<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 13, 1997
CRESCENT OPERATING, INC
(Exact name of Registrant as specified in its Charter)
Delaware 333-25223 75-2701931
(State of Organization) (Commission File Number) (IRS Employer
Identification Number)
777 Main Street
Fort Worth, Texas 76102
(Address of Principal (Zip Code)
Executive Offices)
(817) 877-0477
(Registrant's telephone number, including area code)
<PAGE> 2
On July 2, 1997, Crescent Operating, Inc. (the "Company") filed a Form 8-K
dated June 13, 1997, containing a description of the Magellan transaction in
Item 2 and the trading and distribution of the Company's Common Stock in Item
5. This Form 8-K/A amends the previously filed Form 8-K to include the
financial statements and pro forma disclosure required by Item 7 of Form 8-K.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-05 OF REGULATION S-X
Provider Segment of Magellan Health Services, Inc.
Report of Independent Public Accountants.
Combined Balance Sheets as of September 30, 1995 and 1996
(audited) and March 31, 1997 (unaudited).
Combined Statements of Operations for the years ended
September 30, 1994, 1995 and 1996 (audited) and the six
months ended March 31, 1996 and 1997 (unaudited).
Combined Statements of Changes in Stockholder's Deficit
for the years ended September 30, 1994, 1995 and 1996
(audited) and the six months ended March 31, 1996 and
1997 (unaudited).
Combined Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 (audited) and the
six months ended March 31, 1996 and 1997 (unaudited).
Notes to Combined Financial Statements.
(b) PRO FORMA FINANCIAL INFORMATION
Crescent Operating, Inc.
Pro Forma Consolidated Balance Sheet as of April 3, 1997
(unaudited) and notes thereto.
Pro Forma Consolidated Statement of Operations for the Year
ended December 31, 1996 (unaudited) and notes thereto.
Pro Forma Consolidated Statement of Operations for the Three
Months ended March 31, 1997 (unaudited) and notes thereto.
Charter Behavioral Health Systems, LLC
Pro Forma Consolidated Statement of Operations for the Year
ended September 30, 1996 and notes thereto.
Pro Forma Consolidated Statement of Operations for the Three
Months in the Period ended March 31, 1997 and notes thereto.
(c) EXHIBITS
The following is a list of all exhibits filed as a part of this
Form 8-K/A.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated July __, 1997 (filed herewith).
</TABLE>
3
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: July 30, 1997 CRESCENT OPERATING, INC.
By: /s/ JEFFREY L. STEVENS
--------------------------------
Jeffrey L. Stevens
Treasurer, Chief Financial
Officer and Secretary
4
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Provider Segment of Magellan Health Services, Inc.
Report of Independent Public Accountants ....................................... F-2
Combined Balance Sheets as of September 30, 1995 and 1996 (audited) and
March 31, 1997 (unaudited) ................................................... F-3
Combined Statements of Operations for the years ended September 30, 1994,
1995 and 1996 (audited) and the six months ended March 31, 1996 and
1997 (unaudited).............................................................. F-5
Combined Statements of Changes in Stockholder's Deficit for the years ended
September 30, 1994, 1995 and 1996 (audited) and the six months ended
March 31, 1996 and 1997 (unaudited) .......................................... F-6
Combined Statements of Cash Flows for the years ended September 30, 1994,
1995 and 1996 (audited) and the six months ended March 31, 1996 and
1997 (unaudited) ............................................................. F-7
Notes to Combined Financial Statements.......................................... F-8
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Crescent Operating, Inc.
Pro Forma Consolidated Balance Sheet as of April 3, 1997 and notes thereto ..... F-20
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1996 and notes thereto .......................................... F-24
Pro Forma Consolidated Statement of Operations for the Three Months Ended
March 31, 1997 and notes thereto ............................................. F-26
Charter Behavioral Health Systems, LLC
Pro Forma Consolidated Statement of Operations for the Year
Ended September 30, 1996 and notes thereto ................................... F-29
Pro Forma Consolidated Statement of Operations for the Three
Months in the Period Ended March 31, 1997 and notes thereto .................. F-32
</TABLE>
F-1
<PAGE> 6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Magellan Health Services, Inc:
We have audited the accompanying combined balance sheets of the Provider
Segment (the "Company") of Magellan Health Services, Inc., a Delaware
corporation, as of September 30, 1995 and 1996, and the related combined
statements of operations, changes in stockholder's deficit and cash flows for
each of the three years in the period ended September 30, 1996. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Provider Segment of
Magellan Health Services, Inc. as of September 30, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 7, 1996
F-2
<PAGE> 7
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash, including cash equivalents of $60,234 in 1995 and
$20,999 in 1996 at cost which approximates market
value............................................... $ 103,735 $ 71,822 $ 66,151
Accounts receivable, less allowance for doubtful
accounts of $47,851 in 1995 and $48,299 in 1996..... 170,728 148,805 145,296
Supplies............................................... 5,768 4,753 4,465
Other current assets................................... 13,064 20,120 20,074
--------- --------- ---------
Total Current Assets........................... 293,295 245,500 235,986
Assets restricted for settlement of unpaid claims and
other long-term liabilities............................ 94,138 105,303 96,402
Property and Equipment:
Land................................................... 88,019 83,431 82,705
Buildings and improvements............................. 377,169 388,821 393,812
Equipment.............................................. 107,681 122,927 126,549
--------- --------- ---------
572,869 595,179 603,066
Accumulated depreciation............................... (89,046) (118,937) (132,806)
--------- --------- ---------
483,823 476,242 470,260
Construction in progress............................... 2,902 1,879 2,573
--------- --------- ---------
Total Property and Equipment................... 486,725 478,121 472,833
Other Long-Term Assets................................... 36,846 34,923 28,859
Goodwill, net of accumulated amortization of $944 in 1995
and $1,147 in 1996..................................... 18,208 18,800 18,373
Other Intangible Assets, net of accumulated amortization
of $1,362 in 1995 and $2,958 in 1996................... 5,394 6,258 6,370
--------- --------- ---------
$ 934,606 $ 888,905 $ 858,823
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-3
<PAGE> 8
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current Liabilities:
Accounts payable....................................... $ 69,726 $ 61,685 $ 56,154
Accrued liabilities.................................... 116,380 117,214 88,714
Current maturities of long-term debt and capital lease
obligations......................................... 2,799 2,751 2,845
--------- --------- ---------
Total Current Liabilities...................... 188,905 181,650 147,713
Long-Term Debt and Capital Lease Obligations............. 77,111 73,620 72,380
Reserve for Unpaid Claims................................ 100,125 73,040 62,316
Deferred Credits and Other Long-Term Liabilities......... 34,455 36,506 20,925
Minority Interest........................................ 7,486 21,421 21,947
Due to Parent............................................ 666,349 619,556 637,555
Commitments and Contingencies
Stockholder's Deficit:
Accumulated deficit.................................... (139,003) (114,906) (101,065)
Cumulative foreign currency adjustments................ (822) (1,982) (2,948)
--------- --------- ---------
(139,825) (116,888) (104,013)
--------- --------- ---------
$ 934,606 $ 888,905 $ 858,823
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-4
<PAGE> 9
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- ---------- ---------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue......................... $904,646 $1,106,975 $1,044,345 $538,119 $479,289
-------- ---------- ---------- -------- --------
Costs and expenses
Salaries, supplies and other
operating expenses............. 661,436 825,468 800,912 406,471 372,201
Bad debt expense.................. 70,623 91,652 79,930 41,381 35,055
Depreciation and amortization..... 28,354 36,029 37,108 18,720 18,566
Amortization of reorganization
value in excess of amounts
allocable to identifiable
assets......................... 31,200 26,000 -- -- --
Interest, unaffiliated............ 6,364 5,421 5,492 2,872 2,483
Allocated interest, net from
Parent......................... 33,030 48,756 42,123 19,115 24,321
ESOP expense...................... 49,197 73,527 -- -- --
Stock option expense (credit)..... 10,614 (467) 914 1,414 1,433
Unusual items..................... 71,287 57,437 37,271 -- 1,395
-------- ---------- ---------- -------- --------
962,105 1,163,823 1,003,750 489,973 455,454
-------- ---------- ---------- -------- --------
Income (loss) before income taxes
and minority interest............. (57,459) (56,848) 40,595 48,146 23,835
Provision for (benefit from) income
taxes............................. (10,504) (12,934) 14,883 18,920 8,886
-------- ---------- ---------- -------- --------
Income (loss) before minority
interest.......................... (46,955) (43,914) 25,712 29,226 14,949
Minority interest................... 48 340 1,615 1,476 1,108
-------- ---------- ---------- -------- --------
Net income (loss)................... $(47,003) $ (44,254) $ 24,097 $ 27,750 $ 13,841
======== ========== ========== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-5
<PAGE> 10
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accumulated Deficit:
Balance, beginning of period....... $(47,746) $ (94,749) $(139,003) $(139,003) $(114,906)
Net income (loss).................. (47,003) (44,254) 24,097 27,750 13,841
-------- --------- --------- --------- ---------
Balance, end of period............. (94,749) (139,003) (114,906) (111,253) (101,065)
-------- --------- --------- --------- ---------
Cumulative Foreign Currency
Adjustments:
Balance, beginning of period....... (4,660) (2,454) (822) (822) (1,982)
Foreign currency translation gain
(loss).......................... 2,206 1,632 (1,160) (1,045) (966)
-------- --------- --------- --------- ---------
Balance, end of period............. (2,454) (822) (1,982) (1,867) (2,948)
-------- --------- --------- --------- ---------
Total Stockholder's Deficit.......... $(97,203) $(139,825) $(116,888) $(113,120) $(104,013)
======== ========= ========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-6
<PAGE> 11
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss)................................... $(47,003) $(44,254) $ 24,097 $ 27,750 $ 13,841
-------- -------- -------- -------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sale of assets.......................... -- (2,961) (1,697) (138) (3,302)
Depreciation and amortization................... 59,554 62,029 37,108 18,720 18,566
Non-cash portion of unusual items............... 70,207 45,773 31,206 -- --
ESOP expense.................................... 49,197 73,527 -- -- --
Stock option expense (credit)................... 10,614 (467) 914 1,414 1,433
Non-cash interest expense....................... 2,005 2,735 2,424 1,202 882
Cash flows from changes in assets and
liabilities, net of effects from sales and
acquisitions of businesses:
Accounts receivable, net.................... (7,533) 9,451 22,905 (8,828) 3,509
Other current assets........................ 4,563 8,273 575 (2,848) 667
Other long-term assets...................... 2,860 (5,726) 5,496 5,886 (3,350)
Accounts payable and accrued liabilities.... 2,683 (15,192) (16,917) (12,567) (31,536)
Reserve for unpaid claims................... 1,215 (5,885) (29,985) (10,625) (13,694)
Other liabilities........................... (8,249) (21,127) (18,968) (5,669) (15,179)
Minority interest, net of dividends paid.... 80 22 1,596 1,887 1,593
Due to Parent -- interest and income
taxes..................................... (42,459) (11,966) 19,618 11,741 6,402
Other....................................... 613 285 1,022 121 (1,063)
-------- -------- -------- -------- --------
Total adjustments........................... 145,350 138,771 55,297 296 (35,072)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities.............................. 98,347 94,517 79,394 28,046 (21,231)
-------- -------- -------- -------- --------
Cash Flows From Investing Activities
Capital expenditures................................ (14,626) (19,354) (30,978) (10,403) (9,463)
Acquisitions of businesses, net of cash acquired.... (130,550) (62,125) (235) (256) (6,998)
Decrease (increase) in assets restricted for
settlement of unpaid claims and other long-term
liabilities....................................... 7,076 (19,606) (17,732) (6,070) 8,626
Proceeds from sale of assets........................ 16,584 5,879 5,098 503 10,386
Investment in Parent................................ -- (4,736) -- -- --
Other............................................... -- (1,050) -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities.............................. (121,516) (100,992) (43,847) (16,226) 2,551
-------- -------- -------- -------- --------
Cash Flows From Financing Activities
Change in Due to Parent............................. 86,612 (16,970) (62,625) (30,443) 14,718
Payments on debt and capital lease obligations...... (19,842) (2,423) (4,835) (2,037) (1,709)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.............................. 66,770 (19,393) (67,460) (32,480) 13,009
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 43,601 (25,868) (31,913) (20,660) (5,671)
Cash and cash equivalents at beginning of period...... 86,002 129,603 103,735 103,735 71,822
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............ $129,603 $103,735 $ 71,822 $ 83,075 $ 66,151
======== ======== ======== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-7
<PAGE> 12
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(ALL REFERENCES TO MARCH 31, 1996 AND 1997 FINANCIAL DATA ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of the Provider Segment of Magellan
Health Services, Inc. ("CBHS" or the "Company") include the accounts of the
Company and its subsidiaries except where control is temporary or does not rest
with the Company. All significant intercompany accounts and transactions have
been eliminated in combination. The accompanying unaudited combined financial
statements for the six months ended March 31, 1996 and 1997 have been prepared
in accordance with generally accepted accounting principles for interim
financial information. 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 adjustments considered necessary for a fair presentation,
have been included. Magellan Health Services, Inc. ("Magellan" or "Parent") is
an integrated behavioral healthcare company providing behavioral healthcare
services in the United States, the United Kingdom and Switzerland. Magellan
operates through three principal subsidiaries engaging in (i) the provider
business, (ii) the managed care business and (iii) the public sector business.
The Company utilizes certain Parent systems and services ("Magellan
Overhead"), including, but not limited to, risk management, computer systems,
auditing, third-party reimbursement and treasury. The Company procures insurance
("Insurance") for professional liability claims, worker's compensation claims
and general matters through the Parent. The assets, liabilities and operating
expenses for Magellan Overhead and Insurance are included in the combined
financial statements of the Company. The combined financial statements of CBHS
have been prepared in connection with the sale of certain CBHS assets and
related transactions, which are more fully described in Note 2.
The combined financial statements present the historical combined financial
position, results of operations and cash flows of CBHS and, as a result, include
certain assets, liabilities, operations and personnel that will not be included
in the transactions described below in Note 2.
On June 2, 1992, Magellan filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code. The prepackaged plan of reorganization (the
"Plan") effected a restructuring of Magellan's debt and equity capitalization.
Magellan's Plan was confirmed on July 8, 1992, and became effective on July 21,
1992 (effective on July 31, 1992 for financial reporting purposes). The combined
financial statements for all periods are presented for the Company after the
consummation of the Plan. These financial statements were prepared under the
principles of fresh start accounting. (See Note 4.)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NET REVENUE
Net revenue is based on established billing rates, less estimated
allowances for patients covered by Medicare and other contractual reimbursement
programs and discounts from established billing rates. Amounts received by the
Company for treatment of patients covered by Medicare and other contractual
reimbursement programs, which may be based on cost of services provided or
predetermined rates, are generally less than the established billing rates of
the Company's hospitals. Final determination of amounts earned under contractual
reimbursement programs is subject to review and audit by the applicable
agencies. Net revenue for fiscal 1994, 1995 and 1996 included $32.1 million,
$35.6 million and $28.3 million,
F-8
<PAGE> 13
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, for the settlement and adjustment of reimbursement issues related
to earlier fiscal periods. Net revenue for the six months ended March 31, 1996
and 1997 (unaudited) includes $11.1 million and $13.8 million, respectively for
the settlement and adjustment of reimbursement issues related to earlier fiscal
periods. Management believes that adequate provision has been made for any
adjustments that may result from such reviews.
ADVERTISING COSTS
The production costs of advertising are expensed as incurred. The Company
does not consider any of its advertising costs to be direct-response and,
accordingly, does not capitalize such costs. Advertising costs consist primarily
of radio and television air time, which is amortized as utilized, and printed
media services. Advertising expense was approximately $35.6 million, $33.5
million and $30.3 million for the years ended September 30, 1994, 1995 and 1996,
respectively.
CHARITY CARE
The Company provides healthcare services without charge or at amounts less
than its established rates to patients who meet certain criteria under its
charity care policies. Because the Company does not pursue collection of amounts
determined to be charity care, they are not reported as revenue. For the years
ended September 30, 1994, 1995 and 1996, the Company provided, at its
established billing rates, approximately $29.3 million, $41.2 million and $37.9
million, respectively, of such care.
ALLOCATED INTEREST, NET
Magellan provides financing and cash management services for CBHS.
Magellan's interest expense is allocated to CBHS based on the financing and the
cost of financing provided directly to CBHS. Deferred financing costs and
accrued interest related to such financing is carried on the books of the
Parent.
INCOME TAXES
The operations of CBHS are included in the Magellan consolidated federal
income tax return and in various unitary, foreign and consolidated state income
tax returns. Magellan allocates its consolidated income tax provision or benefit
to CBHS, which approximates income taxes that would be calculated on a
stand-alone basis.
Current and deferred income taxes payable or receivable are settled
currently through the Due to Parent account.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid interest-bearing investments
with a maturity of three months or less when purchased, consisting primarily of
money market instruments.
CONCENTRATION OF CREDIT RISK
Accounts receivable from patient revenue subject the Company to a
concentration of credit risk with third party payors that include insurance
companies, managed healthcare organizations and governmental entities. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is adequate
to provide for normal credit losses.
F-9
<PAGE> 14
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS RESTRICTED FOR THE SETTLEMENT OF UNPAID CLAIMS AND OTHER LONG-TERM
LIABILITIES
Assets restricted for the settlement of unpaid claims and other long-term
liabilities include marketable securities which are carried at fair market
value. Transfer of such investments from the Insurance subsidiaries to the
Company or any of its other subsidiaries is subject to approval by certain
regulatory authorities. These assets will remain with Magellan subsequent to the
sale of the psychiatric facilities.
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). Under FAS 115, investments are classified into three
categories: (i) held to maturity; (ii) available for sale; and (iii) trading.
Unrealized holding gains or losses are recorded for trading and available for
sale securities. The Company's investments are classified as available for sale
and the adoption of FAS 115 did not have a material effect on the Company's
financial statements, financial condition and liquidity or results of
operations. The unrealized gain or loss on investments available for sale was
not material at September 30, 1995 and 1996.
PROPERTY AND EQUIPMENT
As a result of the adoption of fresh start accounting, property and
equipment were adjusted to their estimated fair value as of July 31, 1992 and
historical accumulated depreciation was eliminated. Expenditures for renewals
and improvements are charged to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the respective
assets are expensed as incurred. The Company removes the cost and related
accumulated depreciation from the accounts for property sold or retired, and any
resulting gain or loss is included in operations. Amortization of capital lease
assets is included in depreciation expense. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which is
generally 10 to 40 years for buildings and improvements and three to ten years
for equipment. Depreciation expense was $27.4 million, $34.5 million and $34.9
million for the years ended September 30, 1994, 1995 and 1996, respectively.
INTANGIBLE ASSETS
Intangible assets are composed principally of (i) goodwill and (ii)
non-compete agreements. Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net identifiable assets at the date of
acquisition and is amortized using the straight-line method over 25 to 40 years.
Non-compete agreements are amortized over the term of the related agreements.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through the future cash flows expected
from the use of the asset and its eventual disposition. No impairment losses on
intangible assets were recorded by the Company in fiscal 1994 and 1996.
Impairment losses of approximately $4.0 million were recorded in fiscal 1995.
(See Note 4)
FOREIGN CURRENCY
Changes in the cumulative translation of foreign currency assets and
liabilities are presented as a separate component of stockholder's deficit.
Gains and losses resulting from foreign currency transactions, which were not
material, are included in operations as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for
F-10
<PAGE> 15
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets to be Disposed Of," which became effective for fiscal years
beginning after December 15, 1995. FAS 121 established standards for determining
when impairment losses on long-lived assets have occurred and how impairment
losses should be measured. The Company adopted FAS 121 effective October 1,
1994. The initial financial statement impact of adopting FAS 121 was not
material.
2. SALE OF PSYCHIATRIC FACILITIES (UNAUDITED)
On January 29, 1997, Magellan entered into a series of transactions
including an agreement to sell substantially all of CBHS domestic hospital real
estate and related personal property (the "Assets") to Crescent Real Estate
Equities Company ("Crescent"). In addition, Magellan's domestic portion of its
provider business segment will be operated as a joint venture, New CBHS, that
is initially owned equally by Magellan and an affiliate of Crescent ("Crescent
Operating"). Magellan received approximately $417.2 million in cash (before
costs estimated to be $12.5 million), which includes $17.2 million for
hospitals acquired after January 29, 1997, and warrants in Crescent Operating
for the purchase of 2.5% of Crescent Operating's common stock, exercisable over
12 years, as consideration for the Assets. In addition to the assets, Crescent
and Crescent Operating will each receive 1,283,311 warrants (2,566,622 warrants
in aggregate) to purchase Magellan Common Stock at $30 per share, exercisable
over 12 years.
In related agreements, (i) Crescent will lease the real estate and related
assets to New CBHS for annual rent beginning at $41.7 million, which includes
$1.7 million for hospitals acquired after January 29, 1997 that were sold to
Crescent with a 5% annual escalation clause compounded annually and additional
rent of $20 million, of which at least $10 million must be used for capital
expenditures, and (ii) New CBHS will pay Magellan approximately $78.3 million in
annual franchise fees, subject to increase, for the use of assets retained by
Magellan and for support in certain areas. The franchise fees paid by New CBHS
will be subordinated to the lease obligation with Crescent. The assets retained
by Magellan include, but are not limited to, the "CHARTER" name, intellectual
property, treatment protocols and procedures, clinical quality management,
operating processes and the "1-800-CHARTER" telephone call center. Magellan
will provide New CBHS ongoing support in areas including managed care
contracting services, advertising and marketing assistance, risk management
services, outcomes monitoring, and consultation on matters relating to
reimbursement, government relations, clinical strategies, regulatory matters,
strategic planning and business development.
3. ACQUISITIONS AND JOINT VENTURES
ACQUISITIONS
In February 1995, the Company acquired a 90 percent ownership interest in
Westwood Pembroke Health System ("Westwood Pembroke"), which includes two
psychiatric hospitals and a professional group practice. The Company accounted
for the acquisition using the purchase method of accounting. Magellan will
retain its proportionate ownership interest in Westwood Pembroke subsequent to
the closing of the transactions with Crescent and Crescent Operating.
During fiscal 1994, the Company agreed to acquire 40 psychiatric hospitals
(the "Acquired Hospitals") from Tenet Healthcare Corporation (formerly National
Medical Enterprises). The purchase price for the Acquired Hospitals was
approximately $120.4 million in cash plus an additional cash amount of
approximately $51 million, subject to adjustment, for the net working capital of
the Acquired Hospitals (the "Hospital Acquisition").
F-11
<PAGE> 16
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On June 30, 1994, the Company completed the purchase of 27 of the Acquired
Hospitals for a cash purchase price of approximately $129.6 million, which
included approximately $39.3 million, subject to adjustment, for the net working
capital of the facilities. On October 31, 1994, the Company completed the
purchase of three additional Acquired Hospitals for a cash purchase price of
approximately $5 million, which included approximately $2.2 million related to
the net working capital of the facilities. On November 30, 1994, the Company
completed the purchase of the remaining ten Acquired Hospitals for a cash
purchase price of approximately $36.8 million, including approximately $9.5
million related to the net working capital of the ten Acquired Hospitals. The
Company accounted for the Hospital Acquisition using the purchase method of
accounting. The operating results of the Acquired Hospitals are included in the
Company's Consolidated Statements of Operations from the respective dates of
acquisition.
JOINT VENTURES
The Company has entered into four hospital-based joint ventures with
Columbia/HCA Healthcare Corporation. Generally, each member of the joint venture
leases and/or contributes certain assets in each respective market to the joint
venture with the Company becoming the managing member.
The joint ventures' results of operations have been included in the
consolidated financial statements since inception, less minority interest. A
summary of the joint ventures is as follows:
<TABLE>
<CAPTION>
MARKET DATE
------ ------------
<S> <C>
Albuquerque, NM................................ May 1995
Raleigh, NC.................................... June 1995
Lafayette, LA.................................. October 1995
Anchorage, AK.................................. August 1996
</TABLE>
Magellan will retain its proportionate ownership interest in these joint
ventures subsequent to the closing of the transactions with Crescent and the
Crescent Operating.
4. THE RESTRUCTURING AND FRESH START REPORTING
Under the principles of fresh start accounting, Magellan's total assets
were recorded at their assumed reorganization value, with the reorganization
value allocated to identifiable tangible assets on the basis of their estimated
fair value. Accordingly, the Company's property and equipment were reduced and
its intangible assets were written off. The excess of the reorganization value
over the value of identifiable assets was reported by Magellan as
"reorganization value in excess of amounts allocable to identifiable assets"
(the "Excess Reorganization Value").
The total reorganization value assigned to Magellan's assets was estimated
by calculating projected cash flows before debt service requirements, for a
five-year period, plus an estimated terminal value of Magellan (calculated using
a multiple of approximately six (6) on projected EBDIT (which is net revenue
less operating and bad debt expenses)), each discounted back to its present
value using a discount rate of 12% (representing the estimated after-tax
weighted cost of capital). This amount was approximately $1.2 billion and was
increased by (i) the estimated net realizable value of assets to be sold and
(ii) estimated cash in excess of normal operating requirements. The above
calculations resulted in an estimated reorganization value of approximately $1.3
billion, of which the Excess Reorganization Value was $225 million, of which
$129 million related to continuing operations. The Excess Reorganization Value
was amortized by Magellan over the three-year period ended July 31, 1995, which
is reflected in the Company's Statement of Operations for the years ended
September 30, 1994 and 1995.
F-12
<PAGE> 17
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNUSUAL ITEMS
INSURANCE SETTLEMENTS
Unusual items included the resolutions of disputes between the Company and
insurance carriers concerning certain billings for services.
In November 1994, the Company and a group of insurance carriers resolved a
billing dispute that arose in the fourth quarter of fiscal 1994 related to
claims paid predominantly in the 1980's. As part of the resolution, the Company
agreed to pay the insurance carriers approximately $31 million plus interest,
for a total of $37.5 million in four installments over a three year period. The
Company and the insurance carriers will continue to do business at the same or
similar general levels. Furthermore, the parties will seek additional business
opportunities that will serve to enhance their present relationships.
In March 1995, the Company and a group of insurance carriers resolved a
billing dispute which arose in fiscal 1995 related to matters arising
predominately in the 1980's. As part of the settlement, the Company agreed to
pay the insurance carriers $29.8 million payable in five installments over a
three year period. The Company and the insurance carriers have agreed to
continue to do business at the same or similar general levels and to seek
additional business opportunities that will serve to enhance their present
relationships.
In August 1996, the Company and a group of insurance carriers resolved a
billing dispute which arose in fiscal 1996 related to matters originating in the
1980's. As part of the settlement of these claims, certain related payer matters
and associated legal fees, the Company recorded a charge of approximately $30.0
million during the quarter ended June 30, 1996. The Company will pay the
insurance settlement amount in twelve installments over a three year period,
beginning August 1996. The Company and the insurance carriers have agreed that
the dispute and settlement will not negatively impact any present or pending
business relationships nor will it prevent the parties from negotiating in good
faith concerning additional business opportunities available to, and future
relationships between, the parties.
Amounts payable in future periods under the insurance settlements are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
- -------------
<S> <C> <C>
1997................................................ $21,510
1998................................................ 14,180
1999................................................ 5,745
</TABLE>
FACILITY CLOSURES
During fiscal 1995 and fiscal 1996, the Company consolidated, closed or
sold fifteen and nine psychiatric facilities (the "Closed Facilities"),
respectively. The Closed Facilities will be retained by Magellan subsequent to
the closing of the transaction with Crescent and the Crescent Operating and will
be sold, leased or used for alternative purposes depending on the market
conditions in each geographic area.
The Company recorded charges of approximately $3.6 million and $4.1 million
related to facility closures in fiscal 1995 and fiscal 1996, respectively, as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Severance and related benefits.............................. $2,132 $2,334
Contract terminations and other............................. 1,492 1,782
------ ------
$3,624 $4,116
====== ======
</TABLE>
Approximately 500 and 620 employees were terminated at the facilities
closed in the fourth quarter of fiscal 1995 and during fiscal 1996,
respectively. Severance and related benefits paid and charged against the
F-13
<PAGE> 18
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
resulting liability were approximately $1.3 million and $2.9 million in fiscal
1995 and fiscal 1996, respectively. Other exit costs paid and applied against
the resulting liabilities were approximately $212,000 and $1.4 million in fiscal
1995 and fiscal 1996, respectively.
During the six months ended March 31, 1997, (unaudited) the Company
consolidated or closed three psychiatric facilities and its one general hospital
(the "1997 Closed Facilities"). The 1997 Closed Facilities which were owned by
the Company are expected to be sold as part of the Crescent Transactions. The
Company recorded charges of approximately $4.2 million related to facility
closures during the six months ended March 31, 1997, (unaudited) which consisted
of approximately $3.0 million for severance and related benefits and $1.2
million for contract terminations and other costs.
Approximately 700 employees were terminated at the 1997 Closed Facilities.
Severance and related benefits paid and applied against the resulting liability
were approximately $2.3 million during the six months ended March 31, 1997,
(unaudited). Other exit costs paid and applied against the resulting liability
were approximately $280,000.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expenses and depreciation and amortization, of
the 1995 and 1996 Closed Facilities and the 1997 Closed Facilities (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------- -------------------------
1994 1995 1996 1996 1997
-------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues..................... $124,185 $156,164 $85,810 $51,649 $20,856
Salaries, supplies and other
operating expenses and bad debt
expenses....................... 119,411 152,065 89,965 54,604 21,649
Depreciation and amortization.... 3,291 3,134 1,870 1,193 299
</TABLE>
The Company also recorded a charge of approximately $2.0 million in fiscal
1996 related to severance and related benefits for approximately 275 employees
who were terminated pursuant to planned overhead reductions.
ASSET IMPAIRMENTS
As a result of the Hospital Acquisition, the Company reassessed its
business strategy in certain markets at the end of fiscal 1994. The Company
established a plan to consolidate services in selected markets and to close or
sell certain facilities owned prior to the Hospital Acquisition. The Company
recorded a charge of $23 million in fiscal 1994 primarily to write down the
property and equipment at these facilities to their net realizable value.
As discussed in Note 1, the Company adopted FAS 121 effective October 1,
1994. During fiscal 1995, the Company recorded impairment losses on property and
equipment and intangible assets of approximately $23.0 million and $4.0 million,
respectively. During fiscal 1996, the Company recorded impairment losses on
property and equipment of approximately $1.2 million. Such losses resulted from
changes in the manner that certain of the Company's assets will be used in
future periods and current period operating losses at certain of the Company's
operating facilities combined with projected future operating losses. Fair
values of the long-lived assets that have been written down were determined
using the best available information in each individual circumstance, which
included quoted market price, comparable sales prices for similar assets or
valuation techniques utilizing present value of estimated expected cash flows.
F-14
<PAGE> 19
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
During fiscal 1994, the Company recorded a charge of approximately $4.5
million related to the relocation of the Company's executive offices. During
fiscal 1995, the Company recorded a gain of approximately $3.0 million related
to the sale of three psychiatric hospitals.
The Company also sold two psychiatric facilities during the six months
ended March 31, 1997 that were closed during fiscal 1995. The Company received
approximately $5.6 million in proceeds from sales and recorded an aggregate gain
on such sales of approximately $2.8 million during the six months ended March
31, 1997, (unaudited).
6. BENEFIT PLANS
Magellan maintains an Employee Stock Ownership Plan (the "ESOP"), a
noncontributory retirement plan that enables eligible Company employees to
participate in the ownership of Magellan.
Magellan had recorded unearned compensation to reflect the cost of Magellan
Common Stock purchased by the ESOP but not yet allocated to participants'
accounts. In the period that shares are allocated or projected to be allocated
to participants, ESOP expense is recorded and unearned compensation is reduced.
Magellan's ESOP expense is reflected in the Company's statement of operations.
All shares had been allocated to the participants as of September 30, 1995.
During fiscal 1992, Magellan reinstated a defined contribution plan (the
"401-K Plan"). Employee participants can elect to voluntarily contribute up to
6% of their compensation to the 401-K Plan. Effective October 1, 1992, Magellan
began making contributions to the 401-K Plan based on employee compensation and
contributions. Magellan makes a discretionary contribution of 2% of each
employee's compensation and matches 50% of each employee's contribution up to 3%
of their compensation. During the years ended September 30, 1994, 1995 and 1996,
Magellan made contributions of approximately $4.9 million, $5.8 million and $5.3
million, respectively, to the 401-K Plan, which is reflected in salaries,
supplies and other operating expenses.
Magellan maintains five stock option plans that enable key employees and
directors to purchase shares of Magellan Common Stock. Magellan's 1992 stock
option plan allows for the exercise price of certain options to be reduced upon
termination of employment of a certain optionee without cause. Stock option
expense under Magellan's 1992 stock option plan is reflected in the Company's
statement of operations. As of September 30, 1996, 362,990 options were
outstanding at an exercise price of $4.36 and 6,000 options were outstanding at
an exercise price of $22.75. Such options expire in October 2000 and are 100%
vested.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1995 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
6.59% to 10.75% Mortgage and other notes payable through
1999..................................................... $ 5,268 $ 3,163
Variable rate secured notes due through 2013 (3.65% to
3.85% at September 30, 1996)............................. 62,025 60,875
3.85% to 11.50% Capital lease obligations due through
2014..................................................... 12,617 12,333
------- -------
79,910 76,371
Less amounts due within one year........................... 2,799 2,751
------- -------
$77,111 $73,620
======= =======
</TABLE>
F-15
<PAGE> 20
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate scheduled maturities of long-term debt and capital lease
obligations during the five years subsequent to September 30, 1996, are as
follows (in thousands): 1997 -- $2,751; 1998 -- $2,273; 1999 -- $2,103;
2000 -- $1,991 and 2001 -- $10,359.
LEASES
The Company leases certain of its operating facilities, some of which may
be purchased during the term or at expiration of the leases. The book value of
capital leased assets was approximately $8.4 million at September 30, 1996. The
leases, which expire at various dates through 2069, generally require the
Company to pay all maintenance, property tax and insurance costs.
At September 30, 1996, aggregate amounts of future minimum payments under
operating leases were as follows: 1997 -- $6.4 million; 1998 -- $4.8 million;
1999 -- $3.6 million; 2000 -- $2.2 million; 2001 -- $1.8 million; subsequent to
2001 -- $47.4 million.
Rent expense for the years ended September 1994, 1995 and 1996 was $11.4
million, $15.4 million and $14.0 million, respectively.
8. INCOME TAXES
The provision (benefit) for income taxes allocated to CBHS by Magellan
consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income taxes currently payable:
Federal.............................................. $ -- $ 595 $ 977
State, excluding California state refund............. 639 1,694 971
California state refund.............................. -- -- (3,695)
Foreign.............................................. 1,466 1,188 3,779
Deferred income taxes:
Federal.............................................. (11,078) (14,360) 11,214
State................................................ (1,583) (2,051) 1,602
Foreign.............................................. 52 -- 35
-------- -------- -------
$(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
A reconciliation of the Company's income tax provision (benefit) to that
computed by applying the statutory federal income tax rate is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
income tax rate...................................... $(20,111) $(19,897) $14,208
State income taxes, net of federal income tax benefit
and excluding California state refund................ (616) (232) 1,673
California state refund, net of federal income tax
benefit........................................... -- -- (2,402)
Foreign income taxes, net of federal income tax
benefit.............................................. 987 772 2,479
Amortization of excess reorganization value............ 10,920 9,100 --
Other -- net........................................... (1,684) (2,677) (1,075)
-------- -------- -------
Income tax provision (benefit)......................... $(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
F-16
<PAGE> 21
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Salaries, wages and other benefits.......................... $ 27,386 $ 27,313
Amounts due health insurance programs....................... 10,252 27,146
Other....................................................... 78,742 62,755
-------- --------
$116,380 $117,214
======== ========
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------ -------------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for interest, net of amounts
capitalized................................. $5,842 $5,303 $5,680 $2,099 $2,278
====== ====== ====== ====== ======
</TABLE>
The non-cash portion of unusual items for fiscal 1995 and 1996 includes the
unpaid portion of the $29.8 million and $30.0 million insurance settlements that
were recorded during the quarters ended March 31, 1995, and June 30, 1996,
respectively. The payments of the insurance settlements are included in accounts
payable and other accrued liabilities in the statement of cash flows for the
years ended September 30, 1995 and 1996.
11. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks through Magellan. The reserves for self-insured
general and professional liability losses, including loss adjustment expenses,
are based on actuarial estimates that are discounted at an average rate of 6% to
their present value based on the Company's historical claims experience adjusted
for current industry trends. The undiscounted amount of the reserve for unpaid
claims at September 30, 1995 and 1996 was approximately $113.1 million and $84.3
million, respectively. The reserve for unpaid claims is adjusted periodically as
such claims mature, to reflect changes in actuarial estimates based on actual
experience. During fiscal 1996, the Company recorded a reduction in malpractice
claim reserves of approximately $15.3 million as a result of updated actuarial
estimates. The Company recorded reductions of expenses of approximately $7.5
million and $5.0 million during the six months ended March 31, 1996 and 1997,
(unaudited) respectively. These reductions resulted primarily from updates to
actuarial assumptions regarding the Company's expected losses for more recent
policy years. These revisions are based on changes in expected values of
ultimate losses resulting from the Company's claim experiences, and increased
reliance on such claim experience. While management and its actuaries believe
that the present reserve is reasonable, ultimate settlement of losses may vary
from the amount recorded.
Certain assets of the Company, including substantially all accounts
receivable and personal property, are pledged to the Parent's bank lenders as
collateral for certain Parent indebtedness. In the opinion of management, the
Parent's obligations under such indebtedness will continue to be serviced from
ongoing operations, thereby mitigating the lenders' potential claims against
these assets.
Certain of the Company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of management,
based on consultation with counsel, resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
F-17
<PAGE> 22
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1996, the Company settled an ongoing dispute with the Resolution
Trust Corporation ("RTC"), for itself or in its capacity as conservator or
receiver for 12 financial institutions, which formerly held certain debt
securities that were issued by the Company in 1988. In connection with the
settlement, the Company, denying any liability or fault, paid $2.7 million to
the RTC in exchange for a release of all claims.
On August 1, 1996, the United States Department of Justice, Civil Division,
filed an Amended Complaint in a civil qui tam action initiated in November of
1994 against Magellan and the Company's Orlando South hospital subsidiary by two
former employees. The Amended Complaint alleges that the hospital violated the
federal False Claims Act ("the Act") in billing for inpatient treatment provided
to elderly patients. The Amended Complaint is based on disputed clinical and
factual issues which the Company believes do not constitute a violation of the
Act. The Company and its subsidiary deny any liability in this matter and will
continue to vigorously defend themselves against the suit. As is its policy, the
Company will continue to cooperate with the government in this matter. The
Company does not believe this matter will have a material adverse effect on its
financial position or results of operations.
F-18
<PAGE> 23
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
The following unaudited proforma Statements of Crescent Operating, Inc.
(the "Company" or "Crescent Operating"), including the completion of (i) the
formation and capitalization of the Company, (ii) the acquisition of the
Carter-Crowley Asset Group, (iii) the purchase and subsequent sale of the
12.38% limited partner interest in the partnership that owns the Dallas
Mavericks, (iv) the acquisition of a 50% equity interest in Charter Behavioral
Health Systems LLC and the related acquisition of 1,238,311 warrants to
purchase 1,238,311 common shares of Magellan Health Services, Inc., as of March
31, 1997 as it relates to the balance sheet, and as of January 1, 1996, in each
case, as it relates to the statement of operations.
In management's opinion, all adjustments necessary to reflect the above
discussed transactions have been made. The unaudited pro forma Consolidated
Balance Sheet and Statements of Operations are not necessarily indicative of
what actual results of operations of the Company would have been for the period,
nor does it purport to represent the Company's results of operations for future
periods.
F-19
<PAGE> 24
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED BALANCE SHEET
AS OF APRIL 3, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT CAPITALIZATION OF ACQUISITION OF
OPERATING, INC. CRESCENT CARTER-CROWLEY ACQUISITION OF SALE OF
HISTORICAL(A) OPERATING, INC.(B) ASSET GROUP(C) INVESTMENT(D) INVESTMENT(D)
--------------- ------------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash......................... $ 1 $50,057 $(17,533) $(12,400) $ 100
A/R.......................... -- -- 1,886 -- --
Inventory.................... -- -- 1,611 -- --
Other assets................. -- -- 193 -- --
---- ------- -------- -------- --------
Total current assets..... 1 50,057 (13,843) (12,400) 100
Property and equipment,
net........................ -- -- 5,970 -- --
Investments.................. -- -- 9,589 12,400 (12,400)
---- ------- -------- -------- --------
Total assets............. $ 1 $50,057 $ 1,716 $ -- $(12,300)
==== ======= ======== ======== ========
LIABILITIES:
Accounts payable and accrued
liabilities................ $ -- $ -- $ 1,047 $ -- $ --
Notes payable, current....... -- -- 299 -- --
---- ------- -------- -------- --------
Total current............ -- -- 1,346 -- --
Long-term notes payable, net
of current portion......... 35,957 -- -- (9,920)
Deferred income taxes........ -- -- 370 -- --
---- ------- -------- -------- --------
Total liabilities........ -- 35,957 1,716 -- (9,920)
---- ------- -------- -------- --------
STOCKHOLDER'S EQUITY:
Common stock................. -- -- -- --
Additional Paid in Capital... 1 14,100 -- -- (2,380)
Retained Earnings............ -- -- -- --
---- ------- -------- -------- --------
Total stockholder's
equity................. 1 14,100 -- -- (2,380)
---- ------- -------- -------- --------
Total liabilities and
stockholder's equity... $ 1 $50,057 $ 1,716 $ -- $(12,300)
==== ======= ======== ======== ========
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
ACQUISITION OF CARTER- ACQUISITION OF 50% PROFORMA
CROWLEY ASSET GROUP INTEREST IN CBHS(E) CONSOLIDATED
------------------------ -------------------- -------------
<S> <C> <C> <C>
ASSETS:
Cash......................... $20,225 $(20,000) $ 225
A/R.......................... 1,886 -- 1,886
Inventory.................... 1,611 -- 1,611
Other assets................. 193 -- 193
------- -------- -------
Total current assets..... 23,915 (20,000) 3,915
Property and equipment,
net........................ 5,970 -- 5,970
Investments.................. 9,589 20,000 29,589
------- -------- -------
Total assets............. $39,474 $ -- $39,474
======= ======== =======
LIABILITIES:
Accounts payable and accrued
liabilities................ 1,047 $ -- $ 1,047
Notes payable, current....... 299 -- 299
------- -------- -------
Total current............ 1,346 -- 1,346
Long-term notes payable, net
of current portion......... 26,037 -- 26,037
Deferred income taxes........ 370 -- 370
------- -------- -------
Total liabilities........ 27,753 -- 27,753
------- -------- -------
STOCKHOLDER'S EQUITY:
Common stock................. -- -- --
Additional Paid in Capital... 11,721 -- 11,721
Retained Earnings............ -- --
------- -------- -------
Total stockholder's
equity................. 11,721 -- 11,721
------- -------- -------
Total liabilities and
stockholder's equity... $39,474 $ -- $39,474
======= ======== =======
</TABLE>
F-20
<PAGE> 25
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects Crescent Operating's audited historical balance sheet at April 3,
1997.
(B) Reflects capitalization of Crescent Operating to provide approximately $14.1
million equity and $35.9 million debt to be utilized in the acquisition of
the various assets.
(C) Amounts reflect the acquisition of the Carter-Crowley Asset Group, an
unrelated party, reflected at fair value based upon the acquisition
transaction of $15.8 million, including liabilities assumed, accounted for
as a purchase transaction. Amounts reflect the preliminary purchase price
adjustments as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment, net................................ $ (980)
Investments:
Hicks, Muse, Tate & Furst Equity Fund II................. 1,905
Notes payable, current..................................... (1,874)
Long-term Notes payable.................................... (2,690)
</TABLE>
Fair values assigned were based upon the following methodologies:
Dallas Basketball Limited (DBL) -- Sales of comparable sports franchises
and a recent limited partnership transaction within DBL. (See Note D).
Hicks, Muse, Tate & Furst Equity Fund II (the "Fund") -- Recorded based
upon the purchase price paid by Crescent Operating to Carter-Crowley for
its ownership interest in the Fund. Current values of traded securities
are based upon quoted rates and current values of non-traded securities
are determined by the general partner of the Fund.
As of March 31, 1997, Crescent Operating's investments in the Fund
portfolio consisted of investments in the following industries: (i)
manufacturing (36.6%, 22.0% of which consisted of investments in the
common stock, preferred stock and warrants of a company that
manufactures copper wire); (ii) communications (33.2%, 32.4% of which
consisted of an investment of a partnership interest in a cable
television operator); (iii) real estate (15.0%, all of which consisted
of an investment in a company which owns partnership interests in
partnerships that provide debt and equity capital to real estate owners
and developers); (iv) financial services (10.3%, all of which consisted
of investments of partnership interests in a foreign insurance company
and a small business investment company); and (v) food (4.9%, all of
which consisted of an investment in the common stock of a chocolate
company).
The following represents companies or partnerships in which Crescent
Operating has a significant interest through its ownership interest in
the Fund. Crescent Operating's interest in the Fund is recorded based
upon the purchase price paid by Crescent Operating to Carter-Crowley for
its ownership interest in the Fund. The Fund determines the current
market value of the underlying securities and investments by using
quoted rates for securities that are publicly traded and as determined
by the general partner of the Fund for securities that are not publicly
traded. For each investment Crescent Operating (or previously by
Carter-Crowley) has contributed to within the Fund, the number of shares
or partnership interest owned by Crescent Operating is calculated by the
number of shares or partnership interest owned by the Fund multiplied by
Crescent Operating's
F-21
<PAGE> 26
ownership percentage as determined based on contributions by Crescent
Operating (or previously by Carter-Crowley) divided by total
contributions to the Fund.
<TABLE>
<CAPTION>
SHARES,
PUBLICLY WARRANTS OR
TRADED TYPE OF PARTNERSHIP
COMPANY/PARTNERSHIP SECURITIES INVESTMENT INTEREST
- ---------------------- ---------- ----------------- --------------
<S> <C> <C> <C>
Marcus Cable Company,
L.P.(1) No Partnership 0.33%
International Wire
Group, Inc.(1) No Common Stock/ 1,725,738
Debt Securities/ --
Warrants 5,920
Olympus Partnerships No Various 0.19% to 2.08%
Partnerships
Crain Holdings Corp. No Common Stock 425,253
Seguros Comer. Amer.,
SA de CV(1) Yes Common Stock 229,340
Other Investments
<CAPTION>
CRESCENT FAIR
OPERATING CARTER- MARKET
PURCHASE CROWLEY VALUE AT
PRICE COST MARCH 31,
COMPANY/PARTNERSHIP INDUSTRY ALLOCATION BASIS 1997
- ---------------------- ------------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Marcus Cable Company,
L.P.(1) Communications $3,110,724 $2,002,574 $ 3,393,193
International Wire
Group, Inc.(1) Manufacturing 2,107,965 1,725,738 2,201,318
-- 80,321 91,316
-- 5,383 6,744
Olympus Partnerships Real Estate 1,434,263 1,277,062 1,564,501
Crain Holdings Corp. Manufacturing 899,455 479,423 981,130
Seguros Comer. Amer.,
SA de CV(1) Financial Services 691,629 725,883 754,432
Other Investments 1,345,260 1,498,094 1,467,416
---------- ---------- -----------
$9,589,296 $7,794,478 $10,460,050
========== ========== ===========
</TABLE>
- ---------------
(1) This company files periodic reports with the Securities and Exchange
Commission.
Moody-Day -- A multiple of historical cash flow.
Notes payable, current and long-term notes payable -- adjustments
represent historical liabilities of Carter-Crowley not being assumed.
Property and equipment, net -- in applying the provisions of APB No. 16,
the book value of assets acquired in excess of purchase price has been
recorded as a reduction in long-term assets.
(D) Reflects the acquisition and subsequent sale of the investment in DBL,
repayment of debt and capital distribution to Crescent Operating
Partnership. Crescent Operating recognized a $150,000 gain on the sale of
DBL.
(E) Increase reflects the acquisition of a 50% interest in Charter Behavioral
Health Systems LLC ("CBHS") and the related acquisition of 1,283,311 million
warrants to purchase 1,283,311 million common shares of Magellan Health
Services, Inc. ("Magellan Warrants") based on a preliminary valuation, as
follows (in thousands):
<TABLE>
<S> <C>
Investments in CBHS..................... $ 7,500
Acquisition of Magellan Warrants........ 12,500
-------
$20,000
=======
</TABLE>
Crescent Operating and Crescent have valued the Magellan Warrants at $25.0
million ($12.5 million for the Magellan Warrants issued to Crescent Operating
and $12.5 million for the Magellan Warrants issued to Crescent), based upon a
Black Shoales valuation performed by an independent third party.
F-22
<PAGE> 27
The following is a pro forma condensed balance sheet of CBHS as of March
31, 1997:
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
Current assets.............................................. $ 9,657
Property and equipment, net................................. 18,418
Other long-term assets...................................... 343
-------
$28,418
=======
Accrued liabilities......................................... $ 6,984
Capital lease obligation.................................... 53
Note Payable -- Magellan.................................... 10,000
-------
Total current liabilities......................... 17,037
Capital lease obligation.................................... 888
Member capital.............................................. 10,493
-------
Total liabilities and member capital.............. $28,418
=======
</TABLE>
F-23
<PAGE> 28
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY OTHER CARTER-CROWLEY
HISTORICAL(A) ASSET GROUP(B) ADJUSTMENTS ASSET GROUP
--------------- -------------- ----------- ------------------------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $10,394 $ -- $10,394
Cost of Sales............................ -- 8,537 -- 8,537
---- ------- ------- -------
Gross Profit............................. -- 1,857 -- 1,857
Equity in loss of CBHS................... -- -- -- --
Selling, General and Administrative
Expenses............................... -- 1,748 506(C) 2,254
---- ------- ------- -------
Income (Loss) from Operations............ -- 109 (506) (397)
Other (Income) Expense:
Interest Expense....................... -- 356 2,768(D) 3,124
Other.................................. -- (79) -- (79)
---- ------- ------- -------
Total Other Expense, net......... -- 277 2,768 3,045
---- ------- ------- -------
Income (Loss) Before Income Taxes...... -- (168) (3,274) (3,442)
Income Tax Benefit..................... -- (57) -- (57)
---- ------- ------- -------
Net Income (Loss)...................... $ -- $ (111) $(3,274) $(3,385)
==== ======= ======= =======
Net Income (Loss) per Share............
<CAPTION>
ACQUISITION OF
50% INTEREST PRO FORMA
IN CBHS(E) CONSOLIDATED
-------------- ------------
<S> <C> <C>
Revenues................................. $ -- $ 10,394
Cost of Sales............................ -- 8,537
------- --------
Gross Profit............................. -- 1,857
Equity in loss of CBHS................... 8,860 8,860
Selling, General and Administrative
Expenses............................... -- 2,254
------- --------
Income (Loss) from Operations............ (8,860) (9,257)
Other (Income) Expense:
Interest Expense....................... -- 3,124
Other.................................. -- (79)
------- --------
Total Other Expense, net......... -- 3,045
------- --------
Income (Loss) Before Income Taxes...... (8,860) (12,302)
Income Tax Benefit..................... -- (57)
------- --------
Net Income (Loss)...................... $(8,860) $(12,245)
======= ========
Net Income (Loss) per Share............ $ (1.11)
========
</TABLE>
F-24
<PAGE> 29
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Crescent Operating had no operations prior to the
acquisition of the Carter-Crowley Asset Group
(B) Reflects the historical income and expenses associated with
the acquired company, assuming it occurred at the beginning
of the period ..............................................
(C) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
Salaries and benefits ...................................... $ 250
Rent and other office supplies ............................. 200
Professional fees .......................................... 150
Depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group ................................. (94)
-------
$ 506
-------
(D) Increase is a result of interest expense for long term
financing in conjunction with the capitalization of the
Company, assuming it occurred at the beginning of the
period.
$26,037 loan at a rate of 12% ......................... $ 3,124
Less historical interest expense ...................... (356)
-------
Incremental interest expense .......................... $ 2,768
=======
(E) Reflects the Company's 50% share of net loss of CBHS
(accounted for on the equity method of accounting since the
Company does not control CBHS; the four member board
consists of two directors named by the Company and two
directors named by Magellan) ............................... $(8,860)
</TABLE>
F-25
<PAGE> 30
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY OTHER CARTER-CROWLEY
HISTORICAL(A) ASSET GROUP(B) ADJUSTMENTS ASSET GROUP
--------------- -------------- ----------- ------------------------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $3,039 $ -- $3,039
Cost of Sales............................ -- 2,462 -- 2,462
---- ------ ----- ------
Gross Profit............................. -- 577 -- 577
Equity in loss of CBHS................... -- -- -- --
Selling, General and Administrative
Expenses............................... -- 438 126(C) 564
---- ------ ----- ------
Income (loss) from Operations............ -- 139 (126) 13
Other (Income) Expense:
Interest Expense....................... -- 113 668(D) 781
Other.................................. -- (9) -- (9)
---- ------ ----- ------
Total Other Expense, net......... -- 104 668 772
---- ------ ----- ------
Income (Loss) Before Income Taxes...... -- 35 (794) (759)
Income Tax Provision................... -- 12 -- 12
---- ------ ----- ------
Net Income (Loss)...................... $ -- $ 23 $(794) $ (771)
==== ====== ===== ======
Net Income (Loss) per Share............
<CAPTION>
ACQUISITION OF
50% INTEREST PRO FORMA
IN CBHS(E) CONSOLIDATED
-------------- ------------
<S> <C> <C>
Revenues................................. $ -- $ 3,039
Cost of Sales............................ -- 2,462
------- -------
Gross Profit............................. -- 577
Equity in loss of CBHS................... 2,711 2,711
Selling, General and Administrative
Expenses............................... -- 564
------- -------
Income (loss) from Operations............ (2,711) (2,698)
Other (Income) Expense:
Interest Expense....................... -- 781
Other.................................. -- (9)
------- -------
Total Other Expense, net......... -- 772
------- -------
Income (Loss) Before Income Taxes...... (2,711) (3,470)
Income Tax Provision................... -- 12
------- -------
Net Income (Loss)...................... $(2,711) $(3,482)
======= =======
Net Income (Loss) per Share............ $ (.32)
=======
</TABLE>
F-26
<PAGE> 31
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Crescent Operating had no operations prior to the
acquisition of the Carter-Crowley Asset Group
(B) Reflects the historical income and expenses associated with
the acquired company, assuming it occurred at the beginning
of the period ..............................................
(C) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
Salaries and benefits ...................................... $ 62
Rent and other office supplies ............................. 50
Professional fees .......................................... 38
Depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group ................................. (24)
-------
126
(D) Increase is a result of interest expense for long term
financing in conjunction with the capitalization of the
Company, assuming it occurred at the beginning of the
period.
$26,037 loan at a rate of 12% ......................... $ 781
Less historical interest expense ...................... (113)
-------
Incremental interest expense .......................... $ (668)
=======
(E) Reflects the Company's 50% share of net loss of CBHS
(accounted for on the equity method of accounting since the
Company does not control CBHS; the four member board
consists of two directors named by the Company and two
directors named by Magellan) ............................... $(2,711)
</TABLE>
F-27
<PAGE> 32
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1996
The following unaudited proforma statement of operations of Charter
Behavioral Health Systems, LLC (CBHS) for the year ended September 30, 1996,
assumes the following: (i) the elimination of the European Hospitals, JV
Hospitals not being acquired by CBHS and other operations and overhead and (ii)
the completion of the Crescent Transaction, including the execution of the
Facility Lease Agreement and Master Franchise Agreement, as if they had occurred
on October 1, 1995.
F-28
<PAGE> 33
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(The investment in this entity will be reflected in the financial
statements of Crescent Operating, Inc. on the equity method of accounting. (See
F-25 Note E)
<TABLE>
<CAPTION>
PRO FORMA
CHARTER CHARTER
PROVIDER BEHAVIORAL BEHAVIORAL
SEGMENT HEALTH PRO FORMA HEALTH
AS REPORTED CARVE OUT(A) SYSTEMS, LLC ADJUSTMENTS SYSTEMS, LLC
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue............... $1,044,345 $235,601 $808,744 $ 10,615(B) $819,359
---------- -------- -------- -------- --------
Salaries, supplies and
other operating
expense................. 800,912 195,585 605,327 154,715(C) 760,042
Bad debt expense.......... 79,930 9,909 70,021 0 70,021
Depreciation and
amortization............ 37,108 8,245 28,863 (26,444)(D) 2,419
Interest, net............. 47,615 42,763 4,852 (1,252)(E) 3,600
Stock option expense...... 914 914 0 0 0
Unusual items............. 37,271 36,274 997 0 997
---------- -------- -------- -------- --------
1,003,750 293,690 710,060 127,019 837,079
---------- -------- -------- -------- --------
Income before income taxes
and minority interest... 40,595 (58,089) 98,684 (116,404) (17,720)
Provision for income
taxes................... 14,883 (24,591) 39,474 (39,474)(F) --
---------- -------- -------- -------- --------
Income before minority
interest................ 25,712 (33,498) 59,210 (76,930) (17,720)
Minority interest......... 1,615 1,615 0 -- --
---------- -------- -------- -------- --------
Net income................ $ 24,097 $(35,113) $ 59,210 $(76,930) $(17,720)
========== ======== ======== ======== ========
</TABLE>
F-29
<PAGE> 34
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(A) Includes the elimination of the European Hospitals, and JV Hospitals and
other operations, including closed facilities, which will not be part of
CBHS after the Crescent Transaction, and corporate overhead and other
adjustments necessary to eliminate revenues and expenses related to
non-acquired assets.
(B) Represents management fees of $10.6 million payable by Magellan to CBHS for
the management of hospital based businesses controlled and less than
wholly-owned by Magellan which will not be part of CBHS after the Crescent
Transaction.
(C) Reflects increase in expenses pursuant to franchise fees of $78.3 million
payable under the Master Franchise Agreement, rent expense of $65.3 million
payable to Crescent for hospital-based real estate and equipment computed
on a straight-line basis over the 12 year term under the Facility Lease
Agreement, and $11.1 million of corporate general and administrative
expenses for necessary CBHS corporate functions formerly performed by
Magellan including human resources, legal, and finance and accounting.
(D) Reflects decrease in historical depreciation and amortization expense as a
result of the sale of fixed assets and the Facility Lease Agreement.
(E) Reflects decrease in interest expense based on the following assumptions
(in thousands):
<TABLE>
<S> <C> <C>
Old interest expense, net................................ $ (4,852)
Expected average borrowings -- working capital........... 45,000
Estimated borrowing rate................................. 8.0%
------
3,600
--------
Pro forma adjustment..................................... $ (1,252)
========
</TABLE>
Borrowing rate estimates the rate on a loan commitment received from a
group of commercial banks to provide a line of credit of up to $100 million
pursuant to a 5-year revolving credit facility.
(F) Pro forma adjustment reflects the elimination of the provision for income
taxes as Charter Behavioral Health Systems, LLC is a limited liability
company and is not subject to federal income tax.
F-30
<PAGE> 35
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
MARCH 31, 1997
The following unaudited proforma statement of operations of Charter
Behavioral Health Systems, LLC (CBHS) for the three months in the period ended
March 31, 1997, assumes the following: (i) the elimination of the European
Hospitals, JV Hospitals not being acquired by CBHS and other operations and
overhead and (ii) the completion of the Crescent Transaction, including the
execution of the Facility Lease Agreement and Master Franchise Agreement, as if
they had occurred on October 1, 1996.
F-31
<PAGE> 36
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
CHARTER CHARTER
PROVIDER BEHAVIORAL BEHAVIORAL
SEGMENT HEALTH PRO FORMA HEALTH
AS REPORTED CARVE OUT(A) SYSTEMS, LLC ADJUSTMENTS SYSTEMS, LLC
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue................ $236,862 $ 42,075 $194,787 $ 3,541(B) $198,328
-------- -------- -------- -------- --------
Salaries, supplies and
other operating
expense.................. 181,705 34,210 147,495 37,286(C) 184,781
Bad debt expense........... 14,826 690 14,136 0 14,136
Depreciation and
amortization............. 9,329 2,099 7,230 (6,097)(D) 1,133
Interest, net.............. 13,176 12,231 945 255(E) 1,200
Stock option expense....... 829 829 0
Unusual items.............. 1,395 (1,105) 2,500 0 2,500
-------- -------- -------- -------- --------
221,260 48,954 172,306 31,444 203,750
-------- -------- -------- -------- --------
Income before income taxes
and minority interest.... 15,602 (6,879) 22,481 (27,903) (5,422)
Provision for income
taxes.................... 5,938 (3,054) 8,992 (8,992)(F) --
-------- -------- -------- -------- --------
Income before minority
interest................. 9,664 (3,825) 13,489 (18,911) (5,422)
Minority interest.......... 693 693 0 -- --
-------- -------- -------- -------- --------
Net income................. $ 8,971 $ (4,518) $ 13,489 $(18,911) $ (5,422)
======== ======== ======== ======== ========
</TABLE>
F-32
<PAGE> 37
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(A) Includes the elimination of the European Hospitals, and JV Hospitals and
other operations, including closed facilities, which will not be part of
CBHS after the Crescent Transaction, and corporate overhead and other
adjustments necessary to eliminate revenues and expenses related to
non-acquired assets.
(B) Fees from Magellan for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by Magellan.
(C) The pro forma adjustments to salaries, supplies and other operating
expenses are as follows (000's):
<TABLE>
<S> <C>
Franchise Fees.............................................. $19,575
Rent Expense under the Facilities Lease..................... 16,329
Additional Corporate Overhead............................... 1,382
-------
$37,286
=======
</TABLE>
(D) The pro forma adjustment to depreciation and amortization expense
represents the decrease in depreciation expense as a result of the sale of
property and equipment to Crescent by Magellan and the elimination of
amortization expense related to impaired intangible assets.
(E) The pro forma adjustment to interest, net, is computed as follows (000's):
<TABLE>
<S> <C>
Interest expense on serviced IRB's.......................... $ (945)
Interest expense for new borrowings......................... 1,200
--------
$ 255
========
Average borrowings.......................................... 60,000
Borrowing rate.............................................. 8.0%
--------
Annual Interest................................... 4,800
========
Quarterly Interest................................ 1,200
========
</TABLE>
(F) CBHS will be formed as a limited liability company. Accordingly, no tax
benefit is presented as the tax consequences will pass through to Magellan
and COI.
F-33
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23.01 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.01
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated November 7, 1996 on the Provider Segment of
Magellan Health Services, Inc., included in this Form 8-K/A into Crescent
Operating, Inc.'s previously filed Registration Statement No. 333-25223 and
No. 333-29069.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 29, 1997
