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: March 31, 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 (I.R.S. Employer
of incorporation or identification No.)
organization)
21600 Oxnard Street, Woodland Hills, CA 91367
225 North Main Street, Pueblo, CO 81003
(Address of principal (Zip Codes)
executive offices)
Registrant's telephone (818) 719-6978 (California)
numbers, including area code: (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 the latest practicable date.
As of May 8, 1996, 22,411,697 shares of Class A Common Stock, $.001 par
value per share, were outstanding and 25, 684,152 shares of Class B Common
Stock, $.001 par value per share, were outstanding.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Health Systems International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents
Marketable securities held for sale 368,232 366,629
Premiums receivable, net 96,311 91,106
Prepaid expenses and other 39,838 34,849
Deferred income taxes 16,277 18,902
Total current assets 698,705 737,418
Property and equipment, net 80,123 84,743
Goodwill and other intangible assets, net 337,554 336,365
Deferred income taxes 1,958
Other assets 54,569 53,227
Total assets $ 1,173,741 $ 1,213,711
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Estimated claims payable $ 287,606 $ 310,392
Shared risk and other settlements 30,165 30,664
Unearned subscriber premiums 38,039 91,596
Accounts payable and accrued expenses 103,788 120,161
Federal and state income taxes payable 25,398 13,196
Notes payable, current portion 2,340
Total current liabilities 487,337 568,349
Notes payable 362,937 354,080
Other 6,151 5,755
Total 856,425 928,184
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 - 22,858,556 in 1996
and 22,643,030 in 1995 23 23
Class B nonvoting convertible common stock, $.001 par value
Authorized shares - 30,000,000
Issued and outstanding shares - 25,684,152 in 1996 and 1995 26 26
Additional paid-in capital 83,627 66,147
Retained earnings 247,268 233,711
Advance to repurchase 453,844 shares of Class A common stock in 1996
and 574,869 in 1995 (12,997) (16,330)
Unrealized gain/(loss) on marketable securities held for sale, net (631) 1,950
Total stockholders' equity 317,316 285,527
Total liabilities and stockholders' equity $ 1,173,741 $ 1,213,711
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Health Systems International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three-Months Ended March 31,
1996 1995
<S> <C> <C>
Revenues:
Premium revenue $ 783,123 $ 618,938
Administrative services revenue 18,226 8,559
Total revenue 801,349 627,497
Operating Expenses:
Health care expenses:
Physician 297,704 246,549
Hospital 278,233 199,047
Pharmacy and other 72,985 53,322
Total health care expenses 648,922 498,918
Marketing, general and administrative 80,120 71,620
Depreciation and amortization 13,466 10,887
Administrative services expenses 16,333 7,972
Merger-related costs - 8,927
Total operating expenses 758,841 598,324
Operating income 42,508 29,173
Investment income 8,823 7,372
Interest expense (5,932) (4,309)
Income before income taxes and minority interest 45,399 32,236
Income taxes 19,390 13,334
Minority interest in loss of subsidiary 31 9
Net income $ 26,040 $ 18,911
Earnings per share:
Primary and fully diluted $ 0.54 $ .038
Weighted average common shares outstanding:
Primary 48,135 48,168
Fully diluted 48,177 49,282
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Health Systems International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three-Months Ended March 31,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 26,040 $ 18,911
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of fixed and intangible assets 13,466 10,887
Deferred income taxes 1,331 (653)
Changes in operating assets and liabilities net of acquisition:
Premiums receivable and unearned subscriber premiums (58,762) 2,076
Prepaid expenses and other (4,249) (2,747)
Estimated claims payable, shared risk and other settlements (23,285)
Accounts payable and accrued expenses (16,063) (14,636)
Federal and state income taxes payable 15,648 11,811
Net cash (used) provided by operating activities (45,874) 25,618
INVESTING ACTIVITIES
Sale or redemption of marketable securities held for sale 75,201 63,648
Purchases of marketable securities held for sale (80,929) (57,647)
Purchases of property and equipment (5,922) (6,414)
Acquisition of subsidiaries, net of cash acquired (4,114) (76,648)
Net cash (used) by investing activities (15,764) (77,061)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and
employee stock plan purchases 14,481 481
Borrowings 9,000 75,000
Purchase of treasury stock (9,586)
Repayment of debt and other non current liabilities (142) (10,195)
Net cash provided by financing activities 13,753 65,286
Increase (decrease) in cash and equivalents (47,885) 13,843
Cash and equivalents, beginning of period 225,932 267,877
Cash and equivalents, end of period $ 178,047 $ 281,720
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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, "HSI" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information, and with 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 three month period ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in HSI's Annual Report on
Form 10-K for the year ended December 31, 1995.
2. NOTES PAYABLE
On April 26, 1996 HSI replaced the $400 million revolving credit facility
obtained on April 12, 1995 with a $700 million revolving credit facility.
Under the new credit facility, HSI may incur permitted subordinated indebtedness
in a maximum aggregate amount not to exceed $150 million which will be available
for acquisition purposes and to provide short-term financing to repurchase
shares of stock. HSI 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, HSI 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 March 31, 1996, $319
million had been borrowed against the original $400 million revolving credit
facility. HSI has rolled the $319 million borrowed under the original credit
facility into the new $700 million credit facility.
3. CONTINGENCIES
Litigation
In January 1995, two purported class action lawsuits were filed against HSI
and the members of its Board of Directors alleging breach of fiduciary duties to
HSI's public stockholders by refusing to seriously consider certain acquisition
bids for HSI. These lawsuits were subsequently consolidated into a single
action. On April 19, 1996, such single, consolidated action was dismissed
without prejudice.
HSI is 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 HSI, the resolution of these matters will not have a
material adverse effect on the financial condition or results of operations of
HSI.
4. STOCKHOLDER'S EQUITY
During February of 1996, HSI repurchased 303,879 shares of Class A common
stock from certain current and former management employees of HSI and HN
Management Holdings, Inc., a predecessor to HSI, at a price of $31.55 per share.
The stock repurchased, having an aggregate value of $9,586,000, was immediately
canceled and netted against Class A Common Stock, Additional Paid-in-Capital and
Retained Earnings.
5. RELATED PARTY TRANSACTION
On April 14, 1995, a Board member of HSI was provided a loan by HSI in the
amount of $1.0 million, which is secured by HSI Class A common stock owned by
such board member. The note evidencing the loan is due the earlier of (i)
December 31, 1996 or (ii) the date HSI repurchases the Class A common stock used
as collateral (in which case the note shall be deemed satisfied in the amount of
the proceeds for such repurchase). Interest on the unpaid principal amount is
equal to the lesser of (i) the most favorable rate available to HSI under its
revolving credit facility or (ii) the applicable Federal rate in effect under
the Internal Revenue Code compounded semi-annually. As of March 31, 1996 the
balance owed on this note was $745,000.
6. SUBSEQUENT EVENTS
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 6,664,964 shares of Class A Common
Stock (which constituted 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 "Offering"). The proceeds
received by the Company from the sale of 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 intends to use all of the net proceeds to the Company from the
Offering to repurchase 3,194,374 shares of Class A Common Stock currently held
pursuant to the Amended and Restated Health Net 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 to be paid by the Company to repurchase these shares of Class A Common
Stock from the Class A Stockholders will be equal to the net proceeds per
share received by the Company in the Offering. The Company will not receive
any of the proceeds from the sale of shares of Class A Common Stock by the
Foundation.
On April 10, 1996, HSI 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 will cover non-recurring costs of
a comprehensive restructuring of HSI's Health Net subsidiary, computer software
and hardware write-offs, and the consolidation of certain operational functions
of other subsidiaries.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
HSI is one of the largest 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, HSI provides a wide range of managed health
care services through Network Model and Individual Practice Association Model
HMOs. HSI 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
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
Net income increased 37.7% to $26.0 million for the first three months of
1996, compared with $18.9 million, after net merger related costs of $5.3
million, for the comparable period in 1995. Premium revenues, excluding ASO
revenues, were $783.1 million for the three month period, a 26.5% increase from
the $ 618.9 million reported in 1995. The improved earnings performance resulted
primarily from acquisitions in the Northeast and growth in operations.
SUMMARY OF OPERATING STATISTICS AND MEMBERSHIP DATA
OPERATING STATISTICS
Three Months Ended March 31,
1996 1995
Medical loss ratio (health care expense as a
percentage of premium revenue) 82.9% 80.6%
Marketing, general and administrative expense
including depreciation and amortization
as a percentage of premium revenue 12.0% 13.3%
Net income as a percentage of total revenue 3.2% 3.0%
Primary and fully diluted earnings per share:
Before net merger-related costs (1995) $0.54 $0.49
Net Income $0.54 $0.38
MEMBERSHIP DATA
March 31,
1996 1995
Members by Product Type
Commercial 1,606,260 1,486,865
Medicare 139,787 92,707
Medicaid 59,550 11,071
ASO 108,447 145,871
Managed 4,391 4,112
Total 1,918,435 1,740,626
Members by State
California 1,340,052 1,309,938
Colorado 66,992 45,091
New Mexico 27,751 26,688
Washington/Idaho 113,546 117,798
Oregon 48,331 38,762
Connecticut 156,596 131,545
Pennsylvania 165,167 70,804
Total 1,918,435 1,740,626
HSI added 177,809 new full-risk and ASO members since the first quarter of
1995. Of this increase, 86,509 members are attributed to the acquisition of
Greater Atlantic Health Services, Inc., an HMO operating in Pennsylvania and New
Jersey ("Greater Atlantic"). Internal growth accounted for the remaining
increase in enrollment of 91,300.
For the period ended March 31, 1996 membership decreased by approximately
20,000 (1%) compared to December 31, 1995. The decrease was due to HSI's
efforts to maintain pricing discipline in the current competitive environment,
and marketplace confusion caused by the abandoned merger involving HSI and
WellPoint. The decrease was comprised of a 41,000 member reduction in commercial
enrollment which was partially offset by an increase of 7,000 in Medicare,
10,000 in Medicaid and 4,000 in ASO enrollment.
Total Revenue
Premium revenue, excluding ASO revenue, increased $164.2 million or 26.5%
in the first quarter of 1996 compared to the first quarter of 1995. The
increase in premium revenue was reflective of increased membership. The
Northeast contributed $75.5 million of acquired premium growth and $33.5 million
of post-acquisition internal premium growth between the first quarter of 1996
and the first quarter of 1995. On a same store basis, premium revenue
(including post-acquisition internal premium growth in the Northeast) increased
by $88.7 million or 14.3%, between the three month periods ended March 31, 1996
and March 31, 1995.
Change in Net Premium Revenue
(In Millions)
First Quarter 1996 Compared to First Quarter 1995
Change in revenue due to
premium change (same store):
Commercial $ (9.5)
Medicare 8.1
(1.4)
Change in revenue due to
membership change (same store):
Commercial 42.3
Medicare 47.8
90.1
Change in revenue due to
acquisitions:
Commercial 53.5
Medicare 22.0
75.5
Total change in revenue:
Commercial 86.3
Medicare 77.9
$164.2
Total member months (cumulative number of member service months during the
period) increased by 18.7% to 5,436,000 during the first quarter of 1996
compared to the same period in 1995, and the combined per member per month
("PMPM") premium revenue increased by 6.6% to $144.05.
On a same store basis, total member months increased by 10.4% to 5,052,000
during the first quarter of 1996 compared to the same period in 1995, and total
PMPM premium revenue increased by 3.6% to $140.07. For the same period, revenue
from the Company's ASO contracts increased by $9.7 million due mainly to the
contracts acquired in the Northeast acquisitions.
COMMERCIAL
Commercial member months increased by 16.3% to 5,018,000 during the first
quarter of 1996 compared to the same period in the prior year. For the quarter
ended March 31, 1996, commercial premium revenue PMPM increased by .3% to
$119.91, compared to the same period last year.
For the quarter ended March 31, 1996, excluding the effects of Northeast
acquisitions, commercial member months increased by 8.4% to 4,673,000 compared
to the prior year period. Commercial premium revenue PMPM decreased by 1.8% to
$117.32, compared to the same period last year. The decrease was due mainly to
pricing pressures in the highly competitive California marketplace.
MEDICARE
Medicare member months increased by 57.8% to 418,000 during the first
quarter of 1996 compared to the same period in the prior year. For the quarter
ended March 31, 1996, Medicare premium revenue PMPM increased by 11.1% to
$433.54, compared to the same period last year.
For the quarter ended March 31, 1996, excluding the effects of Northeast
acquisitions, Medicare member months increased by 42.8% to 379,000. Medicare
premium revenue PMPM increased by 7.8% to $420.77 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 30.1% from $498.9 million in the first
quarter of 1995 to $648.9 million in the first quarter of 1996. On a PMPM
basis, health care expenses for the quarter ended March 31, 1996 rose by 9.5% to
$119.37 PMPM, versus $108.98 PMPM during the equivalent period in the prior
year. During the same period, HSI's overall medical loss ratio (i.e., health
care expenses as a percentage of premium revenue, or "MLR"), increased to 82.9%
as compared to 80.6% during the prior year's three-month period.
For the quarter ended March 31, 1996, excluding the effects of Northeast
acquisitions, health care expenses increased by 17.5% from $498.9 million in the
first quarter of 1995 to $586.3 million in the first quarter of 1996. On a PMPM
basis and excluding the effects of Northeast acquisitions, health care expenses
for the quarter ended March 31, 1996 rose by 6.5% to $116.05 PMPM, versus
$108.98 PMPM during the equivalent period in the prior year. HSI's MLR on a
same store basis also increased to 82.9% as compared to 80.6% during the prior
year's three-month period.
The increase in these MLRs is primarily due to unusually high fee for
service claims volumes during the first quarter of 1996. The bulk of the claims
related to the Northern California service area, where high cost Medicare
hospital and pharmacy claims drove up health care costs.
COMMERCIAL
Commercial health care expenses on a PMPM basis in the quarter ended March
31, 1996 increased by 1.5% to $96.40 compared to $94.97 during the same period
last year. Commercial MLR increased to 80.4% from 79.5% for the comparable
period in 1995.
Commercial health care expenses on a PMPM basis in the quarter ended March
31, 1996, excluding the effects of Northeast acquisitions, decreased by .9% to
$94.15 compared to $94.97 during the same period last year. Commercial MLR
increased to 80.3% from 79.5% for the comparable period in 1995.
MEDICARE
Medicare health care expenses on a PMPM basis in the quarter ended March
31, 1996 increased by 17.2% to $394.78, compared to $336.80 during the same
period last year. Medicare MLR increased to 91.1% from 86.3% for the first
quarter of 1995.
Medicare health care expenses on a PMPM basis in the quarter ended March
31, 1996 increased by 14.7% to $386.21, again without the effects of Northeast
acquisitions, compared to $336.80 during the same period last year. Medicare
MLR without the effect of these acquisitions increased to 91.8% from 86.3% for
the first quarter of 1995. The Medicare MLR increase was due to the unusually
high fee for service claims volume discussed above.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses, excluding the effects of
the Company's ASO business, decreased to 10.2% of premium revenue in the first
quarter of 1996 as compared to 11.6% during the first 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 in the first quarter of 1996 as compared to the
first quarter of 1995. These expenses were $13.5 million (1.7% of premium
revenue) in the first quarter of 1996 and $10.9 million (1.8% of premium
revenue) in the first quarter of 1995.
Restructuring Charge
On April 10, 1996, HSI announced its intention to take a one-time
restructuring charge of approximately $34.2 million on a pre-tax basis, which
amounts to an after-tax impact of $.41 per share, during the second quarter of
1996. The charge will cover non-recurring costs of a comprehensive
restructuring of HSI's Health Net subsidiary, computer software and hardware
write-offs, and the consolidation of certain operational functions of other
subsidiaries.
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
cover HSI's centralization of claims processing and certain other functions of
its non-California 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 the positive impact of savings from the restructuring
charges will not become estimable or be realized until fiscal 1997.
Liquidity and Capital Resources
HSI'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.
HSI's capital resources are managed according to certain guidelines
intended to ensure liquidity and maximize total return by assuming prudent
investment risks. HSI'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. HSI presently invests primarily in a
variety of fixed-income obligations according to established investment
guidelines.
During the first quarter of 1996, cash used by operating activities was
$45.9 million, compared with cash provided of $25.6 million in the comparable
prior year period. This decrease compared to 1995 is due primarily to timing
differences associated with payment of claims payable, accounts payable and
accrued expenses, and receipts of unearned subscriber premiums. Increased
efficiencies in the Company's claims processing areas allowed accelerated
handling of claims, as well as reductions to claims inventories.
Cash used for investing activities decreased from $77.1 million in the
quarter ended March 31, 1995 to $15.8 million in the quarter ended March 31,
1996, while cash provided from financing activities also decreased from $65.3
million to $13.8 million during such periods. Decreases in these cash flow
categories resulted from reduced acquisition activity during the first quarter
of 1996, as compared to the comparable prior year quarter.
HSI's current ratios at March 31, 1996 and December 31, 1995 were 1.43 to 1
and 1.30 to 1, respectively. The increase in HSI'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 during the first quarter of 1996.
Outstanding notes payable amounted to $365.3 million at March 31, 1996, an
increase of $8.9 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 scheduled
at between $19 and $25 million per year through 2006. HSI 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. HSI regularly evaluates cash requirements for current
operations and commitments, and for capital acquisitions and other strategic
transactions. HSI 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, HSI 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 HSI's
previous $400 million credit facility, of which $319 million was outstanding as
of March 31, 1996. The outstanding balance of the $400 million credit facility
was rolled into the new $700 million revolving line of credit. Under the credit
facility HSI may incur additional 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.
Under the terms of the five-year Credit Facility, HSI pays interest at a
variable rate (See note 2 of the Notes to Condensed Consolidated Financial
Statements)
HSI'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 March 31, 1996, each of HSI'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 HSI.
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 HSI. 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 HSI.
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 alleges 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 alleges that the individual
directors have 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 requests 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 requests
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 makes allegations similar to those in the Laufer Complaint and seeks
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.
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 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 are presently due on June 13, 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
HSI 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 HSI is of the opinion that the final outcome of all such
proceedings should not have a material adverse effect upon HSI's results of
operations or financial condition.
ITEM 2. CHANGES IN SECURITIES
On April 26, 1996, HSI entered into an Amended and Restated Credit
Agreement among HSI, 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 HSI obtained an
unsecured five-year $700 million revolving credit facility. The Credit
Agreement replaced HSI's prior credit agreement providing for an unsecured $400
million revolving credit facility, which prior agreement was also entered into
by HSI with Bank of America, as agent.
Specifically, Section 7.11 of the Credit Agreement provides that HSI 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 HSI and
its subsidiaries in fiscal 1995 plus 50% of the net income of HSI and its
subsidiaries in fiscal 1996 and subsequent years (calculated on a cumulative
consolidated basis).
In addition, under the Credit Agreement as originally executed HSI is
allowed to incur Subordinated Indebtedness (as defined in the Credit Agreement)
to repurchase its Class A Common Stock, but is limited to repurchasing not more
than 50% of the Class A Common Stock held certain designated Class A
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, a copy of which Amendment No. 1 to the Credit Agreement
is filed herewith.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 23, 1996, HSI held its 1995 Annual Meeting of Stockholders (the
"Annual Meeting"). At the Annual Meeting, HSI stockholders voted upon proposals
to (1) elect four 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, 1995 ("Proposal 2").
The following provides voting information for all matters voted upon at the
meeting, and includes a separate tabulation with respect to each nominee for
director:
Proposal 1
Director Nominee Votes For Votes Against Votes Withheld
J. Thomas Bouchard 19,819,867 0 376,347
Thomas T. Farley 19,819,376 0 376,838
E. Keith Hovland 19,819,284 0 376,930
Douglas M. Mancion 20,061,782 0 134,432
Each of Messrs. Bouchard, Farley, Hovland and Mancino were elected
as a Class II director for a three-year term at the Annual Meeting. Other
directors whose term of office as directors continued after the Annual Meeting
were: Lawrence E. Austin, M.D., Dale T. Berkbigler, M.D., Charles T. Braden,
George Deukmejian, Michael E. Gallagher, Roger F. Greaves, Malik M. Hasan, M.D.,
Kenneth W. Kizer, M.D., Robert L. Montgomery and J. Kevin Murphy.
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,
1995, 20,173,063 votes were cast in favor, 8,902 shares were cast against and
14,249 shares were withheld for such proposal.
In total, 21,995,105 shares of Class A Common Stock were eligible to vote
at the Annual Meeting, 20,196,214 shares were voted at the Annual Meeting and
1,798,891 shares were unvoted at the Annual Meeting.
ITEM 5. OTHER INFORMATION
Public Offering
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 Foundation sold
6,664,964 shares of Class A Common Stock (which constituted 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 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 intends to use all of the net proceeds to the Company from
the Offering to repurchase 3,194,374 shares of Class A Common Stock currently
held pursuant to the Associate Trust Agreement, on behalf of the Class A
Stockholders. The repurchase price per share to be paid by the Company to
repurchase these shares of Class A Common Stock from the Class A Stockholders
will be equal to the net proceeds per share received by the Company in the
Offering. The Company will 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 HSI 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 HSI's
Current Report on Form 8-K dated April 26, 1996. Amendment No. 1 to the Credit
Agreement is attached as Exhibit 10.32 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 HSI's prior $400
million credit facility was rolled into the new facility under the Credit
Agreement. The new facility is available to HSI and its subsidiaries for
general corporate purposes including Permitted Acquisitions and Joint Ventures
and, if HSI should elect, to repurchase or redeem HSI 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 March 31, 1996, HSI had
drawn approximately $319 million under the previous 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
HSI's acquisition $75 million had been drawn to fund HSI's acquisition
of G.H. Holding Corporation.
Bank of America is the lead bank and agent for the other participating
banks named in the Credit Agreement. At the election of HSI, 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 LIBO
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 HSI'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 HSI 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 HSI's capital
stock and, in certain cases, the redemption or repurchase of capital stock or
securities. In addition to obligations incurred under the facility, HSI 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 HSI Class A Common Stock.
Under the Credit Agreement, HSI 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, HSI 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.
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, respec-
tively) 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 State-
ment/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 State-
ment/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 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 incor-
porated 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).
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).
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).
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).
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 Cur-
rent Report on Form 8-K dated March 2, 1995, which is incorpo-
rated 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
therein).
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 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, a copy of which is filed herewith.
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.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by HSI during the
quarterly period ended March 31, 1996:
1. A report dated April 10, 1996 was filed announcing that HSI intends 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 will cover non-recurring costs of a comprehensive
restructuring of HSI'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 HSI has 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 HSI during such period.
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: May 15, 1996 /s/ Malik M. Hasan, M.D.
Malik M. Hasan, M.D., Chairman of the
Board of Directors, President, and Chief
Executive Officer
Date: May 15, 1996 /s/ E. Keith Hovland
E. Keith Hovland, Executive Vice President
Treasurer and Acting Chief Financial Officer
Exhibit 10.32
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is made and
dated as of May 10, 1996 (the "First Amendment") among Health Systems
International, Inc. (the "Company"), the Banks party to the Amended and Restated
Credit Agreement referred to below, and BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, a national banking association, as Agent (the "Agent"), and
amends that certain Amended and Restated Credit Agreement dated as of April 26,
1996 (as so amended or modified from time to time, the "Credit Agreement").
RECITALS
WHEREAS, the Company has requested the Agent and the Banks to amend certain
provisions of the Credit Agreement, and the Agent and the Banks are willing to
do so, on the terms and conditions specified herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Terms. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein. All references to the Credit
Agreement shall mean the Credit Agreement as hereby amended.
2. Amendments. The Company, the Agent and the Banks hereby agree to amend
the Credit Agreement by deleting the third proviso to Section 7.11 of the Credit
Agreement that reads as follows: "provided further that in no event may more
than 50% of the Class A shares held by any Designated Shareholder as of
April 12, 1995 be repurchased or redeemed by the Company prior to the Revolving
Termination Date;".
3. Representations and Warranty. The Company represents and warrants to
the Agent and the Banks that, on and as of the date hereof, and after giving
effect to this First Amendment:
3.1 Authorization. The execution, delivery and performance by the
Company of this First Amendment has been duly authorized by all necessary
corporate action, and this First Amendment has been duly executed and delivered
by the Company.
3.2 Binding Obligation. This First Amendment constitutes the legal,
valid and binding obligations of the Company, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
3.3 No Legal Obstacle to Amendment. The execution, delivery and
performance of this First Amendment will not (a) contravene the Organization
Documents of the Company; (b) constitute a breach or default under any
contractual restriction or violate or contravene any law or governmental
regulation or court decree or order binding on or affecting the Company which
individually or in the aggregate does or could reasonably be expected to have a
Material Adverse Effect; or (c) result in, or require the creation or imposition
of, any Lien on any of the Company's properties. No approval or authorization
of any governmental authority is required to permit the execution, delivery or
performance by the Company of this First Amendment, or the transactions
contemplated hereby.
3.4 Incorporation of Certain Representations. The representations
and warranties of the Company set forth in Article V of the Credit Agreement are
true and correct in all respects on and as of the date hereof as though made on
and as of the date hereof, except as to such representations made as of an
earlier specified date.
3.5 Default. No Default or Event of Default under the Credit
Agreement has occurred and is continuing.
4. Conditions, Effectiveness. The effectiveness of this First Amendment
shall be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of such other evidence with respect to the
Company as the Agent may reasonably request in connection with this First
Amendment and the compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Effectiveness of the Credit Agreement and the Notes. Except as
hereby expressly amended, the Credit Agreement and the Notes shall each remain
in full force and effect, and are hereby ratified and confirmed in all respects
on and as of the date hereof.
5.2 Waivers. This First Amendment is limited solely to the matters
expressly set forth herein and is specific in time and in intent and does not
constitute, nor should it be construed as, a waiver or amendment of any other
term or condition, right, power or privilege under the Credit Agreement or under
any agreement, contract, indenture, document or instrument mentioned therein;
nor does it preclude or prejudice any rights of the Agent or the Banks
thereunder, or any exercise thereof or the exercise of any other right, power or
privilege, nor shall it require the Majority Banks to agree to an amendment,
waiver or consent for a similar transaction or on a future occasion, nor shall
any future waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned in the
Credit Agreement, constitute a waiver of any other right, power, privilege or
default of the same or of any other term or provision.
5.3 Counterparts. This First Amendment may be executed in any number
of counterparts, and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This First Amendment shall not become
effective until the Company, the Agent and the Majority Banks shall have signed
a copy hereof and the same shall have been delivered to the Agent.
5.4 Governing Law. This First Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed and delivered as of the date first written above.
HEALTH SYSTEMS INTERNATIONAL, INC.
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Agent
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Bank
By:
Name:
Title:
Exhibit 11.1
Health Systems International, Inc. and Subsidiaries
Computation of Earnings Per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three-Months Ended March 31,
1996 1995
<S> <C> <C>
Primary:
Shares outstanding at beginning of 48,492
Weighted average shares issued (449) 322
Weighted average shares
Dilutive shares contingently
of stock options, net of
been purchased (at average
treasury with assumed 257 354
Total primary shares 48,135 49,168
Net income $26,040 $18,911
Net income per share $ 0.54 $ 0.38
Fully
Shares outstanding at beginning of
period 48,327 48,492
Weighted average shares issued (449) 322
Weighted average shares
Dilutive shares contingently
of stock options, net of
been purchased (at the
period-end market price) for
assumed proceeds from 299 468
Total fully diluted shares 48,177 49,282
Net income $26,040 $18,911
Net income per share $ 0.54 $ 0.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Health Net's
Form 10-Q and is qualified in its entirety by reference to such Form 10-Q
filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 178,047
<SECURITIES> 368,232
<RECEIVABLES> 106,081
<ALLOWANCES> (9,770)
<INVENTORY> 0
<CURRENT-ASSETS> 698,705
<PP&E> 182,871
<DEPRECIATION> (102,748)
<TOTAL-ASSETS> 1,173,741
<CURRENT-LIABILITIES> 487,337
<BONDS> 362,937
0
0
<COMMON> 49
<OTHER-SE> 317,267
<TOTAL-LIABILITY-AND-EQUITY> 1,173,741
<SALES> 0
<TOTAL-REVENUES> 810,172<F1>
<CGS> 0
<TOTAL-COSTS> 648,922<F2>
<OTHER-EXPENSES> 109,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,932
<INCOME-PRETAX> 45,399<F3>
<INCOME-TAX> 19,390
<INCOME-CONTINUING> 26,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,040
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
<FN>
<F1>Includes 8.823 million of investment income.
<F2>Includes healthcare expenses only.
<F3>Excludes 31 thousand of minority interest in loss of subsidiary.
</FN>
</TABLE>
