sale of Direct Script.
16
<PAGE> 17
Cash used by financing activities totaled $254.8 million during the first
nine months of 2000 compared with $3.5 million in the first nine months of 1999.
During the first nine months of 2000, the Company repurchased shares of its
Series D and Series E Preferred Stock for an aggregate amount of approximately
$130 million and repurchased the remaining outstanding obligation of its $150
million term loan under the Term Loan Agreement, dated as of May 13, 1998 (the
"Term Loan"). In connection with the repayment of the Term Loan, the Company
paid a redemption premium of approximately $3.4 million. Such amount is included
as an extraordinary charge, net of income tax benefits for the nine month period
ended September 30, 2000. In addition, during the third quarter of 2000, the
Company repurchased $1.3 million of its Senior Notes. Costs associated with this
redemption, including redemption premiums, were not material and are included in
interest and other financing charges for the three months ended September 30,
2000. The Company paid the May 13, 2000 dividend on the Series D Cumulative
Preferred Stock (the "Series D Preferred Stock"), valued at approximately $12.5
million, in shares of Series D Preferred Stock and paid the May 13, 2000
dividend on the Series E Cumulative Preferred Stock (the "Series E Preferred
Stock," the Series D Preferred Stock and Series E Preferred Stock together being
the "Preferred Stock") of approximately $3.8 million in cash. All dividends on
both the Series D Preferred Stock and Series E Preferred Stock after May 13,
2000 are payable in cash on a quarterly basis. Accordingly, on June 30, 2000,
the Company paid cash dividends on the Series D Preferred Stock and Series E
Preferred Stock of approximately $1.6 million and $0.5 million, respectively. On
September 30, 2000, the Company paid cash dividends on the Series D Preferred
Stock and Series E Preferred Stock of approximately $3.2 million and $0.9
million, respectively.
As of September 30, 2000, cash and investments aggregating $57.6 million
have been segregated in the accompanying consolidated balance sheet as
restricted investments to comply with federal and state regulatory requirements.
During the first quarter of 2000, the regulatory restrictions on approximately
$0.8 million of collateral (cash and cash equivalents) for advances made by
Oxford Health Plans (NJ), Inc., the Company's New Jersey HMO subsidiary ("Oxford
NJ"), were removed. The restriction on the remaining $4.4 million (cash and cash
equivalents) was removed during the third quarter of 2000. With respect to the
Company's New York subsidiaries, the minimum amount of surplus required is based
on a formula established by the New York State Insurance Department ("NYSID"),
which required approximately $140 million at September 30, 2000. During 2000,
the Company received regulatory approvals from NYSID to pay dividends in excess
of required surplus from Oxford Health Plans (NY), Inc., the Company's New York
HMO subsidiary ("Oxford NY"), to the parent company. Such dividends received
were approximately $120 million and $204.2 million for the three month and nine
month periods ended September 30, 2000, respectively. A dividend of
approximately $6 million was received in May 2000 by the parent company from its
Connecticut health plan. In addition, on April 26, 2000, Oxford NY repaid a
surplus note plus accrued interest to the parent company of approximately $44
million. The Company intends to continue to seek the maximum permitted dividends
in excess of required surplus from its subsidiaries. However, there can be no
assurances as to the amount of or the ability of the subsidiaries to pay any
such future dividends.
In September 1998, the National Association of Insurance Commissioners
("NAIC") adopted new minimum capitalization requirements, known as risk-based
capital rules, for health care coverage provided by HMOs and other risk-bearing
health care entities. Depending on the nature and extent of the new minimum
capitalization requirements ultimately adopted by each state, there could be an
increase in the capital required for certain of the Company's regulated
subsidiaries. The Connecticut Department of Insurance has promulgated
regulations based on the NAIC model which are applicable to its 1999 annual
financial statements. Neither New York nor New Jersey has enacted similar
legislation; however, risk- based capital legislation has been introduced in New
York. In addition, the New Jersey Department of Banking and Insurance published
solvency regulations in June 1999 that resulted in an additional $1.5 million
solvency deposit by Oxford NJ. The Company believes that the current
capitalization of its subsidiaries is sufficient to meet all proposed
requirements.
The New Jersey State legislature has passed legislation that includes a
$50 million assessment on HMOs in the state based on market share and to be
collected over a three-year period. Although the Company does not anticipate
that this assessment will have a material impact on its operations, the
assessment may necessitate a capital contribution to Oxford NJ in an amount up
to approximately
17
<PAGE> 18
$6 million. The Company's estimate of this assessment is included in medical
costs payable at September 30, 2000.
The Company's medical costs payable were $614.8 million as of September
30, 2000 (including $522.8 million for IBNR) compared with $656.1 million as of
December 31, 1999 (including $570.7 million for IBNR). Medical payable days were
75 at September 30, 2000 compared with 76 days at December 31, 1999. The
decrease reflects an increase in payments of prior period claims, a change in
mix of outstanding claims, favorable development of prior period estimates of
medical costs and the timing of certain pharmacy payments. The Company estimates
the amount of its IBNR reserves using standard actuarial methodologies based
upon historical data, including the average interval between the date services
are rendered and the date claims are received and paid, denied claims activity,
expected medical cost inflation, seasonality patterns and changes in membership.
Outstanding provider advances, which have been fully reserved for,
aggregated approximately $25.8 million at September 30, 2000. The Company
continues its efforts to recover outstanding advance payments, either through
repayment by the provider or application against future claims.
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 the case of the North Shore Medicare risk arrangement described
below, the Company no longer records a reserve for claims liability since the
payment obligation has been transferred to North Shore. 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 believes that its reserves
for medical costs payable are adequate to satisfy its ultimate claim
liabilities.
In an effort to control increasing medical costs in its Medicare
programs, the Company has an agreement with North Shore-Long Island Jewish
Health Systems ("North Shore") pursuant to which it has transferred to North
Shore a substantial portion of the medical cost risk associated with its current
22,000 Medicare members in certain New York counties. The Company and North
Shore have made progress in resolving certain operational difficulties under the
agreements; nonetheless the Company bears the risk of nonperformance or default
by North Shore, and the failure of the North Shore arrangement could have a
material adverse effect on the Company's results of operations.
During the first nine months of 2000, Oxford NY made cash contributions
to the capital of its indemnity insurance subsidiary of approximately $41.5
million. In addition, the Company made cash contributions to its New Jersey HMO
subsidiary of approximately $6 million during the first nine months of 2000.
During the first nine months of 1999, the Company made cash contributions to the
capital of two of its HMO subsidiaries totaling approximately $4.5 million. The
capital contributions were made to ensure that the subsidiaries had sufficient
surplus under applicable regulations after giving effect to operating results
and reductions to surplus resulting from the nonadmissibility of certain assets.
The Company does not expect that any additional capital contributions to the
subsidiaries will be required during the remainder of 2000.
As of September 30, 2000, the Company had outstanding 247,318.20 shares
of Series D Preferred Stock and 26,283.27 shares of Series E Preferred Stock.
The Series D Preferred Stock accumulates dividends at a rate of 5.129810%
per year, payable quarterly in cash, provided that prior to May 13, 2000, the
Series D Preferred Stock accumulated dividends at the rate of 5.319521% per
year, payable annually in cash or additional shares of Series D Preferred
18
<PAGE> 19
Stock, at the option of the Company. The Series E Preferred Stock accumulates
dividends at a rate of 14% per year, payable quarterly in cash, provided that
prior to May 13, 2000, the Series E Preferred Stock accumulated dividends at the
rate of 14.589214% per year, payable annually in cash or additional shares of
Series E Preferred Stock, at the option of the Company. Future quarterly
dividends on both the Series D and Series E Preferred Stock are payable in cash.
The Company must redeem all of the outstanding shares of Preferred Stock on May
13, 2008 and may redeem all (but not less than all) of the outstanding shares of
either series of Preferred Stock on or after May 13, 2003. In addition, the
holders of the Preferred Stock may require the Company to redeem any or all of
the shares of the Preferred Stock upon the occurrence of a change of control.
The redemption price for each share of Preferred Stock is equal to all unpaid
dividends accumulated to the date of payment of the redemption price, plus the
stated value of $1,000 per share. 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.
Under certain circumstances, the Company has the right to exchange the
Series D Preferred Stock or the Series E Preferred Stock on any dividend payment
date for junior subordinated debentures issued pursuant to an indenture. The
indenture that would govern the junior subordinated debentures would have terms
comparable to the terms of the series of Preferred Stock that is exchanged,
including an interest rate that is the same as the dividend rate on that series
of Preferred Stock.
As required by the certificates of designations governing the Preferred
Stock, the Company made the following dividend payments on each series of
Preferred Stock for the nine months ended September 30, 2000. On May 13, 2000,
the Company (a) issued a dividend in the amount of $53.20 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, 2000 and (b) paid a cash dividend in the
amount of $145.89 per share of Series E Preferred Stock to the holders of record
as of April 28, 2000. The total amount of the May 13, 2000 cash dividend paid
was approximately $3.8 million. On June 30, 2000, the Company paid cash
dividends on the Series D Preferred Stock and Series E Preferred Stock in the
amounts of $6.70 and $18.28 per share, respectively, to the holders of record as
of June 16, 2000. The total amount of the June 30, 2000 cash dividend paid was
approximately $2.1 million. On September 30, 2000, the Company paid cash
dividends on the Series D Preferred Stock and Series E Preferred Stock in the
amount of $12.82 and $35.00 per share, respectively, to the holders of record as
of September 15, 2000. The total amount of the September 30, 2000 cash dividend
paid was approximately $4.1 million.
In October 2000, the Company redeemed approximately $5.2 million
principal amount of Senior Notes at a cost, before income tax benefits, of
approximately $5.8 million, including redemption premium and the write-off of
deferred finance costs.
Proposed Capital and Financing Arrangements
On October 25, 2000, the Company announced that it had entered into an
exchange and repurchase agreement (the "Agreement") with the holders of its
redeemable Preferred Stock and warrants (the "Investors") whereby (a) the
Company will repurchase approximately $78.6 million face value of outstanding
Preferred Stock and warrants for 11.5 million shares at a total cost of
approximately $220 million, and (b) the Investors will exchange their remaining
approximately $195 million face value of outstanding Preferred Stock and their
remaining warrants for approximately 11 million shares of common stock. The
transaction includes an agreement to terminate the investment agreement dated as
of February 23, 1998 between the Company and Investors, as amended.
In connection with the Agreement, the Company will write off
approximately $38 million of unamortized discount and issuance expenses related
to the Preferred Stock upon the closing of the transaction. Among other things,
the Agreement is contingent upon the Company completing a successful tender
offer for its outstanding 11% Senior Notes due 2005 (the "Senior Notes") and
obtaining a new term loan and revolving credit facility by January 16, 2001. In
connection with the tender offer for the Senior Notes, the Company anticipates
that it will record an extraordinary charge of approximately
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<PAGE> 20
$16 million, net of income tax benefits, upon completion of the tender offer.
All such transactions are anticipated to close in the fourth quarter of 2000.
MARKET RISK DISCLOSURES
The Company's consolidated balance sheet as of September 30, 2000
includes a significant amount of assets whose fair value is subject to market
risk. Since a 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 September 30, 2000 was not significant.
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. The expected change is then adjusted for the estimated
convexity of the instruments in the Company's investment portfolio 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. Hypothetical
immediate increases of 100 and 200 basis points in market interest rates would
decrease the fair value of the Company's investments in debt securities as of
September 30, 2000 by approximately $19.3 million and $38 million, respectively
(compared with $19.3 million and $38 million as of September 30, 1999,
respectively). Hypothetical immediate decreases of 100 and 200 basis points in
market interest rates would increase the fair value of the Company's investments
in debt securities as of September 30, 2000 by approximately $19.8 million and
$39.5 million, respectively (compared with $19.7 million and $39.2 million as of
September 30, 1999, respectively). 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
including statements concerning future results of operations or financial
position, future liquidity, future ability to receive cash from the Company's
regulated subsidiaries, future ability to pay dividends, future ability to
retire, repurchase or exchange debt and equity, future health care and
administrative costs, future premium rates and yields for commercial and
Medicare business, the employer renewal process, future growth or reduction 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,
proposed efforts to control health care and administrative costs, future impact
of risk-sharing and cost-containment agreements with health care providers,
future enrollment levels, future government regulation and relations and the
impact of new laws and regulation, the future of the health care industry, and
the impact on the Company of 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
20
<PAGE> 21
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.
IBNR estimates; Inability to control health care costs
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 received
and paid, denied claims activity, 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, 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 Company's future results of operations depend, in part, on its
ability to predict and control 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 contain such costs may be adversely
affected by various factors, including: new technologies and health care
practices, hospital costs, changes in demographics and trends, new 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.
The effect of higher administrative costs
Although a key element of the Company's future strategy is a reduction in
administrative expenses, no assurance can be given that the Company will be able
to achieve such reductions, especially since such reductions will involve
changing work processes and staffing levels for various functions which, in
turn, could involve operational challenges and the risk of unanticipated costs,
including unexpected employee attrition.
Changes in laws and regulations
The health care financing industry in general, and HMOs in particular,
are subject to substantial federal and state government regulation, including,
but not limited to, regulations relating to cash reserves, minimum net worth,
licensing requirements, approval of policy language and benefits, mandatory
products and benefits, provider compensation arrangements, member disclosure,
premium rates and periodic examinations by state and federal agencies. State
regulations require the Company's HMO and insurance subsidiaries to maintain
restricted cash or available cash reserves and restrict their ability to make
dividend payments, loans or other payments to the Company.
In recent years, significant federal and state legislation affecting the
Company's business was enacted. For example, effective July 1999, New York State
implemented a requirement that managed care members have a right to an external
independent appeal of certain final adverse determinations, including those
involving experimental treatments and clinical trials. In addition, in 1999 and
2000 Connecticut and New Jersey enacted legislation 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 the Company and are currently considering
regulations relating to mandatory benefits and products, defining medical
necessity, provider compensation, health
21
<PAGE> 22
plan liability to members who fail to receive appropriate care, disclosure and
composition of physician networks, and allowing physicians to collectively
negotiate contract terms with carriers, including fees. All of these proposals
would apply to the Company. In addition, Congress is considering significant
changes to Medicare, including a pharmacy benefit requirement and payment relief
to Medicare plans, as well as proposals relating to health care reform,
including a comprehensive package of regulations on managed care called the
"Patient Bill of Rights" legislation. Separate and distinct versions of the
Patient Bill of Rights have passed both the House of Representatives and the
Senate and are awaiting further action.
Premiums for Oxford's Medicare programs are determined through formulas
established by HCFA for Oxford's Medicare contracts. Federal law provides for
annual adjustments in Medicare reimbursement by HCFA which could reduce the
reimbursement received by the Company. 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. Any Medicare risk agreements entered into by Oxford could
pose operational challenges for the Company and could be adversely affected by
regulatory actions or by the failure of the risk contractor to comply with the
terms of such agreement, and failure under any such agreement could have an
adverse effect on the Company's Medicare membership or its relationship with its
providers. Oxford's Medicare programs are subject to certain additional risks
compared to commercial programs, such as higher comparative medical costs,
higher levels of utilization and higher marketing and advertising costs.
Service and management information systems
The Company's claims and service systems depend upon the smooth
functioning of two complex computer systems. While these systems presently
operate at 99% availability and are sufficient to operate the Company's current
business, the systems remain subject to unexpected interruptions resulting from
occurrences such as hardware failures or the impact of ongoing program
modifications. There can be no assurance that such interruptions will not occur
in the future, and any such interruptions could adversely affect the Company's
business and results of operations. 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
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.
Health care provider network
The Company is subject to the risk of disruption in its health care
provider network. Network physicians, hospitals and other health care providers
could terminate their contracts with the Company. In addition, disputes often
arise under provider contracts that could adversely affect the Company or could
expose the Company to regulatory or other liabilities. Such disruptions could
have a material adverse effect on the Company's ability to market its products
and service its membership. Cost-containment arrangements 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. 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 higher reimbursement
levels and changes to the Company's utilization review and administrative
procedures.
Pending litigation and other proceedings against Oxford
The Company is a defendant in a number of purported securities class
action lawsuits and shareholder derivative lawsuits that were filed after a
substantial decline in the price of the Company's common stock in October 1997.
The Company is also the subject of examinations, investigations and inquiries by
several Federal and state governmental agencies. The Company has recently been
sued (i) in a Connecticut class action grounded in ERISA claims and (ii) by the
Connecticut Attorney General's office on similar claims. For a discussion of
these proceedings, as well as other lawsuits pending against the Company, see
"Legal Proceedings" herein and in the Company's Annual Report on Form 10-K for
the year
22
<PAGE> 23
ended December 31, 1999 and Form 10-Q for the quarterly period ended June 30,
2000. The results of these lawsuits, examinations, investigations and inquiries
could adversely affect the Company's results of operations, financial condition,
membership growth and ability to retain members through the imposition of
sanctions, required changes in operations and potential limitations on
enrollment. In addition, evidence obtained in governmental proceedings could be
used adversely against the Company in civil proceedings. The Company cannot
predict the outcomes of these lawsuits, examinations, investigations and
inquiries.
Negative HMO publicity and potential for additional litigation
The managed care industry, in general, has received significant negative
publicity. This publicity has led to increased legislation, regulation and
review of industry practices. Certain litigation, including purported class
actions on behalf of plan members commenced against certain large, national
health plans, and recently against the Company, has resulted in negative
publicity for the managed care industry and creates the potential for similar
additional litigation against the Company. See "Legal Proceedings". These
factors may adversely affect the Company's ability to market its products and
services, may require changes to 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.
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 commercial
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 Medicare revenue represented approximately 17% of premiums earned
during the first nine months of 2000 and 18% of its premiums earned during the
year 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 - Market Risk Disclosures."
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a result of the October 27, 1997 decline in the price per share of the
Company's common stock, the Company is the subject of numerous legal proceedings
and investigations, including:
- a securities class action alleging, among other things, that the
Company, several current and former directors and officers of the
Company and the Company's former independent auditors failed to
disclose material information regarding changes in the Company's
computer system and the Company's membership, enrollment,
revenues, medical expenses and ability to collect on its accounts
receivable;
- a stockholder derivative action alleging, among other things, that
the Company's directors and certain of its officers mismanaged the
Company and wasted its assets in planning and implementing certain
changes to the Company's computer system;
- an investigation by the New York State Attorney General "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"; and
- an investigation by the Securities and Exchange Commission
regarding a number of subjects, including disclosures made in the
Company's October 27, 1997 press release announcing a loss in the
third quarter of 1997.
The Company is also the subject of an arbitration proceeding initiated by
the New York County Medical Society and joined by other medical associations
seeking, among other things, injunctive relief from the Company's practices
regarding the payment of claims submitted by physicians.
The Company has described these and other legal proceedings in more
detail in its Annual Report on Form 10-K for the year ended December 31, 1999
and its quarterly report on Form 10-Q for the quarterly period ended
June 20, 2000. Other than as described below, there have been no material
developments in the legal proceedings involving the Company in the third quarter
of 2000.
On September 7, 2000, the Connecticut Attorney General filed suit against
four HMOs, including the Company, in a federal district court in Connecticut, on
behalf of a putative class consisting of all Connecticut members of the
defendant HMOs who are enrolled in plans governed by ERISA. The suit alleges
that the named HMOs breached their disclosure obligations and fiduciary duties
under ERISA by, inter alia, (i) failing to timely pay claims; (ii) the use of
inappropriate and arbitrary coverage guidelines as the basis for denials; (iii)
the inappropriate use of drug formularies; (iv) failing to respond to member
communications and complaints; and (v) failing to disclose essential coverage
and appeal information. The suit seeks preliminary and permanent injunctions
enjoining the defendants from pursuing the complained of acts and practices.
On September 7, 2000, a group of plaintiffs' law firms commenced an
action in federal district court in Connecticut against the Company and four
other HMOs on behalf of a putative national class consisting of all members of
the defendant HMOs who are or have been enrolled in plans governed by ERISA
within the past six years. The substantive allegations of this complaint, which
also claims violations of ERISA, are nearly identical to that filed by the
Connecticut Attorney General. The complaint seeks the restitution of premiums
paid and/or the disgorgement of profits, in addition to injunctive relief.
Although the outcome of these actions cannot be predicted at this time, the
Company believes that the claims asserted are without merit and intends to
defend the actions vigorously.
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<PAGE> 25
In the ordinary course of its business, the Company is subject to claims
and legal actions by its members in connection with benefit coverage
determinations and alleged acts by network providers and by health care
providers and others. In addition, the Company is subject to examinations from
time to time with respect to financial condition and market conduct for its HMO
and insurance subsidiaries in the states where it conducts business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See information contained in notes 3, 7 and 8 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 5. OTHER INFORMATION
Future Earnings Release and Conference Call Schedule
The Company intends to post, on the Investor Relations page of its web
site (www.oxfordhealth.com), the dates of its public release of quarterly
earnings and the time of the related calls with analysts. The public is
permitted to listen to the conference calls and should use the telephone number
and instructions as shown on the Company's web site.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Document
<S> <C>
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
10 Exchange and Repurchase Agreement, dated as of October 25,
2000, by and among TPG Partners II, L.P., TPG Investors II,
L.P., TPG Parallel II, L.P., Chase Equity Associates, L.P.,
Oxford Acquisition Corp., the DLJ Entities listed therein and
the Registrant
15 Letter of Ernst & Young LLP re Unaudited Consolidated Interim
Financial Statements
</TABLE>
25
<PAGE> 26
(b) Reports on Form 8-K
In a report on Form 8-K dated July 26, 2000 and filed on
July 27, 2000, the Company reported, under Item 5. "Other
Events", its second quarter 2000 earnings press release.
26
<PAGE> 27
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)
October 27, 2000 /s/ MARC M. KOLE
---------------------------- -----------------------------------
Date MARC M. KOLE,
VICE PRESIDENT OF FINANCE AND
CHIEF ACCOUNTING OFFICER
27
<PAGE> 28
OXFORD HEALTH PLANS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
3(a) Second Amended and Restated Certificate of Incorporation, as amended, of
the Registrant*
3(b) Amended and Restated By-laws of the Registrant, incorporated by reference
to Exhibit 3(ii) of the Registrant's Form 10-Q for the quarterly period
ended September 30, 1998 (File No. 0-19442)
4(a) Certificate of Designations of Series D Cumulative Preferred Stock*
4(b) Certificate of Designations of Series E Cumulative Preferred Stock*
10 Exchange and Repurchase Agreement, dated as of October 25, 2000, by and
among TPG Partners II, L.P., TPG Investors II, L.P., TPG Parallel II,
L.P., Chase Equity Associates, L.P., Oxford Acquisition Corp., the DLJ
Entities listed therein and the Registrant*
15 Letter of Ernst & Young LLP re Unaudited Consolidated Interim Financial
Statements*
</TABLE>
*Filed herewith
28
<PAGE> 29
Exhibit 10
EXCHANGE AND REPURCHASE AGREEMENT
EXCHANGE AND REPURCHASE AGREEMENT, dated as of October 25,
2000 (the "Agreement"), by and among TPG Partners II, L.P., a Delaware limited
partnership ("TPG Partners"), TPG Parallel II, L.P., a Delaware limited
partnership ("TPG Parallel"), TPG Investors II, L.P., a Delaware limited
partnership ("TPG Investors", and together with TPG Partners and TPG Parallel,
"TPG"), Chase Equity Associates, L.P., a Delaware limited partnership ("Chase"),
Oxford Acquisition Corp., a Delaware corporation ("Acquisition"), the entities
listed as "DLJ Entities" on the signature pages hereto (each, a "DLJ Entity,"
and together with TPG, Chase and Acquisition, the "Investors") and Oxford Health
Plans, Inc., a Delaware corporation (the "Company").
WHEREAS, the Investors are the holders of 247,318.200 shares
of the Company's Series D Cumulative Preferred Stock, par value $0.01 per share
("Series D Shares"), 26,283.276 shares of the Company's Series E Cumulative
Preferred Stock, par value $0.01 per share ("Series E Shares"), 15,800,000
Series A Warrants of the Company ("Series A Warrants") to purchase shares of the
Company's Common Stock, par value $0.01 per share ("Common Stock"), and
6,730,000 Series B Warrants of the Company ("Series B Warrants") to purchase
shares of Common Stock (the Series A Warrants and the Series B Warrants being
hereinafter collectively referred to as the "Warrants"); and
WHEREAS, the Company desires to purchase from the Investors,
and the Investors desire to sell to the Company, 78,591.70585 Series D Shares
and 11,543,534.09972 Series A Warrants for an aggregate purchase price of
$220,010,900.28, on the terms, and subject to the conditions, set forth below
(the "Repurchase"); and
WHEREAS, the Investors desire to exchange with the Company all
remaining Series D Shares and all Series E Shares for shares of Common Stock by
the exercise of all remaining Warrants, on the terms, and subject to the
conditions, set forth below (the "Exchange"); and
WHEREAS, the Company desires to terminate the Investment
Agreement, dated as of February 23, 1998, between the Company and TPG Oxford
LLC, as amended (the "Investment Agreement"), and the Investors are willing to
terminate the Investment Agreement effective immediately upon consummation of
the Exchange and Repurchase;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements set forth herein, the parties hereto agree as follows:
SECTION 1. THE EXCHANGE AND REPURCHASE. Upon the terms and
subject to the conditions set forth in this Agreement:
(a) The Company shall declare and pay in cash on the Closing Date (as defined in
Section 2) all accumulated and unpaid dividends on the Series D Shares and
Series E Shares to the Closing Date. Each Investor shall, on the Closing Date,
exchange
<PAGE> 30
the number of Series D Shares and Series E Shares set forth opposite such
Investor's name on Schedule B hereto (such shares being hereinafter referred to
as such Investor's "Exchange Preferred Shares") for that number of shares of
Common Stock set forth opposite such Investor's name on Schedule B hereto
("Warrant Shares") by exercising the number of Series A Warrants and Series B
Warrants set forth opposite such Investor's name on Schedule B hereto (such
Warrants being hereinafter referred to as such Investor's "Exchange Warrants")
and delivering to the Company, on the Closing Date, the Exchange Preferred
Shares in payment of the exercise price of the Exchange Warrants. The Company
and the Investors intend that the Exchange will be treated as a recapitalization
within the meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986,
as amended, and agree not to take any position with any tax authority that is
inconsistent with such treatment.
(b) On the Closing Date, the Company shall purchase from each
Investor, and each Investor shall sell to the Company, the number of Series A
Warrants and Series D Shares set forth opposite such Investor's name on Schedule
C hereto, for the aggregate purchase price set forth opposite such Investor's
name on Schedule C hereto.
SECTION 2. CLOSING. (a) The closing of the transactions
contemplated in this Agreement shall occur as soon as practicable after the
conditions set forth in Section 6 have been satisfied. The time at which the
closing occurs is referred to as the "Closing Date".
(b) On the Closing Date, as a part of a simultaneous
transaction, each Investor shall deliver to the Company all Warrants, Series D
Shares and Series E Shares owned by such Investor, and the Company shall pay to
each Investor, by wire transfer to an account designated by such Investor, in
immediately available funds the amounts payable by the Company to such Investor
pursuant to Section 1 and deliver to each Investor such Investor's Warrant
Shares.
SECTION 3. COMPANY'S REPRESENTATIONS AND WARRANTIES. The
Company represents and warrants to, and agrees with, each Investor as follows:
(a) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement.
The execution, delivery and performance of this Agreement, and the consummation
by the Company of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action on the part of the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general principles of equity.
2
<PAGE> 31
(c) Except for regulatory approvals, registrations,
declarations and filings that would not prevent or materially delay the
consummation of the transactions contemplated hereby, or impair the Company's
ability to consummate the transactions contemplated hereby, no regulatory
approval from, or registration, declaration or filing with, any governmental
entity is required to be made or obtained by the Company or any of its
subsidiaries in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby.
(d) The execution and delivery of this Agreement does not, and
the performance of the obligations set forth herein and the consummation of the
transactions contemplated hereby will not (i) violate any provision of the
Company's Second Amended and Restated Certificate of Incorporation, as amended
(the "Certificate of Incorporation"), or the Bylaws of the Company or the
comparable governing instruments of any of its subsidiaries; (ii) give rise to
any rights of first refusal or other similar rights on behalf of any person
under any applicable law or any provision of the Certificate of Incorporation or
the Bylaws of the Company or any agreement or instrument applicable to the
Company; (iii) conflict with, contravene or result in a breach or violation of
any of the terms or provisions of, or constitute a default (with or without
notice or the passage of time) under, or result in or give rise to a right of
termination, cancellation, acceleration or modification of any right or
obligation under, or give rise to a right to put or to compel a tender offer for
outstanding securities of the Company or any of its subsidiaries under, or
require any consent, waiver or approval under, any note, bond, debt instrument,
indenture, mortgage, deed of trust, lease, loan agreement, joint venture
agreement, regulatory approval, contract or any other agreement, instrument or
obligation to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any property of the Company or
any of its subsidiaries is bound; or (iv) violate any law applicable to the
Company or any of its subsidiaries; other than, in the case of clauses (ii)
through (iv) above, such exceptions as would not prevent or materially delay the
consummation of the transactions contemplated hereby, or impair the Company's
ability to consummate the transactions contemplated hereby on the Closing Date,
and would not have, individually or in the aggregate, a material adverse effect
on the financial condition, results of operations, business or regulatory
condition of the Company and its subsidiaries taken as a whole.
SECTION 4. INVESTORS' REPRESENTATIONS AND WARRANTIES. Each
Investor, severally and not jointly, represents and warrants to, and agrees
with, the Company as follows:
(a) Such Investor has all requisite power and authority to
execute, deliver and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement, and the consummation by
such Investor of the transactions contemplated hereby, have been duly authorized
by all other necessary action on the part of such Investor.
3
<PAGE> 32
(b) Such Investor owns the number of Series D Shares, Series E
Shares, Series A Warrants and Series B Warrants set forth opposite such
Investor's name on Schedule A hereto, free and clear of all liens, encumbrances,
claims and security interests.
(c) This Agreement has been duly executed and delivered by
such Investor, and this Agreement constitutes a legal, valid and binding
obligation of such Investor, enforceable against such Investor in accordance
with its terms, subject to applicable bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general principles of equity.
(d) Except for regulatory approvals, registrations,
declarations and filings that would not prevent or materially delay the
consummation of the transactions contemplated hereby, or impair such Investor's
ability to consummate the transactions contemplated hereby, no regulatory
approval from, or registration, declaration or filing with, any governmental
entity is required to be made or obtained by such Investor in connection with
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby.
(e) The execution and delivery of this Agreement does not, and
the performance of the obligations set forth herein and the consummation of the
transactions contemplated hereby will not, (i) violate any provision of the
organizational documents of such Investor; (ii) conflict with, contravene or
result in a breach or violation of any of the terms or provisions of, or
constitute a default (with or without notice or the passage of time) under, or
result in or give rise to a right of termination, cancellation, acceleration or
modification of any right or obligation under, or require any consent, waiver or
approval under, any note, bond, debt instrument, indenture, mortgage, deed of
trust, lease, loan agreement, joint venture agreement, regulatory approval,
contract or any other agreement, instrument or obligation to which such Investor
is a party or by which such Investor or any of its property is bound; or (iii)
violate any law applicable to the Investor; other than, in the case of clauses
(ii) and (iii) above, such exceptions as would not prevent or materially delay
the consummation of the transactions contemplated hereby, or impair such
Investor's ability to consummate the transactions contemplated hereby on the
Closing Date.
(f) Such Investor acknowledges that neither the Company nor
any of its advisers has made any representation or warranty, or provided any
advice, to such Investor regarding any federal, state or local tax consequences
to such Investor in connection with or arising from any of the transactions
contemplated by this Agreement, and such Investor has consulted its own tax
adviser regarding such matters.
(g) Such Investor acknowledges that the Warrant Shares have
not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and may be sold or disposed of only pursuant to an effective
registration statement under the
4
<PAGE> 33
Securities Act or pursuant to an exemption from the registration requirements of
the Securities Act.
SECTION 5. RESTRICTION ON RESALE OF WARRANT SHARES. Each
Investor agrees not to offer or sell any Warrant Shares (other than to the
Company) prior to February 15, 2001; provided, however, that any Investor may at
any time transfer any or all of its Warrant Shares to one or more of its
Permitted Transferees, provided, that each such Permitted Transferee agrees to
be bound by the transfer restrictions set forth in this Section. For purposes
hereof, the term "Permitted Transferee" shall mean (i) any general or limited
partner of any Investor (an "Investor Partner"), and any corporation,
partnership or other entity that is an affiliate (as defined in Rule 144 under
the Securities Act) of any Investor Partner or Investor (collectively, the
"Investor Affiliate"), (ii) any managing director, general partner, director,
limited partner or employee of an Investor Affiliate or the heirs, executors,
administrators, testamentary trustees, legatees or beneficiaries of any of such
persons referred to in this clause (collectively, the "Investor Associates"),
and (iii) any trust, the beneficiaries of which, or any corporation, limited
liability company or partnership, the stockholders, members or general or
limited partners of which include only such Investor, Investor Affiliates,
Investor Associates, their spouses or their lineal descendants.
SECTION 6. CLOSING CONDITIONS. The respective obligations of
the Company and the Investors to consummate the transactions contemplated in
this Agreement are subject to the satisfaction or waiver on or prior to the
Closing Date of each of the conditions set forth below:
(a) Concurrently with or prior to the consummation of the
transactions contemplated by this Agreement, the Company shall consummate its
Offer to Purchase and Consent Solicitation (the "Offer") relating to the
Company's 11% Senior Notes due 2005 (the "Notes"), and the Company and the
trustee for the Notes shall have amended the indenture, dated May 13, 1998 (the
"Note Indenture"), in a manner that will permit the transactions contemplated by
this Agreement, and such amendment shall have become effective in accordance
with its terms, as contemplated by the Offer to Purchase and Consent
Solicitation Statement relating to the Offer.
(b) Each of the representations and warranties of the Company
or the Investors, as the case may be, shall be true and correct as if made on
the Closing Date.
(c) The Company shall have received bank financing in the
amount of up to $400 million (but not less than $300 million) on terms
reasonably acceptable to it.
SECTION 7. BEST EFFORTS. The Company agrees to use its best
efforts to (i) obtain the requisite consents of holders of Notes to the
amendment of the Note Indenture specified in Section 6(a), (ii) consummate the
Offer (which Offer shall be reasonably designed to procure such amendment of the
Note Indenture), and (iii) procure the bank financing as specified in Section
6(c).
5
<PAGE> 34
SECTION 8. TERMINATION OF THE INVESTMENT AGREEMENT.
Immediately upon consummation of the Exchange and Repurchase on the Closing
Date, the Investment Agreement shall be terminated and shall become null and
void and of no further force and effect, and each party to the Investment
Agreement shall be fully and unconditionally discharged and released from any
and all obligations, liabilities and claims based upon, or arising from or
under, or relating to, the Investment Agreement; provided, however, that the
indemnification provisions of clause (ii) of Section 11.05(a) (and, solely
insofar as they relate to clause (ii) of Section 11.05(a), Sections 11.05(c),
11.06 (except that the address of the Company in paragraph (a) thereof shall be
amended to read "Oxford Health Plans, Inc., 48 Monroe Turnpike, Trumbull, CT
06611, Attention: General Counsel"), 11.09 and 11.10(a)) of the Investment
Agreement shall remain in full force and effect in respect of any litigation,
claims, suits, proceedings, penalties, costs, liabilities, damages and expenses
as a result of, relating to or arising out of acts, omissions or events that
occur on or before the Closing Date. Notwithstanding such termination of the
Investment Agreement, the Registration Rights Agreement, dated as of February
23, 1998, between the Company and TPG Oxford LLC, shall remain in full force and
effect.
SECTION 9. CUSTODY AGREEMENT. Upon the request of the Company,
not more than 14 days prior to the anticipated Closing Date, each Investor shall
deposit the Series D Shares, Series E Shares and Warrants owned by such Investor
with a custodian pursuant to a custody agreement in form and substance
reasonably satisfactory to the parties hereto.
SECTION 10. TERMINATION. This Agreement may be terminated by
notice in writing (i) at any time prior to the Closing Date by the Company or a
majority in interest of the Investors if the Exchange and Repurchase shall not
have been consummated by the close of business on January 16, 2001, or (ii) at
any time after the close of business on November 10, 2000 and prior to the close
of business on November 30, 2000, by a majority in interest of the Investors if
the Company shall not have received by the close of business on November 10,
2000, a commitment letter on customary terms, subject to syndication, relating
to the bank financing referred to in Section 6(c).
SECTION 11. ENTIRE AGREEMENT; AMENDMENT. This Agreement sets
forth the entire agreement among the parties hereto with respect to the
transactions contemplated by this Agreement and supersedes any other agreement
or understanding (whether written or oral) with respect thereto. Any provision
of this Agreement may be amended, modified or supplemented in whole or in part
at any time by an agreement in writing among the parties hereto executed in the
same manner as this Agreement; provided, however, that in the case of the
Company, any such amendment, modification or supplement must be approved by a
majority of the directors of the Company other than the Investor Nominees (as
defined in the Investment Agreement) and any other directors who are employed by
or serve as a director of any Investor or any affiliate of an Investor (other
than the Company or any subsidiary of the Company).
6
<PAGE> 35
SECTION 12. FURTHER ASSURANCES. Each Investor agrees that it
will provide such further assurances, and execute and deliver such certificates
or other documents, as the Company may reasonably request regarding such
Investor's rights, title and interests in the Series D Shares, Series E Shares
and Warrants to be exchanged, exercised or sold by such Investor pursuant to
this Agreement or may otherwise reasonably request to the extent necessary or
desirable in order to effect the transactions contemplated by this Agreement in
accordance with its terms.
SECTION 13. EFFECTIVENESS; COUNTERPARTS. This Agreement shall
become effective when executed by each of the parties hereto. This Agreement may
be executed in any number of separate counterparts, each of which shall,
collectively and separately, constitute one agreement.
SECTION 14. GOVERNING LAW. This Agreement shall be governed
by, and construed and enforced in accordance with, the laws of the State of New
York, without regard to the principles thereof regarding conflicts of law.
7
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers or partners thereunto duly
authorized, as of the date first above written.
OXFORD HEALTH PLANS, INC.
By: /s/ Norman C. Payson
------------------------------
Name: Norman C. Payson
Title: Chairman and Chief Executive Officer
TPG PARTNERS II, L.P.
By: TPG GenPar II, L.P.
General Partner
By: TPG Advisors II, Inc.
General Partner
By: /s/ Richard Ekleberry
------------------------------
Name: Richard Ekleberry
Title: Vice President
TPG PARALLEL II, L.P.
By: TPG GenPar II, L.P.
General Partner
By: TPG Advisors II, Inc.
General Partner
By: /s/ Richard Ekleberry
------------------------------
Name: Richard Ekleberry
Title: Vice President
<PAGE> 37
TPG INVESTORS II, L.P.
By: TPG GenPar II, L.P.
General Partner
By: TPG Advisors II, Inc.
General Partner
By: /s/ Richard Ekleberry
------------------------------
Name: Richard Ekleberry
Title: Vice President
CHASE EQUITY ASSOCIATES, L.P.
By: Chase Capital Partners
General Partner
By: /s/ Chris Behrans
------------------------------
Name: Chris Behrans
Title: General Partner
OXFORD ACQUISITION CORP.
By: /s/ John D. Howard
------------------------------
Name: John D. Howard
Title: Executive Vice President
<PAGE> 38
DLJ ENTITIES:
DLJMB FUNDING II, INC.
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ MERCHANT BANKING PARTNERS II, L.P.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ MERCHANT BANKING PARTNERS II-A, L.P.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ OFFSHORE PARTNERS II, C.V.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
<PAGE> 39
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ Diversified Partners, L.P.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ Diversified Partners, L.P.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ MILLENNIUM PARTNERS, L.P.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ MILLENNIUM PARTNERS-A, L.P.
By: DLJ Merchant Banking II, Inc.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
<PAGE> 40
UK INVESTMENT PLAN 1997 PARTNERS
By: UK Investment Plan 1997 Partners, Inc.
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ EAB PARTNERS, L.P.
By: DLJ LBO Plans Management Corporation
General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ FIRST ESC L.P.
By: DLJ LBO Plans Management Corporation
General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
<PAGE> 41
DLJ ESC II L.P.
By: DLJ LBO Plans Management
Corporation Manager
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
DLJ CAPITAL CORPORATION
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
SPROUT GROWTH II, L.P.
By: DLJ Capital Corporation
General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
<PAGE> 42
SPROUT CAPITAL VIII, L.P.
By: DLJ Capital Corporation
Managing General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
SPROUT VENTURE CAPITAL, L.P.
By: DLJ Capital Corporation
General Partner
/s/ Ivy B. Dodes
-------------------------
Name: Ivy B. Dodes
Title: Principal
<PAGE> 43
SCHEDULE A
<TABLE>
<CAPTION>
Series A Series B Series D Series E
Name of Investor Warrants Warrants Shares Shares
<S> <C> <C> <C> <C>
TPG Partners II, L.P. 10,779,898 4,591,691 168,738.2821995 17,932.34330113
TPG Parallel II, L.P. 735,648 313,349 11,515.1353916 1,223.74936667
TPG Investors II, L.P. 1,124,455 478,961 17,601.1416706 1,870.52819843
Chase Equity Associates, L.P. 677,142 288,428 10,599.3513528 1,126.42611783
Oxford Acquisition Corp. 225,714 96,142 3,533.1172021 375.47537261
DLJMB Funding II, Inc. 201,951 86,022 3,161.6351669 335.92533977
DLJ Merchant Banking Partners II, L.P. 1,137,465 484,503 17,804.8914885 1,892.14555286
DLJ Merchant Banking Partners II-A, L.P. 45,299 19,295 708.6423868 75.34536456
DLJ Offshore Partners II, C.V. 55,935 23,825 875.2035655 93.11788539
DLJ Diversified Partners, L.P. 66,501 28,326 1,040.7552457 110.64011620
DLJ Diversified Partners-A, L.P. 24,696 10,519 386.6240066 41.05194836
DLJ Millenium Partners L.P. 18,392 7,834 287.6966966 30.53862741
DLJ Millenium Partners-A, L.P. 3,587 1,528 56.5298915 6.00757441
DLJ EAB Partners, L.P. 5,107 2,175 79.7475879 8.51073771
UK Investment Plan 1997 Partners 30,095 12,819 471.4188438 50.06335379
DLJ First ESC L.P. 2,189 932 34.3216836 3.75478879
DLJ ESC II L.P. 214,497 91,365 3,357.470790 356.70160
DLJ ESC II L.P. 32,696 13,927 511.797270 54.56910
DLJ Capital Corporation 5,998 2,555 93.8800707 10.01265322
The Sprout CEO Fund, L.P. 4,579 1,950 71.6718629 7.75986761
Sprout Growth II, L.P. 276,790 117,899 4,332.6111640 460.58310036
Sprout Capital VIII, L.P. 123,885 52,769 1,939.1765176 205.76049718
Sprout Venture Capital, L.P. 7,481 3,186 117.0975237 12.26552650
Total 15,800,000 6,730,000 247,318.200 26.283.276
</TABLE>
<PAGE> 44
SCHEDULE B
<TABLE>
<CAPTION>
Series A Series B Series D Series E Warrant
Name of Investor Warrants Warrants Shares Shares Shares
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
TPG Partners II, L.P. 2,904,067 4,591,691 115,117.36201 17,932.34330 7,495,758
TPG Parallel II, L.P. 198,181 313,349 7,855.90556 1,223.74937 511,530
TPG Investors II, L.P. 302,924 478,961 12,007.92714 1,870.52820 781,885
Chase Equity Associates, L.P. 182,419 288,428 7,231.13541 1,126.42612 470,847
Oxford Acquisition Corp. 60,806 96,142 2,410.37853 375.47537 156,948
DLJ Merchant Banking Partners II, L.P. 306,429 484,503 12,146.93022 1,892.14555 790,932
DLJ Merchant Banking Partners II-A, L.P. 12,203 19,295 483.45308 75.34536 31,498
DLJ Offshore Partners II, C.V. 15,068 23,825 597.08517 93.11789 38,893
DLJ Diversified Partners, L.P. 17,915 28,326 710.02855 110.64012 46,241
DLJ Diversified Partners-A, L.P. 6,653 10,519 263.76431 41.05195 17,172
DLJMB Funding II, Inc. 54,404 86,022 2,156.94444 335.92534 140,426
DLJ Millenium Partners, L.P. 4,954 7,834 196.27369 30.53863 12,788
DLJ Millenium Partners-A, L.P. 966 1,528 38.56607 6.00757 2,494
DLJ EAB Partners, L.P. 1,375 2,175 54.40575 8.51074 3,550
UK Investment Plan 1997 Partners 8,107 12,819 321.61341 50.06335 20,926
DLJ ESC II L.P. 57,784 91,365 2,290.54827 356.70160 149,149
DLJ ESC II L.P. 8,808 13,927 349.16055 54.56910 22,735
DLJ First ESC L.P. 589 932 23.41509 3.75479 1,521
DLJ Capital Corporation 1,615 2,555 64.04727 10.01265 4,170
Sprout Growth II, L.P. 74,566 117,899 2,955.81276 460.58310 192,465
The Sprout CEO Fund, L.P. 1,233 1,950 48.89629 7.75987 3,183
Sprout Capital VIII, L.P. 33,374 52,769 1,322.95341 205.76050 86,143
Sprout Venture Capital, L.P. 2,015 3,186 79.88678 12.26553 5,201
Total 4,256,455 6,730,000 168,726.49373 26,283.27600 10,986,455
</TABLE>
<PAGE> 45
SCHEDULE C
<TABLE>
<CAPTION>
Aggregate
Series A Series D purchase
Name of Investor Warrants Shares price
-------- ------ -----
<S> <C> <C> <C>
TPG Partners II, L.P. 7,875,830.38952 53,620.92018 150,100,454.36
TPG Parallel II, L.P. 537,466.94768 3,659.22983 10,243,252.26
TPG Investors II, L.P. 821,530.67317 5,593.21454 15,657,292.11
Chase Equity Associates, L.P. 494,722.26376 3,368.21595 9,429,299.92
Oxford Acquisition Corp. 164,907.42125 1,122.73868 3,143,433.33
DLJ Merchant Banking Partners II, L.P. 831,035.82372 5,657.96127 15,838,326.39
DLJ Merchant Banking Partners II-A, L.P. 33,095.60451 225.18931 631,005.96
DLJ Offshore Partners II, C.V. 40,866.30252 278.11840 779,428.08
DLJ Diversified Partners, L.P. 48,585.85830 330.72669 926,045.16
DLJ Diversified Partners-A, L.P. 18,042.98216 122.85970 343,904.07
DLJMB Funding II, Inc. 147,546.09209 1,004.69072 2,813,038.27
DLJ Millenium Partners, L.P. 13,437.25817 91.42301 256,771.25
DLJ Millenium Partners-A, L.P. 2,620.67448 17.96382 50,392.60
DLJ EAB Partners, L.P. 3,731.19169 25.34185 71,857.26
UK Investment Plan 1997 Partners 21,987.51005 149.80544 419,642.39
DLJ ESC II L.P. 156,712.24264 1,066.92252 2,987,404.85
DLJ ESC II L.P. 23,887.80955 162.63672 455,452.83
DLJ First ESC L.P. 1,599.29090 10.90660 31,207.01
DLJ Capital Corporation 4,382.15934 29.83280 84,354.92
Sprout Growth II, L.P. 202,223.72174 1,376.79840 3,854,317.26
The Sprout CEO Fund, L.P. 3,345.43308 22.77557 64,324.05
Sprout Capital VIII, L.P. 90,510.80519 616.22311 1,725,175.29
Sprout Venture Capital, L.P. 5,465.64422 37.21074 104,520.67
Total 11,543,534.09972 78,591.70585 220,010,900.28
</TABLE>
