- ------------------------------------------------------------------------------
FORM 10-Q
AMENDMENT NO. 1
(Amended to include Additional Registrants Listing)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File No. 1-6639
MAGELLAN HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1076937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3414 Peachtree Road, NE, Suite 1400
Atlanta, Georgia 30326
(Address of principal executive offices)
(Zip Code)
(404) 841-9200
(Registrant's telephone number, including area code)
See Table of Additional Registrants below.
------------------------------------
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
The number of shares of the Registrant's Common Stock outstanding as of April
30, 1996, was 32,921,013.
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PAGE>
<TABLE>
<CAPTION>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- -----------------------
<S> <C> <C> <C>
Beltway Community Texas 58-1324281 3414 Peachtree Rd., N.E.
Hospital, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
C.A.C.O. Services, Inc. Ohio 58-1751511 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CCM, Inc. Nevada 58-1662418 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CMCI, Inc. Nevada 88-0224620 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMFC, Inc. Nevada 88-0215629 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMSF, Inc. Florida 58-1324269 3550 Colonial Boulevard
Fort Myers, FL 33912
(813) 939-0403
CPS Associates, Inc. Virginia 58-1761039 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Alvarado California 58-1394959 7050 Parkway Drive
Behavioral Health La Mesa, CA 91942-2352
System, Inc. 619) 465-4411
Charter Appalachian Hall North Carolina 58-2097827 60 Caledonia Road
Behavioral Health Asheville, NC 28803
System, Inc. (704) 253-3681
Charter Arbor Indy Indiana 35-1916340 3314 Peachtree Rd., N.E.
Behavioral Health Suite 1400
System, Inc. Atlanta, GA 30326
(404) 841-9200
Charter Augusta Georgia 58-1615676 3100 Perimeter Parkway
Behavioral Health P.O. Box 14939
System, Inc. Augusta, GA 30909
(404) 868-6625
i
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- -----------------------
Charter Bay Harbor Florida 58-1640244 3414 Peachtree Rd., N.E.
Behavioral Health Suite 1400
System, Inc. Atlanta, Georgia 30326
(404) 841-9200
Charter Beacon Behavioral Indiana 58-1524996 1720 Beacon Street
Health System, Inc. Fort Wayne, IN 46805
(219) 423-3651
Charter Behavioral Health New Jersey 58-2097832 19 Prospect Street
System at Fair Oaks, Inc. Summit, NJ 07901
(908) 277-9102
Charter Behavioral Health Maryland 52-1866212 522 Thomas Run Road
System at Hidden Brook, Bel Air, MD 21014
Inc. (410) 879-1919
Charter Behavioral Health California 33-0606642 3414 Peachtree Rd., N.E.
System at Los Altos, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Florida 65-0519663 1324 37th Avenue, East
System at Manatee Adolescent Bradenton, FL 4208
Treatment Services, Inc. (813) 746-1388
Charter Behavioral Health Maryland 52-1866221 14901 Broschart Road
System at Potomac Ridge, Rockville, MD 20850
Inc. (301) 251-4500
Charter Behavioral Health Delaware 58-2213642 3414 Peachtree Rd., N.E.
Systems, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Georgia 58-1513304 240 Mitchell Bridge Road
System of Athens, Inc. Athens, GA 30606
(404) 546-7277
Charter Behavioral Health Texas 58-1440665 8402 Cross Park Drive
System of Austin, Inc. Austin, TX 78754
(512) 837-1800
Charter Behavioral Health Texas 76-0430571 3414 Peachtree Rd., N.E.
System of Baywood, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Florida 58-1527678 4480 51st Street, West
System of Bradenton, Inc. Bradenton, FL 34210
(813) 746-1388
ii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- -----------------------
Charter Behavioral Health Georgia 58-1408670 3500 Riverside Drive
System of Central Georgia, Macon, GA 31210
Inc. (912) 474-6200
Charter Behavorial Health Virginia 54-1765921 1500 Westbrook Avenue
System of Central Virginia, Richmond, VA 23227
Inc. (804) 266-9671
Charter Behavioral Health South Carolina 58-1761157 2777 Speissegger Drive
System of Charleston, Inc. Charleston, SC 29405-8299
(803) 747-5830
Charter Behavioral Health Virginia 58-1616917 2101 Arlington Boulevard
System of Charlottesville, Charlottesville, VA 22903-1593
Inc. (804) 977-1120
Charter Behavioral Health Illinois 58-1315760 4700 North Clarendon Avenue
System of Chicago, Inc. Chicago, IL 60640
(312) 728-7100
Charter Behavioral Health California 58-1473063 3414 Peachtree Rd., N.E.
System of Chula Vista, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Missouri 61-1009977 200 Portland Street
System of Columbia, Inc. Columbia, MO 65201
(314) 876-8000
Charter Behavioral Health Texas 58-1513305 3126 Rodd Field Road
System of Corpus Christi, Corpus Christi, TX 78414
Inc. (512) 993-8893
Charter Behavioral Health Texas 58-1513306 6800 Preston Road
System of Dallas, Inc. Plano, TX 75024
(214) 964-3939
Charter Behavioral Health Maryland 52-1866214 3680 Warwick Road, Route 1
System of Delmarva, Inc. East New Market, MD 21631
(410) 943-8108
Charter Behavioral Health Indiana 35-1916338 7200 East Indiana
System of Evansville, Inc. Evansville, IN 47715
(812) 476-7200
Charter Behavioral Health Texas 58-1643151 3414 Peachtree Rd., N.E.
System of Fort Worth, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Mississippi 58-1616919 3531 Lakeland Drive
System of Jackson, Inc. Jackson, MS 39208
(601) 939-9030
iii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Behavioral Health Florida 58-1483015 3947 Salisbury Road
System of Jacksonville, Jacksonville, FL 32216
Inc. (904) 296-2447
Charter Behavioral Health Indiana 35-1916342 2700 River City Park Drive
System of Jefferson, Inc. Jeffersonville, IN 47130
(812) 284-3400
Charter Behavioral Health Kansas 58-1603154 8000 West 127th Street
System of Kansas City, Overland Park, KS 66213
Inc. (913) 897-4999
Charter Behavioral Health Louisiana 72-0686492 302 Dulles Drive
System of Lafayette, Inc. Lafayette, LA 70506
(318) 233-9024
Charter Behavioral Health Louisiana 62-1152811 4250 Fifth Avenue, South
System of Lake Charles, Lake Charles, LA 70605
Inc. (318) 474-6133
Charter Behavioral Health Indiana 35-1916343 3714 S. Franklin Street
System of Michigan City, Michigan City, IN 46360
Inc. (219) 872-0531
Charter Behavioral Health Alabama 58-1569921 3414 Peachtree Rd., N.E.
System of Mobile, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health New Hampshire 02-0470752 29 Northwest Boulevard
System of Nashua, Inc. Nashua, NH 03063
(603) 886-5000
Charter Behavioral Health Nevada 58-1321317 7000 West Spring Mountain Rd.
System of Nevada, Inc. Las Vegas, NV 89117
(702) 876-4357
Charter Behavioral Health New Mexico 58-1479480 5901 Zuni Road, SE
System of New Mexico, Inc. Albuquerque, NM 87108
(505) 265-8800
Charter Behavioral Health California 58-1857277 101 Cirby Hills Drive
System of Northern Roseville, CA 95678
California, Inc. (916) 969-4666
Charter Behavioral Health Arkansas 58-1449455 4253 Crossover Road
System of Northwest Fayetteville, AR 72703
Arkansas, Inc. (501) 521-5731
Charter Behavioral Health Indiana 58-1603160 101 West 61st Avenue
System of Northwest State Road 51
Indiana, Inc. Hobart, IN 46342
(219) 947-4464
iv
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Behavioral Health Kentucky 61-1006115 435 Berger Road
System of Paducah, Inc. Paducah, KY 42002-7609
(502) 444-0444
Charter Behavioral Health Georgia 66-0523678 Caso Bldg., Suite 1504
of Puerto Rico, Inc. 1225 Ponce de Leon Avenue
Santurce, PR 00907
Charter Behavioral Health California 58-1747020 455 Silicon Valley Boulevard
System of San Jose, Inc. San Jose, CA 95138
(408) 224-2020
Charter Behavioral Health Georgia 58-1750583 1150 Cornell Avenue
System of Savannah, Inc. Savannah, GA 31406
(912) 354-3911
Charter Behavioral Health Arkansas 71-0752815 3414 Peachtree Rd., N.E.
System of Texarkana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health California 95-2685883 2055 Kellogg Drive
System of the Inland Corona, CA 91719
Empire, Inc. (714) 735-2910
Charter Behavioral Health Ohio 58-1731068 1725 Timberline Road
System of Toledo, Inc. Maumee, Ohio 43537
(419) 891-9333
Charter Behavioral Health Arizona 86-0757462 3414 Peachtree Rd., N.E.
System of Tucson, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health California 33-0606644 3414 Peachtree Rd., N.E.
System of Visalia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Minnesota 41-1775626 109 North Shore Drive
System of Waverly, Inc. Waverly, MN 55390
(612) 658-4811
Charter Behavioral Health North Carolina 56-1050502 3637 Old Vineyard Road
System of Winston-Salem, Winston-Salem, NC 27104
Inc. (919) 768-7710
Charter Behavioral Health California 33-0606646 3414 Peachtree Rd., N.E.
System of Yorba Linda, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
v
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- -----------------------
Charter Behavioral Health Georgia 58-1900736 811 Juniper St., N.E.
Systems of Atlanta, Inc. Atlanta, GA 30308
(404) 881-5800
Charter Brawner Behavioral Georgia 58-0979827 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter By-The-Sea Georgia 58-1351301 2927 Demere Road
Behavioral Health System, St. Simons Island, GA 31522
Inc. (912) 638-1999
Charter Canyon Behavioral Utah 58-1557925 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Canyon Springs California 33-0606640 69696 Ramon Road
Behavioral Health System, Cathedral City, CA 92234
Inc. (619) 321-2000
Charter Centennial Peaks Colorado 58-1761037 2255 South 88th Street
Behavioral Health System, Louisville, CO 80027
Inc. (303) 673-9990
Charter Community Hospital, California 58-1398708 21530 South Pioneer Boulevard
Inc Hawaiian Gardens, CA 90716
(310) 860-0401
Charter Contract Services, Georgia 58-2100699 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Cove Forge Pennsylvania 25-1730464 New Beginnings Road
Behavioral Health System, Williamsburg, PA 16693
Inc. (814) 832-2121
Charter Fairmount Pennsylvania 58-1616921 561 Fairthorne Avenue
Behavioral Health System, Philadelphia, PA 19128
Inc. (215) 487-4000
Charter Fenwick Hall South Carolina 57-0995766 3414 Peachtree Rd., N.E.
Behavioral Health System, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Financial Offices, Georgia 58-1527680 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
vi
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Forest Behavioral Louisiana 58-1508454 9320 Linwood Avenue
Health System, Inc. Shreveport, LA 71106
(318) 688-3930
Charter Grapevine Texas 58-1818492 2300 William D. Tate Ave.
Behavioral Health System, Grapevine, TX 76051
Inc. (817) 481-1900
Charter Greensboro North Carolina 58-1335184 700 Walter Reed Drive
Behavioral Health System, Greensboro, NC 27403
Inc. (919) 852-4821
Charter Health Management Texas 58-2025056 6800 Park Ten Blvd.
of Texas, Inc. Suite 275-W
San Antonio, TX 78213
(210) 699-8585
Charter Hospital of Ohio 58-1598899 3414 Peachtree Rd., N.E.
Columbus, Inc. Suite 1400
Atlanta, GA 30326
404) 841-9200
Charter Hospital of Colorado 58-1662413 3414 Peachtree Rd., N.E.
Denver, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Ft. Colorado 58-1768534 3414 Peachtree Rd., N.E.
Collins, Inc Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Laredo, Texas 58-1491620 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Miami, Florida 61-1061599 11100 N.W. 27th Street
Inc. Miami, FL 33172
(305) 591-3230
Charter Hospital of Mobile, Alabama 58-1318870 5800 Southland Drive
Inc. Mobile, AL 36693
(334) 661-3001
Charter Hospital of Santa New Mexico 58-1584861 3414 Peachtree Rd., N.E.
Teresa, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of St. Missouri 58-1583760 3414 Peachtree Rd., N.E.
Louis, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
vii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Hospital of California 58-1402481 3414 Peachtree Rd., N.E.
Torrance, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Indianapolis Indiana 58-1674291 5602 Caito Drive
Behavioral Health Indianapolis, IN 46226
System, Inc. (317) 545-2111
Charter Lafayette Indiana 58-1603158 3700 Rome Drive
Behavioral Health Lafayette, IN 47905
System, Inc. (317) 448-6999
Charter Lakehurst New Jersey 22-3286879 3414 Peachtree Rd., N.E.
Behavioral Health Suite 1400
System, Inc. Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Tennessee 62-0892645 2911 Brunswick Road
Behavioral Health System, Memphis, TN 38134
Inc. (901) 377-4700
Charter Laurel Heights Georgia 58-1558212 3414 Peachtree Rd., N.E.
Behavioral Health System, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Linden Oaks Illinois 36-3943776 852 West Street
Behavioral Health System, Naperville, IL 60540
Inc. (708) 305-5500
Charter Little Rock Arkansas 58-1747019 1601 Murphy Drive
Behavioral Health System, Maumelle, AR 72113
Inc. (501) 851-8700
Charter Louisville Kentucky 58-1517503 1405 Browns Lane
Behavioral Health System, Louisville, KY 40207
Inc. (502) 896-0495
Charter Meadows Maryland 52-1866216 3414 Peachtree Rd., N.E.
Behavioral Health System, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Medical - Georgia 58-1357345 3414 Peachtree Rd., N.E.
California, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - Clayton Georgia 58-1579404 3414 Peachtree Rd., N.E.
County, Inc. Suite 1400
Atlant30326
(404) 841-9200
viii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Medical - Texas 58-1448733 3414 Peachtree Rd., N.E.
Cleveland, Inc. Suite 1400
Atlant30326
(404) 841-9200
Charter Medical - Dallas, Texas 58-1379846 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlant30326
(404) 841-9200
Charter Medical - Long California 58-1366604 3414 Peachtree Rd., N.E.
Beach, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - New York 58-1761153 3414 Peachtree Rd., N.E.
New York, Inc. Suite 1400
Atlant30326
(404) 841-9200
Charter Medical (Cayman Cayman Islands, 58-1841857 Caledonian Bank & Trust
Islands) Ltd. BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical Georgia 58-1538092 3414 Peachtree Rd., N.E.
Executive Corporation Suite 1400
Atlanta, Ga 30326
(404) 841-9200
Charter Medical Georgia 58-1530236 3414 Peachtree Rd., N.E.
Information Services, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Medical Cayman Islands, N/A Caledonian Bank & Trust
International, Inc. BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical Nevada 58-1605110 3414 Peachtree Rd., N.E.
International S.A., Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical Georgia 58-1195352 3414 Peachtree Rd., N.E.
Management Company Suite 1400
Atlanta, GA 30326
(404) 841-9200
ix
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Medical of East Arizona 58-1643158 2190 N. Grace Boulevard
Valley, Inc. Chandler, AZ 85224
(602) 899-8989
Charter Medical of United Kingdom N/A 111 Kings Road
England Limited Box 323
London SW3 4PB
London, England
44-71-351-1272
Charter Medical of Florida 58-2100703 3414 Peachtree Rd., N.E.
Florida, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of North Arizona 58-1643154 6015 W. Peoria Avenue
Phoenix, Inc. Glendale, AZ 85302
(602) 878-7878
Charter Medical of Puerto Commonwealth of 58-1208667 Caso Building, Suite 1504
Rico, Inc. Puerto Rico 1225 Ponce De Leon Avenue
Santurce, P.R. 00907
(809) 723-8666
Charter Mental Health Florida 58-2100704 3414 Peachtree Rd., N.E.
Options, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Milwaukee Wisconsin 58-1790135 11101 West Lincoln Avenue
Behavioral Health West Allis, WI 53227
System, Inc. (414) 327-3000
Charter Mission Viejo California 58-1761156 23228 Madero
Behavioral Health Mission Viejo, CA 92691
System, Inc. (714) 830-4800
Charter MOB of Virginia 58-1761158 1023 Millmont Avenue
Charlottesville, Inc. Charlottesville, VA 22901
(804) 977-1120
Charter North Behavioral Alaska 58-1474550 2530 DeBarr Road
Health System, Inc. Anchorage, AK 99508-2996
(907) 258-7575
Charter Northbrooke Wisconsin 39-1784461 46000 W. Shroeder Drive
Behavioral Health System, Brown Deer, WI 53223
Inc. (414) 355-2273
Charter North Counseling Alaska 58-2067832 2530 DeBarr Road
Center, Inc. Anchorage, AL 99508-2996
(907) 258-7575
x
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Northridge North Carolina 58-1463919 400 Newton Road
Behavioral Health System, Raleigh, NC 27615
Inc. (919) 847-0008
Charter Oak Behavioral California 58-1334120 1161 East Covina Boulevard
Health System, Inc. Covina, CA 91724
(818) 966-1632
Charter of Alabama, Inc. Alabama 63-0649546 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Palms Behavioral Texas 58-1416537 1421 E. Jackson Avenue
Health System, Inc. McAllen, TX 78502
(512) 631-5421
Charter Peachford Georgia 58-1086165 2151 Peachford Road
Behavioral Health System, Atlanta, GA 30338
Inc. (404) 455-3200
Charter Petersburg Virginia 58-1761160 3414 Peachtree Rd., N.E.
Behavioral Health System, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Pines Behavioral North Carolina 58-1462214 3621 Randolph Road
Health System, Inc. Charlotte, NC 28211
(704) 365-5368
Charter Plains Behavioral Texas 58-1462211 801 N. Quaker Avenue
Health System, Inc. Lubbock, TX 79408
(806) 744-5505
Charter-Provo School, Inc. Utah 58-1647690 4501 North University Ave.
Provo, UT 84604
(801) 227-2000
Charter Real Behavioral Texas 58-1485897 8550 Huebner Road
Health System, Inc. San Antonio, TX 78240
(512) 699-8585
Charter Regional Medical Texas 74-1299623 3414 Peachtree Rd., N.E.
Center, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Ridge Behavioral Kentucky 58-1393063 3050 Rio Dosa Drive
Health System, Inc. Lexington, KY 40509
(606) 269-2325
Charter Rivers Behavioral South Carolina 58-1408623 2900 Sunset Boulevard
Health System, Inc. West Columbia, SC 29169
(803) 796-9911
xi
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter San Diego California 58-1669160 11878 Avenue of Industry
Behavioral Health System, San Diego, CA 92128
Inc. (619) 487-3200
Charter Sioux Falls South Dakota 58-1674278 2812 South Louise Avenue
Behavioral Health System, Sioux Falls, SD 57106
Inc. (605) 361-8111
Charter South Bend Indiana 58-1674287 6704 N. Gumwood Drive
Behavioral Health System, Granger, IN 46530
Inc. (219) 272-9799
Charter Springs Behavioral Florida 58-1517461 3130 S.W. 27th Avenue
Health System, Inc. Ocala, FL 32674
(904) 237-7293
Charter Springwood Virginia 58-2097829 Route 4, Box 50
Behavioral Health System, Leesburg, VA 22075
Inc. (703) 777-0800
Charter Suburban Hospital Texas 75-1161721 3414 Peachtree Rd., N.E.
of Mesquite, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Terre Haute Indiana 58-1674293 1400 Crossing Boulevard
Behavioral Health System, Terre Haute, IN 47802
Inc. (812) 299-4196
Charter Thousand Oaks California 58-1731069 3414 Peachtree Rd., N.E.
Behavioral Health System, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Treatment Center Michigan 58-2025057 3414 Peachtree Rd., N.E.
of Michigan, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Westbrook Virginia 54-0858777 1500 Westbrook Avenue
Behavioral Health System, Richmond, VA 23227
Inc. (804) 266-9671
Charter White Oak Maryland 52-1866223 3414 Peachtree Rd., N.E.
Behavioral Health System, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
Charter Wichita Behavioral Kansas 58-1634296 8901 East Orme
Health System, Inc. Wichita, KS 67207
(316) 686-5000
xii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Woods Behavioral Alabama 58-1330526 700 Cottonwood Road
Health System, Inc. Dothan, AL 36301
(205) 794-4357
Correctional Behavioral Delaware 58-2180940 3414 Peachtree Rd., N.E.
Solutions, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Desert Springs Hospital, Nevada 88-0117696 414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Employee Assistance Georgia 58-1501282 3414 Peachtree Rd., N.E.
Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Florida Health Florida 58-1860493 21808 State Road 54
Facilities, Inc. Lutz, FL 33549
(813) 948-2441
Gulf Coast EAP Alabama 58-2101394 3414 Peachtree Rd., N.E.
Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Hospital Investors, Inc. Georgia 58-1182191 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Ga 30326
(404) 841-9200
Illinois Mentor, Inc. Illinois 36-3643670 313 Congress St.
Boston, MA 02210
(617) 790-4800
Magellan Public Delaware 58-2227841 3414 Peachtree Rd., N.E.
Solutions Suite 1400
Atlanta, GA 30326
(404) 841-9200
Mandarin Meadows, Inc. Florida 58-1761155 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Massachusetts Mentor, Massachusetts 04-2799071 313 Congress St.
Inc. Boston, MA 02210
(617) 790-4800
xiii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
National Mentor, Inc. Delaware 04-3250732 313 Congress St.
Boston, MA 02210
(617) 790-4800
National Mentor Massachusetts 04-2893910 313 Congress St.
Healthcare, Inc. Boston, MA 02210
(617) 790-4800
NEPA - Massachusetts, Inc. Massachusetts 58-2116751 #6 Courthouse Lane
Chelmsford, MA 01863
(508) 441-2332
NEPA - New Hampshire, Inc. New Hampshire 58-2116398 29 Northwest Boulevard
Nashua, NH 03063
(603) 886-5000
Ohio Mentor, Inc. Ohio 31-1098345 313 Congress St.
Boston, MA 02210
(617) 790-4800
Pacific-Charter Medical, California 58-1336537 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
South Carolina Mentor, Inc. South Carolina 57-0782160 313 Congress St..
Boston, MA 02210
(617) 790-4800
Southeast Behavioral Georgia 58-2100700 3414 Peachtree Rd., N.E.
Systems, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Schizophrenia Treatment Georgia 58-1672912 209 Church Street
and Rehabilitation, Inc. Decatur, GA 30030
(404) 377-1986
Sistemas De Terapia Georgia 58-1181077 3414 Peachtree Rd., N.E.
Respiratoria, S.A., Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Western Behavioral California 58-1662416 3414 Peachtree Rd., N.E.
Systems, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
(1) The Additional Registrants listed are wholly-owned subsidiaries of the
Registrant and are guarantors of the Registrant's 11 1/4% Series A
Senior Subordinated Notes due 2004. The Additional Registrants have
been conditionally exempted, pursuant to Section 12(h) of the
Securities Exchange Act of 1934, from filing reports under Section 13
of the Securities Exchange Act of 1934.
xiv
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - Financial Information:
Condensed Consolidated Balance Sheets -
September 30, 1995 and March 31, 1996..............................2
Condensed Consolidated Statements of Operations -
For the Six Months and Quarters ended March 31, 1995 and 1996......4
Condensed Consolidated Statements of Cash Flows -
For the Six Months ended March 31, 1995 and 1996...................5
Notes to Condensed Consolidated Financial Statements................6
Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................16
PART II - Other Information:
Item 1. - Legal Proceedings........................................22
Item 4. - Submission of Matters to Vote of Security Holders........22
Item 5. - Other Information........................................22
Item 6. - Exhibits and Reports on Form 8-K.........................24
Signatures.........................................................26
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I - FINANCIAL INFORMATION
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, March 31,
1995 1996
-------------- -------------
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents......................... $ 105,514 $ 123,674
Accounts receivable, net.......................... 181,163 222,365
Supplies.......................................... 5,768 5,726
Refundable income taxes........................... -- 7,036
Other current assets.............................. 13,130 21,947
---------- ------------
Total Current Assets......................... 305,575 380,748
Property and Equipment
Land.............................................. 88,019 87,737
Buildings and improvements........................ 377,169 388,732
Equipment......................................... 111,554 132,343
--------- ------------
576,742 608,812
Accumulated depreciation.......................... (90,877) (110,611)
--------- ------------
485,865 498,201
Construction in progress.......................... 2,902 3,147
--------- ------------
488,767 501,348
Assets Restricted for Settlement of Unpaid Claims........ 94,138 95,208
Other Long-Term Assets................................... 33,249 25,694
Goodwill, net............................................ 39,994 130,327
Other Intangible Assets, net............................. 21,835 44,187
--------- ------------
$ 983,558 $ 1,177,512
========= ============
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
September 30, March 31,
1995 1996
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current Liabilities
Accounts payable..................................... $ 71,020 $ 78,987
Accrued liabilities.................................. 140,343 181,238
Current maturities of long-term debt and
capital lease obligations......................... 2,799 5,691
----------- ---------------
Total Current Liabilities................... 214,162 265,916
Long-Term Debt and Capital Lease Obligations................ 538,770 536,215
Deferred income tax liabilities............................. -- 13,344
Reserve for Unpaid Claims................................... 100,125 89,500
Deferred Credits and Other Long-Term Liabilities............ 34,455 28,786
Minority Interest........................................... 7,486 51,985
Commitments and Contingencies
Stockholders' Equity
Common Stock, par value $0.25 per share
Authorized - 80,000 shares
Issued and outstanding - 28,405 shares at
September 30, 1995 and 32,915 shares
at March 31, 1996........................... 7,101 8,229
Other Stockholders' Equity
Additional paid-in capital........................ 253,295 326,601
Accumulated deficit............................... (161,840) (132,023)
Warrants outstanding.............................. 64 64
Common Stock in Treasury, 462 at September
30, 1995 and March 31, 1996................. (9,238) (9,238)
Cumulative foreign currency adjustments........... (822) (1,867)
---------- ---------------
Stockholders' Equity........................ 88,560 191,766
---------- ---------------
$ 983,558 $ 1,177,512
========== ===============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
For the Three Months For the Six Months
ended ended
March 31, March 31,
----------------------- --------------------------
1995 1996 1995 1996
--------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenue................................................. $ 299,81 $ 354,953 $ 563,658 $ 650,618
-------- --------- ----------- ---------
Costs and expenses
Salaries, supplies and other operating expenses..... 221,295 275,018 420,822 506,344
Bad debt expense..................................... 23,743 22,619 44,962 42,407
Depreciation and amortization........................ 10,061 13,120 18,418 23,300
Amortization of reorganization value in excess of
amounts allocable to identifiable assets........ 7,800 -- 15,600 --
Interest, net........................................ 13,537 8,572 27,401 22,394
ESOP expense......................................... 14,273 -- 26,773 --
Stock option expense (credit)........................ (956) (409) (3,317) 1,414
Unusual items........................................ 29,800 -- 26,840 --
--------- --------- ----------- ---------
319,553 318,920 577,499 595,859
--------- --------- ----------- ---------
Income (loss) before provision for income taxes
and minority interest................................ (19,736) 36,033 (13,841) 54,759
Provision for (benefit from) income taxes................... (4,774) 14,413 704 22,372
--------- --------- ----------- ---------
Income (loss) before minority interest...................... (14,962) 21,620 (14,545) 32,387
Minority interest........................................... 138 1,551 206 2,570
--------- --------- ----------- ---------
Net income (loss)........................................... $ (15,100) $ 20,069 $ (14,751) $ 29,817
========= ========= =========== =========
Earnings (loss) per common share:
Primary.............................................. $ (0.53) $ 0.63 $ (0.53) $ 0.99
========= ========= =========== =========
Fully diluted........................................ $ (0.53) $ 0.59 $ (0.53) $ 0.96
========= ========= =========== =========
Weighted average number of common shares outstanding:
Primary.............................................. 28,332 31,882 27,613 30,099
Fully diluted........................................ 28,332 34,715 27,613 31,851
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
ended
March 31
----------------------------
1995 1996
---------- -----------
<S> <C><C> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)..................................................... $ (14,751) $ 29,817
---------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization.................................. 34,018 23,300
ESOP expense................................................... 26,773 --
Non-cash portion of unusual items.............................. 18,800 --
Stock option expense (credit).................................. (3,317) 1,414
Non-cash interest expense...................................... 1,186 1,202
Gain on sale of assets......................................... (2,961) (503)
Cash flows from changes in assets and liabilities, net
of effects from sales and acquisitions of businesses:
Accounts receivable, net................................ (16,051) (16,993)
Other assets............................................ (10,133) 1,094
Accounts payable and other accrued liabilities.......... (9,739) (10,048)
Reserve for unpaid claims............................... 6,044 (10,625)
Income taxes receivable/payable......................... (1,700) 10,188
Other liabilities....................................... (13,529) (5,669)
Minority interest, net of dividends paid................ (125) 4,099
Other................................................... 656 121
---------- -----------
Total adjustments.................................. 29,922 (2,420)
---------- -----------
Net cash provided by operating activities..... 15,171 27,397
---------- -----------
Cash Flows From Investing Activities
Capital expenditures.................................................. (9,402) (12,787)
Acquisitions of businesses, net of cash acquired...................... (64,970) (47,920)
Increase in assets restricted for settlement of
unpaid claims....................................................... (13,660) (6,070)
Proceeds from sale of assets.......................................... 5,879 653
---------- -----------
Net cash used in investing activities......... (82,153) (66,124)
---------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of debt........................................ 28,009 68,125
Payments on debt and capital lease obligations........................ (21,111) (80,037)
Proceeds from issuance of common stock, net of issuance costs......... -- 68,669
Treasury stock transactions........................................... (729) --
Proceeds from exercise of stock options and warrants.................. 391 1,808
Income tax payments made on behalf of stock optionees................. -- (1,678)
---------- -----------
Net cash provided by financing activities..... 6,560 56,887
---------- -----------
Net decrease in cash and cash equivalents.................................... (60,422) 18,160
Cash and cash equivalents at beginning of period............................. 129,603 105,514
---------- -----------
Cash and cash equivalents at end of period................................... $ 69,181 $ 123,674
========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</TABLE>
5
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
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.
These financial statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended September
30, 1995, included in the Company's Annual Report on Form 10-K. Certain
reclassifications have been made to fiscal 1995 amounts to conform to fiscal
1996 presentation.
NOTE B - Nature of Business
The Company's hospital business is seasonal in nature, with a reduced
demand for certain services generally occurring in the first fiscal quarter
around major holidays, such as Thanksgiving and Christmas, and during the summer
months comprising the fourth fiscal quarter. The Company's businesses are also
subject to general economic conditions and other factors. Accordingly, the
results of operations for the interim periods are not necessarily indicative of
the actual results expected for the year.
NOTE C - Supplemental Cash Flow Information
Below is supplemental cash flow information related to the six months
ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
For the Six Months ended
March 31
1995 1996
-------- --------
(In thousands)
<S> <C> <C>
Income taxes paid, net of refunds received.............................. $ 2,431 $ 2,698
Interest paid, net of amounts capitalized............................... 26,241 28,080
Notes payable assumed in connection with acquisitions of businesses..... 947 12,100
</TABLE>
The non-cash portion of unusual items for the six months ended March
31, 1995 represents the unpaid portion of the $29.8 million insurance settlement
that was recorded during the quarter and the six months ended March 31, 1995.
The current and long-term portion ($2.0 million and $16.8 million, respectively)
of the insurance settlement are included in accounts payable and other accrued
liabilities and other liabilities in the statement of cash flows for the six
months ended March 31, 1995.
6
<PAGE>
NOTE D - Long-Term Debt and Leases
Information with regard to the Company's long-term debt and capital
lease obligations at September 30, 1995 and March 31, 1996 follows:
<TABLE>
<CAPTION>
September 30, March 31,
1995 1996
--------------- ----------------
(In thousands)
<S> <C> <C> <C>
Revolving Credit Agreement due through 1999
(7.625 % at March 31, 1996)............................. $ 80,593 $ 70,593
11.25% Senior Subordinated Notes due 2004...................... 375,000 375,000
6.66 % to 10.75% Mortgage and other notes
payable through 1999.................................... 5,268 16,248
Variable rate secured notes due through 2013
(3.30% to 3.55% at March 31, 1996)...................... 62,025 61,625
7.5% Swiss Bonds............................................... 6,443 6,443
3.35% to 12.5% Capital lease obligations due through 2014...... 12,617 12,365
-------------- -------------
541,946 542,274
Less amounts due within one year........................ 2,799 5,691
Less debt service funds................................. 377 368
-------------- -------------
$ 538,770 $ 536,215
============== =============
</TABLE>
NOTE E - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1995 1996
-------------- ----------------
<S> <C> <C> <C>
Salaries and wages....................... $ 28,597 $ 35,071
Amounts due health insurance programs.... 10,252 18,577
Medical claims payable................... -- 25,953
Interest................................. 20,561 21,027
Other.................................... 80,933 80,610
------------ --------------
$ 140,343 $ 181,238
============ ==============
</TABLE>
NOTE F - Acquisition
Acquisition
On December 13, 1995, the Company acquired a 51% ownership interest in
Green Spring Health Services, Inc. ("Green Spring") for approximately $68.9
million in cash, the issuance of 215,458 shares of Common Stock valued at
approximately $4.3 million and the contribution of Group Practice Affiliates,
Inc. ("GPA"), a wholly-owned subsidiary of the Company, which became a
wholly-owned subsidiary of Green Spring. On December 20, 1995, the Company
acquired an additional 10% ownership interest in Green Spring for approximately
$16.7 million in cash as a result of an exercise by a minority stockholder of
its Exchange Option (as hereinafter defined) for a portion of the stockholder's
interest in Green Spring. The Company had a 61% ownership interest in Green
Spring as of March 31, 1996. As of March 31, 1996, Green Spring provided managed
behavioral healthcare services, which includes utilization management, care
management and employee assistance programs through a 50-state provider network
for approximately 12.6 million people nationwide.
7
<PAGE>
The minority stockholders of Green Spring consist of four Blue
Cross/Blue Shield organizations (the "Blues") that are key customers of Green
Spring. In addition, two other Blues organizations that formerly owned a portion
of Green Spring will continue as customers of Green Spring. As of March 31,
1996, the minority stockholders of Green Spring have the option, under certain
circumstances, to exchange their ownership interests ("Exchange Option") in
Green Spring for 2,831,739 shares of the Company's Common Stock or $65.1 million
in subordinated notes. The Company may elect to pay cash in lieu of issuing the
subordinated notes. The Exchange Option expires December 13, 1998.
The Company recorded the investments in Green Spring using the purchase
method of accounting. Green Spring's results of operations have been included in
the condensed consolidated financial statements since the acquisition date, less
minority interest.
The cost of the investments in Green Spring have been allocated to the
estimated fair value of assets acquired and liabilities assumed to the extent
acquired by the Company. The remaining portion of Green Spring's assets and
liabilities have been recorded at the historical cost basis of the minority
stockholders. The purchase price allocation for the investments in Green Spring
and the historical cost basis of the minority stockholders of Green Spring, in
aggregate, resulted in goodwill of approximately $88 million and identifiable
intangible assets of approximately $24 million.
NOTE G - Facility Closures
The Company recorded a charge of approximately $3.6 million related to
facility closures during the fourth fiscal quarter of 1995, which consisted of
approximately $2.1 million for severance and related benefits and $1.5 million
for contract terminations and other costs. As of March 31, 1996, substantially
all of the severance and related benefits have been paid. Other exit costs paid
and charged against the resulting liability were not significant for the quarter
and the six months ended March 31, 1996.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expense and net losses (excluding normal
settlement of reimbursement issues from prior year periods, exit costs and
impairment losses) of hospitals closed since the beginning of fiscal 1995
through March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenue.................................. $ 17,182 $ 603 $ 34,815 $ 2,517
Salaries, supplies and other operating
expenses and bad debt expense.............. 17,018 2,310 35,646 6,214
Net loss..................................... (897) (1,211) (2,076) (3,629)
</TABLE>
The Company has consolidated or closed three hospitals during fiscal
1996 through March 31, 1996. The charges related to closing such facilities were
not material. During April 1996, the Company closed three hospitals. The Company
expects to record a charge of approximately $2.5 million during the quarter
ended June 30, 1996 related to the costs necessary to exit the hospital
operations.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expense and net losses (excluding normal
settlement of reimbursement issues from prior periods and impairment losses) for
the three hospitals closed in April 1996 (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenue.................................. $ 3,740 $ 4,882 $ 6,351 $ 10,014
Salaries, supplies and other operating
expenses and bad debt expense.............. 4,002 5,872 6,468 11,237
Net loss..................................... (324) (716) (470) (1,146)
</TABLE>
8
<PAGE>
NOTE H - Earnings (Loss) Per Common Share
Primary earnings (loss) per common share equals net income (loss)
divided by the weighted average number of common shares outstanding, after
giving effect to dilutive common stock equivalents. Fully diluted earnings
(loss) per common share gives effect to dilutive common stock equivalents and
other potentially dilutive securities. The Exchange Option is classified as a
potentially dilutive security for the quarter and the six months ended March 31,
1996 for the purpose of computing fully diluted earnings per common share. A
reconciliation of the calculation of fully diluted earnings per common share,
assuming conversion of the Exchange Option as of the beginning of the periods
presented or December 13, 1995, whichever date is later, is as follows:
<TABLE>
<CAPTION>
Three Months ended Six Months ended
March 31, 1996 March 31, 1996
------------------- -------------------
(in thousands)
<S> <C> <C> <C>
Net income....................................................... $ 20,069 $ 29,817
Adjustments for the assumed conversion of the Exchange Option:
Minority interest......................................... 811 1,082
Amortization.............................................. (276) (341)
----------------
Adjusted net income - Fully diluted earnings per share........... $ 20,604 $ 30,558
================ =================
</TABLE>
<TABLE>
<CAPTION>
Three Months ended Six Month ended
March 31, 1996 March 31, 1996
------------------ -----------------
(in thousands)
<S><C> <C> <C>
Weighted average number of common shares outstanding
for fully diluted earnings per share, excluding the
assumed conversion of the Exchange Option................ 31,883 30,137
Assumed conversion of the Exchange Option................... ---------------- -----------------
Weighted average number of common shares outstanding -
Fully diluted............................................. 34,71 31,851
================ =================
Fully diluted earnings per common share..................... 0.5 0.96
================ =================
</TABLE>
NOTE I - Unusual Items
In December 1994, the Company recorded an unusual item of approximately
$3.0 million which represented the pre-tax gain on the sale of three psychiatric
hospitals.
In March 1995, the Company and a group of insurance carriers resolved
disputes that arose in fiscal 1995 related to claims paid predominantly in the
1980's. As part of the resolution, the Company agreed to pay the insurance
carriers $29.8 million in five installments over a three year period.
NOTE J - Contingencies
The Company is self-insured for a substantial portion of its general
and professional liability risks. 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 was approximately $113.1 million. The reserve
for unpaid claims is adjusted periodically as such claims mature, to reflect
revised actuarial estimates based on actual experience. While management and
its actuaries believe that the present reserves are reasonable, ultimate
settlement of losses may vary from the amounts recorded.
9
<PAGE>
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.
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.
10
<PAGE>
<TABLE>
<CAPTION>
NOTE K - Guarantor Condensed Consolidating Financial Statements
MAGELLAN HEALTH SERVICES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands, except per share amounts)
March 31, 1996
-------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
ASSETS Subsidiaries Subsidiaries Corporation)
<S> <C> <C> <C> <C> <C>
------------ ------------ ----------------
Current Assets
Cash and cash equivalents............................................ $ 51,927 $ 58,142 $ 13,605
Accounts receivable, net............................................. 173,985 48,304 76
Supplies............................................................. 4,888 404 434
Refundable income taxes.............................................. (720) (1,483) 11,944
Other current assets................................................. 9,297 6,437 8,603
------------ ----------- --------------
Total Current Assets................................. 239,377 111,804 34,662
Property and Equipment
Land................................................................. 78,953 7,770 1,014
Buildings and improvements........................................... 348,241 35,419 5,072
Equipment............................................................ 108,107 20,337 3,899
------------ ----------- --------------
535,301 63,526 9,985
Accumulated depreciation............................................. (100,717) (6,420) (3,474)
Construction in progress............................................. 2,848 282 17
------------ ----------- --------------
437,432 57,388 6,528
Assets restricted for settlement of unpaid claims........................... -- 80,803 14,405
Goodwill.................................................................... 21,645 97,757 10,925
Other Long-Term Assets (1).................................................. 123,163 (86,508) 1,172,254
------------ ----------- --------------
$ 821,617 $ 261,244 $ 1,238,774
============ =========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 39,801 $ 27,086 $ 12,144
Accrued expenses and other current liabilities ...................... 61,691 50,059 69,488
Current maturities of long-term debt and capital lease obligations... 2,562 3,129 --
------------ ----------- --------------
Total Current Liabilities............................ 104,054 80,274 81,632
Long-Term Debt and Capital Lease Obligations................................ (399,390) 11,513 924,092
Deferred income tax liabilities............................................. (378) (5,441) 3,091
Reserve for Unpaid Claims................................................... -- 81,729 10,161
Deferred Credits and Other Long-Term Liabilities (1)........................ 476,017 15,680 28,032
Minority Interest........................................................... -- -- 51,985
Commitments and Contingencies
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 32,915 shares.............................. 2,752 (483) 8,229
Other Stockholders' Equity
Additional paid-in capital........................................... 611,354 34,595 326,601
Retained earnings (Accumulated deficit).............................. 28,252 46,806 (132,023)
Warrants outstanding................................................. 64
Common shares in Treasury - 462 shares............................... -- (4,736) (9,238)
Cumulative foreign currency adjustments.............................. (1,044) 1,307 (1,867)
------------ ----------- --------------
641,314 77,489 191,766
------------ ----------- --------------
$ 821,617 $ 261,244 $ 1,238,774
============ =========== ==============
Consolidated
Elimination Consolidated
ASSETS Entries Total
-------------- --------------
Current Assets
Cash and cash equivalents............................................ $ -- 123,674
Accounts receivable, net............................................. -- 222,365
Supplies............................................................. -- 5,726
Refundable income taxes.............................................. (2,705) 7,036
Other current assets................................................. (2,390) 21,947
------------ -----------
Total Current Assets................................. (5,095) 380,748
Property and Equipment
Land................................................................. -- 87,737
Buildings and improvements........................................... -- 388,732
Equipment............................................................ -- 132,343
------------ -----------
-- 608,812
Accumulated depreciation............................................. -- (110,611)
Construction in progress............................................. -- 3,147
------------ -----------
-- 501,348
Assets restricted for settlement of unpaid claims........................... -- 95,208
Goodwill.................................................................... -- 130,327
Other Long-Term Assets (1).................................................. (1,139,028) 69,881
------------ -----------
$ (1,144,123) $ 1,177,512
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ (44) $ 78,987
Accrued expenses and other current liabilities ...................... -- 181,238
Current maturities of long-term debt and capital lease obligations... -- 5,691
------------ -----------
Total Current Liabilities............................ (44) 265,916
Long-Term Debt and Capital Lease Obligations................................ -- 536,215
Deferred income tax liabilities............................................. 16,072 13,344
Reserve for Unpaid Claims................................................... (2,390) 89,500
Deferred Credits and Other Long-Term Liabilities (1)........................ (490,943) 28,786
Minority Interest........................................................... 51,985
Commitments and Contingencies
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 32,915 shares.............................. (2,269) 8,229
Other Stockholders' Equity
Additional paid-in capital........................................... (645,949) 326,601
Retained earnings (Accumulated deficit).............................. (75,058) (132,023)
Warrants outstanding................................................. 64
Common shares in Treasury - 462 shares............................... 4,736 (9,238)
Cumulative foreign currency adjustments.............................. (263) (1,867)
------------ -----------
(718,803) 191,766
------------ -----------
$ (1,144,123) $ 1,177,512
============ ===========
(1) Elimination entry related to intercompany receivables and payables and investment in consolidated subsidiaries.
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands, except per share amounts)
September 30, 1995
--------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
-------------- ------------- ---------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents............................................ $ 60,719 $ 10,279 $ 34,516
Accounts receivable, net............................................. 170,855 10,251 57
Supplies............................................................. 5,081 224 463
Other current assets................................................. 10,004 (1,241) 19,151
------------ ----------- -------------
Total Current Assets................................. 246,659 19,513 54,187
Property and Equipment
Land................................................................. 79,807 7,199 1,013
Buildings and improvements........................................... 351,081 21,017 5,071
Equipment............................................................ 103,125 4,900 3,529
------------ ----------- -------------
534,013 33,116 9,613
Accumulated depreciation............................................. (87,503) (2,716) (658)
Construction in progress............................................. 2,650 25 1
------------ ----------- -------------
449,160 30,651 8,956
Assets restricted for settlement of unpaid claims........................... -- 78,188 15,950
Other Long-Term Assets (1)................................................. 129,898 18,398 1,010,425
Other Intangible Assets, net................................................ 29,498 11,811 20,520
------------ ----------- -------------
$ 855,215 $ 158,561 $ 1,110,038
============ =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 50,510 $ 8,424 $ 12,086
Accrued liabilities and income tax payable........................... 67,646 4,156 68,541
Current maturities of long-term debt and capital lease obligations... 2,673 126 --
------------ ----------- -------------
Total Current Liabilities............................ 120,829 12,706 80,627
Long-Term Debt and Capital Lease Obligations................................ (344,312) 5,271 877,811
Reserve for Unpaid Claims................................................... -- 89,207 25,702
Deferred Credits and Other Long-Term Liabilities (1)........................ 512,426 476 37,338
Minority Interest........................................................... -- -- --
Commitments and Contingencies
Stockholders' Equity........................................................
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 28,405 shares.............................. 2,765 837 7,101
Other Stockholders' Equity
Additional paid-in capital........................................... 612,131 30,455 253,295
Retained earnings (Accumulated deficit).............................. (47,789) 22,601 (161,840)
Warrants outstanding................................................. -- -- 64
Common stock in Treasury
462 shares........................................................ -- (4,736) (9,238)
Cumulative foreign currency adjustments............................. (835) 1,744 (822)
------------ ----------- -------------
566,272 50,901 88,560
------------ ----------- -------------
$ 855,215 $ 158,561 $ 1,110,038
============ =========== =============
September 30, 1995
--------------------------------
Consolidated
Elimination Consolidated
Entries Total
-------------- --------------
ASSETS
Current Assets
Cash and cash equivalents............................................ $ -- $ 105,514
Accounts receivable, net............................................. -- 181,163
Supplies............................................................. -- 5,768
Other current assets................................................. (14,784) 13,130
------------ -----------
Total Current Assets................................. (14,784) 305,575
Property and Equipment
Land................................................................. -- 88,019
Buildings and improvements........................................... -- 377,169
Equipment............................................................ -- 111,554
------------ -----------
-- 576,742
Accumulated depreciation............................................. -- (90,877)
Construction in progress............................................. -- 2,902
------------ -----------
-- 488,767
Assets restricted for settlement of unpaid claims........................... -- 94,138
Other Long-Term Assets (1)................................................. (1,125,472) 33,249
Other Intangible Assets, net................................................ -- 61,829
------------ -----------
$ (1,140,256) $ 983,558
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ -- $ 71,020
Accrued liabilities and income tax payable........................... -- 140,343
Current maturities of long-term debt and capital lease obligations... -- 2,799
------------ -----------
Total Current Liabilities............................ -- 214,162
Long-Term Debt and Capital Lease Obligations................................ -- 538,770
Reserve for Unpaid Claims................................................... (14,784) 100,125
Deferred Credits and Other Long-Term Liabilities (1)........................ (515,785) 34,455
Minority Interest........................................................... 7,486 7,486
Commitments and Contingencies
Stockholders' Equity........................................................
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 28,405 shares.............................. (3,602) 7,101
Other Stockholders' Equity
Additional paid-in capital........................................... (642,586) 253,295
Retained earnings (Accumulated deficit).............................. 25,188 (161,840)
Warrants outstanding................................................. -- 64
Common stock in Treasury
462 shares........................................................ 4,736 (9,238)
Cumulative foreign currency adjustments............................. (909) (822)
------------ -----------
(617,173) 88,560
------------ -----------
$ (1,140,256) $ 983,558
============ ===========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Quarter ended March 31, 1996
--------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
-------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Net revenue................................................................. $ 264,824 $ 95,161 $ (220)
Costs and expenses
Salaries, supplies and other operating expenses..................... 198,177 84,731 (3,078)
Bad debt expense..................................................... 21,074 1,319 226
Depreciation and amortization........................................ 9,283 3,647 190
Interest, net........................................................ (10,286) (348) 19,206
Stock option expense (credit)........................................ -- -- (409)
------------ ----------- ------------
218,248 89,349 16,135
------------ ----------- ------------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. 46,576 5,812 (16,355)
Provision for (benefit from) income taxes................................... 688 1,414 (61)
------------ ----------- ------------
Income (loss) before equity in earnings (loss of subsidiaries).............. 45,888 4,398 (16,294)
Equity in earnings (loss) of subsidiaries................................... (79) 844 (36,363)
------------ ----------- ------------
Net income (loss)........................................................... $ 45,967 $ 3,554 $ 20,069
============ =========== ============
For the Quarter ended March 31, 1995
--------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------ ------------- --------------
Net revenue................................................................. $ 297,171 $ 10,802 $ (2,701)
Costs and expenses
Salaries, supplies and other operating expenses..................... 207,194 10,162 9,029
Bad debt expense..................................................... 23,586 168 (11)
Depreciation and amortization........................................ 9,652 395 237
Amortization of reorganization value in excess of amounts
allocable to identifiable assets................................... -- -- 7,800
Interest, net........................................................ (8,470) 30 21,968
ESOP expense......................................................... 13,431 -- 842
Stock option expense (credit)........................................ -- -- (956)
Unusual item......................................................... -- -- 29,800
------------ ----------- ------------
245,393 10,755 68,709
------------ ----------- ------------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. 51,778 47 (71,410)
Provision for (benefit from) income taxes................................... 647 -- --
------------ ----------- -----------
Income (loss) before equity in earnings (loss of subsidiaries).............. 51,131 47 (71,410)
Equity in earnings (loss) of subsidiaries................................... (530) -- (56,310)
------------ ----------- -----------
Net income (loss)........................................................... $ 51,661 $ 47 $ (15,100)
============ =========== ===========
For the Quarter ended March 31, 1996
--------------------------------------
Consolidated
Elimination Consolidated
Entries Total
-------------- --------------
Net revenue................................................................. $ (4,812) $ 354,953
Costs and expenses
Salaries, supplies and other operating expenses..................... (4,812) 275,018
Bad debt expense..................................................... -- 22,619
Depreciation and amortization........................................ -- 13,120
Interest, net........................................................ -- 8,572
Stock option expense (credit)........................................ -- (409)
------------ -----------
(4,812) 318,920
------------ -----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. -- 36,033
Provision for (benefit from) income taxes................................... 12,372 14,413
------------ -----------
Income (loss) before equity in earnings (loss of subsidiaries).............. (12,372) 21,620
Equity in earnings (loss) of subsidiaries................................... 37,149 1,551
------------ -----------
Net income (loss)........................................................... $ (49,521) $ 20,069
============ ===========
For the Quarter ended March 31, 1995
--------------------------------------------
Consolidated
Elimination Consolidated
Entries Total
------------- --------------
Net revenue................................................................. $ (5,455)....$......299,817
Costs and expenses
Salaries, supplies and other operating expenses..................... (5,090) 221,295
Bad debt expense..................................................... -- 23,743
Depreciation and amortization........................................ (223) 10,061
Amortization of reorganization value in excess of amounts
allocable to identifiable assets................................... -- 7,800
Interest, net........................................................ 9 13,537
ESOP expense......................................................... -- 14,273
Stock option expense (credit)........................................ -- (956)
Unusual item......................................................... -- 29,800
------------ --------------
(5,304) 319,553
------------ --------------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. (151) (19,736)
Provision for (benefit from) income taxes................................... (5,421) (4,774)
------------ --------------
Income (loss) before equity in earnings (loss of subsidiaries).............. 5,270 (14,962)
Equity in earnings (loss) of subsidiaries................................... 56,978 138
------------ --------------
Net income (loss)........................................................... $ (51,708) $ (15,100)
============ ==============
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Six Months ended March 31, 1995
--------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net revenue................................................................. $ 553,157 $ 24,866 $ (3,680)
Costs and expenses
Salaries, supplies and other operating expenses..................... 396,601 24,156 10,526
Bad debt expense..................................................... 46,796 177 (2,011)
Depreciation and amortization........................................ 18,123 722 (204)
Amortization or reorgnization value in excess of amounts
allocable to identifiable assets................................... -- -- 15,600
Interest, net........................................................ (15,800) 38 43,163
ESOP expense......................................................... 26,969 -- (191)
Unusual item......................................................... -- -- 26,840
Stock option expense (credit)........................................ -- -- (3,317)
------------ ----------- -------------
472,689 25,093 90,406
------------ ----------- -------------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. 80,468 (227) (94,086)
Provision for income taxes................................................. 692 -- --
------------ ----------- -------------
Income (loss) before equity in earnings (loss) of subsidiaries.............. 79,776 (227) (94,086)
Equity in earnings (loss) of subsidiaries................................... (1,049) -- (79,335)
------------ ----------- -------------
Net income (loss)........................................................... $ 80,825 $ (227) $ (14,751)
============ =========== =============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities............................. $ 21,773 $ 11,475 $ (18,077)
------------ ----------- -------------
Cash Flows from Investing Activities:
Capital expenditures................................................. (8,089) (396) (917)
Proceeds from sale of assets......................................... -- -- 5,879.
Acquisitions of businesses, net of cash acquired..................... (61,280) (3,690) --.
Increase in assets restricted for the settlement of unpaid claims.... -- (9,798) (3,862)
------------ ----------- -------------
Cash provided by (used in) investing activities............................. (69,369) (13,884) 1,100.
------------ ----------- -------------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt................................... 28,009 -- --.
Payments on debt and capital obligations............................. (7,315) (4,545) (9,251)
Treasury stock transactions.......................................... -- -- (729)
Proceeds from exercise of stock option and warrants.................. -- -- 391
------------ ----------- -------------
Cash provided by (used in) financing activities............................. 20,964 (4,545) (9,589)
------------ ----------- -------------
Net increase (decrease) in cash and cash equivalents........................ (26,902) (6,954) (26,566)
Cash and cash equivalents at beginning of period............................ 71,850 8,606 49,147.
------------ ----------- -------------
Cash and cash equivalents at end of period................................. $ 44,948 $ 1,652 $ 22,581.
============ =========== =============
For the Six Months ended March 31, 1995
----------------------------------------
Consolidated
Elimination Consolidated
Entries Total
--------------- --------------
Net revenue................................................................. $ (10,685) $ 563,658
Costs and expenses
Salaries, supplies and other operating expenses..................... (10,461) 420,822
Bad debt expense..................................................... -- 44,962
Depreciation and amortization........................................ (223) 18,418
Amortization or reorgnization value in excess of amounts
allocable to identifiable assets................................... -- 15,600
Interest, net........................................................ -- 27,401
ESOP expense......................................................... (5) 26,773
Unusual item......................................................... -- 26,840
Stock option expense (credit)........................................ -- (3,317)
------------- -----------
(10,689) 577,499
------------- -----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. 4 (13,841)
Provision for income taxes................................................. 12 704
------------- -----------
Income (loss) before equity in earnings (loss) of subsidiaries.............. (8) (14,545)
Equity in earnings (loss) of subsidiaries................................... 80,590 206
-------------- -----------
Net income (loss)........................................................... $ (80,598) $ (14,751)
============= ===========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities............................. $ -- $ 15,171
------------ -----------
Cash Flows from Investing Activities:
Capital expenditures................................................. -- (9,402)
Proceeds from sale of assets......................................... -- 5,879
Acquisitions of businesses, net of cash acquired..................... -- (64,970)
Increase in assets restricted for the settlement of unpaid claims.... -- (13,660)
------------ -----------
Cash provided by (used in) investing activities............................. -- (82,153)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt................................... -- 28,009
Payments on debt and capital obligations............................. -- (21,111)
Treasury stock transactions.......................................... -- (729)
Proceeds from exercise of stock option and warrants.................. -- 391
------------ -----------
Cash provided by (used in) financing activities............................. -- 6,560
------------ -----------
Net increase (decrease) in cash and cash equivalents........................ -- (60,422)
Cash and cash equivalents at beginning of period............................ -- 129,603
------------ -----------
Cash and cash equivalents at end of period................................. $ -- $ 69,181
============ ===========
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Six Months ended March 31, 1996
--------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue................................................................. $ 512,578 $ 139,689 $ 7,627
Costs and expenses
Salaries, supplies and other operating expenses..................... 392,023 122,091 1,506
Bad debt expense..................................................... 41,038 1,988 (619)
Depreciation and amortization........................................ 18,028 4,903 369
Interest, net........................................................ (20,386) (268) 43,048
Stock option expense (credit)........................................ -- -- 1,414
------------ ----------- -------------
430,703 128,714 45,718
------------ ----------- -------------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. 81,875 10,975 (38,091)
Provision for income taxes................................................. 1,341 2,046 208
------------ ----------- -------------
Income (loss) before equity in earnings (loss) of subsidiaries.............. 80,534 8,929 (38,299)
Equity in earnings (loss) of subsidiaries................................... (368) 1,145 (54,438)
------------ ----------- -------------
Net income (loss)........................................................... $ 80,902 $ 7,784 $ 16,139
============ =========== =============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities............................. $ 14,420 $ 17,954 $ (4,977)
------------ ----------- -------------
Cash Flows from Investing Activities:
Capital expenditures................................................. (12,043) (356) (388)
Proceeds from sale of assets......................................... 653 -- --
Acquisitions of businesses, net of cash acquired..................... (256) 38,226 (85,890)
Increase in assets restricted for the settlement of unpaid claims.... (7,615) 1,545
------------ ----------- -------------
Cash provided by (used in) investing activities............................. (11,646) 30,255 (84,733)
------------ ----------- -------------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt................................... -- 125 68,000
Payments on debt and capital obligations............................. (11,566) (471) (68,000)
Proceeds from issuance of Common Stock, net of issuance costs........ -- -- 68,669
Income tax payments made on behalf of stock optionees................ -- -- (1,678)
Proceeds from exercise of stock option and warrants.................. -- -- 1,808
------------ ----------- -------------
Cash provided by (used in) financing activities............................. (11,566) (346) 68,799
------------ ----------- -------------
Net increase (decrease) in cash and cash equivalents........................ (8,792) 47,863 (20,911)
Cash and cash equivalents at beginning of period............................ 60,719 10,279 34,516
------------ ----------- -------------
Cash and cash equivalents at end of period.................................. $ 51,927 $ 58,142 $ 13,605
============ =========== =============
For the Six Months ended March 31, 1996
--------------------------------------------------
Consolidated
Elimination Consolidated
Entries Total
-------------- --------------
Net revenue................................................................. (9,276) 650,618
Costs and expenses
Salaries, supplies and other operating expenses..................... (9,276) 506,344
Bad debt expense..................................................... -- 42,407
Depreciation and amortization........................................ -- 23,300
Interest, net........................................................ -- 22,394
Stock option expense (credit)........................................ -- 1,414
------------ ------------
(9,276) 595,859
------------ ------------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................. -- 54,759
Provision for income taxes................................................. 18,777 22,372
------------ ------------
Income (loss) before equity in earnings (loss) of subsidiaries.............. (18,777) 32,387
Equity in earnings (loss) of subsidiaries................................... 56,231 2,570
------------ ------------
Net income (loss)........................................................... (75,008) 29,817
============ ============
CONDENSED CONSOLIDAT
Cash provided by (used in) operating activities............................. -- 27,397
------------ --------------
Cash Flows from Investing Activities:
Capital expenditures................................................. -- (12,787)
Proceeds from sale of assets......................................... -- 653
Acquisitions of businesses, net of cash acquired..................... -- (47,920)
Increase in assets restricted for the settlement of unpaid claims.... -- (6,070)
------------ --------------
Cash provided by (used in) investing activities............................. -- (66,124)
------------ --------------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt................................... -- 68,125
Payments on debt and capital obligations............................. -- (80,037)
Proceeds from issuance of Common Stock, net of issuance costs........ -- 68,669
Income tax payments made on behalf of stock optionees................ -- (1,678)
Proceeds from exercise of stock option and warrants.................. -- 1,808
------------ --------------
Cash provided by (used in) financing activities............................. -- 56,887
------------ --------------
Net increase (decrease) in cash and cash equivalents........................ -- 18,160
Cash and cash equivalents at beginning of period............................ -- 105,514
------------ --------------
Cash and cash equivalents at end of period.................................. -- 123,674
============ ==============
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements.
</TABLE>
15
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
March 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements regarding the sufficiency of the Company's
liquidity and sources of capital and the statements under the heading "Outlook".
These forward-looking statements are subject to certain risks, uncertainties and
other factors which could cause actual results to differ materially from those
anticipated, including, without limitation, potential reductions in
reimbursement by third-party payers and changes in hospital payer mix,
governmental budgetary constraints and healthcare reform, the impact of
potential hospital closures, competition in the provider business and the
managed care business, and the regulatory environment for the Company's
businesses, as well as the other factors discussed in Exhibit 99 hereto, which
is hereby incorporated by reference.
Acquisition
On December 13, 1995, the Company acquired a 51% ownership interest in
Green Spring for approximately $68.9 million in cash, the issuance of 215,458
shares of Common Stock valued at approximately $4.3 million and the contribution
of GPA, a wholly-owned subsidiary of the Company, which became a wholly-owned
subsidiary of Green Spring. On December 20, 1995, the Company acquired an
additional 10% ownership interest in Green Spring for approximately $16.7
million in cash as a result of an exercise by a minority stockholder of its
Exchange Option for a portion of the stockholder's interest in Green Spring. The
Company has a 61% ownership interest in Green Spring as of March 31, 1996. Green
Spring provides managed behavioral healthcare services, which includes
utilization management, care management and employee assistance programs through
a 50-state provider network for approximately 12.6 million people nationwide.
The Company has accounted for the acquisition of Green Spring using the purchase
method of accounting, which resulted in additional intangible assets of
approximately $112 million.
The minority stockholders of Green Spring consist of four Blue
Cross/Blue Shield organizations (the "Blues") that are key customers of Green
Spring. In addition, two other Blues organizations that formerly owned a portion
of Green Spring will continue as customers of Green Spring. As of March 31,
1996, the minority stockholders of Green Spring have the option, under certain
circumstances, to exchange their ownership interests in Green Spring for
2,831,739 shares of the Company's Common Stock or $65.1 million in subordinated
notes. The Company may elect to pay cash in lieu of issuing the subordinated
notes. The Exchange Option expires December 13, 1998.
Psychiatric Hospital Results
Selected statistics (from the date of acquisition for acquired
facilities) for the psychiatric hospitals in operation by quarter for fiscal
1995 and fiscal 1996 are as follows:
16
<PAGE>
<TABLE>
<CAPTION>
Fiscal Fiscal %
1995 1996 Change
---------- ---------- -----------
<S> <C> <C> <C> <C>
Hospitals in operation:
December 31..................... 113 102 (10)
March 31........................ 110 99 (10)
June 30......................... 108
September 30.................... 102
Average licensed beds at:
Quarter:
First..................... 9,198 9,110 (1)%
Second.................... 9,567 9,040 (6)
Third..................... 9,585
Fourth.................... 9,130
Year........................... 9,368
Net revenue (in thousands):
Quarter:
First..................... 249,105 $ 253,565 2 %
Second.................... 269,85 257,690 (5)
Third..................... 272,510
Fourth.................... 250,891
---------
Year........................... 1,042,360 .
=========
Patient days:
Quarter:
First..................... 415,122 432,474 4 %
Second.................... 456,885 463,327 1
Third..................... 456,698
Fourth.................... 429,374
---------
Year........................... 1,758,079
=========
Equivalent patient days:
Quarter:
First..................... 462,663 478,693 3 %
Second.................... 509,222 513,502 1
Third..................... 509,354
Fourth.................... 476,270
---------
Year........................... 1,957,509
=========
Net revenue per equivalent patient day:
Quarter:
First...................... 538 530 (1)%
Second..................... 530 502 (5)
Third...................... 535
Fourth..................... 527
Year............................ 532
Admissions:
Quarter:
First...................... 30,626 32,865 7 %
Second..................... 34,772 37,966 9
Third...................... 33,790
Fourth..................... 32,977
---------
Year............................ 132,165
=========
Average length of stay (days):
Quarter:
First...................... 13.3 12.4 (7)%
Second..................... 12.7 12.2 (4)
Third...................... 12.8
Fourth..................... 12.9
Year............................ 12.9
</TABLE>
17
<PAGE>
Results of Operations
The following table summarizes, for the periods indicated, changes in
selected operating indicators.
<TABLE>
<CAPTION>
Percentage of Net Revenue
-------------------------------------------------------------------------
Three Months ended March 31 Six Months ended March 31
----------------------------------- ----------------------------------
1995 1996 1995 1996
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue........................................ 100.0% 100.0% 100.0% 100.0%
Salaries, supplies and other operating expenses.... 73.8 77.5 74.6 77.8
Bad debt expense................................... 7.9 6.4 8.0 6.5
-------------- ------------ ------------ ------------
Total expenses..................................... 81.7 83.9 82.6 84.3
Operating margin................................... 18.3 16.1 17.4 15.7
============== ============ ============ ============
</TABLE>
Patient days at the Company's hospitals increased 1% and 3% for the quarter
and the six months ended March 31, 1996, respectively, compared to the same
periods of fiscal 1995. These increases resulted primarily from (i) patient days
attributable to the hospitals acquired during fiscal 1995 and (ii) admissions
growth at same store hospitals offset by reductions in patient days resulting
from the hospitals closed in fiscal 1995. Total admissions increased 9% and 8%
for the quarter and the six months ended March 31, 1996, compared to the prior
year periods. These increases resulted from continued admissions growth at the
Company's hospitals and admissions attributable to hospitals acquired during
fiscal 1995 offset by reductions resulting from hospitals closed in fiscal 1995
and 1996.
The Company's net revenue for the quarter and the six months ended March
31, 1996 increased 18.4% and 15.4%, respectively, compared to the same periods
in fiscal 1995. These increases resulted primarily from acquisitions less (i)
the effect of hospitals closed during fiscal 1995 and 1996 and (ii) the decrease
in revenue per equivalent patient day in fiscal 1996. National Mentor, Inc.
("Mentor"), which was acquired in January 1995, had revenue of $16.2 million and
$33.1 million for the quarter and the six months ended March 31, 1996 compared
to $13.9 million for the same periods in fiscal 1995. Green Spring (excluding
GPA), which was acquired on December 13, 1995, had revenues of approximately
$61.2 million and $71.9 million for the quarter and the six months ended March
31, 1996, respectively. Net revenue for the quarters ended March 31, 1995 and
1996 included $6.7 million and $3.3 million, respectively, for the normal
settlement and adjustments reimbursement issues related to earlier fiscal
periods ("reimbursement issues"). Net revenue for the six months ended
March 31, 1995 and 1996 included $15.0 million and $11.1 million, respectively,
related to reimbursement issues. Net revenue per equivalent patient day at the
Company's psychiatric hospitals decreased in the quarter and the six months
ending March 31, 1996 by 5% and 4%, respectively, compared to the same periods
in the prior year. The decreases were primarily due to a continued shift in
payer mix from private payer sources to managed care payers and governmental
payers and lower settlements of reimbursement issues. Services to Medicare and
Medicaid patients have increased due to increased recognition and treatment of
behavioral illnesses of the elderly and disabled and, in some states, improved
coverage of behavioral services in psychiatric hospitals for Medicaid
beneficiaries.
The Company's salaries, supplies and other operating expenses increased
24.3% and 20.3% in the quarter and the six months ended March 31, 1996,
respectively, compared to the same periods in fiscal 1995. These increases
resulted primarily from acquisitions less (i) the effect of hospitals closed in
fiscal 1995 and 1996 and (ii) an adjustment, as a result of updated
actuarial estimates to malpractice claim reserves, which resulted in a reduction
of expenses of approximately $7.5 million during the quarter and the six months
ended March 31, 1996. Expenses incurred by Mentor increased to $14.0 million
and $28.4 million for the quarter and the six months ended March 31, 1996
compared to $12.3 million for the same periods in fiscal 1995. Green Spring
expenses (excluding GPA) were approximately $55.6 million and $64.7 million,
respectively, in the quarter and the six months ended March 31, 1996.
18
<PAGE>
The Company's bad debt expense decreased 4.7% and 5.7% in the quarter and
the six months ended March 31, 1996 compared to the same periods in fiscal 1995.
These decreases were primarily due to the shift in the provider business to
managed care payers, which reduces the Company's credit risk associated with
individual patients and improved collections of hospital receivables. The
decrease in bad debt expense as a result of the shift to managed care payers
were partially offset by the increase in bad debt expense related to
hospital-based acquisitions. Mentor and Green Spring bad debt expense was less
than 1% of net revenue for their respective businesses in each period. The
Company could experience future increases in bad debt expense in its provider
business due to increased deductibles and co-insurance and reduced annual and
lifetime psychiatric maximum payment limits for individual patients.
Depreciation and amortization increased 30.4% and 26.5% in the quarter and
the six months ended March 31, 1996 compared to the same periods in fiscal 1995.
These increases resulted primarily from depreciation and amortization related to
acquired businesses. Mentor had depreciation and amortization of approximately
$643,000 and $1.2 million in the quarter and the six months ended March 31,
1996, respectively, compared to $626,000 for the same periods in fiscal 1995.
Green Spring (excluding GPA) had depreciation and amortization of $2.6 million
and $3.1 million for the quarter and the six months ended March 31, 1996,
respectively.
Reorganization value in excess of amounts allocable to identifiable assets
was fully amortized effective July 31, 1995. Accordingly, no such amortization
expense was recorded in the quarter and the six months ended March 31, 1996.
Interest expense, net, decreased 36.7% and 18.3% for the quarter and the
six months ended March 31, 1996 compared to the same periods in fiscal 1995.
These decreases resulted primarily from approximately $5.0 million of interest
income recorded during the quarter and the six months ended March 31, 1996
related to income tax refunds due from the State of California for the Company's
income tax returns for fiscal 1982 through 1989.
ESOP expense for the quarter and the six months ended March 31, 1996 was $0
compared to $14.3 million and $26.8 million in the prior year periods. The
decrease resulted from the Company's commitment to allocate all existing shares
held by the ESOP to the participants as of September 30, 1995.
Stock option expense for the quarter and the six months ended March 31,
1996 increased $547,000 and $4.7 million, respectively, from the previous year
periods primarily due to fluctuations in the market price of the Company's
common stock and a reduced number of options outstanding under variable stock
option plans.
During the first quarter of fiscal 1995, the Company recorded an unusual
item of approximately $3.0 million which represented the pre-tax gain on the
sale of three psychiatric hospitals. During the second quarter of fiscal 1995,
the Company recorded an unusual item of $29.8 million related to the settlement
of insurance claims.
The Company's effective tax rate was 40.0% and 40.9% in the quarter and the
six months ended March 31, 1996. The change in the effective tax rate from the
prior year periods is primarily attributable to (i) the elimination of
non-deductible amortization of reorganization value in excess of amounts
allocable to identifiable assets in fiscal 1996 and (ii) the reduction in the
Company's effective tax rate as a result of the favorable resolution of the
Company's California income tax returns for fiscal 1982 through 1989 offset by
the increase in non-deductible intangible amortization in the fiscal 1996
periods as a result of the Mentor and Green Spring acquisitions.
Minority interest increased $1.4 million and $2.4 million in the quarter
and the six months ended March 31, 1996, respectively, compared to the prior
year periods. The increase is primarily due to the Company acquiring a
controlling interest in Green Spring in December 1995 and obtaining a
controlling interest in other businesses during fiscal 1995 and 1996.
Recent Accounting Pronouncements
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which
becomes effective for fiscal years beginning after December 15, 1995. FAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be
19
<PAGE>
allowed to measure compensation expense for stock-based compensation under FAS
123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"). Entities electing to remain with the accounting in APB 25 will be required
to make pro forma disclosures of net income and earnings per share as if the
provisions of FAS 123 had been applied. The Company is in the process of
evaluating FAS 123. The potential impact on the Company adopting FAS 123 has not
been quantified at this time. The Company must adopt FAS 123 no later than
October 1, 1996.
Liquidity and Sources of Capital
Operating Activities. The Company's net cash provided by operating
activities was approximately $15.2 million and $27.4 million for the six months
ended March 31, 1995 and 1996, respectively. Management believes that the
Company will have adequate cash flows from operations in fiscal 1996 to fund
operations, capital expenditures and debt service obligations.
Investing Activities. The Company acquired a 61% ownership interest in
Green Spring during the six months ended March 31, 1996. The consideration paid
for Green Spring and related acquisition costs have resulted in the use of cash
of approximately $87.0 million compared to approximately $65.0 million in
acquisition expenditures during the six months ended March 31, 1995.
Management believes that its cash on hand, future cash flows from
operations, borrowing capacity under the Revolving Credit Agreement and its
ability to issue debt and equity securities under current market conditions will
provide adequate capital resources to support the Company's anticipated
investing strategies.
Financing Activities. The Company borrowed approximately $28.0 million
and $68.1 million, respectively, during the six months ended March 31, 1995 and
1996, primarily to fund the acquisition of 13 hospitals in fiscal 1995 and to
fund the acquisition of Green Spring in fiscal 1996. The Company believes that
its businesses will generate sufficient cash flows from operations to meet its
future debt service requirements.
On January 25, 1996, the Company issued 4,000,000 shares of Common
Stock (the "Shares") along with a warrant to purchase an additional 2,000,000
shares of Common Stock (the "Warrant") pursuant to a Stock and Warrant Purchase
Agreement. The Warrant, which expires in January, 2000 entitles the holder to
purchase such additional shares of Common Stock at a per share price of $26.15,
subject to adjustment for certain dilutive events, and provides registration
rights for the shares of Common Stock underlying the Warrant. The aggregate
purchase price for the Shares and the Warrant was $69,732,000. The Warrant
becomes exercisable on January 25, 1997 and expires on January 25, 2000.
The Company received proceeds of approximately $68.7 million, net of
issuance costs, from the issuance of the Shares and the Warrant. Approximately
$68.0 million of the proceeds were used to repay outstanding borrowings under
the Revolving Credit Agreement.
As of March 31, 1996, the Company had approximately $100.4 million of
availability under the Revolving Credit Agreement. The Company was in compliance
with all debt covenants at March 31, 1996.
Outlook
Management continually assesses events and changes in circumstances
that could effect its business strategy and the viability of its operating
facilities. During fiscal 1995, the Company consolidated, closed or sold fifteen
psychiatric hospitals. During the first six months of fiscal 1996, the Company
consolidated or closed three hospitals. During April 1996, the Company closed
three additional hospitals. The Company expects to record a charge of
approximately $2.5 million in the quarter ended June 30, 1996, related to the
costs necessary to exit the hospital operations. See Note G for further
information regarding facility closures. Management expects to consolidate
services in selected markets and to close or sell additional facilities in
future periods depending on market conditions and evolving business strategies.
If the Company closes additional psychiatric hospitals in future periods, it
could result in additional charges to income for the costs necessary to exit the
hospital operations.
20
<PAGE>
During the fourth quarter of fiscal 1995, the Company recorded
impairment losses on property and equipment and intangible assets of
approximately $23.0 million and $4.0 million, respectively. The impairment
losses were primarily related to assets to be held and used subsequent to
September 30, 1995. Such impairment losses resulted from changes in the manner
that certain of the Company's assets will be used in future periods and from
historical operating losses at certain of the Company's operating facilities
combined with projected future operating losses. The effected businesses that
were operating as of March 31, 1996 had negative operating income (net revenue
less salaries, supplies and other operating expenses and bad debt expense) in
aggregate during the six months ended March 31, 1996, excluding the normal
settlement of reimbursement issues. When events or changes in circumstances are
present that indicate the carrying amount of long-lived assets may not be
recoverable, the Company assesses the recoverability of long-lived assets by
determining whether the carrying value of such assets will be recovered through
future cash flows expected from the use of the asset and its eventual
disposition. The Company may record impairment losses in future periods as
circumstances warrant.
The Company's hospitals continue to experience a shift in payer mix to
managed care payers from other payers, which contributed to a reduction in
revenue per equivalent patient day compared to prior periods. Management
anticipates continued shifting in its hospitals' payer mix towards managed care
payers as a result of changes in the healthcare marketplace and the synergies
created by the Green Spring acquisition. Future shifts in the Company's hospital
payer mix to managed care payers could result in lower revenue per equivalent
patient day in future quarterly periods for the Company's hospitals operations.
The Company expects the Green Spring acquisition to result in increased
revenue and operating income during fiscal 1996. However, increases in
amortization expense and minority interest resulting from the acquisition of
Green Spring may exceed the expected increase in operating income in fiscal
1996. In addition, the Exchange Option is potentially dilutive to earnings per
share, on a fully diluted basis, in future quarterly periods during fiscal 1996.
The issuance of the Shares in January 1996 resulted in the Company
reducing its long term debt and future interest obligations, increasing its
stockholders' equity and increasing its borrowing capacity. However, the
additional Common Stock outstanding as a result of the issuance of the Shares
will have a dilutive effect on earnings per share during future quarterly
periods.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
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.
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.
Item 4. - Submission of Matters to Vote of Security Holders.
The Company held an annual meeting of stockholders on February 22,
1996.
The tabulation of votes with respect to each matter voted upon at the
meeting is as follows:
<TABLE>
<CAPTION>
Votes cast
-----------------------------------------------------------------
Authority Broker
For Withheld Abstain Non-Votes
--- -------- ------- ---------
<S> <C> <C> <C> <C>
Election of:
Edwin M. Banks
as a Director (term
expiring in 1999) 22,196,978 21,699 N/A N/A
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
Approval of:
1996 Stock Option Plan 12,372,711 4,202,295 65,221 5,578,450
1997 Employee Stock
Purchase Plan 14,733,997 1,853,046 53,183 5,578,451
1996 Directors' Stock
Option Plan 15,317,211 1,287,708 73,783 5,539,975
</TABLE>
Item 5. - Other Information
Acquisition
On December 13, 1995, the Company acquired a 51% ownership interest in
Green Spring for approximately $68.9 million in cash, the issuance of 215,458
shares of Common Stock valued at approximately $4.3 million and the contribution
of GPA, a wholly-owned subsidiary of the Company, which became a wholly-owned
subsidiary of Green Spring. On December 20, 1995, the Company acquired an
additional 10% ownership interest in Green Spring for approximately $16.7
million in cash as a result of an exercise by a minority stockholder of its
Exchange Option for a
22
<PAGE>
portion of the stockholder's interest in Green Spring. The Company has 61%
ownership interest in Green Spring as of March 31, 1996. The Company has
accounted for the acquisition of Green Spring using the purchase method of
accounting.
The minority stockholders of Green Spring consist of four Blue
Cross/Blue Shield organizations (the "Blues") that are key customers of Green
Spring. In addition, two other Blues organizations that formerly owned a portion
of Green Spring will continue as customers of Green Spring. As of March 31,
1996, the minority stockholders of Green Spring have the option, under certain
circumstances, to exchange their ownership interests in Green Spring for
2,831,739 shares of Magellan Common Stock or $65.1 million in subordinated
notes. The Company may elect to pay cash in lieu of issuing the subordinated
notes. The Exchange Option expires December 13, 1998.
Description of Green Spring's Business
Green Spring is the nation's third largest managed behavioral
healthcare organization specializing in mental health and substance
abuse/dependency services through a network of more than 30,000 providers
nationwide, serving approximately 12.6 million members at March 31, 1996.
Green Spring was founded in 1991 by a group of clinicians who utilized
a clinical model that emphasizes the treatment needs of individuals. Green
Spring attempts to match each patient with an appropriate provider, focusing on
the quality of care and cost effectiveness from both the clinical and service
aspects.
Green Spring's services include:
Enhanced Utilization Management, a utilization review process that
employs clinical criteria designed to provide each patient with accessible,
appropriate and affordable treatment across the entire continuum of care and
services;
Care Management, a fully integrated healthcare model that offers
utilization review services and provides care to patients through the management
of a national network of providers and Green Spring-owned staff model clinics;
Employee Assistance Plans, employer-paid assessment, counseling and
referral programs that help employees address personal and workplace problems;
and
Comprehensive Administrative Services, including member assistance,
management reporting, claims processing, clinical management information and
provider referral systems that are adaptable to customer circumstances and
requirements.
Green Spring has several contractual funding arrangements with its
customers ranging from full risk capitated contracts to non-risk administrative
services only (ASO) arrangements. The primary funding arrangements for risk
business include full capitation and partial capitation. Under full capitation
arrangements, Green Spring assumes full risk for care under the contract and is
paid a monthly fee for each at-risk member regardless of the actual utilization
of services by the member. Partial capitation arrangements are similar to full
capitation arrangements except that the underwriting gain or loss is split
between the customer and Green Spring based on a pre-determined formula.
Non-risk funding arrangements include administrative service fees, and incentive
based administrative service fees. ASO funding arrangements call for the payment
of a fee to Green Spring for providing varying levels of administrative support
and management. Incentive-based administrative service fees are similar to
incentive-based ASO arrangements except the ASO fee is subject to adjustment
based on the level of performance achieved by Green Spring compared to a
mutually agreed target level of performance.
At March 31, 1996, Green Spring's risk and non-risk membership was
approximately 3.5 million and 9.1 million, respectively. During the quarter and
the six months ended March 31, 1996, risk and non-risk business comprised
approximately 70% and 30%, respectively, of Green Spring revenues.
23
<PAGE>
Green Spring's customers include Fortune 1000 companies, Blue
Cross/Blue Shield organizations, major HMO's/PPO's, several State employee
programs, labor unions and several State Medicaid programs. During the quarter
and the six months ended March 31, 1996, approximately 70% of Green Spring's
revenues were generated from the Blues organizations.
Government Regulation
Green Spring operations, in some states, are subject to utilization
review licensure and related state regulation procedures. Green Spring provides
managed behavioral healthcare services to various Blue Cross/Blue Shield plans
that operate Medicare and Medicaid health maintenance organizations or other
at-risk managed care programs and that participate in the Blue Cross Federal
Employees health program. As a contractor to these Blue Cross/Blue Shield plans,
Green Spring is indirectly subject to federal and, with respect to the Medicaid
program, state monitoring and regulation of performance and financial reporting
requirements. However, Green Spring must comply with all reporting and
monitoring requirements of the Health Care Financing Administration ("HCFA")
communicated to it from the prime contractor, Blue Cross/Blue Shield plans, for
the behavioral healthcare portion for the Medicare risk business. The Office of
Inspector General of the United States monitors and reviews financial reporting
and performance of the Blue Cross Federal Employees Program for which Green
Spring provides the behavioral healthcare benefit through several Blue Cross
plans. Medicaid business is also subject to the financial reporting and
performance monitoring requirements of the applicable state governments as well
as HCFA as noted above.
The management of Green Spring believe that it is in compliance, in all
material respects, with all current state and federal regulatory requirements
applicable to the business it conducts.
Competition
The managed healthcare industry is being affected by various external
factors including rising healthcare costs, intense price competition, market
consolidation by major managed care companies and proposed healthcare reform
legislation.
Green Spring faces competition from a number of sources, including
other behavioral health managed care companies and traditional full service
managed care companies that contract to provide behavioral healthcare benefits.
Also, to a lesser extent, competition exists from fully capitated
multi-specialty medical groups and individual practice associations that
directly contract with managed care companies and other customers to provide and
manage all components of healthcare for the members including the behavioral
healthcare component.
Green Spring believes that the most significant factors in a customer's
selection of a managed behavioral healthcare company include price, the extent
and depth of provider networks and flexibility and quality of services. The
management of Green Spring believes that Green Spring competes effectively with
respect to these factors.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Amendment No. 1 to Stock and Warrant Purchase
Agreement, dated January 25, 1996, between the
Company and Rainwater-Magellan Holdings, L.P., which
was filed as Exhibit 4.7 to the Company's
Registration Statement on Form S-3 dated February 26,
1996, and is incorporated herein by reference.
*10(a) 1996 Stock Option Plan of the Company.
*10(b) 1996 Directors' Stock Option Plan of the Company.
11 Statement re computation of per share earnings.
27 Financial Data Schedule
24
<PAGE>
99 Safe Harbor for Forward-Looking Statements under
Private Securities Litigation Reform Act of 1995;
Certain Cautionary Statements.
*Constitutes a management contract or compensatory plan
arrangement.
(b) Report on Form 8-K
There were no current reports on Form 8-K filed by
the Registrant with the Securities and Exchange
Commission during the quarter ended March 31, 1996.
25
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAGELLAN HEALTH SERVICES, INC.
------------------------------
(Registrant)
Date: May 14, 1996 /s/ Craig L. McKnight
------------------------ ---------------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
Date: May 14, 1996 /s/ Howard A. McLure
----------------------- --------------------
Howard A. McLure
Vice President and Controller
(Principal Accounting Officer)
26
<PAGE>
- 1 -
MAGELLAN HEALTH SERVICES, INC.
1996 STOCK OPTION PLAN
1. Purpose. The purpose of the Magellan Health Services, Inc.
1996 Stock Option Plan is to motivate and retain officers and other key
employees of Magellan Health Services, Inc. and its Subsidiaries who have major
responsibility for the attainment of the primary long-term performance goals of
Magellan Health Services, Inc.
2. Definitions. The following terms shall have the following
meanings:
"Board" means the Board of Directors of the Corporation.
"Change in Control" means the effective date of the occurrence, at any
time after November 30, 1995, of one or more of the following events: (i) the
sale, lease, transfer or other disposition, in one or more related transactions,
of all or substantially all of the Corporation's assets to any person or related
group of persons, including a "group" as such term is used in Section 13(d)(3)
of the Exchange Act, (ii) the merger or consolidation of the Corporation with or
into another corporation, the merger of another corporation into the Corporation
or any other transaction, to the extent that the stockholders of the Corporation
immediately prior to any such transaction hold less than 50 percent of the total
voting power or of the voting stock of the surviving corporation resulting from
any such transaction, (iii) any person or related group of persons, including a
"group" as such term is used in Section 13(d)(3) of the Exchange Act, whether
such person or group of persons is a stockholder of the Corporation as of
November 30, 1995, holds 30 percent or more of the voting power or of the voting
stock of the Corporation, or (iv) the liquidation or dissolution of the
Corporation.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules promulgated thereunder.
"Committee" means a committee of two or more members of the Board
constituted and empowered by the Board to administer the Plan in accordance with
its terms.
"Corporation" means Magellan Health Services, Inc., a Delaware
corporation.
"Director" means a member of the Board.
"Disability" means a physical or mental condition under which the
Participant qualifies for (or will qualify for after expiration of a waiting
period) disability benefits under the long-term disability plan of the
Corporation or a Subsidiary that employs such Participant.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
DC01/100718-2 //
<PAGE>
- 2 -
"Fair Market Value" means: (1) if the Stock is listed on a national
securities exchange (as such term is defined by the Exchange Act) or is traded
on the Nasdaq National Market System on the date of award or other
determination, the price equal to the mean between the high and low sales prices
of a share of Stock on said national securities exchange or on said Nasdaq
National Market System on that date (or if no shares of the Stock are traded on
that date but there were shares traded on dates within a reasonable period both
before and after such date, the Fair Market Value shall be the weighted average
of the means between the high and low sales prices of the Stock on the nearest
date before and the nearest date after that date on which shares of the Stock
are traded); (2) if the Stock is traded both on a national securities exchange
and in the over-the-counter market, the Fair Market Value shall be determined by
the prices on the national securities exchange; and (3) if the Stock is not
listed for trading on a national securities exchange and is not traded on the
Nasdaq National Market System or otherwise in the over-the-counter market, then
the Committee shall determine the Fair Market Value of the Stock from time to
time in its sole discretion.
"Option" means an Option granted pursuant to Section 6.
"Participant" means an employee of the Corporation or any of its
Subsidiaries who is selected to participate in the Plan in accordance with
Section 4.
"Plan" means the Magellan Health Services, Inc. 1996 Stock Option Plan.
"Stock" means the common stock, par value $0.25 per share, of the
Corporation.
"Stock Option Agreement" means the written agreement or instrument
which sets forth the terms of an Option granted to a Participant under this
Plan.
"Subsidiary" means any corporation, as defined in Section 7701 of the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder, of which the Corporation, at the time, directly or indirectly, owns
50% or more of the outstanding securities having ordinary voting power to elect
directors (other than securities having voting power only by reason of a
contingency).
3. Administration. The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee, acting in its absolute
discretion, shall exercise such powers and take such action as expressly called
for under this Plan and, further, shall have the power to interpret the Plan, to
determine the terms of each Stock Option Agreement (subject to the provisions of
the Plan) and (subject to Section 18 and Rule 16b-3 under the Exchange Act, if
applicable) to take such other action in the administration and operation of
this Plan as the Committee deems equitable under the circumstances. All actions
of the Committee shall be binding on the Corporation, on each affected
Participant and on each other person directly or indirectly affected by such
action. No member of the Board shall serve as a member of the
DC01/100718-2 //
<PAGE>
- 3 -
Committee unless such member is a "disinterested person" within the meaning of
Rule 16b-3 under the Exchange Act. The Committee shall have the right to
delegate to the chief executive officer of the Corporation the authority to
select Participants and to grant Options (except to any person subject to
Section 16 of the Exchange Act), subject to any review, approval or notification
required by the Committee or as otherwise may be required by law.
4. Participation. Participants in the Plan shall be limited to
those officers and employees of the Corporation or any of its Subsidiaries who
have been selected to participate in the Plan by the Committee acting in its
absolute discretion.
5. Maximum Number of Shares Subject to Options. Subject to the
provisions of Section 9, there shall be 1,750,000 shares of Stock reserved for
use under this Plan, and such shares of Stock shall be reserved to the extent
that the Committee and the Board deems appropriate from authorized but unissued
shares of Stock or from shares of Stock which have been reacquired by the
Corporation. Any shares of Stock subject to any Option which remain unpurchased
after the cancellation, expiration, exchange or forfeiture of such Option shall
again become available for use under this Plan. All authorized and unissued
shares issued upon exercise of Options under the Plan shall be fully paid and
nonassessable shares.
6. Grant of Options. The Committee, acting in its absolute discretion,
shall have the right to grant Options to Participants under this Plan from time
to time; provided, that the maximum number of shares of Stock issuable upon
exercise of Options shall not exceed 1,750,000, subject to adjustment as
provided in Section 9. No Option shall be granted after December 31, 1999. The
maximum number of Options that are granted to any Participant shall not exceed
500,000, subject to adjustment as provided in Section 9.
7. Terms and Conditions of Options. Options granted pursuant to the
Plan shall be evidenced by Stock Option Agreements in such form as the Committee
from time to time shall approve, including any such terms and conditions not
inconsistent with the provisions set forth in the Plan as the Committee may
determine; provided, that such Stock Option Agreements and the Options granted
shall comply with and be subject to the following terms and conditions:
(a) Employment. Each Participant shall agree to remain in the
employ of and to render services to the Corporation or a Subsidiary thereof for
such period as the Committee may require in the Stock Option Agreement;
provided, that such agreement shall not impose upon the Corporation or any
Subsidiary thereof any obligation to retain the Participant in its employ for
any period.
(b) Number of Shares. Each Stock Option Agreement shall
state the total number of shares of Stock to which it pertains.
DC01/100718-2 //
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(c) Exercise Price. The exercise price per share for
Options shall be Fair Market Value of the Stock on the date of grant, subject
to adjustment as contemplated by Section 9.
(d) Medium and Time of Payment. The exercise price shall be
payable upon the exercise of the Option, or as provided in Section 7(e) if the
Corporation adopts a broker-directed cashless exercise/resale procedure, in each
case in an amount equal to the number of shares then being purchased times the
per share exercise price. Payment shall be in cash, except that the Corporation,
in its sole discretion, may permit payment by delivery to the Corporation of a
certificate or certificates for shares of Stock duly endorsed for transfer to
the Corporation with signature guaranteed by a member firm of the New York Stock
Exchange or by a national banking association. In the event of any payment by
delivery of shares of Stock, such shares shall be valued on the basis of their
Fair Market Value determined as of the day prior to the date of delivery. If
payment is made by delivery of shares of Stock, the value of such Stock may not
exceed the total exercise price payment; provided, that the preceding clause
shall not prevent delivery of a stock certificate for a number of shares having
a greater value, if the number of shares to be applied to payment of the
exercise price is designated by the Participant and the Participant requests
that a certificate for the remainder shares be delivered to the Participant.
In addition to the payment of the purchase price of the shares of Stock
then being purchased, a Participant shall also, pursuant to Section 16, pay to
the Corporation or otherwise provide for payment of an amount equal to the
amount, if any, which the Corporation at the time of exercise is required to
withhold under the income tax withholding provisions of the Code and other
applicable income tax laws.
(e) Method of Exercise. All Options shall be exercised (i) by
written notice directed to the Secretary of the Corporation at its principal
place of business, accompanied by payment of the option exercise price, in
accordance with the foregoing subsection (d), for the number of shares specified
in the notice of exercise and by any documents required by Section 14, or (ii)
by complying with the exercise and other provisions of any broker-directed
cashless exercise/resale procedure adopted by the Corporation and approved by
the Committee, and by delivery of any documents required by Section 14. The
Corporation shall make delivery of such shares within a reasonable period of
time or in accordance with applicable provisions of any such broker-directed
cashless exercise/resale procedure; provided, that if any law or regulation
requires the Corporation to take any action (including but not limited to the
filing of a registration statement under the Securities Act of 1933 and causing
such registration statement to become effective) with respect to the shares
specified in such notice before their issuance, then the date of delivery of
such shares shall be extended for the period necessary to take such action.
(f) Term of Options. Except as otherwise specifically provided
in the Plan, the terms of all Options shall commence on the date of grant and
shall expire not later than November 30, 2005.
DC01/100718-2 //
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(g) Exercise of Options. Options are exercisable only to the
extent they are vested as provided in Section 8. After Options have vested in
accordance with Section 8, such Options are exercisable at any time, in whole or
in part during their terms if the Participant is at the time of exercise
employed by the Company or a Subsidiary. If a Participant's employment with the
Corporation or any Subsidiary is terminated for any reason other than death or
disability, the vested portion of each Option held by such Participant on the
date of such termination may be exercised for six (6) months following the date
of termination of employment (but not after expiration of the term of the
Option). In the event of the death or Disability of a Participant, the vested
portion of each Option held by such Participant on the date of such event may be
exercised within twelve months of the date of such event (but not after the
expiration of the term of the Option).
In the event of the death of a Participant, the vested portion of each
Option previously held by such Participant may be exercised within the time set
forth above by the executor, other legal representative or, if none, by the heir
or legatee of such Participant.
(h) Adjustments Upon Changes in Capitalization. Upon a change
in capitalization pursuant to Section 9, the number of shares covered by an
Option and the per share option exercise price shall be adjusted in accordance
with the provisions of Section 9.
(i) Transferability. No Option shall be assignable or
transferable by the Participant except by will or by the laws of descent and
distribution. The designation of a beneficiary shall not constitute a transfer;
and, during the lifetime of a Participant, all Options held by such Participant
shall be exercisable only by him or by his lawful representative in the event of
his incapacity.
(j) Rights as a Stockholder. A Participant shall have no
rights as a stockholder with respect to shares covered by his Option until the
date of the issuance of the shares to him and only after such shares are fully
paid. Unless specified in Section 9, no adjustment will be made for dividends or
other rights for which the record date is prior to the date of such issuance.
(k) Miscellaneous Provisions. The Stock Option
Agreements authorized under the Plan may contain such other provisions not
inconsistent with the terms of this Plan as the Committee shall deem advisable.
8. Vesting. Options granted under this Plan shall be exercisable only
to the extent such Options have become vested pursuant to this Section 8. An
Option shall vest at the rate of 25 percent of the shares covered by the Option
on each of the first four anniversary dates of the grant of the Option if the
Participant is an employee of the Company or a Subsidiary on such dates.
DC01/100718-2 //
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9. Change in Capitalization. If the Stock should, as a result of a
stock split or stock dividend, combination of shares, recapitalization or other
change in the capital structure of the Corporation or exchange of Stock for
other securities by reclassification or otherwise, be increased or decreased or
changed into, or exchanged for, a different number or kind of shares or other
securities of the Corporation, or any other corporation, then the number of
shares covered by Options, the number and kind of shares which thereafter may be
distributed or issued under the Plan and the per share option price of Options
shall be appropriately adjusted consistent with such change in such manner as
the Committee may deem equitable to prevent dilution of or increase in the
rights granted to, or available for, Participants.
10. Fractional Shares. In the event that any provision of this
Plan or a Stock Option Agreement would create a right to acquire a fractional
share of Stock, such fractional share shall be disregarded.
11. Successor Corporation. If the Corporation is merged or consolidated
with another corporation or other legal entity and the Corporation is not the
surviving corporation or legal entity, or in the event all or substantially all
of the assets or common stock of the Corporation is acquired by another
corporation or legal entity, or in the case of a dissolution, reorganization or
liquidation of the Corporation, the Board, or the board of directors or
governing body of any corporation or other legal entity assuming the obligations
of the Corporation hereunder, shall either: (i) make appropriate provision for
the preservation of Participants' rights under the Plan in any agreement or plan
it may enter into or adopt to effect any of the foregoing transactions; or (ii)
upon written notice to each Participant, provide that all Options, whether or
not vested, may be exercised within thirty days of the date of such notice and
if not so exercised, shall be terminated.
12. Change in Control. Notwithstanding any provisions in the Plan to
the contrary, in the event of a Change in Control, any unvested and outstanding
Options awarded to Participants under the Plan automatically shall become fully
vested and exercisable in accordance with the terms thereof.
13. Non-Alienation of Benefits. Except insofar as applicable law
otherwise may require, (i) no Options, rights or interest of Participants or
Stock deliverable to any Participant at any time under the Plan shall be subject
in any manner to alienation by anticipation, sale, transfer, assignment,
bankruptcy, pledge, attachment, charge or encumbrance of any kind, and any
attempt to so alienate, sell, transfer, assign, pledge, attach, charge or
otherwise encumber any such amount, whether presently or thereafter payable,
shall be void; and (ii) to the fullest extent permitted by law, the Plan shall
in no manner be liable for, or subject to, claims, liens, attachments or other
like proceedings or the debts, liabilities, contracts, engagements or torts of
any Participant or beneficiary. Nothing in this Section 13 shall prevent a
Participant's rights and interests under the Plan from being transferred by will
or by the laws of descent and distribution; provided, that no transfer by will
or by the laws of descent and distribution shall be effective to
DC01/100718-2 //
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bind the Corporation unless the Committee or its designee shall have been
furnished before or after the death of such Participant with a copy of such will
or such other evidence as the Committee may deem necessary to establish the
validity of the transfer.
14. Listing and Qualification of Shares. The Corporation, in its
discretion, may postpone the issuance or delivery of shares of Stock until
completion of any stock exchange listing, or other qualification or registration
of such shares under any state or federal law, rule or regulation, as the
Corporation may consider appropriate, and may require any Participant to make
such representations, including, but not limited to, a written representation
that the shares are to be acquired for investment and not for resale or with a
view to the distribution thereof, and to furnish such information as it may
consider appropriate in connection with the issuance or delivery of the shares
in compliance with applicable law, rules and regulations. The Corporation may
cause a legend or legends to be placed on such certificates to make appropriate
reference to such representation and to restrict transfer in the absence of
compliance with applicable federal or state securities laws.
15. No Claim or Right Under the Plan. No employee of the Corporation or
any Subsidiary shall at any time have the right to be selected as a Participant
in the Plan nor, having been selected as a Participant and granted an Option, to
be granted any additional Option. Neither the action of the Corporation in
establishing the Plan, nor any action taken by it or by the Board or the
Committee thereunder, nor any provision of the Plan, nor participation in the
Plan, shall be construed to give, and does not give, to any person the right to
be retained in the employ of the Corporation or any Subsidiary, or interfere in
any way with the right of the Corporation or any Subsidiary to discharge or
terminate any person at any time without regard to the effect such discharge or
termination may have upon such person's rights, if any, under the Plan.
16. Taxes. The Corporation may make such provisions and take such steps
as it may deem necessary or appropriate for the withholding of all federal,
state, local and other taxes required by law to be withheld with respect to
Options under the Plan, including, but not limited to, (i) deducting the amount
required to be withheld from salary or any other amount then or thereafter
payable to a Participant, beneficiary or legal representative, (ii) requiring a
Participant, beneficiary or legal representative to pay to the Corporation the
amount required to be withheld as a condition of releasing the Stock, or (iii)
complying with applicable provisions of any broker-directed cashless
exercise/resale procedure adopted by the Corporation pursuant to Section 7(e).
17. No Liability of Directors. No member of the Board or the Committee
shall be personally liable by reason of any contract or other instrument
executed by such member on his behalf in his capacity as a member of the Board
or Committee, nor for any mistake of judgment made in good faith, and the
Corporation shall indemnify and hold harmless each employee, officer and
Director, to whom any duty or power relating to the administration or
interpretation of the Plan may be allocated or delegated, against any cost or
expense (including counsel fees) or
DC01/100718-2 //
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liability (including any sum paid in settlement of a claim with the approval of
the Board) arising out of any act or omission to act in connection with the Plan
to the fullest extent permitted or required by the Corporation's governing
instruments and, in addition, to the fullest extent of any applicable insurance
policy purchased by the Corporation.
18. Other Plans. Nothing contained in the Plan is intended to amend,
modify or rescind any previously approved compensation plans or programs entered
into by the Corporation or its Subsidiaries. The Plan shall be construed to be
in addition to any and all such plans or programs. No award of Options under the
Plan shall be construed as compensation under any other executive compensation
or employee benefit plan of the Corporation or any of its Subsidiaries, except
as specifically provided in any such plan or as otherwise provided by the
Committee. The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power or authority of the Board to adopt such
additional compensation or incentive arrangements as the Board may deem
necessary or desirable.
19. Amendment or Termination. This Plan may be amended by the Board
from time to time to the extent that the Board deems necessary or appropriate;
provided, no such amendment shall be made absent the approval of the
stockholders of the Corporation: (1) if stockholder approval of such amendment
is required for continued compliance with Rule 16b-3 of the Exchange Act, or (2)
if stockholder approval of such amendment is required by any other applicable
laws or regulations or by the rules of any stock exchange as long as the Stock
is listed for trading on such exchange. The Committee also may suspend the
granting of Options under this Plan at any time and may terminate this Plan at
any time; provided, the Corporation shall not have the right to modify, amend or
cancel any Option granted before such suspension or termination unless (1) the
Participant consents in writing to such modification, amendment or cancellation
or (2) there is a dissolution or liquidation of the Corporation or a transaction
described in Section 11 of this Plan.
20. Captions. The captions preceding the sections of the Plan
have been inserted solely as a matter of convenience and shall not, in any
manner, define or limit the scope or intent of any provisions of the Plan.
21. Governing Law. The Plan and all rights thereunder shall be
governed by, and construed in accordance with, the laws of the State of Georgia,
without reference to the principles of conflicts of law thereof.
22. Expenses. All expenses of administering the Plan shall be
borne by the Corporation.
23. Effective Date. The Plan shall be effective as of the date
of its adoption by the Board, subject to approval of this Plan by the
stockholders of the Corporation after the date of its adoption in accordance
with the requirements of Rule 16b-3 under the Exchange Act.
DC01/100718-2 //
<PAGE>
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MAGELLAN HEALTH SERVICES, INC.
1996 DIRECTORS' STOCK OPTION PLAN
1. Purpose. The Magellan Health Services, Inc. 1996 Directors'
Stock Option Plan (the "Plan") is intended as an incentive and as a means of
encouraging stock ownership by non-employee members of the Board of Directors of
Magellan Health Services, Inc. (the "Company").
2. Administration.
(a) The Plan shall be administered, construed and interpreted
by the Compensation Committee (the "Committee") of the Board of Directors.
During any time that the Board of Directors does not have a Compensation
Committee, the duties of the Committee under the Plan shall be performed by the
Board of Directors.
(b) The interpretation and construction by the Committee of
any provision of the Plan, any option granted under it or any written agreement
that sets forth the terms of an option (the "Stock Option Agreement") and any
determination by the Committee, pursuant to any provision of the Plan, any such
option or any provisions of a Stock Option Agreement, shall be final and
conclusive. The terms and conditions of each individual Stock Option Agreement
shall be in accordance with the provisions of the Plan, but the Committee may
provide for such additional terms and conditions, not in conflict with the
provisions of the Plan, as it deems advisable.
3. Eligibility. Members of the Board of Directors who are not
employees of the Company or any subsidiary shall be granted options under and
pursuant to the terms of the Plan.
4. Stock. The stock subject to the options and other provisions of the
Plan shall be authorized but unissued or reacquired shares of the $.25 par value
Common Stock of the Company (the "Common Stock"). Subject to readjustment in
accordance with the provisions of Section 6(h), the total amount of Common Stock
on which options may be granted to Directors under the Plan shall not exceed in
the aggregate 250,000 shares.
If any outstanding option (or portion thereof) under the Plan for any
reason expires unexercised or is terminated without exercise prior to the end of
the period during which options may be granted, the shares of Common Stock
allocable to the unexercised portion of such option again may be subject to an
option under the Plan.
5. Grant of Options. Each eligible Director shall be granted on the
later of November 30, 1995, or the date he or she first becomes a Director an
option to purchase 25,000 shares of Common Stock, for so long as shares are
available under the Plan, but no option shall be granted after December 31,
1999. Options granted shall be subject to the vesting and other terms and
conditions of the Plan and each optionee's Stock Option Agreement.
DC01/100716-2 //
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6. Terms and Conditions of Options. Stock options granted pursuant to
the Plan shall be evidenced by Stock Option Agreements in such form as the
Committee from time to time shall approve; such agreements and the stock options
granted thereby shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares. Each Stock Option Agreement shall
state the total number of shares of Common Stock to which it pertains.
(b) Exercise Price. The exercise price per share shall
be the Fair Market Value per share of the Common Stock on the date of
the grant.
(c) Medium and Time of Payment. The exercise price shall be
payable upon the exercise of the option, or as provided in Section 6(f)
if the Company adopts a broker-directed cashless exercise/resale
procedure, in each case in an amount equal to the number of shares then
being purchased times the per share exercise price. Payment shall be in
cash, except that the Company, in its sole discretion, may permit
payment by delivery to the Company of a certificate or certificates for
shares of Common Stock, duly endorsed for transfer to the Company with
signature guaranteed by a member firm of the New York Stock Exchange or
by a national banking association. In the event of any payment by
delivery of shares of Common Stock, such shares shall be valued on the
basis of their Fair Market Value determined as of the day prior to the
date of delivery. If payment is made by delivery of shares of Common
Stock, the value of such shares may not exceed the total exercise price
payment; but the preceding clause shall not prevent delivery of a stock
certificate for a number of shares having a greater value, if the
number of shares to be applied to payment of the exercise price is
designated by the optionee and the optionee requests that a certificate
for the remainder shares be delivered to the optionee.
In addition to the payment of the purchase price of the shares
then being purchased, an optionee shall also, pursuant to Section 12,
pay to the Company or otherwise provide for an amount equal to the
amount, if any, which the Company at the time of exercise is required
to withhold under the income tax withholding provisions of the Internal
Revenue Code and other applicable income tax laws.
(d) Fair Market Value. For purposes of Sections 6(b) and (c),
Fair Market Value of Common Stock shall be determined on the applicable
date as follows. If the Common Stock is listed on a national securities
exchange (as such term is defined by the Securities Exchange Act of
1934) or is traded in the over-the-counter market on the date of
determination, the Fair Market Value per share of the Common Stock
shall be equal to the mean between the high and low sales prices of a
share of the Common Stock on said
DC01/100716-2 //
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-3-
national securities exchange on that day (or, for purposes of Section
6(c), if no shares of the Common Stock are traded on that date but
there were shares traded on dates within a reasonable period both
before and after such date, the Fair Market Value shall be the weighted
average of the means between the high and low sales prices of the
Common Stock on the nearest date before and the nearest date after that
date on which shares of the stock are traded) or the mean between the
high "bid" and low "asked" prices per share in said over-the-counter
market on that date, as reported by the National Association of
Securities Dealers Automated Quotation System (or a successor to such
system). If the Common Stock is traded on two exchanges, the Fair
Market Value shall be determined by the weighted average Fair Market
Value on such exchanges unless one of such exchanges is the American
Stock Exchange, in which case Fair Market Value shall be determined by
prices on that exchange. If the Common Stock is traded both on a
national securities exchange and in the over-the-counter market, the
Fair Market Value shall be determined by the prices on the national
securities exchange, unless transactions on such exchange and in the
over-the-counter market are jointly reported on a consolidated
reporting system in which case the Fair Market Value shall be
determined by reference to such consolidated reporting system. If the
Common Stock is not listed for trading on a national securities
exchange and is not regularly traded in the over-the-counter market,
then the Committee shall determine the Fair Market Value of the stock
from all relevant available facts which may include opinions of
independent experts as to value and may take into account any recent
sales and purchases of such stock to the extent they are
representative.
(e) Terms of Options; Date of Exercise. Terms of options
granted under the Plan shall commence on the date of grant and shall expire on
November 30, 2005, subject to Section 6(g). Each option shall become exercisable
when vested.
(f) Method of Exercise. Options shall be exercised (i) by
written notice directed to the Secretary of the Company at its principal place
of business, accompanied by payment made in accordance with Section 6(c), in
cash or personal check (which will be accepted subject to collection), or by
certificates for shares of the Common Stock, or by a combination of the
foregoing, of the option price for the number of shares specified in the notice
of exercise and by any documents required by Section 6(j), or (ii) by complying
with the exercise and other provisions of any broker-directed cashless
exercise/resale procedure adopted by the Company and approved by the Committee,
and by delivery of any documents required by Section 6(j). The Company shall
make delivery of such shares within a reasonable period of time or in accordance
with applicable provisions of any such broker-directed cashless exercise/resale
procedure; provided, that if any law or regulation requires the Company to take
any action (including but not limited to the filing of a registration statement
under the Securities Act of 1933 and causing such registration statement to
become effective) with respect to the
DC01/100716-2 //
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-4-
shares specified in such notice before the issuance thereof, then the date of
delivery of such shares shall be extended for the period necessary to take such
action.
(g) Effect of Termination of Service as a Director. If an
optionee during his life ceases to be a non-employee Director of the Company
(including its subsidiaries) due to voluntary resignation as a Director,
voluntary decision not to stand for reelection or removal as a Director by the
stockholders for cause, then the unvested portion of any option shall terminate
on the earlier to occur of (i) the expiration date of the option, or (ii) the
date of termination of service as a non-employee Director. If an optionee ceases
to be a Director for any other reason, the unvested portion of options shall
vest on the date of termination of service and may thereafter be exercised in
accordance with their terms. In the event of the death of the optionee while he
is a non-employee Director of the Company or after termination of such service,
the vested portion of any option may be exercised by his personal
representatives, heirs or legatees at any time prior to the expiration of one
(1) year from the date of death of the optionee, but in no event later than the
date of expiration of the option.
(h) Adjustments Upon Changes in Capitalization. If the Common
Stock should, as a result of a stock split or stock dividend, combination of
shares, recapitalization or other change in the capital structure of the Company
or exchange of Common Stock for other securities by reclassification or
otherwise, be increased or decreased or changed into, or exchanged for, a
different number or kind of shares of other securities of the Company, or any
other corporation, then the number of shares covered by options, the number and
kind of shares which thereafter may be distributed or issued under the Plan and
the per share option price of options shall be appropriately adjusted consistent
with such change in such manner as the Committee may deem equitable to prevent
dilution of or increase in the rights granted to, or available for, optionees.
(i) Who May Exercise. No option shall be assignable or
transferable by the optionee except by will or by the laws of descent and
distribution, and during the lifetime of an optionee, the option shall be
exercisable only by him.
(j) Optionee's Agreement. If, in the opinion of counsel for
the Company, such action is necessary or desirable, no option shall be granted
to any optionee unless at such time such optionee represents and warrants that
the stock will be acquired for investment only and not for purposes of resale or
distribution and makes such further representations and warranties as are deemed
necessary or desirable by counsel to the Company with regard to holding and
resale of the stock. If, at the time of the exercise of any option, in the
opinion of counsel for the Company, it is necessary or desirable, in order to
comply with any applicable laws or regulations relating to the sale of
securities, that the optionee shall represent and warrant that he is purchasing
the shares that are subject to the option for investment and not with any
DC01/100716-2 //
<PAGE>
-5-
present intention to resell or distribute the same or make other and further
representations and warranties with regard to the holding and resale of the
shares, the optionee, upon the request of the Committee, will execute and
deliver to the Company an agreement or affidavit to such effect. All
certificates issued pursuant to the exercise of any option shall be marked with
a restrictive legend, if such marking, in the opinion of counsel to the Company,
is necessary or desirable.
(k) Rights as a Stockholder. An optionee shall have no rights
as a stockholder with respect to shares covered by his option until the date of
the issuance of the shares to him and only after such shares are fully paid.
Unless specified in Section 6(h), no adjustment will be made for dividends or
other rights for which the record date is prior to the date of such issuance.
(l) Vesting. An option shall vest at the rate of 25 percent of
the shares of Common Stock covered by the option on each of the four anniversary
dates of the grant of the option if the Participant is a non-employee Director
of the Company on such dates.
(m) Miscellaneous Provisions. The Stock Option Agreements
authorized under the Plan shall contain such other provisions, including,
without limitation, restrictions upon the exercise of the option as the
Committee shall deem advisable.
7. Effective Date and Termination of Plan.
(a) The Plan shall become effective upon adoption by the Board
of Directors of the Company, provided the Plan is approved by the holders of a
majority of the shares of Common Stock voting on the matter at an annual or
special meeting of stockholders held within twelve months of adoption by the
Board of Directors.
(b) The Plan, with respect to the granting of options, shall
terminate at midnight on December 31, 1999, but the Board of Directors may
terminate the Plan at any time prior to said time and date. Such termination of
the Plan by the Board of Directors shall not alter or impair any of the rights
or obligations under any option theretofore granted under the Plan unless the
affected optionee shall so consent.
8. Fractional Shares. If any provision of this Plan or a Stock
Option Agreement would create a right to acquire a fractional share, such
fractional share shall be disregarded.
9. Successor Corporation. The obligations of the Company under
the Plan shall be binding upon any successor corporation or organization
succeeding to substantially all of the assets and business of the Company and
shall continue to be binding upon the Company notwithstanding any change in
ownership of the Company. The Company agrees that it will make appropriate
provision for the preservation of optionees' rights under the Plan in any
DC01/100716-2 //
<PAGE>
-6-
agreement or plan which it may enter into or adopt to effect any such transfer
of assets or ownership.
10. Non-Alienation of Benefits. Except insofar as applicable law may
otherwise require, (i) no options, rights or interest of optionees or Common
Stock deliverable to any optionee at any time under the Plan shall be subject in
any manner to alienation by anticipation, sale, transfer, assignment,
bankruptcy, pledge, attachment, charges or encumbrance of any kind, and any
attempt to so alienate, sell, transfer, assign, pledge, attach, charge or
otherwise encumber any such amount, whether presently or thereafter payable,
shall be void; and (ii), to the fullest extent permitted by law, the Plan shall
in no manner be liable for, or subject to, claims, liens, attachments or other
like proceedings or the debts, liabilities, contracts, engagements or torts of
any optionee. Nothing in this Section 10 shall prevent an optionee's rights and
interests under the Plan from being transferred by will or by the laws of
descent and distribution; provided, that no transfer by will or by the laws of
descent and distribution shall be effective to bind the Company unless the
Committee or its designee shall have been furnished before or after the death of
such optionee with a copy of such will or such other evidence as the Committee
may deem necessary to establish the validity of the transfer.
11. Listing and Qualification of Shares. The Company, in its
discretion, may postpone the issuance or delivery of shares of Common Stock
until completion of any stock exchange listing, or other qualification or
registration of such shares under any state or federal law, rule or regulation,
as the Company may consider appropriate, and may require any optionee to furnish
such information as it may consider appropriate in connection with the issuance
or delivery of the shares in compliance with applicable laws, rules and
regulations.
12. Taxes. The Company may make such provisions and take such steps as
it may deem necessary or appropriate for the withholding of all federal, state,
local and other taxes required by law to be withheld with respect to options
under the Plan, including, but not limited to (i) deducting the amount required
to be withheld from any amount then or thereafter payable to an optionee,
beneficiary or legal representative, (ii) requiring an optionee, beneficiary or
legal representative to pay to the Company the amount required to be withheld as
a condition of releasing shares, or (iii) complying with applicable provisions
of any broker-directed cashless exercise/resale procedure adopted by the Company
pursuant to Section 6(f). If, in the exercise of an option, the Company requires
payment pursuant to (ii), then, to the extent permitted by the Company in its
discretion, payment may be made in any medium provided for in subsection (c) of
Section 6.
13. No Liability of Directors. No member of the Board or the
Committee shall be personally liable by reason of any contract or other
instrument executed by such member on his behalf in his capacity as a member of
the Board or Committee, nor for any mistake of judgment
DC01/100716-2 //
<PAGE>
-7-
made in good faith, and the Company shall indemnify and hold harmless each
employee, officer and Director of the Company, to whom any duty or power
relating to the administration or interpretation of the Plan may be allocated or
delegated, against any cost or expense (including counsel fees) or liability
(including any sum paid in settlement of a claim with the approval of the Board)
arising out of any act or omission to act in connection with the Plan to the
fullest extent permitted or required by the Company's governing instruments and,
in addition, to the fullest extent of any applicable insurance policy purchased
by the Company.
14. Amendments. This Plan may be amended by the Board from time to time
to the extent that the Board deems necessary or appropriate; provided, no such
amendment shall be made absent the approval of the stockholders of the Company:
(1) if stockholder approval of such amendment is required for continued
compliance with Rule 16b-3 of the Securities Exchange Act, or (2) if stockholder
approval of such amendment is required by any other applicable laws or
regulations or by the rules of the American Stock Exchange as long as the Common
Stock is listed for trading on such Exchange. The Committee also may suspend the
granting of options under this Plan at any time; provided, the Company shall not
have the right initially to modify, amend or cancel any option granted before
such suspension unless (1) the optionee consents in writing to such
modification, amendment or cancellation or (2) there is a dissolution or
liquidation of the Company or a transaction described in Section 6(h) of this
Plan.
15. Captions. The captions preceding the sections of the Plan
have been inserted solely as a matter of convenience and shall not, in any
manner, define or limit the scope or intent of any provisions of the Plan.
16. Governing Law. The Plan and all rights thereunder shall be
governed by, and construed in accordance with, the laws of the State of Georgia,
without reference to the principles of conflicts of law thereof.
17. Expenses. All expenses of administering the Plan shall be
borne by the Company.
DC01/100716-2 //
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 1995 March 31, 1996 March 31, 1995 March 31, 1996
-------------- -------------- -------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net income(loss) $ (15,100) $ 20,069 $ (14,751) $ 29,817
============= ============= ============== ==============
Weighted average number of common shares outstanding:
Common shares outstanding 28,332 31,247 27,613 29,612
Stock Options and Rights - 615 - 468
Warrants - 20 - 19
------------- ------------- -------------- --------------
28,332 31,882 27,613 30,099
============= ============= ============== ==============
Primary earnings(loss) per share $ (0.53) $ 0.63 $ (0.53) $ 0.99
============= ============= ============== ==============
Net income(loss) $ (15,100) $ 20,069 $ (14,751) $ 29,817
Adjustments for the assumed conversion of the
Exchange Option:
Minority interest - 811 - 1,082
Amortization - (276) - (341)
------------- ------------ -------------- --------------
Adjusted net income $ (15,100) $ 20,604 $ (14,751) $ 30,558
============= ============ ============== ==============
Weighted average number of common shares outstanding:
Common shares outstanding 28,332 31,247 27,613 29,612
Stock Options and Rights - 616 - 505
Warrants - 2,832 - 1,714
------------- ------------ -------------- --------------
28,332 34,715 27,613 31,851
============= ============ ============== ==============
Fully diluted earnings(loss) per share $ (0.53) $ 0.59 $ (0.53) $ 0.96
============= ============ ============== ==============
Note: Common stock equivalents(stock options,rights and warrants) were anti-dilutive for the three months and six months ended
March 31, 1995. Accordingly, they are not presented herein.
</TABLE>
EXHIBIT 99
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY
STATEMENTS
The Company or its representatives from time to time may make or may
have made certain forward-looking statements, whether orally or in writing,
including without limitation any such statements made or to be made in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in its various filings with the Securities and Exchange
Commission. The Company wishes to ensure that such statements are accompanied by
meaningful cautionary statements, so as to ensure to the fullest extent
possible, the protections of the safe harbor established in the Private
Securities Litigation Reform Act of 1995. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from those projected in such forward-looking statements.
The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a rapidly changing business, and new risk
factors emerge from time to time. Management cannot predict such risk factors,
nor can it assess the impact, if any, of such risk factors on the Company's
business or the extent to which any factors, or combination of factors, may
cause actual results to differ materially from those projected in any
forward-looking statements. Accordingly, forward-looking statements should not
be relied upon as a prediction of actual results.
Many of the important factors discussed below have been discussed
previously in the Company's filing with the Securities and Exchange Commission,
including without limitation, in the Company's most recent S-3 Registration
Statement, Registration No. 333-01217.
Acquisition Growth Strategy
The Company has historically grown through acquisitions and internal
growth. There can be no assurance that the Company will be able to make
successful acquisitions in the future or that any such acquisitions will be
successfully integrated into its operations. In addition, future acquisitions
could have an adverse effect upon the Company's operating results, particularly
in the fiscal quarters immediately following the consummation of such
transactions while the acquired operations are being integrated into its
operations.
Green Spring Health Services, Inc. Acquisition and Potential Adverse Reaction
On December 13, 1995, the Company acquired a controlling interest in
Green Spring Health Services, Inc. ("Green Spring"), a leading provider of
managed behavioral healthcare services. The Company's hospitals have contracts
with behavioral managed care companies other than Green Spring. Such other
companies could decide to terminate their contracts with the Company's hospitals
in reaction to the Company's acquisition of a majority interest in one of their
major competitors. In addition, there can be no assurance that Green Spring will
be successfully integrated into the Company's operations.
Historical Operating Losses
The Company has experienced losses from continuing operations before
reorganization items, extraordinary items and the cumulative effect of a change
in accounting principle in each fiscal year since the completion of a management
buyout in 1988. Such losses amounted to $167.2 million for the fiscal year ended
September 30, 1991, $81.7 million for the ten-month period ended July 31, 1992,
$8.1 million for the two-month period ended September 30, 1992 and $39.6
million, $47.0 million and $43.0 million for the fiscal years ended September
30, 1993, 1994 and 1995, respectively. The Company reported net revenue and loss
from continuing operations of approximately $299.8 million and $15.1 million,
respectively, for the quarter ended March 31, 1995 compared to net revenue and
income from continuing operations of approximately $355.0 million and $20.1
million, respectively, for the quarter ended March 31, 1996. The Company also
reported net revenue and loss from continuing operations of approximately $563.7
million and $14.8 million, respectively, for the six months ended March 31, 1995
compared to net revenue and income from
<PAGE>
continuing operations of approximately $650.6 million and $29.8 million,
respectively, for the six months ended March 31, 1996. The results of operations
for such interim periods are not necessarily indicative of the actual results
expected for the year. There can be no assurance that the Company's
profitability in the quarter and the six months ended March 31, 1996 will
continue in future periods. The Company's history of losses could have an
adverse effect on its operations.
Potential Hospital Closures
The Company continually assesses events and changes in circumstances
that could affect its business strategy and the viability of its operating
facilities. During fiscal 1995, the Company consolidated, closed or sold fifteen
psychiatric hospitals. The Company has consolidated or closed six psychiatric
hospitals during fiscal 1996, including the April 1996 decision to close three
psychiatric hospitals. The Company recorded charges of approximately $200,000 in
the quarterly period ended March 31, 1996 and anticipates recording a charge of
approximately $2.5 million in the quarterly period ended June 30, 1996, as a
result of these consolidations and closures. The Company may elect to
consolidate services in selected markets and to close or sell additional
facilities in future periods depending on market conditions and evolving
business strategies. If the Company closes additional psychiatric hospitals in
future periods, it could result in charges to income for the cost necessary to
exit the hospital operations.
Potential Reductions in Reimbursement by
Third-Party Payers and Changes in Hospital Payor Mix
The Company's hospitals have been adversely affected by factors
influencing the entire psychiatric hospital industry. Factors which affect the
Company include (i) the imposition of more stringent length of stay and
admission criteria and other cost containment measures by payers; (ii) the
failure of reimbursement rate increases from certain payers that reimburse on a
per diem or other discounted basis to offset increases in the cost of providing
services; (iii) an increase in the percentage of its business that the Company
derives from payers that reimburse on a per diem or other discounted basis; (iv)
a trend toward higher deductible and co-insurance for individual patients; and
(v) a trend toward limiting employee health benefits, such as reductions in
annual and lifetime limits on mental health coverage. All of these factors may
result in reductions in the amounts that the Company's hospitals can expect to
collect per patient day for services provided.
For the fiscal year ended September 30, 1995, the Company derived
approximately 47% of its gross psychiatric patient service revenue from
private-pay sources (including HMOs, PPOs, commercial insurance and Blue Cross),
26% from Medicare, 17% from Medicaid, 4% from the Civilian Health and Medical
Program for the Uniformed Services ("CHAMPUS") and 6% from other government
programs. Changes in the mix of the Company's patients among the private-pay,
Medicare and Medicaid categories, and among different types of private-pay
sources, can significantly affect the profitability of the Company's hospital
operations. Therefore, there can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs of providing care to patients covered by such programs.
Previous Bankruptcy Reorganization
The Company was reorganized pursuant to Chapter 11 of the United States
Bankruptcy Code, effective on July 21, 1992 (the "Reorganization"). Prior to the
Reorganization, the Company's total indebtedness was approximately $1.8 billion;
and from February 1991 until July 1992, the Company was in default in the
payment of interest and principal, or both, on substantially all such
indebtedness. The indebtedness was incurred by the Company in connection with a
management buy-out of the Company in 1988 and a hospital-construction program.
As a result of the Reorganization, the Company's long-term debt was reduced by
approximately $700 million and its redeemable preferred stock of $233 million
was eliminated. The holders of such debt and preferred stock received
approximately 97% of Magellan's Common Stock outstanding on July 21, 1992.
<PAGE>
Governmental Budgetary Constraints and Healthcare Reform
In the 1995 and 1996 sessions of the United States Congress, the focus
of healthcare legislation has been on budgetary and related funding mechanism
issues. A number of reports, including the 1995 Annual Report of the Board of
Trustees of the Federal Hospital Insurance Program (Medicare) have projected
that the Medicare "trust fund" is likely to become insolvent by the year 2002 if
the current growth rate of approximately 10% per annum in Medicare expenditures
continues. Similarly, federal and state expenditures under the Medicaid program
are projected to increase significantly during the same seven-year period. In
response to these projected expenditure increases, and as part of an effort to
balance the federal budget, both the Congress and the Clinton Administration
have made proposals to reduce the rate of increase in projected Medicare and
Medicaid expenditures and to change funding mechanisms and other aspects of both
programs. Congress has passed legislation that would reduce projected
expenditure increases substantially and would make significant changes in the
Medicare and the Medicaid programs. The Clinton Administration has proposed
alternate measures to reduce, to a lesser extent, projected increases in
Medicare and Medicaid expenditures. As of the date of this Prospectus, neither
proposal has become law.
The Medicare legislation that has been adopted by Congress would, with
some differences, reduce projected expenditure increases by a variety of means,
including reduced payments to providers (including the Company), increased
beneficiary premiums for physician and certain other services, and creation of
incentives for Medicare beneficiaries to enroll in managed care plans or to
accept Medicare coverage with a substantially increased deductible. Changes in
the Medicaid program would reduce the number and extent of federal mandates
concerning how state Medicaid programs operate (including levels of benefits
provided and levels of payments to providers) and would change the funding
mechanism from a sharing formula between the federal government and a state to
"block grant" funding. The Company cannot predict the effect of any such
legislation, if adopted, on its operations; but the Company anticipates that,
although overall Medicare and Medicaid funding may be reduced from projected
levels, the changes in such programs may provide opportunities to the Company to
obtain increased Medicare and Medicaid business through risk-sharing or partial
risk-sharing contracts with managed care plans and state Medicaid programs.
Although the United States Congress, in 1995 and 1996, has not
considered healthcare reform proposals, the Company anticipates that numerous
healthcare reform proposals will continue to be introduced in future sessions of
Congress. The Company cannot predict whether any such proposal will be adopted
or the effect on the Company of any proposal that does become law.
A number of states in which the Company has operations have either
adopted or are considering the adoption of healthcare reform proposals of
general applicability or Medicaid reform proposals, partly in response to
possible changes in Medicaid law. Where adopted, these state reform laws have
often not yet been fully implemented. The Company cannot predict the effect of
these state healthcare reform and Medicaid reform laws on its operations.
Provider Business-Competition
Each of the Company's hospitals competes with other hospitals, some of
which are larger and have greater financial resources. Some competing hospitals
are owned and operated by governmental agencies, others by nonprofit
organizations supported by endowments and charitable contributions and others by
proprietary hospital corporations. The hospitals frequently draw patients from
areas outside their immediate locale and, therefore, the Company's hospitals
may, in certain markets, compete with both local and distant hospitals. In
addition, the Company's hospitals compete not only with other psychiatric
hospitals, but also with psychiatric units in general hospitals, and outpatient
services provided by the Company may compete with private practicing mental
health professionals and publicly funded mental health centers. The competitive
position of a hospital is, to a significant degree, dependent upon the number
and quality of physicians who practice at the hospital and who are members of
its medical staff. The Company has entered into joint venture arrangements with
other healthcare providers in certain markets to promote more efficiency in the
local delivery system. The Company believes that its provider business competes
effectively with respect to the aforementioned factors. However, there can be no
assurance that Magellan will be able to compete successfully in the provider
business in the future.
<PAGE>
Competition among hospitals and other healthcare providers for patients
has intensified in recent years. During this period, hospital occupancy rates
for inpatient behavioral care patients in the United States have declined as a
result of cost containment pressures, changing technology, changes in
reimbursement, changes in practice patterns from inpatient to outpatient
treatment and other factors. In recent years, the competitive position of
hospitals has been affected by the ability of such hospitals to obtain contracts
with Preferred Provider Organizations ("PPO's"), Health Maintenance
Organizations ("HMO's") and other managed care programs to provide inpatient and
other services. Such contracts normally involve a discount from the hospital's
established charges, but provide a base of patient referrals. These contracts
also frequently provide for pre-admission certification and for concurrent
length of stay reviews. The importance of obtaining contracts with HMO's, PPO's
and other managed care companies varies from market to market, depending on the
individual market strength of the managed care companies. State certificate of
need laws place limitations on the Company's and its competitors' ability to
build new hospitals and to expand existing hospitals. Protection from new
competition is reduced in those states where there is no certificate of need
law, and opportunities for growth are limited by the certificate of need
requirement in states having such laws. As of April 30, 1996, the Company
operated 40 hospitals in 12 states (Arizona, Arkansas, California, Colorado,
Indiana, Kansas, Louisiana, Nevada, New Mexico, South Dakota, Texas and Utah)
which do not have certificate of need laws applicable to hospitals. In most
cases, these laws do not restrict the ability of the Company or its competitors
to offer new outpatient services. Proposals have been made in a number of
jurisdictions to repeal currently applicable certificate of need laws. Several
states have instituted moratoria on new certificates of need or otherwise stated
their intent not to grant approval for new facilities.
Managed Care Business - Competition
The Company, through its Green Spring subsidiary, now operates in the
managed healthcare industry. The managed healthcare industry is being affected
by various external factors including rising healthcare costs, intense price
competition, and market consolidation by major managed care companies. Magellan
faces competition from a number of sources including other behavioral health
managed care companies and traditional full service managed care companies that
contract to provide behavioral healthcare benefits. Also, to a lesser extent,
competition exists from fully capitated multi-specialty medical groups and
individual practice associations that directly contract with managed care
companies and other customers to provide and manage all components of healthcare
for the members including the behavioral healthcare component. The Company
believes that the most significant factors in a customer's selection of a
managed behavioral healthcare company include price, the extent and depth of
provider networks and quality of services. The Company also believes that the
acquisition of Green Spring creates opportunities to enhance its revenues
through managed care contracts utilizing the continuum of care and through
information systems that support care management and at-risk pricing mechanisms,
although no such assurance can be given. Management believes that its managed
care business competes effectively with respect to these factors. However, there
can be no assurance that Magellan will be able to compete successfully in the
managed care business in the future.
Limitations Imposed by the Credit Agreement
and Senior Note Indenture
In May 1994, the Company entered into a Second Amended and Restated
Credit Agreement (the "Credit Agreement") with certain financial institutions
and issued $375 million of Senior Subordinated Notes (the "Senior Notes") to
institutional investors. The Credit Agreement and the indenture for the Senior
Notes contain a number of restrictive covenants which, among other things, limit
the ability of the Company and certain of its subsidiaries to incur other
indebtedness, enter into certain joint venture transactions, incur liens, make
certain restricted payments and investments, enter into certain business
combination and asset sale transactions and make capital expenditures. These
restrictions could adversely affect the Company's ability to conduct its
operations, finance its capital needs or to pursue attractive business
combinations and joint ventures if such opportunities arise. Under the Credit
Agreement, the Company also is required to maintain certain specified financial
ratios. Failure by the Company to maintain such financial ratios or to comply
with the restrictions contained in the Credit Agreement and the indenture for
the Senior Notes could cause such indebtedness (and by reason of
cross-acceleration provisions, other indebtedness) to become immediately due and
payable and/or could cause the cessation of funding under the Credit Agreement.
<PAGE>
Regulatory Environment
The federal government and all states in which the Company operates
regulate various aspects of the Company's businesses. Such regulations provide
for periodic inspections or other reviews of the Company's provider operations
by, among others, state agencies, the United States Department of Health and
Human Services (the "Department") and CHAMPUS to determine compliance with their
respective standards of care and other applicable conditions of participation
which is necessary for continued licensure or participation in identified
healthcare programs, including, but not limited to, Medicare, Medicaid and
CHAMPUS. The Company is also subject to state regulation regarding the admission
and treatment of patients and federal regulations regarding confidentiality of
medical records of substance abuse patients. Although the Company endeavors to
comply with such regulatory requirements, there can be no assurance that the
Company will always be in full compliance. The failure to obtain or renew any
required regulatory approvals or licenses or to qualify for continued
participation in identified healthcare programs could adversely affect the
Company's operations. In addition, there is currently pending before Congress
legislation that would establish a program to control fraud and abuse with
respect to health plans maintained by all public and private payers, as opposed
to current fraud and abuse laws that relate only to specified governmental
payers.
The Company is also subject to federal and state laws that govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments between healthcare providers that
are designed to induce overutilization of services paid for by Medicare or
Medicaid. Such laws include the anti-kickback provisions of the federal Medicare
and Medicaid Patients and Program Protection Act of 1987. These provisions
prohibit, among other things, the offer, payment, solicitation or receipt of any
form of remuneration in return for the referral of Medicare and Medicaid
patients. GPA, the Company's subsidiary that owns or manages professional group
practices, is subject to the federal and the state illegal remuneration,
practice of medicine and certain other laws which prohibit the subsidiary from
owning, but not managing, professional practices. In addition, some states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. The Company endeavors to comply with all federal and
state laws applicable to its business. However, a violation of these federal and
state laws may result in civil or criminal penalties for individuals or entities
or exclusion from participation in identified healthcare programs.
Magellan's managed care business operations, in some states, are
subject to utilization review, licensure and related state regulation
procedures. Green Spring provides managed behavioral healthcare services to
various Blue Cross/Blue Shield plans that operate Medicare and Medicaid health
maintenance organizations or other at-risk managed care programs and that
participate in the Blue Cross Federal Employees health program. As a contractor
to these Blue Cross/Blue Shield plans, Green Spring is indirectly subject to
federal and, with respect to the Medicaid program, state monitoring and
regulation of performance and financial reporting requirements. Although
Magellan believes that it is in compliance with all current state and federal
regulatory requirements applicable to the managed care business it conducts,
failure to do so could adversely affect its operations.
Physician ownership of or investment in healthcare entities to which
they refer patients has come under increasing scrutiny at both state and federal
levels. Congress passed legislation (commonly referred to as "Stark I") which
prohibits physicians from referring Medicare patients for clinical laboratory
services to an entity with which the physician has a financial relationship. The
Department recently published final Stark I regulations on August 14, 1995. Such
regulations will govern how the Department views and reviews these financial
relationships. Additionally, Congress passed legislation (commonly referred to
as "Stark II") which prohibits physicians from referring Medicare or Medicaid
patients for certain designated health services, including inpatient and
outpatient hospital services, to entities in which they have an ownership or
investment interest or with which they have a compensation arrangement. The
entity is also prohibited from billing the Medicare or Medicaid programs for
such services rendered pursuant to a prohibited referral. To the extent
designated services are provided by the Company's provider and managed care
operations, physicians who have a financial relationship with the Company and
the Company will be subject to the provisions of Stark II. Some states have
passed similar legislation which prohibits the referral of private pay patients.
To date, the Department has not published Stark II regulations. However, the
Department indicated that it will review referrals involving any of the
designated services under the language and interpretations set forth in the
Stark I rule.
<PAGE>
The Company's acquisitions and joint venture activities are also
subject to federal antitrust laws. The healthcare industry has recently been an
active area of antitrust enforcement action by the United States Federal Trade
Commission (the "FTC") and the Department of Justice ("DOJ"). The Company's
acquisitions and joint venture arrangements could be the subject of a DOJ or an
FTC enforcement action which, if determined adversely to the Company, could have
a material adverse effect upon the Company's operations.
Changes in laws or regulations or new interpretations of existing laws
or regulations can have an adverse effect on the Company's operating methods,
costs, reimbursement amounts and acquisition and joint venture activities. In
addition, the healthcare industry is subject to increasing governmental
scrutiny, and additional laws and regulations may be enacted which could require
changes in the Company's operations. A federal or state agency charged with
enforcement of such laws and regulations might assert an interpretation of such
laws and resolutions or may increase scrutiny of a previously ignored area,
which may require changes in the Company's operations.
Dependence on Healthcare Professionals
Physicians traditionally have been the source of a significant portion
of the patients treated at the Company's hospitals. Therefore, the success of
the Company's hospitals is dependent in part on the number and quality of the
physicians on the medical staffs of its hospitals and their admission practices.
A small number of physicians account for a significant portion of patient
admissions at some of the Company's hospitals. There can be no assurance that
the Company can retain its current physicians on staff or that additional
physician relationships will be developed in the future. Furthermore, hospital
physicians generally are not employees of the Company and in general Magellan
does not have contractual arrangements with hospital physicians restricting the
ability of such physicians to practice elsewhere.
Potential General and Professional Liability
Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"),
a wholly-owned Bermuda subsidiary of the Company, provides general and hospital
professional liability insurance up to $25 million per occurrence for the
Company's hospitals. All of the risk of losses from $1.5 million to $25 million
per occurrence has been reinsured with unaffiliated insurers. The Company also
insures with an unaffiliated insurer 100% of the risk of losses between $25
million and $100 million per occurrence, subject to an annual aggregate limit of
$75 million. The Company's general and professional liability coverage is
written on a "claims made or circumstances reported" basis. For reinsured claims
between $10 and $25 million per occurrence, the Company has an annual aggregate
limit of coverage of $30 million. For reinsured claims between $1.5 million and
$10 million per occurrence, the Company has no significant limitations on the
aggregate dollar amounts of coverage.
For the six years from June 1, 1989 through May 31, 1995, the Company
had a similar general and hospital professional liability insurance program. For
those years, the per occurrence deductible (with respect to which the Company
was self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2
million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to
the Company's general hospitals sold on September 30, 1993) for the year ended
May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a
per occurrence deductible for the years ended May 31, 1994 and 1995. In December
1994, the per occurrence deductible for the years ended May 31, 1989 and 1990
was eliminated. Plymouth provides coverage with no per occurrence deductible for
hospital system claims which had not been paid prior to December 31, 1994.
Plymouth does not underwrite any insurance policies with any parties other than
the Company or its affiliates and subsidiaries.
The amount of expense relating to Magellan's malpractice insurance may
materially increase or decrease from year to year depending, among other things,
on the nature and number of new reported claims against Magellan and amounts of
settlements of previously reported claims. To date, Magellan has not experienced
a loss in excess of policy limits. Management believes that its coverage limits
are adequate. However, losses in excess of the limits described above or for
which insurance is otherwise unavailable could have a material adverse effect
upon the Company.
<PAGE>
Potential Expiration and Realization Uncertainties Related
to Estimated Tax Net Operating Loss Carryforwards
As of September 30, 1995, the Company had estimated tax net operating
loss ('NOL") carryforwards of approximately $233 million available to reduce
future federal taxable income. These NOL carryforwards expire in 2006 through
2009 and are subject to adjustment upon examination by the Internal Revenue
Service. Due to the ownership change which occurred as a result of the
Reorganization, the Company's utilization of NOLs generated prior to the
effective date of the Reorganization is limited. Based on this limitation and
certain other factors, the Company has recorded a valuation allowance of
approximately $93.2 million against the amount of the NOL deferred tax asset
that in Management's opinion, is not likely to be recovered. There can be no
assurance that these NOL carryforwards will not expire, be reduced or be made
subject to further limitations prior to their potential utilization in future
periods.
Capitation Arrangements
The Company's managed care business contracts with companies holding
state HMO or insurance company licenses on a capitated or "at-risk" basis where
the risk of patient care is assumed by the Company in exchange for a monthly fee
per member regardless of utilization level. As of March 31, 1996, approximately
30% of Green Spring's managed care members were under capitated arrangements.
During 1995, approximately 70% of Green Spring's revenues were from at-risk
contracts. Increases in utilization levels under capitated contractual
arrangements could adversely effect the operations of the managed care business.
Some jurisdictions are taking the position that capitated agreements in
which the provider bears the risk should be regulated by insurance laws. In this
regard, Green Spring's primary customers are comprised of Blue Cross/Blue Shield
Plans and other insurance entities which are licensed insurance organizations in
their respective states. Green Spring offers "carved out" managed mental health
benefits, on a wholesale basis, as a vendor to the regulated insurance
organizations. Most current employer group relationships are also contracted
through the respective regulated insurance organizations. However, as Magellan
and Green Spring develop more direct risk arrangements on a retail basis
directly with employer groups or other non-insurance entity customers, the
Company may be required to obtain insurance licenses in the respective states
where the direct risk arrangements are to be pursued. There can be no assurance
that the Company can obtain the insurance licenses required by the respective
states in a timely or cost effective manner to respond to market demand.
Possible Volatility of Stock Price
The Company believes factors such as announcements with respect to
healthcare reform measures, reductions in government healthcare program
projected expenditures, acquisitions and quarter-to-quarter and year-to-year
variations in financial results could cause the market price of Magellan Common
Stock to fluctuate substantially. Any such adverse announcement with respect to
healthcare reform measures or program expenditures, acquisitions or any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
Magellan Common Stock in any given period. As a result, the market for Magellan
Common Stock may experience price and volume fluctuations unrelated to the
operating performance of Magellan.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 2, 3, AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 123,674,000
<SECURITIES> 0
<RECEIVABLES> 222,365,000
<ALLOWANCES> 0
<INVENTORY> 5,726,000
<CURRENT-ASSETS> 375,748,000
<PP&E> 611,959,000
<DEPRECIATION> 110,611,000
<TOTAL-ASSETS> 1,177,512,000
<CURRENT-LIABILITIES> 265,916,000
<BONDS> 536,215,000
0
0
<COMMON> 8,229,000
<OTHER-SE> 183,537,000
<TOTAL-LIABILITY-AND-EQUITY> 1,177,512,000
<SALES> 650,618,000
<TOTAL-REVENUES> 650,618,000
<CGS> 0
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<INTEREST-EXPENSE> 22,394,000
<INCOME-PRETAX> 54,594,000
<INCOME-TAX> 22,372,000
<INCOME-CONTINUING> 29,817,000
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,817,000
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.96
</TABLE>
