SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
October 1, 1996
_________________________________
(Date of earliest event reported)
HEALTH SYSTEMS INTERNATIONAL, INC.
______________________________________________________
(Exact name of Registrant as specified in its charter)
Delaware 1-2718 95-42288333
______________ _____________________ __________________
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
21660 Oxnard Street, Woodland Hills, California 91367
225 North Main Street, Pueblo, Colorado 81003
____________________________________________________________
(Address of principal executive offices, including zip code)
(818) 719-6978 (Woodland Hills)
(719) 542-0500 (Pueblo)
____________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_____________________________________________________________
(Former name or former address, if changed since last report)
Item 5. Other Events.
On October 1, 1996, the Registrant issued the press
release attached hereto as Exhibit 99.1 which is incorp-
orated herein by reference. The press release announced
that on October 1, 1996, the Registrant had entered into
an Agreement and Plan of Merger with Foundation Health
Corporation ("FHC") and FH Acquisition Corp., a wholly
owned subsidiary of the Registrant ("Merger Sub"), pursuant
to which Merger Sub will be merged with and into FHC sub-
ject to regulatory and stockholder approvals.
On October 1, 1996, the Company entered into an
Amendment to its Rights Agreement with Harris Trust and
Savings Bank, attached hereto as Exhibit 10.1 which is
incoporated herein by reference, to exempt the Merger
Agreement with FHC 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.
Item No. Exhibit Index
99.1 Press Release dated
October 1, 1996
10.1 First Amendment to the
Rights Agreement, dated
October 2, 1996
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
HEALTH SYSTEMS INTERNATIONAL, INC.
By /s/ Michael E. Jansen
-------------------------------
Michael E. Jansen
Vice President, Assistant
General Counsel and
Assistant Secretary
EXHIBIT INDEX
Exhibit
Number Description
99.1 Press Release dated October 1, 1996
10.1 First Amendment to the Rights Agreement,
dated October 1, 1996
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 $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 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 of 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 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. Hansen, 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-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. Hansan 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. Hansan 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.
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 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
medical groups is preliminarily expected to $41 million
($.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 Medicare 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, 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.
# # #
THE COMPANIES AT A GLANCE
Foundation Health Health Systems
Corporation International, Inc.
Headquarters Rancho Cordova, CA Woodland Hills, CA and
Pueblo, CO
Annual Revenues: $3.3 billion $3.0 billion
(latest 12 months)
Shares Outstanding 59 million 48 million
Employees: 11,000 4,000
States with HMO's (ranked California California
by enrollment) 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: Worker's Compensation Workers' Compensation
Behavioral Health Administrative Services
Programs PPO Network
Pharmacy Benefit
Management
Dental and Vision
Coverage
Exhibit 10.1
FIRST AMENDMENT TO THE RIGHTS AGREEMENT
AMENDMENT made and entered into as of the first
day of October, 1996 by and between Health Systems
International, Inc. (the "Company") and Harris Trust and
Savings Bank (the "Rights Agent"), under the Rights
Agreement dated as of June 1, 1996, by and between the
Company and the Rights Agent (the "Agreement").
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 (the "Merger
Agreement"), among the Company, Foundation Health
Corporation, and FH Acquisition Corp., a wholly owned
subsidiary of the Company; and
WHEREAS, the Board of Directors of the Company
has determined that the 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:
A. Section 1(a)(vi) of the Agreement is
hereby amended by adding the following at the beginning
of such subsection:
at all times, until the "Effective Time" as
defined in that certain Agreement and Plan of Merger,
dated October 1, 1996, among the Company, FH Acquisition
Corp. (the "Merger Sub") and Foundation Health
Corporation ("FHC") (the "Merger Agreement"),
B. Section 1(a) of the Agreement is hereby
amended by adding the following sentence at the end
thereof:
The Common Stock to be issued to and received
by stockholders of FHC pursuant to the Merger Agreement
shall be deemed to have been acquired from the Company
consistent with the terms of subsection 1(a)(v) of first
sentence of Section 1(a) and subsection (ii) of second
sentence of Section 1(a) on line 40 of Section 1(a) and
shall be subject to all other terms of this Section 1(a).
C. Section 1(b)(i) is hereby amended by
deleting the last word thereof and adding the following
at the end thereof:
for a period from the "Effective Time" (as
defined in the Merger Agreement), through the first two
years following the Effective Time for so long as Dr.
Hasan shall be the chief executive officer and director
of the Company, unless such determination is made by the
vote of at least eight members of the Board of Directors,
and
D. Section 30 of the 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 to constitute a Triggering Event 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.
E. 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.
F. 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.
G. 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 affect.
IN WITNESS WHEREOF, the parties have caused
this Amendment to be duly executed as of the date first
above written.
Attest: HEALTH SYSTEMS
INTERNATIONAL, INC.
[SEAL]
By:--------------------- By:-------------------------
Name: Name:
Title: Title:
Attest: HARRIS TRUST AND SAVINGS
BANK
[SEAL]
By:--------------------- By:-------------------------
Name: Name:
Title: Title:
