<PAGE>
FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report: October 1, 1996
FOUNDATION HEALTH CORPORATION
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 1-10540 68-0014772
- --------------- ------------- ----------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
corporation) No.)
3400 DATA DRIVE, RANCHO CORDOVA, CA 95670
- --------------------------------------- ------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:
(916) 631-5000
<PAGE>
Item 5. Other Events.
On October 1, 1996, Foundation Health Corporation (the "Company")
announced that it had entered into an Agreement and Plan of Merger with Health
Systems International, Inc. ("HSI") and FH Acquisition Corp., a wholly owned
subsidiary of HSI ("Merger Sub"), pursuant to which Merger Sub will be merged
with and into the Company, subject to regulatory and stockholder approvals.
On October 1, 1996, the Company entered into an Amendment to its Rights
Agreement with ChaseMellon Shareholder Services, L.L.C. to exempt HSI and Merger
Sub from the Rights Agreement and modify the circumstances under which the
Company's Board of Directors can terminate the Rights Agreement.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
Exhibit
Number
4.1 Amendment dated as of October 1, 1996 to Rights
Agreement dated as of September 27, 1991 between
Foundation Health Corporation and ChaseMellon
Shareholder Services, L.L.C. (as successor to Chemical
Trust Company of California and Manufacturers Hanover
Trust Company of California).
99.1 Press Release dated October 1, 1996.
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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 hereunto duly authorized.
Dated: October 9, 1996.
FOUNDATION HEALTH CORPORATION
By /s/JEFFREY L. ELDER
------------------------------
Jeffrey L. Elder
Senior Vice President and
Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
4.1 Amendment dated as of October 1, 1996 to Rights
Agreement dated as of September 27, 1991 between
Foundation Health Corporation and ChaseMellon
Shareholder Services, L.L.C. (as successor to Chemical
Trust Company of California and Manufacturers Hanover
Trust Company of California).
99.1 Press Release dated October 1, 1996.
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<PAGE>
EXHIBIT 4.1
AMENDMENT TO RIGHTS AGREEMENT
AMENDMENT, dated as of October 1, 1996, to the Rights Agreement, dated as
of September 27, 1991 (the "Rights Agreement"), between Foundation Health
Corporation, a Delaware corporation (the "Company"), and ChaseMellon Shareholder
Services, L.L.C. (as successor to Chemical Trust Company of California and
Manufacturers Hanover Trust Company of California), a New Jersey Limited
Liability Company, as Rights Agent (the "Rights Agent").
WHEREAS, the Company and the Rights Agent have heretofore executed and
entered into the Rights Agreement; and
WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company may
from time to time prior to the Distribution Date (as defined therein) supplement
or amend the Rights Agreement in accordance with the provisions of Section 27
thereof; and
WHEREAS, it is proposed that the Company enter into an Agreement and Plan
of Merger (as it may be amended or supplemented from time to time, the "Merger
Agreement"), among the Company, Health Systems International, Inc., a Delaware
corporation and FH Acquisition Corp., a Delaware corporation; and
WHEREAS, the Board of Directors of the Company has determined that the
Merger and the other transactions contemplated by the Merger Agreement are fair
to and in the best interests of the Company and its stockholders; and
WHEREAS, the Board of Directors has determined that it is in the best
interests of the Company and its stockholders to amend the Rights Agreement to
exempt the Merger Agreement and the transactions contemplated thereby from the
application of the Rights Agreement.
NOW, THEREFORE, the Company and the Rights Agent hereby amend the Rights
Agreement as follows:
1. Section 1(a) of the Rights Agreement is hereby amended by adding the
following sentence at the end thereof:
"Neither Health Systems International, Inc., a Delaware
corporation ("Parent"), FH Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Parent ("Merger
Sub"), nor any of their respective Subsidiaries, shall be deemed
to be an Acquiring Person with respect to and to the extent that
shares of Common Stock are acquired by such entities or their
Affiliates or Subsidiaries in connection with the transactions
contemplated by the Agreement and Plan of Merger (as it may be
amended or supplemented from time to
<PAGE>
time, the "Merger Agreement") entered into as of October 1, 1996,
among the Company, Parent and Merger Sub."
2. Section 30 of the Rights Agreement is hereby amended to add the
following sentence at the end thereof:
"Nothing in this Agreement shall be construed to create or
cause a Distribution Date or Stock Acquisition Date or give
any holder of Rights or any other Person any legal or
equitable rights, remedy or claim under this Agreement in
connection with the Merger Agreement or any transactions
contemplated by the Merger Agreement."
3. Section 24 is hereby amended by deleting the heading for such Section
and deleting Sections 24(a)(i), (a)(ii) and (b) in their entirety and
substituting therefor the following:
"24. TERMINATION AND EXCHANGE.
(a)(i) The Board of Directors of the Company may, at its option,
at any time prior to the earlier of (x) the Stock Acquisition Date or
(y) 5 p.m., San Francisco time, on the Final Expiration Date,
terminate the Rights without any payment to any holder thereof.
(ii) In addition, and notwithstanding the provisions of Section
24(a)(i), the Board of Directors of the Company may terminate the
Rights without any payment to any holder thereof following the Stock
Acquisition Date but prior to any event described in Section 13(a)
either (x) in connection with any event specified in Section 13(a) in
which all holders of Common Stock are treated alike and not involving
(other than as a holder of Common Stock being treated like all other
such holders) an Acquiring Person or an Affiliate of Associate thereof
or any other Person in which such Acquiring Person or Affiliate or
Associate thereof has any interest, or any other Person acting
directly or indirectly on behalf of or in association with any such
Acquiring Person or Affiliate or Associate thereof, or (y) following
the occurrence of an event set forth in, and the expiration of any
periods during which the holder of Rights may exercise the rights
under Section 11(a)(ii) if and for as long as any Acquiring Person
having triggered such event is not thereafter the Beneficial Owner of
securities representing 15% or more of the outstanding shares of the
Voting Power, and at the time of termination there are no other
Persons who are Acquiring Persons.
(b) In the case of a termination permitted under Section
24(a)(i), immediately upon the action of the Board of Directors of the
Company ordering the termination of the Rights, evidence of which
shall have been filed with the Rights Agent and without any further
action and without any
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<PAGE>
notice, the right to exercise the Rights will terminate and each
right will thereafter be null and void. In the case of a
termination permitted only under Section 24(a)(ii), evidence of
which shall have been filed with the Rights Agent, the right to
exercise the Rights will terminate and each right will thereafter be
null and void only after ten Business Days following the giving of
notice of such termination to the holders of such Rights if no event
set forth in Section 11(a)(ii) shall have occurred, and, if such event
shall have occurred, upon the later of ten Business Days following the
giving of such notice or the expiration of any period during which the
rights under Section 11(a)(ii) may be exercised. Within ten days
after the action of the Board of Directors ordering any termination of
the Rights, the Company shall give notice of such termination to the
Rights Agent and the holders of the then outstanding Rights by mailing
such notice to the Rights Agent and to all such holders at their last
addresses as they appear upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the
Transfer Agent for the Common Stock. Any notice which is mailed in
the manner herein provided shall be deemed given, whether or not the
holder receives the notice."
4. Section 24 of the Rights Agreement is hereby amended by adding a new
subsection (d) thereto:
"(d) Notwithstanding anything in this Agreement, the Rights
shall terminate without any payment or notice to any holder thereof
immediately prior to the Effective Time as defined in the Merger
Agreement."
5. The second paragraph of Section 3(a) of the Rights Agreement is hereby
amended by deleting the word "redemption" and the immediately following comma in
the parentheticals following the phrase "Distribution Date" in each of the ninth
and fifteenth lines of such second paragraph.
6. Section 3(b) of the Rights Agreement is hereby amended as follows:
(a) the legend forming a part of Section 3(b) to the Rights Agreement is hereby
amended by deleting the word "redeemed" in the eleventh line of such legend
immediately following the phrase "such Rights may be" and substituting therefor
the word "terminated," and (b) in the parenthetical in the last paragraph of
Section 3(b), the word "redemption" and the immediately following comma shall be
deleted.
7. Clause (ii) of Section 7(a) of the Rights Agreement is hereby amended
by deleting in its entirety Clause (ii) and substituting in its place the
following:
"(ii) the time at which the Rights are terminated as provided in
Section 24 hereof,"
8. Section 23 of the Rights Agreement is hereby amended to delete the
word "redemption" in line twelve and substitute the word "termination" therefor.
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9. Section 28 of the Rights Agreement is hereby amended by deleting the
word "redeem" in each place in the parenthetical in clause (ii) and substituting
the word "terminate" therefor.
10. This Amendment shall be deemed to be a contract made under the laws of
the State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such state applicable to contracts to be made and
performed entirely within such state.
11. This Amendment may be executed in any number of counterparts, each of
which shall for all purposes be deemed an original, and all of which together
shall constitute but one and the same instrument.
Except as expressly set forth herein, this Amendment shall not by
implication or otherwise alter, modify, amend or in any way affect any of the
terms, conditions, obligations, covenants or agreements contained in the Rights
Agreement, all of which are ratified and affirmed in all respects and shall
continue in full force and effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and the respective corporate seals to be affixed and attested, all
as of the day and year first above written.
Attest: FOUNDATION HEALTH CORPORATION
[SEAL]
By: /S/ KAREN DEMPSEY By: /S/ KIRK A. BENSON
--------------------------- --------------------------
Name: Karen Dempsey Name: Kirk A. Benson
Title: Title:
Attest: CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
[SEAL]
By: /S/ ASA DREW By: /S/ DANIEL SPENGEL
--------------------------- --------------------------
Name: Asa Drew Name: Daniel Spengel
Title: Assistant Vice President Title: Trust Officer
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<PAGE>
EXHIBIT 99.1
Contact: Kurt Davis
Foundation Health Corporation
(916) 631-5288
[email protected]
David Olson
Health Systems International
(818) 719-6978
HTTP://WWW.HSINTL.COM
[email protected]
FOUNDATION HEALTH AND HEALTH SYSTEMS INTERNATIONAL
TO COMBINE IN $3 BILLION MERGER-OF-EQUALS TRANSACTION
-- New company, to be called Foundation Health Systems, Inc. (FHS), will be
nation's fourth-largest publicly traded managed care company, with 5
million medical members in 16 states
-- Merger partners have identified significant potential operational cost
savings
-- FHS will be financially strong and well-positioned for accelerating
growth in the rapidly consolidating managed health care industry
PUEBLO, COLO., RANCHO CORDOVA, CALIF. AND WOODLAND HILLS, CALIF. OCTOBER 1,
1996 -- Foundation Health Corporation (NYSE:FH) (Foundation) and Health Systems
International, Inc. (NYSE:HQ) (HSI) today announced that they have agreed to
combine in a merger-of-equals transaction valued at approximately $3 billion,
based on the companies' combined market capitalization.
Under the definitive agreement approved by both companies' boards of
directors, Foundation and HSI will combine to form Foundation Health Systems,
Inc. (FHS). On a pro forma basis, FHS would have recorded total annual revenues
of $6.4 billion in
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the twelve months ended June 30, 1996. Both companies expect FHS's
calendar 1997 revenues to exceed $8 billion.
Foundation and HSI have identified at least $110 million of annual
operating synergies that they expect to realize following completion of the
transaction. These synergies will be derived from consolidation of corporate
overhead and administration, merging overlapping operations such as California
HMOs, cross-selling of certain Foundation specialty products to HSI members,
from the benefits of combined medical contracting and other savings.
Completion of the transaction, which will be a tax-free combination and
accounted for as a pooling of interests, is subject to shareholder and
regulatory approval as well as other customary conditions and is expected to
occur by the end of January 1997. The new company will operate on a calendar
year for financial reporting purposes.
Under the terms of the agreement, which is based on a fixed exchange ratio,
Foundation will merge with and become a subsidiary of HSI, and HSI will
simultaneously change its name to Foundation Health Systems. Each stockholder
of Foundation will receive 1.3 FHS Class A common shares for each share of
Foundation held. All outstanding HSI Class A common shares will continue to
remain outstanding pursuant to the agreement (and will become an equivalent
number of FHS Class A common shares). The California Wellness Foundation, which
currently owns 19.3 million shares of Class B non-voting HSI stock, will
continue to
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<PAGE>
hold the same number of Class B non-voting shares of the new company.
FHS will thus have approximately 124 million shares outstanding upon
completion of the transaction, 61 percent of which will be owned by Foundation's
stockholders and 39 percent by HSI's stockholders.
"This transaction represents a unique opportunity to build value for both
companies' members, providers, employer groups and, in turn, shareholders far
beyond what either Foundation or HSI could have achieved independently," said
Daniel D. Crowley, chairman, president and chief executive officer of
Foundation. "I am particularly excited about HSI's fourth-generation medical
management system and its medical management expertise in general, which can
bring significant benefits to our members and providers. I look forward to
working closely with Dr. Hasan, Jay Gellert and our combined management team to
complete the transaction and establish Foundation Health Systems as one of the
best and fastest-growing health care companies in the United States."
"The new company will have highly complementary strengths," said Malik M.
Hasan, M.D., chairman and chief executive officer of HSI. "The transaction will
immediately establish FHS as a major national player, with strong market
positions in California and the West and rapidly growing operations in Texas,
Florida and the Northeast. The combined product line will cover virtually every
facet of managed health care, including conventional health maintenance
organizations (HMOs), Medicare-
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<PAGE>
risk HMOs and other substantial government programs, workers' compensation
and specialty products."
Mr. Crowley will serve as FHS's chairman for the year following completion
of the transaction. At the end of that period, Mr. Crowley will resign as
chairman while remaining a director of the company.
Dr. Hasan will be FHS' president and chief executive officer and will
become chairman following Mr. Crowley's resignation.
Jay M. Gellert, currently president and chief operating officer of HSI,
will become executive vice president and chief operating officer of FHS. He
will assume the president's title from Dr. Hasan after the first year.
Kirk A. Benson, chief operating officer of Foundation's commercial
operations will be a senior vice president of FHS and will play a major role in
integration activities targeted at achieving anticipated synergies.
Jeffrey L. Elder, Foundation's senior vice president and chief financial
officer, will hold the same posts at the new company. Steven D. Tough,
currently president and chief operating officer of Foundation's government
programs, will continue to head those programs in FHS, principally including the
operations serving military families covered by the Civilian Health and Medical
Program of the Uniformed Services (CHAMPUS). Foundation currently serves 1.5
million CHAMPUS beneficiaries in seven states.
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<PAGE>
The FHS board of directors will be composed of 11 members, including
Mr. Crowley, Dr. Hasan and nine independent directors chosen by the two
companies, five initially by Foundation and four by HSI. The new company will
establish a single headquarters office at a site to be determined prior to
closing.
All FHS California HMO operations will be consolidated under Health Net in
the months following completion of the merger. Both companies expect that the
existing operating structure of Foundation's government and specialty businesses
will be maintained.
The definitive agreement provides for the payment of a termination fee, in
certain events.
Morgan Stanley & Co. Incorporated advised Foundation with regard to the
transaction, and Salomon Brothers, Shattuck Hammond Partners, Smith, Barney Inc.
and Volpe, Welty & Company advised HSI. Morgan Stanley, Salomon and Shattuck
Hammond have rendered fairness opinions with regard to the transaction.
Foundation also announced that in connection with the previously announced
sale of its physician practice management operations and affiliated physician-
owned medical groups, Foundation has reconsidered its prior accounting treatment
for the medical groups. The evolution of the physician practice management
industry has led Foundation, in consultation with its independent auditors,
Deloitte & Touche LLP, to conclude that the operating results of such groups
should be included in Foundation's consolidated financial statements.
Accordingly, HSI and Foundation have agreed that Foundation will adjust
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previously issued consolidated financial statements to reflect operating losses
incurred by the medical groups.
The effect on Foundation's consolidated financial statements as a result of
recognizing the losses from the medial groups is preliminarily expected to be
$41 million ($.70 per share) in the fiscal year ended June 30, 1996 and $39
($.70 per share) in fiscal 1995. If the sale of the physician practice
management operations and affiliated medical groups to FPA Medical Management,
Inc. (FPA) is consummated as anticipated, such adjustments will result in a gain
on sale. As previously disclosed, the sale to FPA is currently awaiting
regulatory and other approvals and is expected to close in November 1996,
although there can be no assurance on the timing of the close or that the
transaction will be completed.
Certain statements contained in this press release are forward looking in
nature and are believed to be reasonable based on information available to the
companies' managements at this time. Actual results may vary due to changes in
health care administrative cost trends, pricing, sales volume, the timing of new
contract implementation and other factors. For further information, please see
the risk factors sections of the two companies' periodic filings with the
Securities and Exchange Commission.
Foundation Health Corporation is a Fortune 500 managed care organization
with headquarters in Rancho Cordova, California. Through its HMO, insured PPO
and government contracts subsidiaries, the Company provides group, individual,
Medicare,
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<PAGE>
Medicaid and CHAMPUS coverage for more than three million individuals. In
addition, the Company's subsidiaries offer managed care products related to
workers' compensation, behavioral health, dental, vision and prescription
drugs, and administrative services for medical groups and self-funded
benefits programs.
Health Systems International is one of the largest managed health care
organizations in the United States. It serves more than 1.9 million members in
nine states: California, Colorado, Connecticut, Idaho, New Jersey, New Mexico,
Pennsylvania, Oregon and Washington. It also owns Preferred Health Network,
Inc. (PHN), a preferred provider organization (PPO) network providing access to
more than 4.6 million individuals in 38 states, and coordinates managed care
products for multi-region employers. For five years in a row, HSI or QualMed,
Inc., a predecessor company to HSI, has been included on FORTUNE Magazine's list
of America's 100 fastest growing companies.
# # #
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<PAGE>
THE COMPANIES AT A GLANCE
<TABLE>
<CAPTION>
FOUNDATION HEALTH CORPORATION HEALTH SYSTEMS INTERNATIONAL, INC.
----------------------------- ----------------------------------
<S> <C> <C>
Headquarters: Rancho Cordova, CA Woodland Hills, CA and Pueblo, CO
Annual Revenues: (latest 12 months) $3.3 billion $3.0 billion
Shares Outstanding: 59 million 48 million
Employees: 11,000 4,000
States with HMOs: (ranked by enrollment) California California
Arizona Connecticut
Florida Washington/Idaho
Utah Pennsylvania
Colorado Colorado
Oklahoma Oregon
Texas New Mexico
Louisiana
Enrollment:
Group & Ind. 1.2 million 1.6 million
Medicare 87,000 141,000
Medicaid 260,000 62,000
CHAMPUS 1.5 million 0
TOTAL 3.1 million 1.8 million
Other Products: Workers' Compensation Workers' Compensation Administrative
Services
Behavioral Health Programs PPO Network
Pharmacy Benefit Management
Dental and Vision Coverage
</TABLE>
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<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
MEDICAL COVERED LIVES, PRO FORMA AT JUNE 30,1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOUNDATION HEALTH CORPORATION HEALTH SYSTEMS, INTERNATIONAL, INC.
------------------------------------------------------- -------------------------------------
COMMERCIAL HMO, INSURED PPO GOVERNMENT SUBTOTAL COMMERCIAL HMO, INSURED PPO SUBTOTAL COMBINED
TOTAL
----------------------------------------- ---------- -------- ------------------------------- -------- -------
GROUP AND MEDICARE COMMERCIAL CHAMPUS FH GROUP AND MEDICARE HQ
STATE INDIVIDUAL RISK MEDICAID SUBTOTAL TRICARE TOTAL INDIVIDUAL RISK MEDICAID TOTAL
- ---------- ---------- -------- -------- ---------- --------- ------- ---------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona 313 40 7 360 0 360 0 0 0 0 380
California 577 21 199 797 640 1,437 1,210 114 0 1,324 2,761
Colorado 33 0 0 33 0 33 46 10 0 56 89
Connecticut 0 0 0 0 0 0 124 0 18 142 142
Florida 69 26 19 114 0 114 0 0 0 0 114
Louisiana 23 0 0 23 81 104 0 0 0 0 104
New Mexico 0 0 0 0 0 0 27 2 0 29 29
Oklahoma 2 0 25 27 116 143 0 0 0 0 143
Oregon 0 0 0 0 33 33 47 0 3 49 82
Pennsylvania 0 0 0 0 0 0 46 13 26 85 85
Texas 24 0 0 24 415 439 0 0 0 0 439
Utah 87 0 10 97 0 97 0 0 0 0 97
Wash/Idaho 0 0 0 0 194 194 95 2 16 113 307
Other 67 0 0 67 50 117 0 0 0 0 117
---- ---- --- ----- ----- ---- ----- ---- --- ----- -----
TOTAL 1,195 87 260 1,542 1,529 3,071 1,595 141 62 1,798 4,869
---- ---- --- ----- ----- ---- ----- ---- --- ----- -----
---- ---- --- ----- ----- ---- ----- ---- --- ----- -----
</TABLE>
COMBINED ENROLLMENT BY PRODUCT
------------------------------------
Group & 2,790
Indiv.
Medicare Risk 228
Medicaid 322
CHAMPUS 1,529
-----
Total 4,869
-----
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