-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U/zzSY3Dk6DDZXnD8CC68taThgNai325Vquy/3ef1UFTWOtFl+vfCCl8oUxm/ov6 rKrGgWJEmtxSP65Fnu21ww== /in/edgar/work/20000728/0000914039-00-000329/0000914039-00-000329.txt : 20000921 0000914039-00-000329.hdr.sgml : 20000921 ACCESSION NUMBER: 0000914039-00-000329 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OXFORD HEALTH PLANS INC CENTRAL INDEX KEY: 0000865084 STANDARD INDUSTRIAL CLASSIFICATION: [6324 ] IRS NUMBER: 061118515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19442 FILM NUMBER: 681294 BUSINESS ADDRESS: STREET 1: 48 MONROE TURNPIKE CITY: TRUMBULL STATE: CT ZIP: 06611 BUSINESS PHONE: 2034597000 MAIL ADDRESS: STREET 1: 48 MONROE TURNPIKE CITY: TRUMBULL STATE: CT ZIP: 06611 10-Q 1 e10-q.txt FORM 10-Q 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 June 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 Commission File Number: 0-19442 OXFORD HEALTH PLANS, INC. (Exact name of registrant as specified in its charter) Delaware 06-1118515 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 48 Monroe Turnpike, Trumbull, Connecticut 06611 (Address of principal executive offices) (Zip Code)
(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 July 27, 2000 was 83,893,351. 2 OXFORD HEALTH PLANS, INC. INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE ITEM 1 Financial Statements Consolidated Balance Sheets at June 30, 2000 and December 31, 1999......................................3 Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2000 and 1999............................................................................4 Consolidated Statements of Cash Flows for the Six Months Ended June 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 .............................................................24 ITEM 4 Submission of Matters to a Vote of Security Holders....................................................24 ITEM 5 Other..................................................................................................25 ITEM 6 Exhibits and Reports on Form 8-K ......................................................................26 SIGNATURES .....................................................................................................27
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS June 30, Dec. 31, Current assets: 2000 1999 ----------- ----------- Cash and cash equivalents $ 206,196 $ 332,882 Investments - available-for-sale, at market value 843,472 829,054 Premiums receivable, net 53,808 64,071 Other receivables 25,559 32,588 Prepaid expenses and other current assets 5,311 3,862 Deferred income taxes 70,985 68,266 ----------- ----------- Total current assets 1,205,331 1,330,723 Property and equipment, net 37,497 49,519 Deferred income taxes 173,318 231,512 Restricted cash and investments 57,531 61,603 Other noncurrent assets 21,472 13,531 ----------- ----------- Total assets $ 1,495,149 $ 1,686,888 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Medical costs payable $ 644,256 $ 656,063 Trade accounts payable and accrued expenses 112,570 122,345 Unearned premiums 111,500 97,155 Current portion of capital lease obligations 10,252 12,467 ----------- ----------- Total current liabilities 878,578 888,030 Long-term debt 200,000 350,000 Obligations under capital leases 1,471 5,787 Redeemable preferred stock 228,695 344,316 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 83,738,061 shares in 2000 and 837 820 81,986,457 shares in 1999 Additional paid-in capital 488,073 488,030 Accumulated deficit (286,196) (372,350) Accumulated other comprehensive earnings (loss) (16,309) (17,745) ----------- ----------- Total shareholders' equity 186,405 98,755 ----------- ----------- Total liabilities and shareholders' equity $ 1,495,149 $ 1,686,888 =========== ===========
See accompanying notes to consolidated financial statements. 3 4 OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Six Months Ended June 30, Ended June 30, ----------------------------- ----------------------------- Revenues: 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Premiums earned $ 990,565 $ 1,033,670 $ 1,991,436 $ 2,060,256 Third-party administration, net 4,207 4,091 7,731 7,701 Investment and other income, net 18,025 13,020 36,011 43,129 ----------- ----------- ----------- ----------- Total revenues 1,012,797 1,050,781 2,035,178 2,111,086 ----------- ----------- ----------- ----------- Expenses: Health care services 801,141 886,836 1,618,506 1,758,709 Marketing, general and administrative 120,024 155,210 241,793 304,947 Interest and other financing charges 8,626 12,180 20,088 26,230 ----------- ----------- ----------- ----------- Total expenses 929,791 1,054,226 1,880,387 2,089,886 ----------- ----------- ----------- ----------- Operating earnings (loss) before income taxes and extraordinary item 83,006 (3,445) 154,791 21,200 Income tax expense (benefit) 34,863 (1,446) 65,013 8,904 ----------- ----------- ----------- ----------- Net earnings (loss) before extraordinary item 48,143 (1,999) 89,778 12,296 Extraordinary item - Loss on early retirement of debt, net of income tax benefit of $2,624 (3,624) -- (3,624) -- ----------- ----------- ----------- ----------- Net earnings (loss) 44,519 (1,999) 86,154 12,296 Less - preferred dividends and amortization (7,516) (11,377) (20,351) (22,459) ----------- ----------- ----------- ----------- Net earnings (loss) attributable to common shares $ 37,003 $ (13,376) $ 65,803 $ (10,163) =========== =========== =========== =========== Earnings (loss) per common share - basic: Earnings (loss) before extraordinary item $ 0.48 $ (0.16) $ 0.84 $ (0.13) Extraordinary item (0.04) -- (0.04) -- ----------- ----------- ----------- ----------- Net earnings (loss) per common share - basic $ 0.44 $ (0.16) $ 0.80 $ (0.13) =========== =========== =========== =========== Earnings (loss) per common share - diluted: Earnings (loss) before extraordinary item $ 0.45 $ (0.16) $ 0.81 $ (0.13) Extraordinary item (0.04) -- (0.04) -- ----------- ----------- ----------- ----------- Net earnings (loss) per common share - diluted $ 0.41 $ (0.16) $ 0.77 $ (0.13) =========== =========== =========== =========== Weighted-average common shares outstanding-basic 83,382 81,162 82,351 80,970 Effect of dilutive securities: Stock options 4,464 -- 3,114 -- Warrants 2,196 -- -- -- ----------- ----------- ----------- ----------- Weighted-average common shares outstanding-diluted 90,042 81,162 85,465 80,970 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 5 OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (IN THOUSANDS)
Six Months Ended June 30, --------------------------- 2000 1999 --------- --------- Cash flows from operating activities: Net earnings $ 86,154 $ 12,296 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 19,417 29,068 Deferred income taxes 61,030 8,904 Realized loss on sale of investments 379 3,395 Extraordinary item - loss on early retirement of debt 3,624 -- Other, net 1,420 1,271 Changes in assets and liabilities: Premiums receivable 10,263 (3,426) Other receivables 7,029 1,908 Prepaid expenses and other current assets (1,449) (2,242) Medical costs payable (11,807) (108,787) Trade accounts payable and accrued expenses (9,775) (25,814) Unearned premiums 14,345 (60,699) Other, net 1,297 (10,293) --------- --------- Net cash provided (used) by operating activities 181,927 (154,419) --------- --------- Cash flows from investing activities: Capital expenditures (7,268) (4,147) Purchases of available-for-sale investments (257,588) (597,917) Sales and maturities of available-for-sale investments 243,469 683,077 Other, net (7,834) (11,189) --------- --------- Net cash provided (used) by investing activities (29,221) 69,824 --------- --------- Cash flows from financing activities: Proceeds from exercise of stock options 16,511 9,765 Cash dividends paid (5,972) -- Redemption of notes payable (153,400) -- Redemption of preferred stock (130,000) -- Payments under capital leases (6,531) (11,980) --------- --------- Net cash used by financing activities (279,392) (2,215) --------- --------- Net decrease in cash and cash equivalents (126,686) (86,810) Cash and cash equivalents at beginning of period 332,882 237,717 --------- --------- Cash and cash equivalents at end of period $ 206,196 $ 150,907 ========= ========= Supplemental schedule of noncash investing and financing activities: Cash payments (refunds) for income taxes, net $ 4,214 $ (1,444) Cash payments for interest 19,731 28,404 Supplemental schedule of noncash investing and financing activities: Unrealized appreciation (depreciation) of short-term investments 1,436 (13,759) Preferred stock dividends and amortization 14,379 22,459
See accompanying notes to consolidated financial statements 5 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 generally accepted accounting principles, have been omitted pursuant to SEC rules and regulations; nevertheless, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. The financial statements include amounts that are based on management's best estimates and judgments. The most significant estimates relate to medical costs payable and other policy liabilities and liabilities and asset impairments related to operational restructuring activities. These estimates may be adjusted as more current information becomes available. 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 six months of 2000 related to the restructuring charge reserves. As of June 30, 2000, the Turnaround Plan is proceeding in all material respects as expected and the activity during the first six months of 2000 is consistent with the Company's estimates. The Company believes that the reserves as of June 30, 2000 are adequate and that no revisions of estimates are necessary at this time.
12/31/99 6/30/00 Restructuring Cash Noncash Restructuring (In thousands) Reserves Used Activity Reserves -------- -------- -------- -------- Provisions for loss on noncore businesses $ 2,065 $ (239) $ (13) $ 1,813 Severance and related costs 7,724 (1,486) -- 6,238 Costs of consolidating operations 8,006 (2,388) -- 5,618 -------- -------- -------- -------- $ 17,795 $ (4,113) $ (13) $ 13,669 ======== ======== ======== ========
Cash expenses charged against the reserve for loss on noncore businesses amounted to $0.2 million during the first six months of 2000 and were primarily related to premium deficiencies, professional fees and other incremental costs associated with exiting such businesses. As of June 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 $1.5 million to former employees of the Company in accordance with their respective 6 7 severance arrangements. The June 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 $2.4 million, net of sublease income, related to vacated office space. The remaining costs of the operations consolidations reserve at June 30, 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 extend to July 2005. (3) INVESTMENT IN MEDUNITE INC. In June 2000, the Company made an equity investment in MedUnite Inc., an independent company conceived and financed in equal amounts by six health care payers, in an amount of $2 million. MedUnite Inc. was organized to provide claims submission and payment, referrals, eligibility information and other internet provider connectivity services. The Company has committed to invest in MedUnite Inc., subject to certain contingencies, including approval of the Company's Board of Directors, an additional amount of $8 million. Each of the other investors has made a similar commitment. It is anticipated that MedUnite Inc. will obtain substantial third party financing. MedUnite Inc. was in the start-up stage at June 30, 2000 and had no operational activity. The investment in MedUnite is included in other noncurrent assets at June 30, 2000 at cost. (4) REDEEMABLE PREFERRED STOCK As of June 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. 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 two dividend payments on each series of Preferred Stock. 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 7 8 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. (5) 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 $1.8 million and $(13.8) million for the six months ended June 30, 2000 and 1999, respectively, reduced by the tax effects of $4.5 million for the six months ended June 30, 1999, and reclassification adjustments of $(0.4) million and $(3.4) million for the six months ended June 30, 2000 and 1999, respectively, reduced by the tax effects of $1.1 million for the six months ended June 30, 1999. (6) 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, the Company received regulatory approvals from New York State authorizing a dividend of $40 million from Oxford NY to the parent company. The dividend payment was made on July 25, 2000. (7) 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. 8 9 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. (8) 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. 9 10 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 June 30, 2000 and 1999, the consolidated statements of earnings for the three-month and six-month periods ended June 30, 2000 and 1999 and the consolidated statements of cash flows for the six-month periods ended June 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 June 30, 2000 and 1999, and for the three-month and six-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 July 25, 2000 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows membership by product:
As of June 30, Increase (Decrease) -------------------------- ---------------------- Membership: 2000 1999 Amount % --------- --------- --------- ---- Freedom, Liberty and Other Plans 1,115,900 1,269,400 (153,500) (12.1%) HMOs 223,000 242,100 (19,100) (7.9%) --------- --------- --------- Total commercial membership 1,338,900 1,511,500 (172,600) (11.4%) Medicare 90,100 103,800 (13,700) (13.1%) --------- --------- --------- Total fully insured membership 1,429,000 1,615,300 (186,300) (11.5%) Third-party administration 62,600 53,400 9,200 17.2% --------- --------- --------- Total membership 1,491,600 1,668,700 (177,100) (10.6%) ========= ========= ========= ====
The following table provides certain statement of operations data expressed as a percentage of total revenues for the three month and six month periods ended June 30, 2000 and 1999:
Three Months Six Months Ended June 30, Ended June 30, -------------------------- -------------------------- Revenues: 2000 1999 2000 1999 --------- --------- --------- --------- Premiums earned 97.8% 98.4% 97.8% 97.6% Third-party administration, net 0.4% 0.4% 0.4% 0.4% Investment and other income, net 1.8% 1.2% 1.8% 2.0% --------- --------- --------- --------- Total revenues 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- Expenses: Health care services 79.1% 84.3% 79.5% 83.4% Marketing, general and administrative 11.9% 14.8% 11.9% 14.4% Interest and other financing charges 0.8% 1.2% 1.0% 1.2% --------- --------- --------- --------- Total expenses 91.8% 100.3% 92.4% 99.0% --------- --------- --------- --------- Earnings (loss) before income taxes and extraordinary item 8.2% (0.3%) 7.6% 1.0% Income tax expense (benefit) 3.4% (0.1%) 3.2% 0.4% --------- --------- --------- --------- Net earnings (loss) before extraordinary item 4.8% (0.2%) 4.4% 0.6% Extraordinary item - Loss on early retirement of debt, net of income tax benefits (0.4%) -- (0.2%) -- --------- --------- --------- --------- Net earnings (loss) 4.4% (0.2%) 4.2% 0.6% Less - preferred dividends and amortization (0.7%) (1.1%) (1.0%) (1.1%) --------- --------- --------- --------- Net earnings (loss) attributable to common shares 3.7% (1.3%) 3.2% (0.5%) ========= ========= ========= ========= Selected Information: Medical loss ratio 80.9% 85.8% 81.3% 85.4% Administrative loss ratio 12.1% 15.0% 12.1% 14.7% PMPM premium revenue $ 230.12 $ 212.11 $ 226.58 $ 208.39 PMPM medical expense $ 186.11 $ 181.98 $ 184.15 $ 177.89 Fully insured member months (000's) 4,304.6 4,873.2 8,789.1 9,886.5
11 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 second quarter of 2000 and expects declines in membership throughout 2000, although to a 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 six months of 2000 related to the restructuring charge reserves. As of June 30, 2000, the Turnaround Plan is proceeding in all material respects as expected and the activity during the first six months of 2000 is consistent with the Company's estimates. The Company believes that the reserves as of June 30, 2000 are adequate and that no revisions of estimates are necessary at this time.
12/31/99 6/30/00 Restructuring Cash Noncash Restructuring (In thousands) Reserves Used Activity Reserves -------- -------- -------- -------- Provisions for loss on noncore businesses $ 2,065 $ (239) $ (13) $ 1,813 Severance and related costs 7,724 (1,486) -- 6,238 Costs of consolidating operations 8,006 (2,388) -- 5,618 -------- -------- -------- -------- $ 17,795 $ (4,113) $ (13) $ 13,669 ======== ======== ======== ========
Cash expenses charged against the reserve for loss on noncore businesses amounted to $0.2 million during the first six months of 2000 and were primarily related to premium deficiencies, professional fees and other incremental costs associated with exiting such businesses. As of June 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. 12 13 The reduction in the reserve for severance and related costs reflects contractual payments of approximately $1.5 million to former employees of the Company in accordance with their respective severance arrangements. The June 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 $2.4 million, net of sublease income, related to vacated office space. The remaining costs of the operations consolidations reserve at June 30, 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. Three months ended June 30, 2000 compared with three months ended June 30, 1999 Total revenues for the quarter ended June 30, 2000 were $1.01 billion, down 3.6% from $1.05 billion during the same period in the prior year. Net earnings before extraordinary item attributable to common shares for the second quarter of 2000 totaled $40.6 million, or $0.45 per diluted share, compared with a net loss of $13.4 million, or $0.16 per diluted share, for the second quarter of 1999. During the second quarter of 2000, the Company repaid the balance outstanding under its existing term loan and recorded an extraordinary charge, net of tax benefits, of $3.6 million, or $0.04 per diluted share. Membership in the Company's fully insured health care programs as of June 30, 2000 decreased by approximately 186,300 members from the level of such membership as of June 30, 1999 and by 114,600 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, and not renew groups or products where underwriting margins are unacceptable. Partially offsetting this decline was a net increase of approximately 4,300 members in the Company's large group products. Membership in Medicare programs decreased by approximately 13,700 members compared with June 30, 1999 and by approximately 7,600 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 announced that it would withdraw from the Medicare market in 8 counties within New Jersey at the end 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 June 30, 2000 decreased 2.6% to $821.1 million compared with $843.2 million in the same period in the prior year. The decrease in premiums earned is attributable to a 11.5% decrease in member months in the Company's commercial health care programs, partially offset by a 10.1% increase in average premium yield over the second quarter of 1999. 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 10.2% to $169.5 million in the second quarter of 2000 compared with $188.7 million in the second quarter of 1999. The revenue decline was caused by membership declines as member months of Medicare programs decreased 13.7% when compared with the prior year second quarter, partially offset by increases in average premium yields of Medicare programs of 3.2% over the level of the prior year second 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. Premiums earned from Medicaid programs were nominal in the second quarter of 1999. Investment and other income increased 38.4% to $18 million for the three months ended June 30, 2000 compared with $13 million for the same period last year. The 2000 second quarter included realized capital gains of $0.3 million while the 1999 second quarter included realized capital losses of $2.9 million. 13 14 Investment income during the second quarter of 2000, excluding capital gains and losses, improved 14.1% over the comparable 1999 period as a result of higher investment yields and invested balances. Health care services expense stated as a percentage of premium revenues (the "medical loss ratio") was 80.9% for the second quarter of 2000 compared with 85.8% for the second quarter of 1999. The improvement in the second quarter of 2000 over the second quarter of 1999 reflects an 8.5% increase in average overall premium yield offset in part by a 2.3% increase in per member per month medical costs. Included in medical costs for the three months ended June 30, 2000 are favorable developments of prior year estimates of medical costs of approximately $15.4 million. Health care services expense was adversely affected in the second quarter of 1999 by a provision for loss on claims advances totaling $13.8 million and $8 million for additional reserves related to the unwinding of a Medicare risk transfer agreement in New Jersey. See "Liquidity and Capital Resources." Excluding the favorable development of prior year estimates of medical costs in the second quarter of 2000, the medical loss ratio would have been 82.4%. 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 June 30, 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 $120 million in the second quarter of 2000 compared with $155.2 million in the second quarter of 1999. The decrease when compared with the second quarter of 1999 is primarily attributable to a $27.6 million decrease in payroll and benefits due to reduced staffing and $4.8 million in depreciation savings. Administrative expenses as a percent of operating revenue were 12.1% during the second quarter of 2000 compared with 15% during the second quarter of 1999 and 14.6% for the full year 1999. Included in marketing, general and administrative expense for the three months ended June 30, 2000 are severance costs of approximately $1.7 million related to changes in operating management structure and reporting responsibilities. Interest expense decreased 29.2% or $3.6 million to $8.6 million in the second quarter of 2000 compared with $12.2 million in the second quarter of 1999. The Company incurred interest and other financing charges of $8 million in the second quarter of 2000 related to its outstanding debt and capital lease obligations, compared with $10.1 million in the comparable 1999 period. Interest expense on delayed claims totaled $0.6 million in the second quarter of 2000 compared with $2.1 million in the second 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 and capital lease obligations. The Company had an income tax expense of $34.9 million for the second quarter of 2000 compared with an income tax benefit of $1.4 million for the second 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 June 30, 2000, the Company had deferred tax assets of approximately $244.3 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 14 15 amounts of future taxable income necessary during the carryforward period to utilize the unreserved net deferred tax assets is approximately $582 million. Net earnings before the extraordinary item attributable to common shares for the three months ended June 30, 2000 and 1999 were reduced by preferred dividends and amortization of approximately $7.5 million and $11.4 million, respectively. 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 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. Six months ended June 30, 2000 compared with six months ended June 30, 1999 Total revenues for the six months ended June 30, 2000 were $2.04 billion, down 3.6% from $2.11 billion during the same period in the prior year. Net earnings before extraordinary item attributable to common stock for the first six months of 2000 totaled $69.4 million, or $0.81 per diluted share, compared with a net loss of $10.2 million, or $0.13 per diluted share, for the first six months of 1999. Total commercial premiums earned for the six months ended June 30, 2000 decreased 1.1% to $1.65 billion compared with $1.67 billion in the same period in the prior year. The year to year decrease in premiums earned is attributable to a 10.2% increase in average premium yield compared with the first six months of 1999 offset by a 10.2% 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 10.5% to $336.1 million in the first six months of 2000 from $375.6 million in the first six months of 1999. The revenue decline was caused by membership declines as member months of Medicare programs decreased 15.5% when compared with the prior year period, partially offset by increases in average premium yields of Medicare programs of 5.8% 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 six months of 1999. Investment and other income decreased 16.5% to $36 million for the first six months of 2000 compared with $43.1 million in the comparable 1999 period. Net investment income for the six months ended June 30, 2000 increased 26.3% to $36.9 million from $29.2 million for the same period last year. The improvement is primarily due to a $3.1 million decrease in capital losses realized in the first six months of 2000 compared with the prior year period and an increase in average investment yields during the first half of 2000 compared with the first half of 1999. Included in other income for the six months ended June 30, 1999 is a $13.5 million gain from 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 81.3% for the first six months of 2000 compared with 85.4% for the first six months of 1999. The improvement in the first six months of 2000 over the first six months of 1999 reflects an 8.7% increase in average overall premium yield offset in part by a 3.5% increase in per member per month medical costs when compared to the prior year period. Included in medical costs for the six months ended June 30, 2000 are favorable developments of prior period medical costs of approximately $23.4 million. Medical costs were adversely affected during the first six 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." Excluding the favorable development of prior year estimates of medical costs in the first six months of 2000, the medical loss ratio would have been 82.5%. 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 15 16 June 30, 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 $241.8 million in the first six months of 2000 compared with $304.9 million in the first six months of 1999. The decrease when compared to the prior year period is primarily attributable to a $34.9 million decrease in payroll and benefits due to reduced staffing, a $8.1 million decrease in consulting fees and temporary help and $8.8 million in depreciation savings. These expenses as a percent of operating revenue were 12.1% during the first six months of 2000 compared with 14.7% during the first six months of 1999. Included in marketing, general and administrative expense for the first six months of 2000 are severance costs of approximately $5 million payable to former employees of the Company. Interest expense decreased $6.1 million to $20.1 million in the first six months of 2000 compared with $26.2 million in the comparable prior year period. The Company incurred interest and other financing charges of $18.5 million in the first six months of 2000 related to its outstanding debt and capital lease obligations, compared with $20.2 million in the first six months of 1999. Interest expense on delayed claims totaled $1.6 million in the first six months of 2000 compared with $6 million in the first six 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 and capital lease obligations. The Company had income tax expense of $65 million for the first six months of 2000 reflecting an effective tax rate of 42% for 2000, compared with $8.9 million for the 1999 period. Net earnings before extraordinary item attributable to common shares for the six months ended June 30, 2000 and 1999 were reduced by preferred dividends and amortization of approximately $20.4 million and $22.5 million, respectively. Preferred dividends and amortization for the six months ended June 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 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 six months of 2000 approximated $181.9 million, compared with cash used of $154.4 million for the first six months of 1999. The $336.3 million improvement in 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. In addition, cash flow for the first six months of 1999 was negatively affected by the runoff of claims reserves relating to discontinued or restructured businesses of approximately $80 million and reductions of claim inventories. Cash flows from operations for the first six months of 1999 included only five months of Medicare premiums as the January 1999 premium of $68.4 million was received in the preceding December. The Company's capital expenditures for the first six months of 2000 totaled $7.3 million compared with $4.1 million for the first six months of 1999. Amounts were principally for certain leasehold improvements, computer equipment and software. 16 17 Cash used by financing activities totaled $279.4 million during the first six months of 2000 compared with $2.2 million in the first six months of 1999. During the first six 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 three and six month periods ended June 30, 2000. 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 would declare and pay a dividend to the parent company in the second quarter of 2000. In May 2000, the dividend of approximately $84.2 million was paid by Oxford NY to the parent company. 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 paid the May 13, 2000 dividend on 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 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 will be 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 in the approximate amounts of $1.6 million and $0.5 million, respectively. Except for Preferred Stock dividends and anticipated capital expenditures, the Company does not have material cash commitments. As of June 30, 2000, cash and investments aggregating $57.5 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 $140 million at June 30, 2000. In July 2000, the Company received regulatory approvals from New York State authorizing a dividend of $40 million from Oxford NY to the parent company. The divided payment was made on July 25, 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 June 30, 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 17 18 relating to the Company's exit from certain businesses during the first quarter of 1998 and thereafter. Outstanding advances aggregated approximately $7.6 million at June 30, 2000, net of a valuation reserve of $25.7 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 $644.3 million as of June 30, 2000 (including $541.8 million for IBNR) compared with $656.1 million as of December 31, 1999 (including $570.7 million for IBNR). The decrease reflects lower levels of production claims inventory and related reserves, an increase in claims paid compared with prior periods, a change in mix of outstanding claims and favorable development of prior period estimates of medical costs. 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 June 30, 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 with a different provider covering New Jersey Medicare members was terminated in July 1999. During the first six 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 in 2000. During the first six 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 significant additional capital contributions to the subsidiaries will be required during the remainder of 2000. As of June 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% 18 19 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 two dividend payments on each series of Preferred Stock during the second quarter 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. MARKET RISK DISCLOSURES The Company's consolidated balance sheet as of June 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 June 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 June 30, 2000 by approximately $20.6 million and $40.5 million, respectively (compared to $20.2 million and $39.8 million as 19 20 of June 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 June 30, 2000 by approximately $21.3 million and $42.7 million, respectively (compared to $20.5 million and $41 million as of June 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 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, 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. 20 21 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. 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 21 22 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 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 (not including Oxford), 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 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 six months of 2000 and 18% of its premiums earned during the year 1999. 22 23 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 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, 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; - 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, 1997 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. On February 28 and March 9, 2000, Judge Brient issued decisions denying the motions to dismiss previously filed by the Company and the individual defendants in the derivative litigation, designating certain of the plaintiffs as class representatives in the class action, and permitting certain other plaintiffs to seek appointment as class representatives in the class action. There have been no material developments in the legal proceedings involving the Company in the second quarter of 2000. 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 4 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of the Company was held on May 11, 2000 in connection with which proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. At the meeting, stockholders were asked to consider and vote upon (a) the election of three directors; (b) an 24 25 amendment of the Company's Certificate of Incorporation, as amended, to confer voting power upon future holders (if any) of the Company's Series D Junior Subordinated Debentures due May 13, 2008 and Series E Junior Subordinated Debentures due May 13, 2008 and to clarify the voting rights of the Company's Series D Preferred Stock and Series E Preferred Stock ("Proposal Number 1"); (c) an amendment of the Company's 1991 Stock Option Plan, as amended, to increase the number of shares of Common Stock issuable thereunder from 25,580,000 to 30,380,000 ("Proposal Number 2"); (d) an amendment of the 1991 Stock Option Plan, as amended, to extend the term thereof from ten years to fifteen years ("Proposal Number 3"); and (e) a shareholder proposal that the Company establish a nominating committee comprised solely of independent directors ("Proposal Number 4"). At the meeting, Norman C. Payson, M.D., Robert B. Milligan, Jr. and Joseph W. Brown, Jr. were each elected a director of the Company for a term to expire in 2003. Continuing directors whose terms expire in 2001 are David Bonderman, Jonathan J. Coslet, Benjamin H. Safirstein, M.D. and Kent J. Thiry. Continuing directors whose terms expire in 2002 are Fred F. Nazem, James G. Coulter and Thomas A. Scully. A total of 86,397,214 votes were cast in favor of, and 1,322,954 votes were cast to withhold authority for, Dr. Payson's election. A total of 86,771,524 votes were cast in favor of, and 948,644 votes were cast to withhold authority for, Mr. Milligan's election. A total of 86,905,563 votes were cast in favor of, and 814,605 votes were cast to withhold authority for, Mr. Brown's election. Proposal Number 1 was adopted with 59,522,771 votes cast for, and 1,407,316 votes cast against the Proposal; in addition, there were 410,615 abstentions and 26,379,466 broker nonvotes related to the Proposal. Proposal Number 2 was adopted with 41,726,590 votes cast for, and 19,267,264 votes cast against the Proposal; in addition, there were 346,848 abstentions and 26,379,466 broker nonvotes related to the Proposal. Proposal Number 3 was adopted with 43,831,172 votes cast for, and 17,139,415 votes cast against the Proposal; in addition, there were 370,115 abstentions and 26,379,466 broker nonvotes related to the Proposal. Proposal Number 4 was defeated with 17,738,929 votes cast for, and 41,505,063 votes cast against the Proposal; in addition, there were 2,096,710 abstentions and 26,379,466 broker nonvotes related to the Proposal. 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.oxhp.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. 25 26 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 15 Letter of Ernst & Young LLP re Unaudited Consolidated Interim Financial Statements
(b) Reports on Form 8-K In a report on Form 8-K dated and filed on April 26, 2000, the Company reported, under Item 5. "Other Events", its first quarter 2000 earnings press release. In a report on Form 8-K dated and filed on May 17, 2000 and as amended on May 26, 2000, the Company reported, under Item 5. "Other Events", the repayment of its Term Loan. 26 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) July 28, 2000 /s/ KURT B. THOMPSON. - ------------------------------ ------------------------- Date KURT B. THOMPSON, CHIEF FINANCIAL OFFICER 27 28 OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES INDEX TO EXHIBITS
Exhibit Number Description of Document - ------ ----------------------- 3(a) Second Amended and Restated Certificate of Incorporation, as amended, of the Registrant, incorporated by reference to Exhibit 3(a) of the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998 (File No. 0-19442) 3(b) Amended and Restated By-laws of the Registrant, incorporated by reference to Exhibit 3(ii) of the Registrant's Form 10-Q for the quarterly period ended September 30, 1998 (File No. 0-19442) 4(a) Certificate of Designations of Series D Cumulative Preferred Stock, incorporated by reference to Exhibit 3(a) of the Registrant's Annual Report on Form 10-K 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) 15 Letter of Ernst & Young LLP re Unaudited Consolidated Interim Financial Statements*
*Filed herewith 28 EX-15 2 ex15.txt EXHIBIT 15 1 EXHIBIT 15 Letter of Ernst & Young LLP re Unaudited 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 July 25, 2000, relating to the unaudited consolidated interim financial statements of Oxford Health Plans, Inc. included in its Form 10-Q for the quarter ended June 30, 2000. Ernst & Young LLP New York, New York July 25, 2000 29 EX-27 3 ex27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT JUNE 30, 2000 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 6 MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000865084 OXFORD HEALTH PLANS, INC. 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 206,196 843,472 63,808 10,000 0 1,205,331 184,353 146,856 1,495,149 878,578 201,471 228,695 0 837 186,568 1,495,149 0 2,035,178 0 1,618,506 241,793 0 20,088 154,791 65,013 89,778 0 (3,624) 0 86,154 0.80 0.77
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