1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
Commission file number: 1-12718
HEALTH SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-42288333
- ------------------------------------------------ ------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer identification No.)
organization)
21600 Oxnard Street, Woodland Hills, CA 91367
225 North Main Street, Pueblo, CO 81003
- ----------------------------------------- -----------
(Address of principal executive offices) (Zip Codes)
Registrant's telephone numbers, including area code: (818) 719-6978 (California)
(719) 542-0500 (Colorado)
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.
As of August 1, 1996, 29,028,935 shares of Class A Common Stock, $.001
par value per share, were outstanding (exclusive of 3,194,374 shares held as
treasury stock) and 19,297,642 shares of Class B Common Stock, $.001 par value
per share, were outstanding.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Health Systems International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
June 30, December 31,
1996 1995
----------- ------------
ASSETS
Current assets
Cash and equivalents $ 103,787 $ 225,932
Marketable securities held for sale 387,689 366,629
Premiums receivable, net 91,575 91,106
Prepaid expenses and other 49,433 34,849
Deferred income taxes 10,689 18,902
----------- -----------
Total current assets 643,173 737,418
Property and equipment, net 80,260 84,743
Goodwill and other intangible assets, net 339,010 336,365
Deferred income taxes 1,651 1,958
Other assets 55,406 53,227
----------- -----------
Total assets $ 1,119,500 $ 1,213,711
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Estimated claims payable $ 245,986 $ 310,392
Shared risk and other settlements 12,921 30,664
Unearned subscriber premiums 27,834 91,596
Accounts payable and accrued expenses 94,810 120,161
Federal and state income taxes payable 13,975 13,196
Notes payable, current portion 2,299 2,340
----------- -----------
Total current liabilities 397,825 568,349
Notes payable 362,769 354,080
Other 12,385 5,755
----------- -----------
Total liabilities 772,979 928,184
----------- -----------
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Stockholders' equity
Preferred stock, $.001 par value
Authorized shares - 10,000,000
Issued and outstanding shares - none -- --
Class A common stock, $.001 par value
Authorized shares - 135,000,000
Issued and outstanding shares - 32,194,194 in 1996
and 22,643,030 in 1995 32 23
Class B nonvoting convertible common stock, $.001 par value
Authorized shares - 30,000,000
Issued and outstanding shares - 19,297,642 in 1996 and
25,684,152 in 1995 19 26
Additional paid-in capital 185,461 66,147
Retained earnings 259,073 233,711
Advance to repurchase 574,869 shares of Class A common stock in 1995 (16,330)
Treasury Stock 3,194,374 shares of Class A common stock in 1996 (95,831)
Unrealized gain/(loss) on marketable securities held for sale, net (2,233) 1,950
----------- -----------
Total stockholders' equity 346,521 285,527
----------- -----------
Total liabilities and stockholders' equity $ 1,119,500 $ 1,213,711
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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Health Systems International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
Three-Months Ended June 30, Six-Months Ended June 30,
------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues:
Premium revenue $ 777,524 $ 649,930 $ 1,560,647 $ 1,268,868
Administrative services and
other revenue 20,435 10,782 38,661 19,340
----------- ----------- ----------- -----------
Total revenue 797,959 660,712 1,599,308 1,288,208
----------- ----------- ----------- -----------
Operating Expenses:
Health care expenses:
Physician 311,447 240,439 609,151 486,988
Hospital 257,853 215,488 536,086 414,535
Pharmacy and other 78,661 67,177 151,646 120,499
----------- ----------- ----------- -----------
Total health care expenses 647,961 523,104 1,296,883 1,022,022
Marketing, general and administrative 79,901 74,351 160,021 145,971
Depreciation and amortization 13,208 11,870 26,674 22,757
Administrative services and
other expenses 17,229 10,166 33,562 18,138
Merger-related costs 2,185 11,112
----------- ----------- ----------- -----------
Total operating expenses 758,299 621,676 1,517,140 1,220,000
----------- ----------- ----------- -----------
Operating income 39,660 39,036 82,168 68,208
Investment income 9,956 7,671 18,779 15,103
Interest expense (6,000) (4,877) (11,932) (9,246)
----------- ----------- ----------- -----------
Income before income taxes
and minority interest 43,616 41,830 89,015 74,065
Income taxes 19,201 18,947 38,591 32,281
Minority interest in loss of
subsidiary 33 83 64 93
=========== =========== =========== ===========
Net Income $ 24,448 $ 22,966 $ 50,488 $ 41,877
=========== =========== =========== ===========
Earnings per share:
Primary and fully diluted $ 0.51 $ 0.47 $ 1.05 $ 0.85
=========== =========== =========== ===========
Weighted average common
shares outstanding:
Primary 48,388 49,035 48,260 49,225
=========== =========== =========== ===========
Fully diluted 48,388 49,073 48,265 49,257
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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Health Systems International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Six-Months Ended June 30,
---------------------------
1996 1995
--------- ---------
OPERATING ACTIVITIES
Net income $ 50,488 $ 41,877
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization of fixed and intangible assets 26,674 22,757
Deferred income taxes 8,653 15,575
Changes in operating assets and liabilities net of acquisition:
Premiums receivable and unearned subscriber premiums (64,231) 8,460
Prepaid expenses and other (14,730) (15,005)
Estimated claims payable, shared risk and other settlements (82,149) (31,199)
Accounts payable and accrued expenses (20,404) (38,583)
Federal and state income taxes payable 4,389 (4,141)
--------- ---------
Net cash used by operating activities (91,310) (259)
INVESTING ACTIVITIES
Sale or redemption of marketable securities held for sale 127,129 119,101
Purchases of marketable securities held for sale (154,462) (170,765)
Purchases of property and equipment (14,568) (18,814)
Acquisition of subsidiaries, net of cash acquired (4,114) (90,639)
--------- ---------
Net cash used by investing activities (46,015) (161,117)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and
employee stock plan purchases 15,719 2,288
Proceeds from sale of stock 96,230 --
Borrowings 9,000 235,000
Purchase of treasury stock (105,417) (13,302)
Advances to repurchase shares of Class A common stock (12,997)
Repayment of debt and other non current liabilities (352) (144,716)
--------- ---------
Net cash provided by financing activities 15,180 66,273
--------- ---------
Decrease in cash and equivalents (122,145) (95,103)
Cash and equivalents, beginning of period 225,932 267,877
--------- ---------
Cash and equivalents, end of period $ 103,787 $ 172,774
========= =========
See accompanying notes to condensed consolidated financial statements.
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HEALTH SYSTEMS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Health Systems International, Inc. and its wholly and majority
owned subsidiaries (collectively, the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information, and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, reference is made to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, and
to certain "Cautionary Factors" included elsewhere in this quarterly report on
Form 10-Q.
2. CREDIT FACILITY
On April 26, 1996, the Company replaced its $400 million revolving
credit facility obtained on April 12, 1995 with a $700 million revolving credit
facility. Under the new credit facility, the Company may incur permitted
subordinated indebtedness in a maximum aggregate amount not to exceed $150
million which is available for acquisition purposes and to provide short-term
financing to repurchase shares of stock. The Company may elect from various
short-term interest rates based upon a spread above the LIBOR rate; or the
greater of the bank's reference rate or the federal funds rate plus 1/2%. In
addition, the Company may elect a "competitive bid auction" in which
participating banks are offered an opportunity to bid alternative rates. The
credit facility is for a term of five years from the date of execution, with two
one year extension options. At June 30, 1996, $319 million had been borrowed
against the new $700 million credit facility.
3. CONTINGENCIES
In January 1995, two purported class action lawsuits were filed against
the Company and the members of its Board of Directors alleging breach of
fiduciary duties to its public stockholders by refusing to seriously consider
certain acquisition bids for the Company. These lawsuits were subsequently
consolidated into a single action. On April 19, 1996, such single, consolidated
action was dismissed without prejudice.
The Company is also involved in various other legal proceedings, most
of which are routine to its business. In the opinion of management, based in
part on advice from litigation counsel to the
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Company, the resolution of these matters should not have a material adverse
effect on the financial condition or results of operations of the Company.
4. STOCKHOLDER'S EQUITY
During the first quarter of 1996, the Company repurchased 303,879
shares of its Class A Common Stock from certain current and former management
employees of the Company and HN Management Holdings, Inc., a predecessor to the
Company, at a price of $31.55 per share. The repurchased shares were held
pursuant to the Amended and Restated Health Net Associate Trust Agreement dated
as of May 1, 1994 (the "Associate Trust Agreement"), on behalf of certain
founding stockholders of the Company at the date of the conversion of Health Net
to for-profit status (the "Class A Stockholders"). The repurchased shares,
having an aggregate value of $9,587,000, were immediately canceled and netted
against Class A Common Stock, Additional Paid-in-Capital and Retained Earnings.
On May 15, 1996, the Company completed a public offering in which the
Company sold 3,194,374 shares of Class A Common Stock and the California
Wellness Foundation (the "Foundation") sold 6,386,510 shares of Class A Common
Stock (constituting 6,386,510 shares of Class B Common Stock which automatically
converted into shares of Class A Common Stock upon the sale) for a per share
purchase price to the public of $30.00 (the "Offering"). The net proceeds
received by the Company from the sale of the 3,194,374 shares of Class A Common
Stock were approximately $92.4 million after deducting underwriting discounts
and commissions and estimated expenses of the Offering payable by the Company.
The Company used its net proceeds from the Offering to repurchase 3,194,374
shares of Class A Common Stock held pursuant to the Associate Trust Agreement
from certain Class A Stockholders. The Company repurchased these shares of Class
A Common Stock from the Class A Stockholders at $30.00 per share less
transaction costs associated with the offering, amounting to $1.08 per share.
All of these 3,194,374 shares of Class A Common Stock repurchased are currently
held in treasury. The Company did not receive any of the proceeds from the sale
of shares of Class A Common Stock in the Offering by the Foundation.
5. RELATED PARTY TRANSACTION
On April 14, 1995, a member of the Company's Board of Directors, who is
also a Class A Stockholder, was provided a loan by the Company in the amount of
$1.0 million, which was secured by shares of the Company's Class A Common Stock
owned by such board member and held pursuant to the Associate Trust Agreement.
On May 15, 1996, the note evidencing this loan was paid back in full by the
board member as part of his stock sale during the Company's repurchase of Class
A Common Stock held pursuant to the Associate Trust Agreement described above.
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6. ACQUISITION
On May 14, 1996, the Company announced that it had reached a definitive
agreement with the St. Francis Health System to acquire Advantage Health, Inc.,
a managed care company headquartered in Pittsburgh, Pa., with approximately
60,000 members for approximately $12.5 million in cash. The transaction is
subject to approvals from regulatory authorities, and other customary conditions
of closing. The transaction is expected to close in the third quarter of 1996.
7. RESTRUCTURING CHARGE
On April 10, 1996, the Company announced its intention to take a
pre-tax one-time restructuring charge of approximately $34.2 million or $.41 per
share after tax, during the second quarter of 1996. The charge was to cover
non-recurring costs of a comprehensive restructuring of the Company's Health Net
subsidiary, computer software and hardware write-offs, and the consolidation of
certain operational functions of other subsidiaries.
The Company subsequently put in place a new management team consisting
of a new president and chief operating officer, and a new president and chief
executive officer for both its Health Net and QualMed subsidiaries. To allow
this new management team time to fully assess the impact of the proposed
restructuring and consolidations of the Company's primary subsidiaries, the
Company has postponed the restructuring charge until the third quarter of 1996.
The restructuring of Health Net will include the reorganization of its
management and operating structure and staff reductions. The software write-offs
are related to abandoned development projects at Health Net, while the computer
hardware write-offs recognize the obsolescence of certain equipment in the
anticipation of significant system upgrades. A portion of the charge will also
cover the Company's centralization of claims processing and certain other
functions in its non-California health plans in Pueblo, Colorado. Since the
restructuring of Health Net and the centralization of functions in Pueblo will
occur throughout 1996, it is anticipated that savings from the restructuring
charges, if any, will not become estimable or be realized until 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Health Systems International, Inc. (the "Company") is one of the
largest health maintenance organizations ("HMOs") in the United States,
providing health care and administrative services to more than 1.9 million
full-risk HMO and administrative services only ("ASO") members in California,
Colorado, Connecticut, Idaho, New Jersey, New Mexico, Oregon, Pennsylvania and
Washington. Through its operating subsidiaries, the Company provides a wide
range of managed health care services through Network Model and Individual
Practice Association Model HMOs. The Company also provides various tailored
managed health care products, operates a preferred provider organization network
and owns two health and life insurance companies.
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
RESULTS OF OPERATIONS
The following table sets forth certain selected operating statistics
and membership data of the Company for the three and six month periods ended
June 30, 1996.
SUMMARY OF OPERATING STATISTICS AND MEMBERSHIP DATA
OPERATING STATISTICS
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1996 1995 1996 1995
------ ------ ------ ------
Medical loss ratio (health care expense as a
percentage of premium revenue) 83.3% 80.5% 83.1% 80.5%
Marketing, general and administrative expense
including depreciation and amortization
as a percentage of premium revenue 12.0% 13.3% 12.0% 13.3%
Net income as a percentage of total revenue 3.1% 3.5% 3.2% 3.3%
Primary and fully diluted earnings per share
(before net merger-related costs in 1995) $ 0.51 $ 0.51 $ 1.05 $ 1.00
====== ====== ====== ======
Primary and fully diluted earnings per share $ 0.51 $ 0.47 $ 1.05 $ 0.85
====== ====== ====== ======
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Enrollment Data
June 30,
--------------------------
1996 1995
---- ----
Members by Product Type
Commercial 1,594,849 1,497,891
Medicare 141,334 102,178
Medicaid 61,794 11,567
--------- ---------
Full Risk Members 1,797,977 1,611,636
ASO 114,525 150,407
Managed 4,551 4,202
--------- ---------
Total 1,917,053 1,766,245
========= =========
Members by State
California 1,323,926 1,317,928
Colorado 70,522 48,582
New Mexico 28,535 27,096
Washington/Idaho 113,415 123,960
Oregon 49,014 39,894
Connecticut 162,318 133,785
Pennsylvania 169,323 75,000
--------- ---------
Total 1,917,053 1,766,245
========= =========
The Company added 150,808 new full-risk and ASO members since the
second quarter of 1995. Of this increase, 85,223 members resulted from the
acquisition of Greater Atlantic Health Services, Inc., an HMO operating in
Pennsylvania and New Jersey. Internal growth accounted for the remaining
increase in enrollment of 65,585.
For the period ended June 30, 1996, enrollment decreased by
approximately 22,000 (1%) compared to December 31, 1995. The bulk of the
enrollment decrease occurred during the first quarter of 1996. The decrease was
due to the Company's efforts to maintain pricing discipline in the current
competitive environment and marketplace uncertainty caused by the abandoned
merger involving the Company and WellPoint Health Networks Inc. The decrease
resulted from a 52,000 member reduction in commercial enrollment, partially
offset by increases of 8,000, 12,000 and 10,000 in the Company's Medicare,
Medicaid and ASO lines of business, respectively. Enrollment remained relatively
stable throughout the second quarter of 1996.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Net income increased 6.5% to $24.4 million for the three months ended
June 30, 1996, compared to $23.0 million, after net merger-related costs of $2.2
million, for the comparable period in 1995. The increase in net income
reflected the Company's higher investment income, growth in membership and
premium revenue, and a decrease in
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administrative expenses as a percentage of revenue, offset in part by an
increase in the Company's medical loss ratio (i.e., health care expenses as a
percentage of premium revenue, or "MLR") from 80.5% in the three months ended
June 30, 1995 to 83.3% in the three months ended June 30, 1996.
Premium Revenue
Premium revenue, excluding ASO revenue, increased $127.6 million or
19.6% in the second quarter of 1996 compared to the second quarter of 1995. The
increase in premium revenue was reflective of increased membership and premium
rate increases in the Medicare line of business. The Company's Northeast
operations contributed $53.9 million of acquired premium growth and $35.7
million of post-acquisition internal premium growth between the second quarter
of 1996 and the second quarter of 1995. On a same store basis, premium revenue
(including post-acquisition internal premium growth in the Northeast)
increased by $73.7 million or 11.3%, between the three month periods ended
June 30, 1996 and June 30, 1995.
Change in Net Premium Revenue
(In Millions)
Second Quarter 1996 Compared to Second Quarter 1995
Change in revenue due to
premium change (same store):
Commercial $ (1.9)
Medicare 9.8
------
7.9
Change in revenue due to
membership change (same store):
Commercial 30.6
Medicare 35.2
------
65.8
Change in revenue due to
acquisitions:
Commercial 31.2
Medicare 22.7
------
53.9
Total change in revenue:
Commercial 59.9
Medicare 67.7
------
$127.6
Total member months (cumulative number of member service months during
the period) increased by 12.5% to 5,397,000 during the second quarter of 1996
compared to the same period in 1995, and the combined per member per month
("PMPM") premium revenue increased by 6.3% to $144.07.
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On a same store basis, total member months increased by 7.1% to
5,139,000 during the second quarter of 1996 compared to the same period in 1995,
and total PMPM premium revenue increased by 3.9% to $140.80.
Commercial member months increased by 10.6% to 4,974,000 during the
second quarter of 1996 compared to the same period in the prior year. For the
quarter ended June 30, 1996, commercial premium revenue PMPM increased by .6% to
$119.35, compared to the same period last year. Excluding the effects of
Northeast acquisitions, commercial member months for the quarter ended
June 30, 1996 increased by 5.7% to 4,757,000 compared to the prior year
period. Commercial premium revenue PMPM, excluding the effects of Northeast
acquisitions, decreased by .3% to $118.25, compared to the same period
last year. The decrease was due mainly to pricing pressures in the highly
competitive California marketplace.
Medicare member months increased by 41.3% to 422,000 during the first
quarter of 1996 compared to the same period in the prior year. For the quarter
ended June 30, 1996, Medicare premium revenue PMPM increased by 12.0% to
$435.13, compared to the same period last year. Excluding the effects of
Northeast acquisitions, Medicare member months for the quarter ended June 30,
1996 increased by 27.9% to 383,000. Medicare premium revenue PMPM, excluding the
effects of Northeast acquisitions, increased by 8.4% to $421.19 compared to the
same period last year. Increases in Medicare PMPM are principally a result of
rate increases by the Federal Health Care Financing Administration.
Health Care Expenses
Health care expenses increased by 23.9% from $523.1 million in the
second quarter of 1995 to $648.0 million in the second quarter of 1996. On a
PMPM basis, health care expenses for the quarter ended June 30, 1996 rose by
10.1% to $120.06 PMPM, versus $109.05 PMPM during the equivalent period in the
prior year. During the same period, the Company's overall MLR increased to 83.3%
as compared to 80.5% during the prior year's three-month period. The increase in
the Company's MLR was principally a result of increases in pharmacy costs
compared to the second quarter in 1995 and higher utilization of services
coupled with premium rate reductions in the Company's Medicaid line of
business in the Philadelphia market. In addition, flat PMPM growth in the
California commercial market contributed to the increase in the Company's
overall MLR.
Commercial health care expenses on a PMPM basis in the quarter ended
June 30, 1996 increased by 4.6% to $97.34 compared to $93.09 during the same
period last year. The Commercial MLR increased to 81.6% from 78.4% for the
comparable period in 1995. As previously described, the increase reflects higher
pharmacy costs, increased utilization, higher medical costs for the Company's
Philadelphia Medicaid business and flat PMPM revenue growth in the California
commercial market.
Medicare health care expenses on a PMPM basis in the quarter ended June
30, 1996 increased by 11.0% to $387.58, compared to $349.11 during the same
period last year. The Medicare MLR decreased to 89.1% from 89.9% for the second
quarter of 1995. The reduction in this overall
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Medicare MLR is primarily a result of an 82% MLR for the Company's Philadelphia
Medicare business offset, in part, by higher pharmacy costs in the Company's
California Medicare business.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses, excluding the effects
of the Company's ASO business, decreased to 10.3% of premium revenue in the
second quarter of 1996 as compared to 11.4% during the second quarter of the
prior year. The decrease in marketing, general and administrative expenses
reflects the Company's ongoing efforts to aggressively control its
administrative costs.
Depreciation and Amortization Expenses
Depreciation and amortization expenses remained relatively static as a
percentage of premium revenue for the three months ended June 30, 1996, compared
to the same period in 1995. These expenses were $13.2 million (1.7% of premium
revenue) in the second quarter of 1996 compared to $11.9 million (1.8% of
premium revenue) in the second quarter of 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net income increased 20.6% to $50.5 million for the six months ended
June 30, 1996, compared with $41.9 million, after merger related costs net of
tax of $7.5 million, for the comparable period in 1995. The increase in net
income reflected the Company's growth in membership and premium rates, and a
decrease in administrative expenses as a percentage of revenue, offset in part
by an increase in the Company's MLR from 80.5% for the six months ended June
30, 1995 to 83.1% for the six months ended June 30, 1996.
Premium Revenue
Premium revenue, excluding ASO revenue, increased $291.8 million or 23%
in the first six months of 1996 compared to the first six months of 1995.
The Company's Northeast acquisitions contributed $129.5 million of acquired
premium growth and $69.2 million of post-acquisition internal premium growth
between the first six months of 1996 and the first six months of 1995. On a same
store basis, premium revenue (including post-acquisition internal premium growth
in the Northeast) increased by $162.3 million or 12.8%, between the six month
periods ended June 30, 1996 and June 30, 1995.
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Change in Net Premium Revenue
(In Millions)
Six Months Ended 1996 Compared to Six Months Ended 1995
Change in revenue due to
premium change (same store):
Commercial $ (8.2)
Medicare 18.2
------
10.0
Change in revenue due to
membership change (same store):
Commercial 69.8
Medicare 82.5
------
152.3
Change in revenue due to
acquisitions:
Commercial 84.6
Medicare 44.9
------
129.5
Total change in revenue:
Commercial 146.2
Medicare 145.6
------
$291.8
Total member months increased by 15.2% to 10,827,000 during the first
six months of 1996 compared to the same period in 1995, and the combined
PMPM premium revenue increased by 6.8% to $144.15.
On a same store basis, total member months increased by 8.4% to
10,186,000 during the first six months of 1996 compared to the same period in
1995, and total PMPM premium revenue increased by 4.1% to $140.51.
Commercial member months increased by 13.1% to 9,986,000 during the
first six months of 1996 compared to the same period in the prior year. For the
six months ended June 30, 1996, commercial premium revenue PMPM increased by .8%
to $119.71, compared to the same period the prior year. Excluding the effects
of Northeast acquisitions, commercial member months for the six months ended
June 30, 1996 increased by 6.7% to 9,425,000 compared to the prior year period.
Commercial premium revenue PMPM, excluding the effects of Northeast
acquisitions, decreased by .8% to $117.85, compared to the same period last
year. The decrease was due mainly to pricing pressures in the highly
competitive California marketplace.
Medicare member months increased by 48.8% to 841,000 during the first
six months of 1996 compared to the same period in the prior year. For the six
months ended June 30, 1996,
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Medicare premium revenue PMPM increased by 11.7% to $434.37, compared to the
same period last year. Excluding the effects of Northeast acquisitions,
Medicare member months for the six months ended June 30, 1996 increased by
34.7% to 761,000. Medicare premium revenue PMPM, excluding the effects of
Northeast acquisitions, increased by 8.3% to $421.01 compared to the same
period last year. Increases in Medicare PMPM are principally a result of rate
increases by the Federal Health Care Financing Administration.
Health Care Expenses
Health care expenses increased by 26.9% from $1.0 billion in the first
six months of 1995 to $1.3 billion in the first six months of 1996. On a PMPM
basis, health care expenses for the first six months ended June 30, 1996 rose by
10.1% to $119.79 PMPM, versus $108.75 PMPM during the equivalent period in the
prior year. During the same period, the Company's MLR increased to 83.1% as
compared to 80.5% during the prior year's six month period. The increase in the
Company's MLR was principally a result of increases in pharmacy costs compared
to the first six months of 1995 and higher utilization of services coupled
with premium rate reductions in the Company's Medicaid line of business in the
Philadelphia market. In addition, flat PMPM growth in the California commercial
market contributed to the increase in the Company's overall MLR.
Commercial health care expenses on a PMPM basis for the six month
period ended June 30, 1996 increased by 3.4% to $96.93 compared to $93.78 during
the same period in 1995. The Commercial MLR increased to 81.0% for the first six
months of 1996 from 78.9% for the comparable period in 1995. The increase
reflects higher pharmacy and outpatient costs in certain of the Company's
markets, the previously described higher medical costs for the Company's
Philadelphia Medicaid business and flat PMPM revenue growth in the California
commercial market.
Medicare health care expenses on a PMPM basis in the six months ended
June 30, 1996 increased by 14.1% to $391.19, compared to $342.77 during the same
period last year. The Medicare MLR increased to 90.1% from 88.2% for the first
six months of 1995. The increase in this overall Medicare MLR is primarily a
result of unusually high Medicare fee for service claims volumes during the
first quarter of 1996.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses, excluding the effects
of the Company's ASO business, decreased to 10.3% of premium revenue in the
first six months of 1996 as compared to 11.5% during the first six months of the
prior year. The decrease in marketing, general and administrative expenses
reflects the Company's ongoing efforts to aggressively control its
administrative costs.
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16
Depreciation and Amortization Expenses
Depreciation and amortization expenses remained relatively static as a
percentage of premium revenue in the first six months of 1996 as compared to the
first six months of 1995. These expenses were $26.7 million (1.7% of premium
revenue) in the first six months of 1996 as compared to $22.8 million (1.8% of
premium revenue) in the first six months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash is premium revenue. Its primary
uses of cash are claims and capitation payments. Estimates of future cash flows
include a component to account for the delay between providing health care
services and reporting their cost. The estimate is based on actuarial
projections of claims and other costs, claims paid history, membership growth,
inflation, seasonality, claims inventory and reserves.
The Company's capital resources are managed according to certain
guidelines intended to ensure liquidity and maximize total return by assuming
prudent investment risks. The Company's liquidity requirements consist of the
need to service medical claims in a timely manner and to satisfy shared risk and
other obligations. Such requirements are the principal factors in determining
the appropriate investment portfolio mix. The Company presently invests
primarily in a variety of fixed-income obligations according to established
investment guidelines.
During the first six months of 1996, cash used by operating activities
was $91.3 million, compared with cash used of $.3 million in the comparable
prior year period. This increase in cash used by operating activities is due
primarily to payments of claims payable, shared risk settlement, accounts
payable and accrued expenses, and the timing of receipts of unearned
subscriber premiums. Increased efficiencies in the Company's claims processing
areas allowed accelerated handling of claims, as well as reductions in claims
inventories.
Cash used by investing activities decreased from $161.1 million in the
six months ended June 30, 1995 to $46.0 million in the six months ended June 30,
1996, while cash provided by financing activities also decreased from $66.3
million to $15.2 million during such periods. Decreases in these cash flow
categories resulted from limited acquisition activity during the first six
months of 1996, as compared to the comparable prior year period.
The Company's current ratios at June 30, 1996 and December 31, 1995
were 1.62 to 1 and 1.30 to 1, respectively. The increase in the Company's
current ratio is primarily attributable to decreased current liabilities
resulting from increased payments of claims, accounts payable and accrued
expenses, as well as reductions in unearned premiums as of June 30, 1996.
Outstanding notes payable amounted to $365.1 million at June 30, 1996,
an increase of $8.7 million from December 31, 1995, resulting primarily from
additional borrowings relating to the stock repurchases during the first quarter
of 1996 (see note 4 of the Notes to Condensed Consolidated Financial
Statements). Principal and interest requirements of notes payable are
-15-
17
scheduled at between $19 and $25 million per year through 2006. The Company
believes that cash from operations and existing working capital are adequate to
fund existing obligations, introduce new products and services and continue to
develop health care-related businesses. The Company regularly evaluates its cash
requirements for current operations and commitments, and for capital
acquisitions and other strategic transactions. The Company may elect to raise
additional funds for these purposes, either through additional debt or equity,
the sale of investment securities or otherwise, as appropriate.
On April 26, 1996, the Company obtained an unsecured $700 million
revolving line of credit from a lending syndicate led by Bank of America and
co-agented by Industrial Bank of Japan and Citibank. The new credit facility
replaced the Company's previous $400 million credit facility. Under the credit
facility the Company may incur permitted subordinated indebtedness in
a maximum aggregate amount not to exceed $150 million which is available for
acquisition and other purposes, and to provide short-term financing to
repurchase shares of stock. As of June 30, 1996, $319 million was outstanding
under the Company's new credit facility.
Under the terms of the five-year Credit Facility, the Company pays
interest at a variable rate (See note 2 of the Notes to Condensed Consolidated
Financial Statements).
The Company's subsidiaries must comply with certain minimum capital
requirements under applicable state laws and regulations. The long-term portion
of principal and interest payments under the notes payable to the Foundation is
subordinated to Health Net meeting its tangible net equity ("TNE") requirements
under applicable California laws and regulations. As of June 30, 1996, each of
the Company's subsidiaries was in compliance with its minimum capital
requirements.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit
margin is low. Hence, it is especially sensitive to inflation. Increases in
medical expenses without corresponding increases in premiums could have a
material adverse effect on the Company.
Various federal and state legislative initiatives regarding the health
care industry have been proposed during recent legislative sessions, and health
care reform and similar issues continue to be in the forefront of social and
political discussion. If health care reform or similar legislation is enacted,
such legislation could impact the Company. Management cannot at this time
predict whether any such initiative will be enacted and, if enacted, the impact
on the financial condition or operations of the Company.
Reference is also made to the disclosures contained under the heading
"Cautionary Factors" included elsewhere in this Quarterly Report on Form 10-Q,
which could cause the Company's actual results to differ from those projected in
forward looking statements of the Company made by or on behalf of the Company.
In addition, certain of these factors may have affected the Company's past
results and may affect future results.
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18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Class Action Lawsuits
On January 4, 1995, a purported class action lawsuit was filed in the
Delaware Court of Chancery under the caption Philip Laufer v. Roger F. Greaves,
et al., C.A. No. 13952 (the "Laufer Complaint"), against the Company and the
members of its Board of Directors. The Laufer Complaint alleged that the
individual directors breached their fiduciary duties to the Company's public
stockholders by allegedly refusing to seriously consider certain acquisition
bids for the Company. The Laufer Complaint further alleged that the individual
directors had put their own interest before the interests of the Company's
public stockholders and deprived the public stockholders of the opportunities to
operate competitively in the HMO marketplace and maximize the value of their
investment. The Laufer Complaint requested an injunction ordering the Company's
directors: to evaluate alternatives to maximize shareholder value; to ensure
that no conflicts exist between the individual directors' interests and their
fiduciary obligations to the public stockholders; and to account for all damages
allegedly suffered by the class members. The Laufer Complaint also requested
that the Court order the defendants to pay plaintiffs' costs and disbursements
including attorneys' and expert fees.
On January 5, 1995, a second purported class action lawsuit was brought
in the Delaware Court of Chancery under the caption, John E. Kovalchick v.
Health Systems International, Inc. et al., C.A. No. 13953 (the "Kovalchick
Complaint"), against the Company and the members of its Board of Directors. The
Kovalchick Complaint made allegations similar to those in the Laufer Complaint
and sought similar relief. By order of the Court of Chancery dated March 6,
1995, the Laufer and Kovalchick actions were consolidated under the caption In
re Health Systems International, Inc. Shareholders Litigation, Consolidated C.A.
No. 13952 (the "Consolidated Action"). On March 31, 1995, all defendants filed
answers in the Consolidated Action. On April 19, 1996, the Court entered a
Stipulation and Order of Dismissal dismissing the Consolidated Action without
prejudice.
Restricted Stock Dispute
Following the conversion of Health Net to a for-profit subsidiary of
the Company (the "Conversion"), a restricted stock plan (the "Restricted Stock
Plan") was adopted and restricted shares were issued to certain management
employees of Health Net. In February 1993, the California Department of
Corporations (the "DOC") informed Health Net that it believed the issuance of
such restricted shares ("Restricted Shares") of the Company to persons who were
stockholders of the Company as of the date of the Conversion (the "Restricted
Share Recipients") violated certain provisions and terms imposed by the DOC in
connection with the Conversion. In March 1993, the DOC insisted that such
restricted shares be rescinded and stated that the DOC would take steps
necessary to revoke the approval of the Conversion if the issuance of the
Restricted Shares was not rescinded (the "Conditional Revocation Order"). In
April 1993 the Restricted Share Recipients agreed to rescind all of the
Restricted Shares issued to them, under express protest to the DOC.
Subsequently, a formal protest was filed with the DOC which requested a hearing
regarding the correctness of the decision.
19
On September 14, 1994, Health Net, the Company and certain of the
Restricted Stock Recipients, on behalf of all the Restricted Stock Recipients
(the "Petitioners"), filed a Petition for Writ of Administrative Mandamus in the
Superior Court of the County of Los Angeles (Case No. BS030426) (the "Writ
Proceeding"). The Writ Proceeding seeks to overturn the Conditional Revocation
Order and to require the Commissioner of the DOC to follow procedures set forth
in the Administrative Procedures Act which would result in an administrative
hearing regarding the correctness of the Conditional Revocation Order or, in the
alternative, to treat the Conditional Revocation Order as a final agency action
and to have the Court order the Commissioner of the DOC to rescind the
Conditional Revocation Order.
On May 25, 1995, the Petitioners filed an amended petition expanding
the original claims and adding a new cause of action for a declaratory judgment
that would revoke the rescission of the issuance of the Restricted Shares. The
DOC and The California Wellness Foundation (the "Foundation") filed new
demurrers to the amended petition on July 3, 1995. At a hearing on July 28,
1995, the Court sustained the demurrers without leave to amend. On August 7,
1995, the Petitioners filed objections to the Court's Statement of Decision. On
August 15, 1995, the Court overruled the objections of the Petitioners to the
Court's Statement of Decision. On September 8, 1995, the Court entered an Order
of Dismissal, and the Amended Petition for Writ of Mandate and Complaint for
Declaratory Relief of the Petitioners was dismissed. On September 19, 1995, the
DOC served notice of the entry of the Order of Dismissal. On October 18, 1995,
the Petitioners filed a Notice of Appeal. The opening brief was filed on March
15, 1996, and the Respondents' briefs were filed on or around June 13, 1996. The
Reply Briefs are due August 19, 1996.
Under the terms of the Agreement and Plan of Merger relating to the
merger involving QualMed, Inc. and Health Net which created the Company, in the
event that the Petitioners are successful and the Restricted Shares are
permitted to be issued to the Original Shareholders, shares of common stock
would be transferred from the Foundation to the Restricted Stock Recipients and
the Company would not suffer any adverse effect other than the payment of legal
fees and related costs of the Writ Proceeding which the Company is obligated to
fund.
Miscellaneous Proceedings
The Company and certain of its subsidiaries are also parties to various
legal proceedings, many of which involve claims for coverage encountered in the
ordinary course of its business. Based upon information presently available,
management of the Company is of the opinion, based in part on advice from
litigation counsel to the Company, that the final outcome of all such
proceedings should not have a material adverse effect upon the Company's results
of operations or financial condition.
20
ITEM 2. CHANGES IN SECURITIES
Revolving Credit Facility
On April 26, 1996, the Company entered into an Amended and Restated
Credit Agreement among the Company, Bank of America National Trust and Savings
Association ("Bank of America"), as agent, and certain financial institutions
which are parties thereto (the "Credit Agreement") pursuant to which the Company
obtained an unsecured five-year $700 million revolving credit facility. The
Credit Agreement replaced the Company's prior credit agreement providing for an
unsecured $400 million revolving credit facility, which prior agreement was also
entered into by the Company with Bank of America, as agent.
Specifically, Section 7.11 of the Credit Agreement provides that the
Company and its subsidiaries may, so long as no event of default exists (i)
declare and distribute stock as a dividend; (ii) purchase, redeem or acquire its
stock, options and warrants with the proceeds of concurrent public offerings and
(iii) declare and pay dividends or purchase, redeem or otherwise acquire its
capital stock, warrants, options or similar rights with cash so long as the sum
of such acquisitions does not exceed $150 million plus 25% of the net income of
the Company and its subsidiaries in fiscal 1995 plus 50% of the net income of
the Company and its subsidiaries in fiscal 1996 and subsequent years (calculated
on a cumulative consolidated basis).
In addition, under the Credit Agreement as originally executed the
Company was allowed to incur Subordinated Indebtedness (as defined in the Credit
Agreement) to repurchase its Class A Common Stock, but was limited to
repurchasing not more than 50% of the Class A Common Stock held by certain
designated stockholders (the "50% Repurchase Limitation"). The Credit Agreement
was amended by Amendment No. 1 thereto on May 10, 1996 to eliminate the 50%
Repurchase Limitation.
On May 28, 1996, the Credit Agreement was further amended by Amendment
No. 2 thereto to clarify the definition of the term "LIBOR Base Rate," a copy of
which Amendment No. 2 to the Credit Agreement is filed herewith.
Shareholder Rights Plan
On May 20, 1996, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each outstanding share of the
Company's Class A Common Stock and Class B Common Stock (collectively, the
"Common Stock"), to stockholders of record at the close of business on July 31,
1996 (the "Record Date"). The Board of Directors of the Company also authorized
the issuance of one Right for each share of Common Stock issued after the Record
Date and prior to the earliest of the Distribution Date (as defined below), the
redemption of the Rights and the expiration of the Rights and in certain other
circumstances. Rights will attach to all Common Stock certificates representing
shares then outstanding and no separate Rights Certificates will be distributed.
Subject to certain exceptions contained in the Rights Agreement dated as of June
1, 1996 by and between the Company and Harris Trust and Savings Bank, as Rights
Agent (the "Rights Agreement"), the Rights will separate from the Common Stock
in the event any person acquires 15% or more of the
21
outstanding Class A Common Stock, the Board of Directors of the Company declares
a holder of 10% or more of the outstanding Class A Common Stock to be an
"Adverse Person," or any person commences a tender offer for 15% of the Class A
Common Stock (each event causing a "Distribution Date").
Except as set forth below and subject to adjustment as provided in the
Rights Agreement, each Right entitles its registered holder, upon the occurrence
of a Distribution Date, to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock, at a price of $170.00
per one-thousandth share. However, in the event any person acquires 15% or more
of the outstanding Class A Common Stock, or the Board of Directors of the
Company declares a holder of 10% or more of the outstanding Class A Common Stock
to be an "Adverse Person," the Rights (subject to certain exceptions contained
in the Rights Agreement) will instead become exercisable for Class A Common
Stock having a market value at such time equal to $340.00. The Rights are
redeemable under certain circumstances at $.01 per Right and will expire, unless
earlier redeemed, on July 31, 2006.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as Exhibit 99.1 to the Company's Registration Statement on
Form 8-A (File No. 001-12718), and is available free of charge from the Company.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1996, the Company held its 1996 Annual Meeting of
Stockholders (the "Annual Meeting"). At the Annual Meeting, the Company's
stockholders voted upon proposals to (1) elect five directors for a term of
three years ("Proposal 1"); and (2) ratify the selection of Deloitte & Touche
LLP as the Company's independent public accountants for the year ended December
31, 1996 ("Proposal 2").
The following provides voting information for all matters voted upon at
the Annual Meeting, and includes a separate tabulation with respect to each
nominee for director:
Proposal 1
Director Nominee Votes For Votes Against Votes Withheld
- ---------------- --------- ------------- --------------
Malik M. Hasan, M.D. 20,096,641 0 114,646
Lawrence E. Austin, M.D. 20,097,124 0 114,163
Dale T. Berkbigler, M.D. 20,091,173 0 120,114
Roger F. Greaves 20,096,248 0 115,039
Kenneth W. Kizer 20,097,324 0 113,963
Each of Drs. Hasan, Austin, Berkbigler and Kizer and Mr. Greaves was
elected as a Class III director for a three-year term at the Annual Meeting.
Other directors whose term of office as directors continued after the Annual
Meeting were: J. Thomas Bouchard, Charles T. Braden, George Deukmejian, Thomas
T. Farley, Michael E. Gallagher, E. Keith Hovland, Robert L. Montgomery, Douglas
M. Mancino and J. Kevin Murphy. Mr. Hovland resigned as a director effective May
15, 1996 in connection with his retirement from the Company. Jay M. Gellert was
elected as a director of the Company as of July 1, 1996.
Proposal 2
With respect to the ratification of the selection of Deloitte & Touche
LLP as the Company's independent public accountants for the year ended December
31, 1996, 20,201,358 votes were cast in favor, 3,498 votes were cast against and
6,431 votes were withheld for such proposal.
In total, 22,329,678 shares of Class A Common Stock were eligible to
vote at the Annual Meeting, 20,211,287 shares were voted at the Annual Meeting
and 2,118,391 shares were unvoted at the Annual Meeting.
23
ITEM 5. OTHER INFORMATION
Public Offering
On May 15, 1996, the Company completed a public offering (the
"Offering") in which the Company sold 3,194,374 shares of Class A Common Stock
and the Foundation sold 6,664,964 shares of Class A Common Stock (constituting
6,664,964 shares of Class B Common Stock which automatically converted into
shares of Class A Common Stock upon the sale) for a per share purchase price to
the public of $30.00. The proceeds received by the Company from the sale of the
3,194,374 shares of Class A Common Stock were approximately $92.4 million after
deducting underwriting discounts and commissions and estimated expenses of the
Offering payable by the Company. The Company used its net proceeds from the
Offering to repurchase 3,194,374 shares of Class A Common Stock held pursuant to
the Amended and Restated Health Net Associate Trust Agreement dated as of May 1,
1994 (the "Associate Trust Agreement"), on behalf of certain founding
stockholders of the Company at the date of the conversion of Health Net to
for-profit status (the "Class A Stockholders"). The repurchase price per share
paid by the Company to repurchase these shares of Class A Common Stock from the
Class A Stockholders was $28.92, which represented the net proceeds per share
received by the Company in the Offering. All 3,194,374 of such shares
repurchased by the Company are currently held as treasury stock. The Company did
not receive any of the proceeds from the sale of shares of Class A Common Stock
by the Foundation.
Revolving Credit Facility
As indicated in Item 2 above, on April 26, 1996 the Company executed
the Credit Agreement which provides an unsecured five-year $700 million
revolving credit facility. A copy of the Credit Agreement was attached as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 26, 1996.
Amendment No. 1 to the Credit Agreement was attached as Exhibit 10.33 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and
Amendment No. 2 to the Credit Agreement is attached as Exhibit 10.33 to this
Quarterly Report on Form 10-Q. Capitalized terms used but not defined herein
have the meanings set forth in the Credit Agreement.
Approximately $319 million which was borrowed under the Company's prior
$400 million credit facility was rolled into the new facility under the Credit
Agreement. The new facility is available to the Company and its subsidiaries for
general corporate purposes including Permitted Acquisitions and Joint Ventures
and, if the Company should elect, to repurchase or redeem the Company's capital
stock to the extent allowed by the Federal Reserve Board Regulations and other
requirements of law and as set forth in the Credit Agreement. As of June 30,
1996, the Company had drawn approximately $319 million under the facility of
which approximately $135 million had been applied to pay a portion of the notes
payable to the Foundation, approximately $100 million had been drawn to fund the
Company's acquisition of M.D. Enterprises of Connecticut, Inc., approximately
$75 million had been drawn to fund the Company's acquisition of G.H. Holding
Corporation and approximately $9 million had been drawn to fund certain stock
repurchases from the Class A Stockholders in February of 1996.
24
Bank of America is the lead bank and agent for the other participating
banks named in the Credit Agreement. At the election of the Company, and subject
to customary covenants, loans can be initiated on a bid or committed basis and
will carry interest at offshore or domestic rates, but subject to the applicable
LIBOR Rate or the Base Rate, of .50% above the Federal Funds Rate or the Bank of
America "reference rate." Actual rates on borrowings under the facility will
vary based on competitive bidding, sources of funds and the Company's senior
leverage ratio at the time of the borrowing. The facility is available for five
years, until April 2001, but may be extended, under certain circumstances, for
two additional years until April 2003.
Loans under the facility are unsecured but the Company and its
subsidiaries are subject to affirmative and negative covenants. As described in
Item 2 above, these include limitations on the payment of cash dividends on the
Company's capital stock and, in certain cases, the redemption or repurchase of
capital stock or securities. In addition to obligations incurred under the
facility, the Company and its subsidiaries are entitled to incur Permitted
Subordinated Indebtedness for seller financing of Permitted Acquisitions and
certain other items in an aggregate amount of up to $150 million and to incur
unsecured indebtedness to repurchase the Company's Class A Common Stock.
Under the Credit Agreement, the Company is (i) obligated to maintain at
all times a Total Leverage Ratio not to exceed 3 to 1, a Fixed Charge Coverage
of not less than 2.75 to 1 and to preserve its combined net worth and Permitted
Class A Subordinated Indebtedness (as defined in the Credit Agreement) at not
less than $100 million plus 50% of net income after December 31, 1994 on a
cumulative consolidated basis, (ii) obligated to limit liens on its assets to
those incurred in the normal course and for taxes and other similar obligations,
and (iii) subject to customary covenants to dispose of assets only in the
ordinary course and generally at fair value, to restrict mergers and
consolidations to those permitted under the Credit Agreement, and to limit
loans, leases, joint ventures and contingent obligations and certain
transactions with affiliates. Upon the occurrence of a default or an event of
default, the Company and its subsidiaries would be subject to further
restrictions, including with respect to the operating HMO subsidiaries, an
obligation to advance to the parent company reserves in excess of those held to
comply with state and similar administrative requirements.
Cautionary Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby filing
cautionary statements identifying important risk factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements of the Company made by or on behalf of the Company.
The Company wishes to caution readers that the following factors, among
others, could cause the Company's actual financial or enrollment results to
differ materially from those expressed in any projected, estimated or
forward-looking statements relating to the Company. The following factors should
be considered in conjunction with any discussion of operations or results by the
Company or its representatives, including any forward-looking discussion, as
well as comments contained in press releases, presentations to securities
analysts or investors, or other communications by the Company.
25
In making these statements, the Company is not undertaking to address
or update each factor in future filings or communications regarding the
Company's business or results, and is not undertaking to address how any of
these factors may have caused changes to discussions or information contained in
previous filings or communications. In addition, certain of the matters
discussed below may have affected the Company's past results and may affect
future results.
Health Care Costs. A large portion of the revenue received by the
Company is expended to pay the costs of health care services or supplies
delivered to its members. The total health care costs incurred by the Company
are affected by the number of individual services rendered and the cost of each
service. Much of the Company's premium revenue is set in advance of the actual
delivery of services and the related incurring of the cost, usually on a
prospective annual basis. While the Company attempts to base the premiums it
charges at least in part on its estimate of expected health care costs over the
fixed premium period, competition, regulations and other circumstances may limit
the Company's ability to fully base premiums on estimated costs. In addition,
many factors may and often do cause actual health care costs to exceed those
costs estimated and reflected in premiums. These factors may include increased
utilization of services, increased cost of individual services, catastrophes,
epidemics, seasonality, general inflation, new mandated benefits or other
regulatory changes and insured population characteristics.
Marketing. The Company markets its products and services through both
employed sales people and independent sales agents. Although the Company has a
number of such sales employees and agents, if certain key sales employees or
agents or a large subset of such individuals were to leave the Company, its
ability to retain existing customers and members could be impaired. In addition,
certain of the Company's customers or potential customers consider rating,
accreditation or certification of the Company by various private or governmental
bodies or rating agencies necessary or important. Certain of the Company's
health plans or other business units may not have obtained or may not desire or
be able to obtain or maintain such accreditation or certification which could
adversely affect the Company's ability to obtain or retain business with such
customers.
The managed care industry has recently received a significant amount of
negative publicity. Such general publicity, or any negative publicity regarding
the Company in particular, could adversely affect the Company's ability to sell
its products or services or could create regulatory problems for the Company.
Competition. The Company competes with a number of other entities in
the geographic and product markets in which it operates, some of which other
entities may have certain characteristics or capabilities which give them an
advantage in competing with the Company. The Company believes there are few
barriers to entry in these markets, so that the addition of new competitors can
occur relatively easily. Certain of the Company's customers may decide to
perform for themselves functions or services formerly provided by the Company,
which should result in a decrease in the Company's revenues. Certain of the
Company's providers may decide to market products and services to Company
customers in competition with the Company. In addition, significant merger and
acquisition activity has occurred in the industry in which the Company operates
as well as in industries which act as suppliers to the Company such as the
hospital, physician, pharmaceutical and medical device industries. This activity
may create
26
stronger competitors and/or result in higher health care costs. To the extent
that there is strong competition or that competition intensifies in any market,
the Company's ability to retain or increase customers, its revenue growth, its
pricing flexibility, its control over medical cost trends and its marketing
expenses may all be adversely affected.
Provider Relations. One of the significant techniques the Company uses
to mange health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers. Because
of the large number of providers with which the Company's health plans contract,
the Company currently believes it has a limited exposure to provider relations
issues. In any particular market, however, providers could refuse to contract
with the Company, demand higher payments or take other actions which could
result in higher health care costs, less desirable products for customers and
members or difficulty in meeting regulatory or accreditation requirements.
In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions or even monopolies. Many of these providers may
compete directly with the Company. If such providers refuse to contract with the
Company or utilize their market position to negotiate favorable contracts or
place the Company at a competitive disadvantage, the Company's ability to market
products or to be profitable in those areas could be adversely affected.
Administration and Management. The level of administrative expense is a
partial determinant of the Company's profitability. While the Company attempts
to effectively manage such expenses, increases in staff-related and other
administrative expenses may occur from time-to-time due to business or product
start-ups or expansions, growth or changes in business, acquisition, regulatory
requirements or other reasons. Such expense increases are not clearly
predictable and increases in administrative expenses may adversely affect
results.
The Company's business is significantly dependent on effective
information systems. The Company has many different information systems for its
various businesses. The Company is in the process of attempting to reduce the
number of systems and also upgrade and expand its information systems
capabilities. Failure to maintain an effective information system could result
in loss of existing customers and difficulty in attracting new customers,
customer and provider disputes, regulatory problems, increases in administrative
expenses or other adverse consequences. In addition, the Company may, from
time-to-time, obtain significant portions of its systems-related or other
services or facilities from independent third parties which may make the
Company's operations vulnerable to such third parties' failure to perform
adequately.
The Company currently believes it has a relatively experienced, capable
management staff. Loss of certain managers or a number of such managers could
adversely affect the Company's ability to administer and manage its business.
Management of Growth. The Company has made several large acquisitions
in recent years, and has an active ongoing acquisition program. Failure to
effectively integrate acquired operations could result in increased
administrative costs or customer confusion or dissatisfaction. The Company may
also not be able to manage this growth effectively, including not being able
27
to continue to develop processes and systems to support its growing operations.
There can be no assurance that the Company will be able to maintain its
historical growth rate.
Government Programs and Regulation. The Company's business is heavily
regulated. The laws and rules governing the Company's business and
interpretations of those laws and rules are subject to frequent change. Existing
or future laws and rules could force the Company to change how it does business
and may restrict the Company's revenue and/or enrollment growth and/or increase
its health care and administrative costs. Regulatory approvals must be obtained
and maintained to market many of the Company's products and services. Delays in
obtaining or failure to obtain or maintain such approvals could affect the
Company's revenue or the number of its members, or could increase costs.
A significant portion of the Company's revenues relate to federal,
state and local government health care coverage programs. These types of
programs, such as Medicare and Medicaid programs, are generally subject to
frequent change including changes which may reduce the number of persons
enrolled or eligible, reduce the revenue received by the Company or increase the
Company's administrative or health care costs under such programs. Such changes
may in the future adversely affect the Company's results and its willingness to
participate in such programs.
The Company is also subject to various governmental audits and
investigations. Such activities could result in the loss of licensure or the
right to participate in certain programs, or the imposition of fines, penalties
and other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could negatively affect the Company's reputation in
various markets and make it more difficult for the Company to sell its products
and services.
Loss Reserves. The Company's loss reserves are estimates of future
costs based on various assumptions. The accuracy of these estimates may be
affected by external forces such as changes in the rate of inflation, the
regulatory environment, the judicial administration of claims, medical costs and
other factors. Included in the loss reserves are estimates for incurred but not
reported ("IBNR") claims which are established for unreported claims and adverse
loss developments relating to current and prior years. On a quarterly basis, the
Company and an independent actuary review the adequacy of its loss reserves
using generally accepted actuarial methods, and annually, an opinion is used by
the actuary as to the adequacy of the reserves. If the assumptions on which the
estimates are based prove to be incorrect and reserves are inadequate to cover
the Company's actual experience, the Company's profitability could be adversely
affected.
Litigation and Insurance. The Company is subject to a variety of legal
actions to which any corporation may be subject, including employment and
employment discrimination-related suits, employee benefit claims, breach of
contract actions, tort claims, shareholder suits, including for securities
fraud, and intellectual property related litigation. In addition, because of the
nature of its business, the Company incurs and likely will continue to incur
potential liability for claims related to its business, such as failure to pay
for or provide health care, poor outcomes for care delivered or arranged,
provider disputes, including disputes over withheld compensation and claims
related to self-funded business. In some cases, substantial non-economic or
punitive damages may be sought. While the Company currently has insurance
coverage for some of these
28
potential liabilities, others may not be covered by insurance, the insurers may
dispute coverage or the amount of insurance may not be enough to cover the
damages awarded. In addition, certain types of damages, such as punitive
damages, may not be covered by insurance and insurance coverage for all or
certain forms of liability may become unavailable or prohibitively expensive in
the future.
Stock Market. Recently, the market prices of the securities of certain
of the publicly-held companies in the industry in which the Company operates
have shown volatility and sensitivity in response to many factors, including
public communications regarding managed care, legislative or regulatory actions,
health care cost trends, pricing trends, competition, earning or membership
reports of particular industry participants, and acquisition activity. There can
be no assurances regarding the level of stability of the Company's share price
at any time or the impact of these or any other factors on the share price.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q or are incorporated herein by reference:
2.1 Agreement and Plan of Merger, dated August 28, 1993, between
and among HN Management Holdings, Inc., QualMed, Inc. and QM
Merger Sub, Inc. (included as Annex A to the HSI Proxy
Statement/Prospectus filed with HSI's Registration Statements
on Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively) which is incorporated by reference herein).
2.1.1 Amendment No. 1 to the Agreement and Plan of Merger, dated
August 29, 1993, between and among HN Management Holdings,
Inc., QualMed, Inc. and QM Merger Sub, Inc. (included in Annex
A to the HSI Proxy Statement/Prospectus filed with HSI's
Registration Statements on Forms S-1 and S-4 (File nos.
33-72892 and 33-72892-01, respectively) which is incorporated
by reference herein).
2.1.2 Letter Agreement re: Split Ratio, dated December 6, 1993, by
and among HN Management Holdings, Inc., QualMed, Inc. and QM
Merger Sub, Inc. (included in Annex A to the HSI Proxy
Statement/Prospectus filed with HSI's Registration Statements
on Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively) which is incorporated by reference herein).
2.2 Agreement and Plan of Merger, dated September 14, 1994, by and
among Health Systems International, Inc., M.D. Enterprises of
Connecticut, Inc., M.D. Health Plan, Inc. and MDE Merger Sub,
Inc., (included in Annex A to the Proxy Statement/Prospectus
with HSI's Registration Statement on Form S-4 (File No.
33-86524) which is incorporated by reference herein).
2.2.1 Amendment No. 1 to the Agreement and Plan of Merger, dated
November 14, 1994, by and among Health Systems International,
Inc., M.D. Enterprises of Connecticut, Inc., M.D. Health Plan,
Inc. and MDE Merger Sub, Inc. (included in Annex A to the
Proxy Statement/Prospectus with HSI's Registration Statement
on Form S-4 (File No. 33-86524) which is incorporated by
reference herein).
2.2.2 Amended and Restated Agreement and Plan of Merger dated
January 13, 1995 by and among Health Systems International,
Inc., M.D. Enterprises of Connecticut, Inc., M.D. Health Plan,
Inc. and MDE Merger Sub, Inc., (included in Annex A to the
Proxy Statement/Prospectus, filed with Amendment No. 1 to
HSI's Registration Statement on Form S-4 (File No. 33-86524)
which is incorporated by reference herein).
2.3 Purchase Agreement, dated as of June 13, 1995, between Health
Systems International, Inc. and G.H. Holding Corporation
(including the Addendum
30
thereto dated as of July 10, 1995) (filed as Exhibit 2.1 to
HSI's Current Report on Form 8-K dated July 10, 1995, which is
incorporated by reference herein).
3.1 Third Amended and Restated Certificate of Incorporation of HSI
(included as Exhibit 4.1 to the HSI Registration Statement on
Form S-8 (File no. 33-74780) which is incorporated by
reference herein).
3.2 Third Amended and Restated By-Laws of HSI (included as Exhibit
4.1 to HSI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, which is incorporated by reference
herein).
4.1 Form of Class A Common Stock Certificate of HSI (included as
Exhibit 4.2 to HSI's Registration Statements on Forms S-1 and
S-4 (File nos. 33-72892 and 33-72892-01, respectively which is
incorporated by reference herein).
4.2 Form of Class B Common Stock Certificate of HSI (included as
Exhibit 4.3 to HSI's Registration Statements on Forms S-1 and
S-4 (File nos. 33-72892 and 33-72892-01, respectively) which
is incorporated by reference herein).
4.3.1 Nonnegotiable Senior Secured Promissory Note in the original
principal amount of $150,000,000, dated January 28, 1992, made
by Health Net in favor of The California Wellness Foundation
(filed as Exhibit 4.8 to HSI's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively) which is incorporated by reference herein).
4.3.2 Nonnegotiable Subordinated Secured Promissory Note in the
original principal amount of $75,000,000, dated January 28,
1992, made by Health Net in favor of The California Wellness
Foundation (filed as Exhibit 4.9 to HSI's Registration
Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference
herein).
4.3.3 Senior Security Agreement, dated January 28, 1992, between
Health Net and The California Wellness Foundation (filed as
Exhibit 4.10 to HSI's Registration Statements on Forms S-1 and
S-4 (File nos. 33-72892 and 33-72892-01, respectively) which
is incorporated by reference herein).
4.3.4 Subordinated Security Agreement, dated January 28, 1992,
between Health Net and The California Wellness Foundation
(filed as Exhibit 4.11 to HSI's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively) which is incorporated by reference herein).
4.3.5 Cash Pledge Agreement, dated January 28, 1992, by and between
Health Net and The California Wellness Foundation (filed as
Exhibit 4.12 to HSI's Registration Statements on Forms S-1 and
S-4 (File nos. 33-72892 and 33-72892-01, respectively) which
is incorporated by reference herein).
31
4.3.6 Sinking Fund Agreement, dated as of January 28, 1992, by and
between Health Net and The California Wellness Foundation
(filed as Exhibit 4.13 to HSI's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively) which is incorporated by reference herein).
4.3.7 Charitable Contribution Grant and Subordination Agreement,
dated January 28, 1992, between Health Net and The California
Wellness Foundation (filed as Exhibit 4.14 to HSI's
Registration Statements on Forms S-1 and S-4 (File nos.
33-72892 and 33-72892-01, respectively) which is incorporated
by reference herein).
4.3.8 Guaranty Agreement, dated January 28, 1992, between Health Net
and The California Wellness Foundation (filed as Exhibit 4.15
to HSI's Registration Statements on Forms S-1 and S-4 (File
nos. 33-72892 and 33-72892-01, respectively) which is
incorporated by reference herein).
9.1.1 Amended and Restated Trust Agreement, dated as of May 1, 1994,
among Roger F. Greaves, Gerald M. Cooper and Stephen D. Vogt,
as Trustees, and the shareholders on Exhibit 1 therein (filed
as Exhibit 9.1 to HSI's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994) which is incorporated by
reference herein).
9.1.2 Letter Agreement, dated March 31, 1995, among Health Systems
International, Inc., WellPoint Health Networks Inc. and Roger
F. Greaves, Stephen D. Vogt and Gerald M. Cooper, as Trustees
of the Trust created pursuant to the Amended and Restated
Trust Agreement dated as of May 1, 1994 (filed as Exhibit 10.3
to HSI's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, which is incorporated by reference herein).
9.1.3 Letter Agreement dated as of January 26, 1995, among Health
Systems International, Inc., The California Wellness
Foundation and the founding stockholders of Health Systems
International, Inc. (filed as Exhibit 28.1 to HSI's Current
Report on Form 8-K dated January 26, 1995, which is
incorporated by reference herein).
9.1.4 Letter Agreement, dated March 9, 1995, among Health Systems
International, Inc. and Roger F. Greaves, Stephen D. Vogt and
Gerald M. Cooper, as Trustees of the Trust created pursuant to
the Amended and Restated Trust Agreement dated as of May 1,
1994 (filed as Exhibit 10.1 to HSI's Current Report on Form
8-K dated March 9, 1995, which is incorporated by reference
herein).
10.1 Amended Foundation Shareholder Agreement, dated as of January
28, 1992, among HN Management Holdings, Inc., the California
Wellness Foundation and the stockholders of HN Management
Holdings, Inc. named therein (filed as Exhibit 10.1 to HSI's
Registration Statements on Forms S-1 and S-4 (File nos.
33-72892 and 33-72892-01, respectively) which is incorporated
by reference herein).
32
10.2 Officers' Agreement, dated August 28, 1993, by and among HN
Management Holdings, Inc., QualMed, Inc., Roger F. Greaves,
Stephen D. Vogt and Gerald M. Cooper (filed as Exhibit 10.2 to
HSI's Registration Statements on Forms S-1 and S-4 (File nos.
33-72892 and 33-72892-01, respectively) which is incorporated
by reference herein).
10.3 Employment Agreement, dated August 28, 1993, by and among HN
Management Holdings, Inc., Health Net and Joe V. Criscione
(filed as Exhibit 10.16 to HSI's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively) which is incorporated by reference herein).
10.4 Employment Agreement, dated August 28, 1993, by and among
QualMed, Inc., HN Management Holdings, Inc. and Malik M.
Hasan, M.D. (filed as Exhibit 10.18 to HSI's Registration
Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference
herein).
10.5 Employment Agreement, dated August 28, 1993, by and among
QualMed, Inc., HN Management Holdings, Inc., Health Net and E.
Keith Hovland (filed as Exhibit 10.19 to HSI's Registration
Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference
herein).
10.6 Employment Agreement, dated August 28, 1993, by and among
QualMed, Inc., HN Management Holdings, Inc. and Dale T.
Berkbigler, M.D. (filed as Exhibit 10.20 to HSI's Registration
Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference
herein).
10.7 Employment Agreement, dated August 28, 1993, by and among
QualMed, Inc., HN Management Holdings, Inc. and Walter G.
Woodbury (filed as Exhibit 10.22 to HSI's Registration
Statements on Forms S-1 and S-4 (file nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference
herein).
10.8 Severance Payment Agreement, dated as of April 25, 1994, among
HSI, Health Net and James J. Wilk (filed as Exhibit 10.9 to
HSI's Annual Report on Form 10-K for the year ended December
31, 1994, which is incorporated by reference herein).
10.9 Severance Payment Agreement, dated as of April 25, 1994, among
HSI, QualMed, Inc. and B. Curtis Westen (filed as Exhibit
10.10 to HSI's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated by reference herein).
10.10 Severance Payment Agreement, dated as of April 25, 1994, among
HSI, QualMed, Inc. and Terry Fouts, M.D. (filed as Exhibit
10.11 to HSI's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated by reference herein).
33
10.11 Amendment No. 1 to Employment Agreement dated as of April 27,
1994, by and among HSI, Health Net and Joe Criscione (filed as
Exhibit 10.12 to HSI's Annual Report on Form 10-K for the year
ended December 31, 1994, which is incorporated by reference
herein).
10.12 Amendment No. 1 to Employment Agreement dated as of April 27,
1994, by and among HSI, QualMed, Inc. and Walter G. Woodbury
(filed as Exhibit 10.15 to HSI's Annual Report on Form 10-K
for the year ended December 31, 1994, which is incorporated by
reference herein).
10.13 Amendment No. 1 to Employment Agreement dated as of April 25,
1994, by and among HSI, QualMed, Inc. and Malik Hasan, M.D.
(filed as Exhibit 10.16 to HSI's Annual Report on Form 10-K
for the year ended December 31, 1994, which is incorporated by
reference herein).
10.14 Amendment No. 1 to Employment Agreement dated as of April 27,
1994, by and among HSI, QualMed, Inc. and Dale T. Berkbigler,
M.D. (filed as Exhibit 10.17 to HSI's Annual Report on Form
10-K for the year ended December 31, 1994, which is
incorporated by reference herein).
10.15 Amendment No. 1 to Employment Agreement dated as of April 27,
1994, by and among HSI, QualMed, Inc. and E. Keith Hovland
(filed as Exhibit 10.18 to HSI's Annual Report on Form 10-K
for the year ended December 31, 1994, which is incorporated by
reference herein).
10.16 Office Lease, dated as of January 1, 1992, by and between
Warner Properties III and Health Net (filed as Exhibit 10.23
to HSI's Registration Statements on Forms S-1 and S-4 (File
Nos. 33-72892 and 33-72892-01, respectively) which is
incorporated by reference herein).
10.17 Health Systems International, Inc. Second Amended and Restated
1991 Stock Option Plan (filed as Exhibit 10.30 to Registration
Statement on Form S-4 (File No. 33-86524) which is
incorporated by reference herein).
10.18 Health Systems International, Inc. Second Amended and Restated
Non-Employee Director Stock Option Plan (filed as Exhibit
10.31 to Registration Statement on Form S-4 (File No.
33-86524) which is incorporated by reference herein).
10.19 Health Systems International, Inc. Employee Stock Purchase
Plan (filed as Exhibit 10.33 to HSI's Registration Statements
on Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01
respectively) which is incorporated by reference herein).
10.20 Health Systems International, Inc. 1994 Optional Stock
Repurchase Program (filed as Exhibit 10.1 to HSI's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994,
filed May 13, 1994, which is incorporated by reference
herein).
34
10.21 Health Systems International, Inc. Performance-Based Annual
Bonus Plan (filed as Exhibit 10.35 to Registration Statement
on Form S-4 (File No. 33-86524) which is incorporated by
reference herein).
10.22 Deferred Compensation Agreement dated as of March 3, 1995, by
and among Malik M. Hasan, M.D., HSI and the Compensation and
Stock Option Committee of the Board of Directors of HSI (filed
as Exhibit 10.31 to HSI's Annual Report on Form 10-K for the
year ended December 31, 1994, which is incorporated by
reference herein).
10.23 Trust Agreement for Deferred Compensation Arrangement for
Malik M. Hasan, M.D., dated as of March 3, 1995, by and
between HSI and Norwest Bank Colorado N.A. (filed as Exhibit
10.32 to HSI's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated by reference herein).
10.24 Registration Rights Agreement dated as of March 2, 1995
between HSI and the Foundation (filed as Exhibit No. 28.2 to
HSI's Current Report on Form 8-K dated March 2, 1995, which is
incorporated by reference herein).
10.25 Description of Retention Payment Arrangement between Health
Systems International, Inc. and Andrew Wang (filed as Exhibit
10.10 to HSI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, which is incorporated by reference
herein).
10.26 Health Systems International, Inc. 1995 Stock Appreciation
Right Plan (filed as Exhibit 10.12 to HSI's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995, which
is incorporated by reference herein).
10.27 Letter Agreement Re: Temporary Warehouse/Mail Center
Operations Support, dated October 16, 1995, between Health Net
and CBS Associates, Inc. (an affiliate of Charles Braden, a
director of HSI) (filed as Exhibit 10.15 to HSI's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
which is incorporated by reference herein).
10.28 Employment Letter, dated June 9, 1995, between Philip Katz,
Ph.D. and Health Net (filed as Exhibit 10.38 to HSI's Annual
Report on Form 10-K for the year ended December 31, 1995,
which is incorporated by reference herein).
10.29 Agreement and accompanying Promissory Note, each dated August
17, 1995, between Philip Katz, Ph.D. and Health Net (filed as
Exhibit 10.39 to HSI's Annual Report on Form 10-K for the year
ended December 31, 1995, which is incorporated by reference
herein).
10.30 Credit Agreement dated as of April 12, 1995 among Health
Systems International, Inc., Bank of America National Trust
and Savings Association, as Agent, and financial institutions
party thereto (filed as Exhibit 10.17 to HSI's Quarterly
35
Report on Form 10-Q for the quarter ended March 31, 1995,
which is incorporated by reference herein).
10.31 Amended and Restated Credit Agreement dated as of April 26,
1996 among Health Systems International, Inc., Bank of America
National Trust and Savings Association, as Agent, and
financial institutions party thereto (filed as Exhibit 10.1 to
HSI's Current Report on Form 10-K dated May 3, 1996, which is
incorporated by reference herein).
10.32 Amendment No. 1 to Credit Agreement dated as of May 10, 1996
among Health Systems International, Inc., Bank of America
National Trust and Savings Association, as Agent, and
financial institutions party thereto (filed as Exhibit 10.32
to HSI's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, which is incorporated by reference herein).
*10.33 Amendment No. 2 to Credit Agreement dated as of May 28, 1996
among Health Systems International, Inc., Bank of America
National Trust and Savings Association, as Agent, and
financial institutions party thereto, a copy of which is filed
herewith.
*10.34 Confidential Settlement and Separation Agreement and General
Release dated as of June 15, 1996 by and between E. Keith
Hovland and HSI, a copy of which is filed herewith.
*10.35 Employment Letter Agreement dated May 28, 1996 between Michael
D. Pugh and QualMed, Inc., a copy of which is filed herewith.
*10.36 Employment Letter Agreement dated June 4, 1996 between Arthur
M. Southam and HSI and Health Net, a copy of which is filed
herewith.
10.37 Rights Agreement dated as of June 1, 1996 by and between the
Company and Harris Trust and Savings Bank, as Rights Agent
(filed as Exhibit 99.1 to the Company's Registration Statement
on Form 8-A (File No. 001-12718) which is incorporated by
reference herein).
*11.1 Statement relative to computation of earnings per share of the
Company, a copy of which is filed herewith.
21.1 Subsidiaries of HSI (filed as Exhibit 21.1 to HSI's Annual
Report on Form 10-K for the year ended December 31, 1995,
which is incorporated by reference herein).
*27.1 Financial Data Schedule, a copy of which is filed herewith.
* A copy of the Exhibit is filed herewith.
36
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by the Company
during the quarterly period ended June 30, 1996:
1. A report dated April 11, 1996 was filed announcing that the Company
intended to take an approximately $34.2 million pre-tax one-time restructuring
charge in its second quarter ending June 30, 1996, amounting to approximately
$.41 per share after tax, which charge would cover non-recurring costs of a
comprehensive restructuring of the Company's Health Net subsidiary, computer
software and hardware write-offs and the consolidation of certain operational
functions of other subsidiaries.
2. A report dated May 3, 1996 was filed announcing that the Company
had entered into a new Amended and Restated Credit Agreement, dated as of April
26, 1996, providing for a $700 million revolving credit facility with a
consortium of commercial banks.
No other Current Reports on Form 8-K were filed by the Company during
such period.
37
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.
HEALTH SYSTEMS INTERNATIONAL, INC.
(Registrant)
Date: August 14, 1996 /s/ Malik M. Hasan, M.D.
--------------------------------------
Malik M. Hasan, M.D., Chairman of the
Board of Directors and Chief
Executive Officer
Date: August 14, 1996 /s/ Jay M. Gellert
--------------------------------------
Jay M. Gellert, President and
Chief Operating Officer