Revenues and Earnings, Financial Position and Per Common Share information set forth below for each year in the five-year period ended December 31, 2000 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.
(1) Net earnings for common shares in 2000 includes $41,085 of costs associated with the redemption of preferred stock.
(3) Defined as health care services expense as a percentage of premiums earned.
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 (and, prior to 1999, its Medicaid programs), third-party administration fee revenue for its self-funded plan services (which is stated net of direct expenses such as third-party reinsurance premiums) and investment income. 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.
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 ("IBNR") or paid claims. The Company estimates IBNR expense based on a number of factors, including prior claims experience. The ultimate payment of unpaid claims attributable to any period may be more or less than the amount of IBNR reported. The Company's results for the year ended December 31, 1998 were adversely affected by additions to the Company's reserves for IBNR in the second and fourth quarters. See "Liquidity and Capital Resources".
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 (the "Turnaround Plan"). 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 1998, the costs of consolidating operations reserve was established for $13.7 million of estimated costs associated with future rental obligations (net of estimated sublease revenues), commissions, legal costs, penalties and other expenses relating to disposition of excess space in various locations. The Company recorded an additional restructuring charge of approximately $4.5 million in the fourth quarter of 1998 as a change in estimate because the Company's experience in negotiating subleases and lease cancellations through the fourth quarter indicated that costs would exceed previous estimates.
During the second quarter of 1998, the Company sold 540,000 shares of common stock of FPA Medical Management, Inc. ("FPAM") and recognized a loss of $8.1 million. In July 1998, FPAM filed for protection under Chapter 11 of the U.S. Bankruptcy Code and the market value per share of its common stock fell below one dollar. The Company wrote down its remaining investment in FPAM to nominal value and recognized a loss in the second quarter of 1998 of $30.2 million. The total 1998 recognized loss and write down of $38.3 million, or $.49 per share, has been recognized as write downs of strategic investments in the accompanying 1998 financial statements.
As a consequence of the charges described in the previous paragraphs, comparisons of operating results for 1999 and 1998 may not be meaningful.
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 related to additional steps taken in the Company's Turnaround Plan 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%.
Marketing, general and administrative expenses decreased $122.7 million or 20.5% to $476.4 million for 2000 compared with $599.2 million for 1999. Marketing, general and administrative expenses as a percent of operating revenue were 11.8% in 2000 compared with 14.6% in 1999. Significant expense reductions in 2000 compared to 1999 include $44.9 million in payroll and employee related expenses, $20.3 million in occupancy and depreciation costs, $15.1 million in operating costs (primarily equipment rental and maintenance, telephone, postage expense and other services), $8.7 million in marketing and outside services and $24 million in other general and administrative costs, representing a charge in 1999 for the purchase of insurance policies for litigation matters. Included in marketing, general and administrative expenses for 2000 are severance charges of approximately $7.5 million. Although the Company experienced lower levels of administrative costs in 2000 as compared with 1999, such costs in future periods may also be adversely affected by costs associated with responding to regulatory inquiries, investigations and defending pending securities class actions, shareholder derivative and other litigation, including fees and disbursements of counsel and other experts to the extent such costs are not reimbursed under existing policies of insurance. See "Legal Proceedings".
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 a $175 million senior secured term loan and a $75 million revolving credit facility. 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.
Total revenues for the year ended December 31, 1999 were $4.2 billion, down 11.1% from $4.7 billion in the prior year. Net income attributable to common stock in 1999 totaled $274.4 million, or $3.26 per diluted share, compared to a net loss of $624.4 million, or $7.79 per share, in 1998. Results of operations in 1999 were adversely affected by net restructuring charges of $19.9 million related to additional steps taken in the Company's Turnaround Plan and a charge of $24 million for litigation insurance coverage. Net income for 1999 was favorably affected by the reversal of $225 million of deferred tax valuation allowances. Results of operations in 1998 were adversely affected by significantly higher medical costs in the Company's commercial group business, Medicare, Medicaid and New York Individual Plans. Additionally, 1998 included approximately $113.7 million of restructuring charges, a $31.8 million premium deficiency reserve for losses on government contracts and $38.3 million of write-downs of strategic investments. See "Liquidity and Capital Resources" and "Overview".
efforts to rationalize its product lines and not renew groups or products where underwriting margins were unacceptable.
In 1999 and 1998, the Company expensed a total of $73.9 million and $76.4 million, respectively, for graduate medical education and a total of $41.9 million and $54.8 million, respectively, for hospital bad debt and charity care. Health care services expense in 1998 included a provision of $25 million related to valuation reserves established in respect of provider advances. See "Liquidity and Capital Resources".
The Company incurred interest and other financing charges of $38.3 million and $41.6 million in 1999 and 1998, respectively, related to debt issued in 1998. Interest expense on capital leases entered into during 1998 aggregated $2 million in 1999 and $1.4 million in 1998. Interest expense on delayed claims totaled $9.2 million in 1999 compared to $14.1 million in 1998. Interest payments were made in accordance with the Company's interest payment policy and applicable law.
During the second quarter of 1998, the Company incurred a net loss of $507.6 million. At that time, the Company evaluated the deferred tax assets arising from the net loss and established a valuation allowance pending the results of its Turnaround Plan. During 1998, the Company performed detailed analyses to assess the realizability of the Company's deferred tax assets. These analyses included an evaluation of the results of operations for 1998 and prior periods, the progress to date in its Turnaround Plan and projections of future results of operations, including the estimated impact of the Turnaround Plan. Based on these analyses, management concluded that it was not more likely than not that all of its deferred tax assets would be fully
Cash used for capital expenditures totaled $12.8 million during 2000. This amount was used primarily for computer equipment and software. The Company currently anticipates that capital expenditures in 2001 will be approximately $16 million, a significant portion of which will be devoted to management information systems. In addition, the Company has committed, under an outsource agreement, to make payments of approximately $25 million in 2001 for capital equipment purchases (see Note 10 to the consolidated financial statements).
Cash and investments aggregating $57.2 million at December 31, 2000 have been segregated as restricted investments to comply with state regulatory requirements. With respect to the Company's HMO subsidiaries, the minimum amount of surplus required is based on formulas established by the state insurance departments. These statutory surplus requirements amounted to approximately $176 million and $163 million at December 31, 2000 and 1999, respectively. In addition, the Company's subsidiaries are subject to certain
Outstanding provider advances aggregated approximately $23.5 million at December 31, 2000, and are fully reserved. The Company continues its efforts to recover outstanding advance payments, either through repayment by the provider or application against future claims; however, such recovery can not be assured as many of these advances are in excess of three years old.
The Company has risk-sharing agreements with a limited number of hospitals and hospital systems covering approximately 33,800 Medicare members. Premium revenues for the Medicare members covered under these agreements totaled approximately $240 million in 2000. North Shore Long Island Jewish Health Systems ("North Shore") and the Company are in discussions with regard to a possible restructuring of their agreement. In connection with these discussions, North Shore has sent a notice of mediation to the Company and has asserted various claims of breach by the Company, including a claim for recission of this agreement. The Company's agreement with Lenox Hill Hospital ("Lenox") is also under renegotiation. In connection with such
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 (originally issued as Series A and Series B and later exchanged for Series D Cumulative Preferred Stock, par value $.01 per share (the "Series D Preferred Stock"), and Series E Cumulative Preferred Stock, par value $.01 per share (the "Series E Preferred Stock", together with the Series D Preferred Stock, the "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 Series A and Series B 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 11% Senior Notes due 2005 (the "Senior Notes") and (iii) the Company entered into a Term Loan Agreement, dated as of May 13, 1998 (the "Term Loan"), pursuant to which the Company borrowed $150 million in the form of a senior secured 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.
The Senior Credit Facilities grant a first priority lien to the Lenders on all property of the Company and material non-regulated subsidiaries and all capital stock of its material subsidiaries, require the Company to maintain certain financial ratios and prohibit certain restricted payments, as defined.