<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 March 31, 2000
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------------- -------------------
Commission File Number: 0-19442
---------------------------------------------------------
OXFORD HEALTH PLANS, INC.
(Exact name of registrant as specified in its charter)
<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 April 24, 2000 was
82,146,107.
<PAGE> 2
OXFORD HEALTH PLANS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1 Financial Statements 3
Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Earnings for the Three Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Report of Independent Accountants 9
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 21
ITEM 2 Changes in Securities and Use of Proceeds 21
ITEM 6 Exhibits and Reports on Form 8-K 21
SIGNATURES
</TABLE>
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
March 31, Dec. 31,
Current assets: 2000 1999
- --------------- ---- ----
<S> <C> <C>
Cash and cash equivalents $ 267,135 $ 332,882
Investments - available-for-sale, at market value 854,107 829,054
Premiums receivable, net 63,108 64,071
Other receivables 31,481 32,588
Prepaid expenses and other current assets 5,897 3,862
Deferred income taxes 73,397 68,266
----------- -----------
Total current assets 1,295,125 1,330,723
Property and equipment, net 42,654 49,519
Deferred income taxes 196,231 231,512
Restricted cash and investments 60,897 61,603
Other noncurrent assets 17,128 13,531
----------- -----------
Total assets $ 1,612,035 $ 1,686,888
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical costs payable $ 673,428 $ 656,063
Notes payable 136,000 -
Trade accounts payable and accrued expenses 126,119 122,345
Unearned premiums 105,783 97,155
Current portion of capital lease obligations 12,131 12,467
----------- -----------
Total current liabilities 1,053,461 888,030
Long-term debt 200,000 350,000
Obligations under capital leases 2,378 5,787
Redeemable preferred stock 227,151 344,316
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 82,125,769 shares in 2000
and 81,986,457 shares in 1999 821 820
Additional paid-in capital 476,451 488,030
Accumulated deficit (330,715) (372,350)
Other comprehensive income (loss) (17,512) (17,745)
----------- -----------
Total shareholders' equity 129,045 98,755
----------- -----------
Total liabilities and shareholders' equity $ 1,612,035 $ 1,686,888
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 4
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Revenues: 2000 1999
- --------- ---- ----
<S> <C> <C>
Premiums earned $ 1,000,871 $ 1,026,586
Third-party administration, net 3,524 3,610
Investment and other income, net 17,986 30,109
--------- ---------
Total revenues 1,022,381 1,060,305
--------- ---------
Expenses:
Health care services 817,365 871,873
Marketing, general and administrative 121,769 149,737
Interest and other financing charges 11,462 14,050
--------- ---------
Total expenses 950,596 1,035,660
--------- ---------
Operating Earnings before income taxes 71,785 24,645
Income tax expense 30,150 10,350
--------- ---------
Net earnings 41,635 14,295
Less preferred dividends and amortization (12,835) (11,082)
--------- ---------
Net earnings attributable to common shares $ 28,800 $ 3,213
========= =========
Earnings per common and common equivalent share:
Basic $ 0.35 $ .04
Diluted $ 0.34 $ .04
Weighted-average common shares outstanding-basic 82,049 80,785
Effect of dilutive securities:
Stock options 2,733 4,117
Warrants -- 83
--------- ---------
Weighted-average common shares outstanding-diluted 84,782 84,985
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 5
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cash flows from operating activities: 2000 1999
- ------------------------------------- ---- ----
<S> <C> <C>
Net earnings $ 41,635 $ 14,295
Adjustments to reconcile net earnings to net cash
used by operating activities:
Depreciation and amortization 10,406 14,344
Deferred income taxes 30,150 10,350
Realized loss on sale of investments 614 542
Other, net -- 791
Changes in assets and liabilities, net of effect of dispositions:
Premiums receivable 963 (23,382)
Other receivables 1,107 (5,963)
Prepaid expenses and other current assets (2,035) (167)
Medical costs payable 17,365 (55,787)
Trade accounts payable and accrued expenses 3,774 (10,568)
Unearned premiums 8,628 (67,605)
Other, net (3,354) (4,505)
-------- --------
Net cash provided (used) by operating activities 109,253 (127,655)
-------- --------
Cash flows from investing activities:
Capital expenditures (2,602) (1,081)
Purchases of available-for-sale investments (124,751) (259,355)
Sales and maturities of available-for-sale investments 103,730 360,389
Other, net (4,407) 393
-------- --------
Net cash provided (used) by investing activities (28,030) 100,346
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 775 4,820
Redemption of notes payable (14,000) --
Redemption of preferred stock (130,000) --
Payments under capital leases (3,745) (7,427)
-------- --------
Net cash used by financing activities (146,970) (2,607)
-------- --------
Net decrease in cash and cash equivalents (65,747) (29,916)
Cash and cash equivalents at beginning of period 332,882 237,717
-------- --------
Cash and cash equivalents at end of period $ 267,135 $ 207,801
======== ========
Supplemental cash flow information:
Cash payments (refunds) for income taxes, net $ 165 $ (84)
Cash payments for interest 2,921 8,795
Supplemental schedule of noncash investing and financing activities:
Unrealized appreciation (depreciation) of
short-term investments 233 (7,734)
Preferred stock dividends and amortization
12,835 11,082
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 6
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 accounting principles generally accepted in the United States,
have been omitted pursuant to SEC rules and regulations; nevertheless,
management of the Company believes that the disclosures herein are adequate to
make the information presented not misleading. The financial statements include
amounts that are based on management's best estimates and judgments. The most
significant estimates relate to medical costs payable and other policy
liabilities and liabilities and asset impairments related to operational
restructuring activities. These estimates may be adjusted as more current
information becomes available, and any adjustments could be significant. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position and
results of operations of the Company with respect to the interim consolidated
financial statements have been made. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year.
The consolidated financial statements and notes should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of 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 quarter of 2000 related to the
restructuring charge reserves. As of March 31, 2000, the Turnaround Plan is
proceeding in all material respects as expected and the activity during the
first quarter of 2000 is consistent with the Company's estimates. The Company
believes that the reserves as of March 31, 2000 are adequate and that no
revisions of estimates are necessary at this time.
<TABLE>
<CAPTION>
12/31/99 3/31/00
Restructuring Noncash Changes in Restructuring
(In thousands) Reserves Cash Used Activity Estimate Reserves
- -------------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Provisions for loss on noncore businesses $ 2,065 $ (224) $ (5) $ _ $ 1,836
Severance and related costs 7,724 (1,101) _ _ 6,623
Costs of consolidating operations 8,006 (885) _ _ 7,121
------------ ---------- --------- --------- ----------
$ 17,795 $ (2,210) $ (5) $ _ $ 15,580
============ ========== ========= ========= ==========
</TABLE>
-6-
<PAGE> 7
Cash expenses charged against the reserve for loss on noncore businesses
amounted to $0.2 million during the first quarter of 2000 and were primarily
related to premium deficiencies, professional fees and other incremental costs
associated with exiting such businesses. As of March 31, 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 $1.1 million to former employees of the
Company in accordance with their respective severance arrangements. The March
31, 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 $0.9 million, net of
sublease income, related to vacated office space. The remaining costs of the
operations consolidations reserve at March 31, 2000 is comprised of future
minimum lease rentals, net of sublease income and lease termination and other
costs. The Company's related lease obligations for these properties extends to
July 2005.
(3) REDEEMABLE PREFERRED STOCK
As of the beginning of the first quarter of 2000, the Company had
outstanding 263,606.55 shares of Series D Cumulative Preferred Stock ("Series D
Preferred Stock") and 115,899.27 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"). On February 29, 2000,
the Company repurchased 28,780 shares of Series D Preferred Stock for
approximately $30 million and 89,616 shares of Series E Preferred Stock for
approximately $100 million thereby reducing the total number of outstanding
shares of Series D Preferred Stock to 234,826.55 and the total number of
outstanding shares of Series E Preferred Stock to 26,283.27.
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 accumulates 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 accumulates 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 intends to pay the
May 2000 dividend on the Series D Preferred Stock in additional shares of Series
D Preferred Stock and the May 2000 dividend on the Series E Preferred Stock in
cash. The Company must redeem all of the outstanding shares of Preferred Stock
on May 13, 2008 and may redeem 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. Prior to May 13, 2000, the holders of the Series D
Preferred Stock may not use the Series D Preferred Stock in connection with the
exercise of the Company's Series A Warrants or Series B Warrants unless they use
a percentage of the total amount of Series D Preferred Stock issued on February
13, 1999 that does not exceed the percentage of the total number of shares of
Series E Preferred Stock issued on February 13, 1999 that have been redeemed,
repurchased or retired by the Company, or used as consideration in connection
with the exercise of the Company's Series A Warrants or Series B Warrants by the
holders. With respect to dividend rights, the Series D Preferred Stock and
Series E Preferred Stock rank on a parity with each other and prior to the
Company's common stock.
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
-7-
<PAGE> 8
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.
(4) COMPREHENSIVE INCOME (LOSS)
The changes in the value of available-for-sale securities included in other
comprehensive income (loss) include unrealized holding gains (losses) on
available-for-sale securities of $0.8 million and $(8.3) million for the three
months ended March 31, 2000 and 1999, respectively, reduced by the tax effects
of $2.5 million for the three months ended March 31, 1999, and reclassification
adjustments of $(0.6) million and $0.5 million for the three months ended March
31, 2000 and 1999, respectively, reduced by the tax effects of $(0.2) million
for the three months ended March 31, 1999.
(5) 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.
In addition, several managed care organizations (not including Oxford) have
recently been sued in class action lawsuits asserting various causes of action
under RICO, ERISA and state law. These lawsuits typically assert that the
defendant health plans have employed criteria and procedures for providing care
that are inconsistent with those stated in the certificates and other
information provided to their members, and that because of these intentional
misrepresentations and omissions, a class of all plan members has been injured
by virtue of the fact that they received benefits of lesser value than the
benefits represented to and paid for by such members. The potential exists for
similar lawsuits to be filed against the Company. The financial and operational
impact that such evolving theories of recovery may have on the managed care
industry generally, or Oxford in particular, is presently unknown.
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.
(6) SUBSEQUENT EVENTS
In April 2000, the Company provided 30 days' notice to the New York State
regulatory authorities that it will dividend approximately $87 million from its
New York health plan to the parent company. Additionally, New York State
regulatory authorities authorized the repayment of a $38 million surplus note
plus $6 million in accrued interest by Oxford's New York health plan to the
parent company. It is the Company's intent to use such proceeds, when received,
to reduce outstanding indebtedness under its $150 million Term Loan Agreement,
dated as of May 13, 1998, during the second quarter of 2000. Accordingly, such
indebtedness is included in current liabilities at March 31, 2000.
-8-
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
To 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 March 31, 2000 and
1999 and the consolidated statements of earnings and cash flows for the three
months then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with the standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with 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 review, we are not aware of any material modifications that
should be made to the financial statements at March 31, 2000 and 1999, and for
the three-month periods then ended for them to be in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York
April 26, 2000
-9-
<PAGE> 10
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 March 31, Increase (Decrease)
Membership: 2000 1999 Amount %
- ----------- ---- ---- ------ -
<S> <C> <C> <C> <C>
Freedom, Liberty and Other Plans 1,143,300 1,286,600 (143,300) (11.1%)
HMOs 225,500 245,700 (20,200) (8.2%)
--------- --------- -------- -----
Total commercial membership 1,368,800 1,532,300 (163,500) (10.7%)
--------- --------- -------- -----
Medicare 89,900 105,900 (16,000) (15.1%)
--------- --------- --------
Total fully insured membership 1,458,700 1,638,200 (179,500) (11.0%)
Self-funded membership 61,300 52,800 8,500 16.1%
--------- --------- -------- -----
Total membership 1,520,000 1,691,000 (171,000) (10.1%)
--------- --------- -------- -----
</TABLE>
The following table provides certain statement of operations data
expressed as a percentage of Total Revenues for the three months ended March 31,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
Revenues: 2000 1999
- --------- ---- ----
<S> <C> <C>
Premiums earned 97.9% 96.8%
Third-party administration, net 0.3% 0.3%
Investment and other income, net 1.8% 2.9%
----- -----
Total revenues 100.0% 100.0%
===== =====
Expenses:
Health care services 80.0% 82.2%
Marketing, general and administrative 11.9% 14.1%
Interest and other financing charges 1.1% 1.3%
----- -----
Total expenses 93.0% 97.6%
===== =====
Earnings before income taxes 7.0% 2.4%
Income tax expense 2.9% 1.0%
----- -----
Net earnings 4.1% 1.4%
Less preferred dividends and amortization (1.3%) (1.0%)
----- -----
Net earnings attributable to common shares 2.8% 0.4%
===== =====
Selected Information:
Medical loss ratio 81.7% 84.9%
Administrative loss ratio 12.1% 14.5%
PMPM premium revenue $ 223.19 $ 204.77
PMPM medical expense $ 182.27 $ 173.91
Fully insured member months (000s) 4,484.5 5,013.3
</TABLE>
-10-
<PAGE> 11
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
was 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 first quarter of 2000 and such declines
are expected to continue through 2000. 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 quarter of 2000 related to the
restructuring charge reserves. As of March 31, 2000, the Turnaround Plan is
proceeding in all material respects as expected and the activity during the
first quarter of 2000 is consistent with the Company's estimates. The Company
believes that the reserves as of March 31, 2000 are adequate and that no
revisions of estimates are necessary at this time.
<TABLE>
<CAPTION>
(In thousands) 12/31/99 3/31/00
Restructuring Noncash Changes in Restructuring
Reserves Cash Used Activity Estimate Reserves
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Provisions for loss on noncore
businesses $ 2,065 $ (224) $ (5) $ _ $ 1,836
Severance and related costs 7,724 (1,101) _ _ 6,623
Costs of consolidating operations 8,006 (885) _ _ 7,121
------------ ----------- -------- ------- -----------
$ 17,795 $ (2,210) $ (5) $ _ $ 15,580
============ =========== ======== ======= ===========
</TABLE>
Cash expenses charged against the reserve for loss on noncore businesses
amounted to $0.2 million during the first quarter of 2000 and were primarily
related to premium deficiencies, professional fees and other incremental costs
associated with exiting such businesses. As of March 31, 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.
-11-
<PAGE> 12
The reduction in the reserve for severance and related costs reflects
contractual payments of approximately $1.1 million to former employees of the
Company in accordance with their respective severance arrangements. The March
31, 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 $0.9 million, net of
sublease income, related to vacated office space. The remaining costs of the
operations consolidations reserve at March 31, 2000 is comprised of future
minimum lease rentals, net of sublease income and lease termination and other
costs. The Company's related lease obligations for these properties extends to
July 2005.
The three months ended March 31, 2000 compared with the three months ended
March 31, 1999
Total revenues for the quarter ended March 31, 2000 were $1.02 billion,
down 3.6% from $1.06 billion during the same period in the prior year. Net
earnings attributable to common shares for the first quarter of 2000 totaled
$28.8 million, or $0.34 per diluted share, compared to $3.2 million, or $.04 per
diluted share, for the first quarter of 1999.
Membership in the Company's fully insured commercial health care programs
as of March 31, 2000 decreased by approximately 163,500 members from the level
of such membership as of March 31, 1999 and by approximately 77,100 members
since year-end 1999. Such membership attrition is a result of the Company's
continued efforts to rationalize its product lines and not renew groups or
products where underwriting margins are unacceptable. Membership in government
programs decreased by approximately 16,000 members compared with March 31, 1999
and by approximately 7,800 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 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 March 31, 2000
increased 0.6% to $834 million compared with $829.4 million in the same period
in the prior year. This increase is attributable to a 10% increase in average
premium yield partially offset by an 8.9% 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 10.9% to $166.6 million in
the first quarter of 2000 compared with $187 million in the first quarter of
1999. The revenue decline was caused by membership declines as member months of
Medicare programs decreased 17.1% when compared with the prior year first
quarter, partially offset by increases in average premium yields of Medicare
programs of 7.5% over the level of the prior year first 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
the Medicaid program in the first quarter of 1999. Premiums earned from Medicaid
programs were $10.2 million in the first quarter of 1999.
Investment and other income decreased 40.3% to $18 million for the three
months ended March 31, 2000 compared with $30.1 million for the same period last
year. Net investment income increased 14.1% to $18.4 million due to higher
investment yields and higher average invested balances in the first quarter of
2000 compared with the first quarter of 1999. Other income in the first quarter
of 1999 included a $13.5 million gain on the sale of the Company's New York
Medicaid business.
Health care services expense stated as a percentage of premium revenues
(the "medical loss ratio") was 81.7% for the first quarter of 2000 compared with
84.9% for the first quarter of 1999. The improvement in the first quarter of
2000 reflects a 9% increase in average overall premium yield offset in part by a
4.8% increase in per member per month medical costs when compared to the prior
year first
-12-
<PAGE> 13
quarter. Included in medical costs for the three months ended March 31, 2000 are
favorable developments of prior period estimates of medical costs of
approximately $8 million. Excluding these costs, the medical loss ratio would
have been 82.5%, resulting in a 5.9% increase in per member per month medical
costs over the 1999 first quarter. 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 March 31, 2000. There can be no
assurance, however, that additional reserve additions will not be necessary as
the Company continues to review and reconcile delayed claims and claims paid or
denied in error. Additions to reserves could also result as a consequence of
regulatory examinations. 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 $121.8 million in
the first quarter of 2000 compared with $149.7 million in the first quarter of
1999. The decrease is primarily attributable to a $8.5 million decrease in
payroll and benefits due to reduced staffing, a $10 million reduction in
consulting fees and temporary help and $4 million in depreciation savings.
Substantially all of the cost reductions were a result of the Company's
Turnaround Plan. These expenses as a percent of operating revenue were 12.1%
during the first quarter of 2000 compared with 14.5% during the first quarter of
1999 and 14.6% for the full year 1999. Included in marketing, general and
administrative expense for the three months ended March 31, 2000 are severance
costs of approximately $3.3 million payable to former employees of the Company.
Excluding these costs, the administrative loss ratio would have been 11.8%.
Interest expense decreased $2.6 million to $11.5 million for the three
months ended March 31, 2000 compared with $14.1 million in the comparable 1999
period. The Company incurred interest and other financing charges of $10.5
million in the first three months of 2000 related to its outstanding debt and
capital lease obligations, compared with $10.1 million in the first three months
of 1999. Interest expense on delayed claims totaled $0.9 million in the first
three months of 2000, compared with $3.9 million in the first three months of
1999. 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 outstanding indebtedness and
capital lease obligations.
The Company had an income tax expense of $30.2 million for the first
quarter of 2000 reflecting an effective tax rate of 42%. The Company's periodic
analysis to assess the realizability of the Company's 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 realizability 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 March 31,
2000, the Company had deferred tax assets of approximately $269.6 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 $642 million.
Net earnings attributable to common shares for the three months ended March
31, 2000 and 1999 were reduced by preferred dividends and amortization of
approximately $12.8 million and $11.1 million, respectively. Preferred dividends
and amortization for the three months ended March 31, 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the first quarter of 2000 approximated
$109 million compared with cash used of approximately $128 million in the first
quarter of 1999. The $237 million improvement in
-13-
<PAGE> 14
cash flow was the result of increased net earnings and improved working capital
management, particularly in the area of premiums receivable and medical costs
payable.
The Company's capital expenditures for the first three months of 2000
totaled $2.6 million. This amount was principally for certain leasehold
improvements, computer equipment and software.
Cash used by financing activities totaled $147 million during the first
quarter of 2000 compared with $2.6 million in the first quarter of 1999. During
the first quarter 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 $14 million of its $150 million term loan under the Term Loan
Agreement, dated as of May 13, 1998 (the "Term Loan"). In April 2000, Oxford
Health Plans (NY), Inc., the Company's New York HMO subsidiary ("Oxford NY"),
notified the New York State Insurance Department ("NYSID") that it will declare
and pay a dividend to the parent company in May 2000 in an amount of
approximately $87 million. In addition, on April 26, 2000, Oxford NY repaid a
surplus note plus accrued interest to the parent company of approximately $44
million. It is the Company's intent to use such proceeds to reduce outstanding
indebtedness under the Term Loan during the second quarter of 2000. The Company
intends to pay the May 13, 2000 dividend on the Series D Preferred Stock in
shares of Series D Preferred Stock and to pay the May 13, 2000 dividend on the
Series E Preferred Stock in cash. Thereafter, quarterly dividends on both the
Series D and Series E Preferred Stock will be payable in cash. Except for Term
Loan repayments, Preferred Stock dividends and anticipated capital expenditures,
the Company does not have material cash commitments.
As of March 31, 2000, cash and investments aggregating approximately $60.9
million have been segregated in the accompanying 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 and such amount is now included in current assets. The restriction on
the remaining $4.4 million (cash and cash equivalents) is expected to be removed
during the second half of 2000. With respect to the Company's New York
subsidiaries, the minimum amount of surplus required is based on a formula
established by NYSID which required approximately $133 million at March 31,
2000. 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 ("NJDBI")
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 $6 million. The Company's estimate of this assessment is
included in medical costs payable at March 31, 2000.
As a result of delays in claims payments in prior periods, the Company
experienced a significant increase in medical claims payable. The increase in
medical costs payable was mitigated by progress in paying backlogged claims, by
making advance payments to providers and through reductions in IBNR
-14-
<PAGE> 15
relating to the Company's exit from certain businesses during the first quarter
of 1998 and thereafter. Outstanding advances aggregated approximately $19.5
million at March 31, 2000, net of a valuation reserve of $30.8 million, and have
been netted against medical costs payable in the Company's consolidated balance
sheet. The Company believes that it will be able to recover net outstanding
advance payments, either through repayment by the provider or application
against future claims.
The Company's medical costs payable were $673.4 million as of March 31,
2000 (including $580.1 million for IBNR) compared with $656.1 million as of
December 31, 1999 (including $570.7 million for IBNR). The increase reflects
higher levels of production claims inventory and related reserves, partially
offset by favorable development of prior period estimates of medical costs and
the timing of payments to the Company's pharmacy benefit manager and obligations
under certain state programs. 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.
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 approximately
21,000 Medicare members in certain New York counties as of March 31, 2000 where
it had experienced substantial losses. The Company and North Shore have made
progress in resolving certain initial operational difficulties. 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. A similar agreement covering New Jersey
Medicare members was terminated in July 1999. The Company is currently in
arbitration proceedings to resolve the New Jersey agreement. See "Legal
Proceedings".
As of the beginning of the first quarter of 2000, the Company had
outstanding 263,606.55 shares of Series D Cumulative Preferred Stock ("Series D
Preferred Stock") and 115,899.27 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"). On February 29, 2000,
the Company repurchased 28,780 shares of Series D Preferred Stock for
approximately $30 million and 89,616 shares of Series E Preferred Stock for
approximately $100 million thereby reducing the total number of outstanding
shares of Series D Preferred Stock to 234,826.55 and the total number of
outstanding shares of Series E Preferred Stock to 26,283.27.
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 accumulates 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 accumulates 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 intends to pay the
May 2000 dividend on the Series D Preferred Stock in additional shares of Series
D Preferred Stock and the May 2000 dividend on the Series E Preferred Stock in
cash. The Company must redeem all of the outstanding
-15-
<PAGE> 16
shares of Preferred Stock on May 13, 2008 and may redeem 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. Prior to May 13, 2000, the holders of
the Series D Preferred Stock may not use the Series D Preferred Stock in
connection with the exercise of the Company's Series A Warrants or Series B
Warrants unless they use a percentage of the total amount of Series D Preferred
Stock issued on February 13, 1999 that does not exceed the percentage of the
total number of shares of Series E Preferred Stock issued on February 13, 1999
that have been redeemed, repurchased or retired by the Company, or used as
consideration in connection with the exercise of the Company's Series A Warrants
or Series B Warrants by the holders. With respect to dividend rights, the Series
D Preferred Stock and Series E Preferred Stock rank on a parity with each other
and prior to the Company's common stock.
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.
MARKET RISK DISCLOSURES
The Company's consolidated balance sheet as of March 31, 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 March 31, 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 March 31, 2000 by approximately $21.4
million and $42 million, respectively (compared to $21.3 million and $41.9
million as of March 31, 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 March 31, 2000 by
approximately $22.2 million and $44.5 million, respectively (compared to $21.6
million and $43.8 million as of March 31, 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.
-16-
<PAGE> 17
YEAR 2000 READINESS
The Company completed its assessment, planning, remediation and testing of
its computer programs associated with its mission critical systems that could be
affected by the "Year 2000" date issue. The Year 2000 problem was the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company did not experience any significant interruption of
business operations or any other system failures or disruptions as a result of
the failure of any of its business systems or those of its material vendors as a
result of the Year 2000 issue.
The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities which regulate its business.
The Company is in compliance with such Year 2000 reporting requirements. Such
regulatory authorities have also asked the Company to submit to certain audits
regarding its Year 2000 compliance.
The Company incurred expenses of approximately $2.5 million for the three
months ended March 31, 1999 related to its Year 2000 compliance efforts. Year
2000 costs for the three months ended March 31, 2000 were not material.
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 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 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, Oxford's prior rapid growth, delays in paying claims, paying
or denying claims in error and changing speed of payment affect the Company's
ability to rely on historical information in making IBNR reserve estimates.
There can be no assurances as to the ultimate accuracy of such estimates. Any
adjustments to such estimates could adversely affect Oxford's results of
operations in future periods.
The 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
-17-
<PAGE> 18
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, New York State implemented a
requirement that managed care members have a right to an external appeal of
certain final adverse determinations, effective July 1999. In addition,
Connecticut and New Jersey enacted legislation in 1999 concerning prompt payment
of claims, mental health parity and other mandated benefits and practices. State
and federal government authorities are continually considering changes to laws
and regulations applicable to the Company and are currently considering
regulations relating to mandatory benefits and products, defining medical
necessity, provider compensation, health plan liability to members who fail to
receive appropriate care, disclosure and composition of physician networks, all
of which would apply to the Company. In addition, Congress is considering
significant changes to Medicare legislation and 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 action by a conference committee.
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.
-18-
<PAGE> 19
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 which 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 large number of purported securities class
action lawsuits and shareholder derivative lawsuits which 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. 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
ended December 31, 1999. 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 recently commenced against certain large,
national health plans, has resulted in negative publicity for the managed care
industry and creates the potential for similar litigation against the Company.
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
-19-
<PAGE> 20
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 18% of its premiums earned during the year 1999 and 16.6% of
premiums earned during the first three months of 2000.
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."
-20-
<PAGE> 21
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, investigations and arbitral proceedings, 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;
- investigations by the New York State Insurance Department and the
New Jersey Department of Health and Senior Services which have
identified a number of alleged regulatory violations;
- 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";
- an investigation by the Securities and Exchange Commission
regarding a number of subjects, including disclosures made in the
Company's October 27, 1999 press release announcing a loss in the
third quarter of 1997; and
- an arbitral 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. There have
been no material developments in the legal proceedings involving the Company in
the first quarter of 2000 except that on March 9, 2000, Judge Brient issued
decisions denying the motions to dismiss previously filed on March 15, 1999 by
Oxford, the individual defendants and, separately, KPMG LLP.
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 note 3 of "Notes to Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Document
3(a) Second Amended and Restated Certificate of Incorporation,
as amended, of the Registrant
3(b) Amended and Restated By-laws of the Registrant
4(a) Certificate of Designations of Series D Cumulative
Preferred Stock
4(b) Certificate of Designations of Series E Cumulative
Preferred Stock
10(a) Amendment No. 2, dated as of March 7, 2000, to Employment
Agreement, dated as of April 13, 1998, by and between the
Registrant and Jon S. Richardson
10(b) Employment Agreement, dated March 15, 2000, by and
between the Registrant and Kurt B. Thompson
10(c) Share Repurchase Agreement, dated as of February 29,
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. and the DLJ Entities
listed therein
15 Letter of Ernst & Young LLP re Unaudited Condensed
Consolidated Interim Financial Statements
-21-
<PAGE> 22
(b) Reports on Form 8-K
In a report on Form 8-K dated December 30, 1999 and filed
on January 3, 2000, the Company reported, under Item 5.
"Other Events", its press release regarding certain
changes to senior management.
In a report on Form 8-K dated and filed on February 24,
2000, the Company reported, under Item 5. "Other Events",
its fourth quarter 1999 earnings press release.
In a report on Form 8-K dated and filed on February 29,
2000, the Company reported, under Item 5. "Other Events",
its press release announcing the repurchase of preferred
shares.
In a report on Form 8-K dated March 15, 2000 and filed on
March 20, 2000, the Company reported, under Item 5. "Other
Events", its press release regarding certain changes to
senior management.
-22-
<PAGE> 23
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)
April 28, 2000 /s/ Kurt B. Thompson
- ------------------------------ -----------------------------------------
Date KURT B. THOMPSON
CHIEF FINANCIAL OFFICER AND
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
-23-
<PAGE> 24
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description of Document
3(a) Second Amended and Restated Certificate of Incorporation,
as amended, of the Registrant, incorporated by reference
to Exhibit 3(a) of the Registrant's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1998 (File
No. 0-19442)
3(b) Amended and Restated By-laws of the Registrant,
incorporated by reference to Exhibit 3(ii) of the
Registrant's Form 10-Q for the quarterly period ended
September 30, 1998 (File No. 0-19442)
4(a) Certificate of Designations of Series D Cumulative
Preferred Stock, incorporated by reference to Exhibit
4(b) of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 (File No.
0-19442)
4(b) Certificate of Designations of Series E Cumulative
Preferred Stock, incorporated by reference to Exhibit
3(a) of the Registrant's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1998 (File No.
0-19442)
10(a) Amendment No. 2, dated as of March 7, 2000, to Employment
Agreement, dated as of April 13, 1998, by and between the
Registrant and Jon S. Richardson incorporated by
reference to Exhibit 10(j) of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999 (File No. 0-19442)
10(b) Employment Agreement, dated March 15, 2000, by and
between the Registrant and Kurt B. Thompson incorporated
by reference to Exhibit 10(z) of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999 (File No. 0-19442)
10(c) Share Repurchase Agreement, dated as of February 29,
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. and the DLJ Entities
listed therein incorporated by reference to Exhibit
10(qq) of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 (File No.
0-19442)
15 Letter of Ernst & Young LLP re Unaudited Condensed
Consolidated Interim Financial Statements*
------------
* Filed herewith
-24-
<PAGE> 1
EXHIBIT 15
Letter of Ernst & Young LLP
re Unaudited Condensed Consolidated Interim Financial Statements
The Board of Directors
Oxford Health Plans, Inc.
Trumbull, Connecticut
We are aware of the incorporation by reference in the Oxford Health Plans, Inc.
registration statements on Form S-8 (Nos. 33-49738, 33-70908, 33-94242, 333-988,
333-28109, 333-35693, 333-79063 and 333-33226) of our report dated April 26,
2000, relating to the unaudited condensed consolidated interim financial
statements of Oxford Health Plans, Inc. included in its Form 10-Q for the
quarter ended March 31, 2000.
Ernst & Young LLP
New York, New York
April 26, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE 3 MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865084
<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 267,135
<SECURITIES> 854,107
<RECEIVABLES> 63,108
<ALLOWANCES> 10,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,295,125
<PP&E> 181,447
<DEPRECIATION> 138,793
<TOTAL-ASSETS> 1,612,035
<CURRENT-LIABILITIES> 1,053,461
<BONDS> 202,378
227,151
0
<COMMON> 821
<OTHER-SE> 128,224
<TOTAL-LIABILITY-AND-EQUITY> 1,612,035
<SALES> 0
<TOTAL-REVENUES> 1,022,381
<CGS> 0
<TOTAL-COSTS> 817,365
<OTHER-EXPENSES> 121,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,462
<INCOME-PRETAX> 71,785
<INCOME-TAX> 30,150
<INCOME-CONTINUING> 41,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,635
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.34
</TABLE>
