Revenue and Earnings, Financial Position and per common share information set forth below for each year in the five-year period ended December 31, 2001, have been derived from the consolidated financial statements of the Company. The information below is qualified by reference to and should be read in conjunction with the audited consolidated financial statements and related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.
Net earnings for common shares in 2000 includes $41,085 of costs associated with the redemption of preferred stock.
Defined as marketing, general and administrative expense as a percentage of operating revenues.
The Company’s revenues consist primarily of commercial premiums derived from its Freedom Plan, Liberty Plan and health maintenance organizations (“HMOs”). Revenues also include 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. 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.
During the third quarter of 1999, the Company recorded pretax restructuring charges totaling $19.9 million ($11.3 million after income tax benefits, or $0.13 per diluted share) in connection with additional steps taken under the Company’s plan to improve operations and restore the Company’s profitability. These charges included estimated costs related to work force reductions; additional consolidation of the Company’s office facilities inclusive of the net write-off of fixed assets, consisting primarily of leasehold improvements; write-off of certain computer equipment; and leases for equipment no longer used in operations. These charges were partially offset by a pretax gain of $2.5 million related to the disposal of the Company’s minority investment in Ralin Medical, Inc., which was written down in value as part of the Company’s 1998 restructuring charge.
During the first half of 1998, the Company recorded restructuring charges totaling $123.5 million ($114.8 million after income tax benefits, or $1.43 per share). These charges resulted from the Company’s actions to better align its organization and cost structure. These charges included estimated costs related to the disposition or closure of noncore businesses; the write-down of certain property and equipment; severance and related costs; and operations consolidation, including long-term lease commitments. The ending reserves for these charges have generally been classified in the Company’s consolidated balance sheets as accounts payable and accrued expenses.
The table below presents the activity for the three years ended December 31, 2001, for the restructuring reserves established in 1999 and 1998.
The Company’s results of operations are dependent, in part, on its ability to predict and influence health care costs (through, among other things, appropriate benefit design, utilization review and case management programs, risk-transfer and risk-sharing and payment arrangements with providers) while providing members with coverage for the health care benefits provided under their contracts. However, the Company’s ability to contain such costs may be adversely affected by various factors, including, but not limited to: changes in the historical patterns of health care utilization and/or unit costs generally and directly or indirectly related to the war on terrorism or the concerns of members or providers due to the threat of terrorism, new technologies and health care practices, hospital costs, changes in demographics and trends, changes in laws and regulations, mandated benefits or practices, selection biases, increases in unit costs paid to providers, termination of provider arrangements, termination of, or disputes under, risk-transfer or risk-sharing arrangements, major epidemics, catastrophes, acts of terrorism or war, inability to establish or maintain acceptable compensation agreements with providers, higher utilization of medical services, including, without limitation, higher out-of-network utilization under point-of-service plans, operational and regulatory issues and numerous other factors may affect the Company’s ability to control such costs. The Company attempts to use its medical cost-containment capabilities, such as claim auditing systems, with a view to reducing the rate of growth in health care service expense.
Total commercial premiums earned for the year ended December 31, 2001 were $3.65 billion, compared with $3.35 billion in the prior year. Average premium yield increases were 8.3% and member months increased 0.9% for commercial products during 2001. Overall commercial membership increased by 2.6% at December 31, 2001 compared with the prior year primarily due to growth in the Company’s Freedom Plan group of products. The Company expects commercial enrollment to grow by approximately 2% in 2002, excluding the anticipated impact of the acquisition of MedSpan, Inc., the parent of a Connecticut health maintenance organization, anticipated to be completed by the end of the first quarter of 2002.
increase from CMS and the county-specific mix of membership. The Company expects its Medicare membership to be about 11,000 members lower in 2002 as the result of withdrawals from Medicare in all but Hudson County in New Jersey and the withdrawal from Nassau County, New York. The lower levels are expected to result in 2002 Medicare revenue being approximately $100 million lower than in 2001. Reimbursement levels for the Company’s 2002 Medicare business are expected to be approximately 2% higher than 2001 on a county-specific basis due to minimum CMS mandated increases. The average per member reimbursement will likely be higher due to a change in the Company’s county-specific mix of business. The Company believes that future Medicare premiums may not keep up with the cost of health care increases. Given current public policy and the fact that Medicare premiums are not scheduled to keep up with the cost of health care, it is possible that the Company may decrease its Medicare membership further by, among other things, reducing benefits and exiting additional counties. See “Business - Government Regulations - Federal Regulation”.
The Company incurred interest and other financing charges of $15.6 million and $29.4 million in 2001 and 2000, respectively, related to bank debt. Interest on bank debt decreased in part during 2001 due to the repayment in full of the Term Loan during the second quarter of 2000. During December 2000, the Company completed a capital restructuring whereby all outstanding Senior Notes were repurchased or tendered and
In light of the Company’s progress from 1999 through 2001, estimates of future earnings and the expected timing of the reversal of other net tax deductible temporary differences, management concluded that a valuation allowance was no longer necessary for substantially all of the remaining deferred tax assets at December 31, 2001. The income tax expense (benefit) recorded for the years ended December 31, 2001, 2000 and 1999 includes the reversal of $21 million, $10 million and $225 million, respectively, of deferred tax valuation allowances. The Company adjusted its net deferred tax assets during 2000 to reflect anticipated tax rates relating to the periods when the net deferred tax assets are expected to reverse. The impact was to increase the 2000 income tax expense by approximately $11.8 million. The remaining valuation allowance at December 31, 2001 of $3.1 million relates primarily to the recognition of certain restructuring related and property and equipment deferred tax assets. Management believes that the Company will obtain the full benefit of the net deferred tax assets recorded at December 31, 2001.
Total revenues for the year ended December 31, 2000 were $4.1 billion, down 2% from $4.2 billion in the prior year. Net income attributable to common stock in 2000 totaled $191.3 million, or $2.02 per diluted common share (including the effect of recapitalization charges in 2000) compared with $274.4 million, or $3.26 per diluted common share in 1999, which included a $225 million tax benefit. During 2000, the Company recorded an extraordinary charge of $20.3 million, net of income tax benefits of $13.9 million, in connection with the prepayment of the Term Loan and the repurchase or tender of its $200 million Senior Notes. The extraordinary charges include premiums paid, transaction costs and the write-off of unamortized original issuance debt costs. In addition, the Company completed an exchange agreement for all of its outstanding Preferred Stock and incurred costs of approximately $41.1 million related to the write-off of unamortized preferred stock discount and costs from the original issuance in 1998 and related transaction fees. Results of operations in 1999 were adversely affected by net restructuring charges of $19.9 million and a charge of $24 million for litigation insurance coverage. See “Liquidity and Capital Resources” and “Overview”.
Health care service expense stated as a percentage of premium revenues (the “medical loss ratio”) was 77.5% for 2000 compared with 82.1% for 1999. Overall per member per month revenue in 2000 increased 9.4% to $231.96 from $212.12 in 1999 due primarily to a 10.7% increase in premium yields for the Company’s commercial products and lesser increases for the Company’s Medicare programs. Overall per member per month health care services expenses increased 3.2% to $179.67 in 2000 from $174.13 in 1999. For the year ended December 31, 2000, health care services expense benefited from favorable development of prior period estimates of medical costs of approximately $47.7 million, claim recoveries of approximately $13.2 million and additional New York Stabilization Pool recoveries applicable to 1997 and 1998 of approximately $25.1 million. Excluding these items, the medical loss ratio was 79.6% for 2000. Health care services expense benefited from initiatives to improve health care utilization and reduce costs as well as a change in membership mix whereby government program membership was reduced. Health care services expense in 1999 included the favorable development of prior period estimates of medical costs and claim recoveries of approximately $28.6 million. Excluding favorable development and claims recoveries in 1999, the 1999 medical loss ratio was 82.8%.
In 2000 and 1999, the Company expensed a total of $63 million and $73.9 million, respectively, for graduate medical education and a total of $38.9 million and $41.9 million, respectively, for hospital bad debt and charity care.
The Company incurred interest and other financing charges of $29.4 million and $38.3 million in 2000 and 1999, respectively, related to bank debt. Interest on bank debt decreased during 2000 due to the repayment in full of the Term Loan during the second quarter of 2000. During December 2000, the Company completed a capital restructuring whereby all outstanding Senior Notes were repurchased or tendered and replaced with the Senior Credit Facilities. See “Liquidity and Capital Resources - Financing”. Interest expense on capital leases aggregated $0.9 million in 2000 and $2 million in 1999. Interest expense on delayed claims totaled $4 million in 2000 compared with $9.2 million in 1999, reflecting a more timely payment of claims and lower levels of older claims outstanding.
In light of the Company’s progress during 1999 and 2000, estimates of future earnings and the expected timing of the reversal of other net tax deductible temporary differences, management concluded that a valuation allowance was no longer necessary for its federal net operating loss carryforwards and certain other temporary differences. The income tax expense (benefit) recorded for the years ended December 31, 2000 and 1999 includes the reversal of $10 million and $225 million, respectively, of deferred tax valuation allowances. The Company adjusted its net deferred tax assets during 2000 to reflect anticipated tax rates relating to the periods
when the net deferred tax assets are expected to reverse. The impact was to increase 2000 income tax expense by approximately $11.8 million. The remaining valuation allowance at December 31, 2000 of $24.1 million relates primarily to capital loss carryforwards and certain state net operating loss carryforwards.
Capital expenditures totaled $21.4 million during 2001 compared with $12.8 million in 2000. This amount was used primarily for computer equipment and software, including approximately $13.6 million paid under the Company’s computer system outsource agreement. The Company currently anticipates that capital expenditures in 2002 will be approximately $35 million, a significant portion of which will be devoted to management information systems, including amounts due under the Company’s computer systems outsource agreement. In May 2001, the Company purchased all of the outstanding shares of Investors Guaranty Life Insurance Company (“IGL”), a California insurance company, for approximately $11.8 million, net of cash acquired. The acquisition is intended to allow the Company to, among other things, expand offerings of its various health plans to New York and New Jersey based employers with employees outside the tri-state area. The Company made additional
investments of approximately $7.7 million in 2001 and $1 million in 2002, for a total investment of approximately $11 million, in MedUnite Inc., a company originally founded by certain healthcare payors to create an Internet-based health care transaction system.
Cash used by financing activities totaled $364.6 million for the year ended December 31, 2001, compared with $519.7 million in 2000. During 2001, the Company repaid approximately $21.9 million of its New Term Loan. In July 2001, the Company’s Board of Directors approved a share repurchase program for up to $250 million of the Company’s outstanding common stock through August 1, 2003. In November 2001, the Company’s Board of Directors approved an increase of $250 million to its existing share repurchase program and extended the program through September 2003. The program authorizes the Company to purchase shares on the open market and in privately negotiated transactions from time to time depending on general market conditions. Through December 31, 2001, the Company had repurchased approximately 13 million of its common shares at an aggregate cost of approximately $366.5 million. The Company has remaining repurchase authority of approximately $133.5 million as of December 31, 2001. During 2000, the Company retired its $150 million Term Loan and its $200 million Senior Notes, including premiums of approximately $26.4 million. In addition, the Company consummated two transactions, including an exchange and repurchase agreement during the fourth quarter of 2000, whereby the Company paid a total of $350 million to repurchase certain of the shares of Preferred Stock and approximately 11.5 million of the outstanding warrants. The Company entered into new senior credit facilities during 2000 that included a term loan of $175 million and a revolving credit facility of $75 million, which has not been drawn. Under the terms of the new senior credit facilities, the Company must make scheduled payments and reductions in the revolving credit facility and must prepay the term loan or reduce the revolving credit facility upon the occurrence of certain events, as defined. See “Liquidity and Capital Resources - Financing”. The Company paid cash dividends on the then outstanding Preferred Stock of approximately $13.8 million during 2000. Proceeds from the exercise of stock options were approximately $29.5 million during 2001 compared with $64.6 million and $18.2 million in 2000 and 1999, respectively.
the parent company. Although the Company received dividends from its HMO subsidiaries in 2001 and 2000, there can be no assurances that such dividend payments will be made in future periods.
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 rules ultimately adopted by each state, there could be an increase in the minimum capital requirement for certain of the Company’s regulated subsidiaries. The Connecticut Department of Insurance has promulgated regulations based on the NAIC model that are applicable to its 2001 annual financial statements. Neither New York nor New Jersey has enacted similar legislation. Legislation has been introduced in the New York State Senate to strengthen current solvency regulations to allow the New York State Insurance Department (“NYSID”) to take over failing health plans without a court order; however, capitalization requirements continue to be subject to state interpretation from time to time. The Company believes that the current capitalization of the subsidiaries is sufficient to meet these requirements.
In order to fund operating losses incurred in 1997 and 1998 and make necessary capital contributions to its HMO and insurance subsidiaries, in May 1998, the Company raised a total of $700 million in capital (the “Financing”) through the following arrangements: (i) the Company sold $350 million of Preferred Stock to TPG Partners II, L.P. (formerly TPG Oxford LLC) and certain of its affiliates and designees (“TPG Investors”) under an Investment Agreement, dated as of February 23, 1998, as amended (the “Investment Agreement”), together with warrants to acquire up to 22,530,000 shares of the Company’s common stock at an exercise price of $17.75; (ii) the Company issued $200 million of Senior Notes and (iii) the Company entered into the $150 million Term Loan. Simultaneously with these transactions, Norman C. Payson, M.D., the Company’s Chairman and Chief Executive Officer, purchased 644,330 newly issued shares of Oxford common stock for a purchase price of $10 million.
In February 2000, the Company commenced a capital restructuring with the repurchase of (i) $130 million of Preferred Stock and (ii) $19 million of loans outstanding under its existing Term Loan. In May 2000, the Company prepaid the remaining $131 million balance of the Term Loan, including pre-payment premiums, for a total amount of $134.3 million. During the second half of 2000, the Company repurchased or tendered all of its $200 million Senior Notes and paid $22.4 million in tender and consent premiums. The purchase price for each $1,000 principal amount of the remaining Senior Notes validly tendered and accepted was determined based on a fixed spread of 0.5% over the yield to maturity of the 7.5% U.S. Treasury Note due May 15, 2002. All of the outstanding Senior Notes were tendered with consent. The total purchase price, including tender and consent premiums, was approximately $215.9 million, or $1,115.50 per $1,000 principal amount. In addition, in December 2000, the Company consummated an exchange and repurchase agreement pursuant to which, among other things, (i) the Company paid $220 million to TPG Investors to repurchase certain of the shares of Preferred Stock and certain of the warrants and (ii) TPG Investors exchanged their remaining shares of Preferred Stock and remaining warrants for 10,986,455 newly issued shares of common stock (the “Recapitalization”). The TPG Investors agreed not to sell the newly issued shares of common stock prior to February 15, 2001. In connection with the Recapitalization in the fourth quarter of 2000, the Company incurred costs of approximately $38.5 million related to the write-off of unamortized Preferred Stock discount and costs from the original issuance in 1998 and related transaction fees. Accordingly, as of the end of 2000, the Company had no warrants, Preferred Stock or Senior Notes remaining outstanding.
Under the computer system outsource agreement, CSC invoices the Company for base operating and capital costs, which covers payments for asset purchases and services, including data center operations and help desk services, among other things. Costs for CSC services and equipment utilization fluctuate based on the Company’s actual usage and are billed by CSC at rates established in the agreement. The outsource agreement, may be terminated by the Company at any time prior to its expiration subject to early termination fees and penalties of approximately $15 million to $20 million through 2002, declining to approximately $8 million to $10 million in 2005..