- -------------------------------------------------------------------------------
FORM 10-Q
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 June 30, 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 July 31,
1996, was 33,002,826.
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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
Blue Grass Physician Kentucky 66-1294402 3050 Rio Dosa Drive
Management Group, Inc. Lexington, KY 40509
(606) 269-2325
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
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 Augusta Georgia 58-1615676 3100 Perimeter Parkway
Behavioral Health P.O. Box 14939
System, Inc. Augusta, GA 30909
(404) 868-6625
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
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 Florida 58-1527678 4480 51st Street, West
System of Bradenton, Inc. Bradenton, FL 34210
(813) 746-1388
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
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 Mississippi 58-1616919 3531 Lakeland Drive
System of Jackson, Inc. Jackson, MS 39208
(601) 939-9030
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
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 Indiana 58-1603160 101 West 61st Avenue
System of Northwest State Road 51
Indiana, Inc. Hobart, IN 46342
(219) 947-4464
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
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 California 33-0606646 3414 Peachtree Rd., N.E.
System of Yorba Linda, Suite 1400
Inc. Atlanta, GA 30326
(404) 841-9200
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
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 Financial Offices, Georgia 58-1527680 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
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
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 St. Missouri 58-1583760 3414 Peachtree Rd., N.E.
Louis, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
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 Louisiana Behavioral Louisiana 72-1219231 1514 Doctor's Drive
Health System, Inc. Suite 102
Bossier City, LA 71111
(318) 747-4362
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
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 - 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
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
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 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
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
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 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, AK 99508-2996
(907) 258-7575
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
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 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
Charter Rockford Behavioral Delaware 51-0374617 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 871-9200
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
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 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
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
Correctional Behavioral Indiana 35-1978792 3414 Peachtree Rd., N.E.
Solutions of Indiana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral New Jersey 22-3436964 3000 Atrium Way
Solutions of New Jersey, Suite 410
Inc. Mount Laurel, NJ
(609) 235-2339
Correctional Behavioral Ohio 34-1826431 Allen Correctional Institute
Solutions of Ohio, Inc. 2338 North West Street
Lima, OH 45801
(419) 224-8000
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
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
- -------------------- -------------- -------------- ------------------------
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
Magellan Public Network, Delaware 51-0374654 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Massachusetts Mentor, Massachusetts 04-2799071 313 Congress St.
Inc. Boston, MA 02210
(617) 790-4800
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
xiv
<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
- -------------------- -------------- -------------- ------------------------
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.
xv
<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 June 30, 1996................................2
Condensed Consolidated Statements of Operations -
For the Nine Months and Quarters ended June 30, 1995 and 1996.......4
Condensed Consolidated Statements of Cash Flows -
For the Nine Months ended June 30, 1995 and 1996....................5
Notes to Condensed Consolidated Financial Statements.................6
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................15
PART II - Other Information:
Item 1. - Legal Proceedings.........................................21
Item 5. - Other Information.........................................21
Item 6. - Exhibits and Reports on Form 8-K..........................23
Signatures..........................................................24
<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, June 30,
1995 1996
---------------- ----------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents......................... $ 105,514 $ 136,604
Accounts receivable, net.......................... 181,163 208,574
Supplies.......................................... 5,768 5,314
Other current assets.............................. 13,130 20,053
-------- ----------
Total Current Assets......................... 305,575 370,545
Property and Equipment
Land.............................................. 88,019 85,706
Buildings and improvements........................ 377,169 384,034
Equipment......................................... 111,554 139,999
-------- ----------
576,742 609,739
Accumulated depreciation.......................... (90,877) (119,178)
-------- ----------
485,865 490,561
Construction in progress.......................... 2,902 4,654
-------- ----------
488,767 495,215
Assets Restricted for Settlement of Unpaid Claims........ 94,138 99,185
Other Long-Term Assets................................... 33,249 33,662
Goodwill, net............................................ 39,994 128,868
Other Intangible Assets, net............................. 21,835 42,712
-------- ----------
$983,558 $1,170,187
======== ==========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
September 30, June 30,
1995 1996
-------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable...................................... $ 71,020 $ 77,775
Accrued liabilities................................... 140,343 172,021
Current maturities of long-term debt and
capital lease obligations.......................... 2,799 5,720
----------- -----------
Total Current Liabilities.................... 214,162 255,516
Long-Term Debt and Capital Lease Obligations................. 538,770 532,100
Deferred income tax liabilities.............................. -- 7,634
Reserve for Unpaid Claims.................................... 100,125 86,074
Deferred Credits and Other Long-Term Liabilities............. 34,455 49,518
Minority Interest............................................ 7,486 53,630
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 32,935 shares
at June 30, 1996............................ 7,101 8,234
Other Stockholders' Equity
Additional paid-in capital......................... 253,295 326,725
Accumulated deficit................................ (161,840) (137,745)
Warrants outstanding............................... 64 64
Common Stock in Treasury, 462 shares at September
30, 1995 and June 30, 1996................... (9,238) (9,238)
Cumulative foreign currency adjustments............ (822) (2,325)
----------- -----------
Stockholders' Equity......................... 88,560 185,715
----------- -----------
$ 983,558 $ 1,170,187
=========== ===========
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 Nine Months
ended ended
June 30, June 30,
----------------------- --------------------------
1995 1996 1995 1996
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue.................................................. $304,745 $346,379 $868,403 $996,997
-------- -------- -------- --------
Costs and expenses:
Salaries, supplies and other operating expenses...... 225,578 274,536 646,399 780,880
Bad debt expense...................................... 26,130 18,886 71,092 61,293
Depreciation and amortization........................ 9,929 12,886 28,347 36,186
Amortization of reorganization value in excess of
amounts allocable to identifiable assets......... 7,800 - 23,400 --
Interest, net......................................... 13,789 13,065 41,190 35,459
ESOP expense.......................................... 14,165 -- 40,938 --
Stock option expense (credit)......................... (841) (210) (4,158) 1,204
Unusual items......................................... -- 33,959 26,840 33,959
-------- -------- -------- --------
296,550 353,122 874,048 948,981
-------- -------- -------- --------
Income (loss) before provision for income taxes
and minority interest................................. 8,195 (6,743) (5,645) 48,016
Provision for (benefit from) income taxes.................... 6,398 (2,698) 7,102 19,674
-------- -------- -------- --------
Income (loss) before minority interest....................... 1,797 (4,045) (12,747) 28,342
Minority interest............................................ 115 1,677 322 4,247
-------- -------- -------- --------
Net income (loss)............................................ $ 1,682 $ (5,722) $(13,069) $ 24,095
======== ======== ======== ========
Net income (loss) per common share........................... $ 0.06 $ (0.18) $ (0.47) $ 0.79
Average number of common shares outstanding................. 28,272 32,464 27,833 30,559
The accompanying Notes to Condensed 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 Nine Months
ended
June 30,
----------------------------
1995 1996
---------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss)................................................... $ (13,069) $ 24,095
---------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................................ 51,747 36,186
ESOP expense................................................. 40,938 --
Non-cash portion of unusual items............................ 18,800 31,206
Stock option expense (credit)................................ (4,158) 1,204
Non-cash interest expense.................................... 1,802 1,812
Gain on sale of assets....................................... (2,961) (867)
Cash flows from changes in assets and liabilities, net
of effects from sales and acquisitions of businesses:
Accounts receivable, net.............................. (13,749) (3,201)
Other assets.......................................... (10,203) 2,291
Accounts payable and other accrued liabilities........ (21,402) (28,798)
Reserve for unpaid claims............................. 9,473 (14,051)
Income taxes payable.................................. 2,076 11,514
Other liabilities..................................... (20,578) (5,957)
Minority interest, net of dividends paid.............. (63) 4,868
Other................................................. 545 155
---------- -----------
Total adjustments................................ 52,267 36,362
---------- -----------
Net cash provided by operating activities... 39,198 60,457
---------- -----------
Cash Flows From Investing Activities
Capital expenditures................................................ (12,077) (24,617)
Acquisitions of businesses, net of cash acquired.................... (61,473) (50,099)
Increase in assets restricted for settlement of
unpaid claims..................................................... (15,394) (8,567)
Proceeds from sale of assets........................................ 5,879 1,253
---------- -----------
Net cash used in investing activities....... (83,065) (82,030)
---------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of debt...................................... 28,009 68,125
Payments on debt and capital lease obligations...................... (42,091) (84,492)
Proceeds from issuance of common stock, net of issuance costs....... -- 68,561
Treasury stock transactions......................................... (4,712) --
Proceeds from exercise of stock options and warrants................ 517 2,147
Income tax payments made on behalf of stock optionees............... -- (1,678)
---------- -----------
Net cash provided by (used in)
financing activities...................... (18,277) 52,663
---------- -----------
Net increase (decrease) in cash and cash equivalents....................... (62,144) 31,090
Cash and cash equivalents at beginning of period........................... 129,603 105,514
---------- -----------
Cash and cash equivalents at end of period................................. $ 67,459 $ 136,604
========== ===========
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
June 30, 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 nine months
ended June 30, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
For the Nine Months ended
June 30
1995 1996
--------- --------
<S> <C> <C>
Income taxes paid, net of refunds received............................... $ 3,788 $ 6,853
Interest paid, net of amounts capitalized................................ 51,113 53,350
Notes payable assumed in connection with acquisitions of businesses...... -- 12,100
</TABLE>
The non-cash portion of unusual items for the nine months ended June
30, 1995 and 1996 includes the unpaid portion of the $29.8 million and $30.0
million insurance settlements that were recorded during the quarters ended March
31, 1995 and June 30, 1996, respectively. The payments of the March 31, 1995
insurance settlement are included in accounts payable and other accrued
liabilities in the statement of cash flows for the nine months ended June 30,
1995 and 1996.
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 June 30, 1996 follows (in
thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
--------------- ----------------
<S> <C> <C> <C>
Revolving Credit Agreement due through 1999
(7.1875 % at June 30, 1996)............................. $ 80,593 $ 70,593
11.25% Senior Subordinated Notes due 2004...................... 375,000 375,000
6.46 % to 10.75% Mortgage and other notes
payable through 1999.................................... 5,268 12,310
Variable rate secured notes due through 2013
(3.40% to 3.70% at June 30, 1996)....................... 62,025 61,475
7.5% Swiss Bonds............................................... 6,443 6,443
3.55% to 12.50% Capital lease obligations due through 2014..... 12,617 12,349
------------ -------------
541,946 538,170
Less amounts due within one year........................ 2,799 5,720
Less debt service funds................................. 377 350
------------ -------------
$ 538,770 $ 532,100
============ =============
</TABLE>
NOTE E - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
-------------- ----------------
<S> <C> <C>
Salaries and wages......................... $ 28,597 $ 36,808
Amounts due health insurance programs...... 10,252 23,314
Medical claims payable..................... -- 25,613
Interest................................... 20,561 9,562
Other...................................... 80,933 76,724
----------- -----------
$ 140,343 $ 172,021
=========== ===========
</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 June 30, 1996. As of June 30, 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 have continued as customers of Green Spring. As of June 30,
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 - Unusual Items
Insurance Settlements
Unusual items included the resolution of disputes between the Company
and insurance carriers concerning certain billings for services.
In March 1995, the Company and a group of insurance carriers resolved a
billing dispute which arose in fiscal 1995 related to matters arising
predominately in the 1980's. As part of the settlement, the Company agreed to
pay the insurance carriers $29.8 million payable in five installments over a
three year period. The Company and the insurance carriers have agreed to
continue to do business at the same or similar general levels and to seek
additional business opportunities that will serve to enhance their present
relationships.
In August 1996, the Company and a group of insurance carriers resolved
a billing dispute which arose in fiscal 1996 related to matters originating in
the 1980's. As part of the settlement of these claims, certain related payer
matters and associated legal fees, the Company recorded a charge of
approximately $30.0 million during the quarter ended June 30, 1996. The Company
will pay the insurance settlement amount in twelve installments over a three
year period, beginning August 1996. The Company and the insurance carriers have
agreed that the dispute and settlement will not negatively impact any present or
pending business relationships nor will it prevent the parties from negotiating
in good faith concerning additional business opportunities available to, and
future relationships between, the parties.
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 June 30, 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 nine months ended June 30, 1996.
The Company consolidated or closed three hospitals during the six
months ended March 31, 1996. The charges related to closing such facilities were
not material. In April 1996, the Company closed three hospitals. The Company
recorded a charge of approximately $2.8 million during the quarter and the nine
months ended June 30, 1996 related to the costs necessary to exit the hospital
operations, as follows (in thousands):
Severance and related benefits .......... $ 1,891
Contract terminations and other.......... 862
----------
$ 2,753
==========
8
<PAGE>
Approximately 320 employees were terminated at the facilities closed in
the quarter ended June 30, 1996. Severance and related benefits paid and charged
against the resulting liability were approximately $1.6 million during the
quarter ended June 30, 1996. Other exit costs paid and applied against the
resulting liability were approximately $446,000.
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 June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
June 30, June 30,
-------------------------------- --------------------------
1995 1996 1995 1996
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net revenue.................................... $ 17,536 $ 1,222 $ 58,702 $ 13,753
Salaries, supplies and other operating
expenses and bad debt expense................ 18,936 2,162 61,203 19,613
Net loss....................................... (2,128) (1,212) (5,394) (6,078)
</TABLE>
Impairment Losses
During the quarter ended June 30, 1996, the Company recorded an
impairment loss of approximately $1.2 million. The impairment loss related to
the property and equipment of a psychiatric hospital being held for disposal,
pending exercise of a purchase option by a third party.
Other
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.
NOTE H - 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.
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.
On August 1, 1996, the United States Department of Justice, Civil
Division, filed an Amended Complaint in a civil qui tam action initiated in
November of 1994 against the Company and its Orlando South hospital subsidiary
by two former employees. The Amended Complaint alleges that the hospital
violated the federal False Claims Act ("the Act") in billing for inpatient
treatment provided to elderly patients. The Amended Complaint is based on
disputed clinical and factual issues which the Company believes do not
constitute a violation of the Act. The Company and its subsidiary deny any
liability in this matter and will vigorously defend themselves against the suit.
As is its policy, the Company will continue to cooperate with the government in
this matter. The Company does not believe this matter will have a material
adverse effect on its financial position or results of operations.
9
<PAGE>
NOTE K - Guarantor Condensed Consolidating Financial Statements
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands, except per share amounts)
June 30, 1996
--------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
ASSETS Subsidiaries Subsidiaries Corporation)
-------------- ---------------- --------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents............................................ $ 38,412 $ 63,149 $ 35,043
Accounts receivable, net............................................. 152,991 44,855 10,728
Supplies............................................................. 4,583 395 336
Other current assets................................................. 9,300 4,782 3,642
----------- ---------- ----------
Total Current Assets................................. 205,286 113,181 49,749
Property and Equipment
Land................................................................. 77,252 7,439 1,015
Buildings and improvements........................................... 343,614 35,296 5,124
Equipment........................................................... 109,820 21,827 8,352
----------- ---------- ----------
530,686 64,562 14,491
Accumulated depreciation............................................. (107,148) (8,237) (3,793)
Construction in progress............................................. 3,886 706 62
----------- ---------- ----------
427,424 57,031 10,760
Assets restricted for settlement of unpaid claims........................... -- 84,743 14,442
Goodwill.................................................................... 21,128 94,975 12,765
Other Long-Term Assets (1).................................................. 98,923 (55,153) 1,173,196
----------- ---------- ----------
$ 752,761 $ 294,777 $1,260,912
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 39,866 $ 28,149 $ 9,990
Accrued expenses and other current liabilities ...................... 70,337 45,978 55,706
Current maturities of long-term debt and capital lease obligations... 2,591 3,129 --
----------- ---------- ----------
Total Current Liabilities............................ 112,794 77,256 65,696
Long-Term Debt and Capital Lease Obligations................................ (429,563) 8,965 952,698
Deferred income tax liabilities............................................. (470) (4,287) 7,457
Reserve for Unpaid Claims................................................... -- 79,925 3,820
Deferred Credits and Other Long-Term Liabilities (1)........................ 390,244 56,137 45,526
Minority Interest........................................................... -- -- --
Commitments and Contingencies
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 32,935 shares.............................. 2,764 (483) 8,234
Other Stockholders' Equity
Additional paid-in capital........................................... 611,506 34,595 326,725
Retained earnings (Accumulated deficit).............................. 61,635 51,650 (137,745)
Warrants outstanding................................................. -- -- 64
Common shares in Treasury - 462 shares............................... -- (4,736) (9,238)
Cumulative foreign currency adjustments.............................. 3,851 (4,245) (2,325)
----------- ---------- ----------
679,756 76,781 185,715
----------- ---------- ----------
$ 752,761 $ 294,777 $1,260,912
=========== ========== ==========
Consolidated
Elimination Consolidated
ASSETS Entries Total
-------------- ------------
Current Assets
Cash and cash equivalents............................................ $ -- $ 136,604
Accounts receivable, net............................................. -- 208,574
Supplies............................................................. -- 5,314
Other current assets................................................. 2,329 20,053
----------- ----------
Total Current Assets................................. 2,329 370,545
Property and Equipment
Land................................................................. -- 85,706
Buildings and improvements........................................... -- 384,034
Equipment........................................................... -- 139,999
----------- ----------
-- 609,739
Accumulated depreciation............................................. -- (119,178)
Construction in progress............................................. -- 4,654
----------- ----------
-- 495,215
Assets restricted for settlement of unpaid claims........................... -- 99,185
Goodwill.................................................................... -- 128,868
Other Long-Term Assets (1).................................................. (1,140,592) 76,374
---------- ----------
$(1,138,263) $1,170,187
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ (230) $ 77,775
Accrued expenses and other current liabilities ...................... -- 172,021
Current maturities of long-term debt and capital lease obligations... -- 5,720
----------- ----------
Total Current Liabilities............................ (230) 255,516
Long-Term Debt and Capital Lease Obligations................................ -- 532,100
Deferred income tax liabilities............................................. 4,934 7,634
Reserve for Unpaid Claims................................................... 2,329 86,074
Deferred Credits and Other Long-Term Liabilities (1)........................ (442,389) 49,518
Minority Interest.......................................................... 53,630 53,630
Commitments and Contingencies
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 32,935 shares.............................. (2,281) 8,234
Other Stockholders' Equity
Additional paid-in capital........................................... (646,101) 326,725
Retained earnings (Accumulated deficit).............................. (113,285) (137,745)
Warrants outstanding................................................. -- 64
Common shares in Treasury - 462 shares............................... 4,736 (9,238)
Cumulative foreign currency adjustments.............................. 394 (2,325)
----------- ----------
(756,537) 185,715
----------- ----------
$(1,138,263) $1,170,187
=========== ==========
(1) Elimination entry related to intercompany receivables and payables and investments in consolidated subsidiaries.
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements.
</TABLE>
10
<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>
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............................................ 2,650 251 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
=========== ========== ==========
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
=========== ==========
(1) Elimination entry related to intercompany receivables and payables and investment in consolidated subsidiaries.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Quarter ended June 30, 1996
-----------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
-------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenue................................................................ $ 252,810 $ 96,031 $ 1,776
Costs and expenses
Salaries, supplies and other operating expenses.................... 194,157 82,021 2,596
Bad debt expense.................................................... 21,482 1,671 (4,267)
Depreciation and amortization....................................... 9,015 3,443 428
Interest, net....................................................... (10,923) (307) 24,295
Stock option expense (credit)....................................... -- -- (210)
Unusual items....................................................... 3,959 -- 30,000
----------- ---------- ----------
217,690 86,828 52,842
----------- ---------- ----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................ 35,120 9,203 (51,066)
Provision for (benefit from) income taxes.................................. 197 2,799 11
----------- ---------- ----------
Income (loss) before equity in earnings (loss of subsidiaries)............. 34,923 6,404 (51,077)
Equity in earnings (loss) of subsidiaries.................................. 1,540 1,602 (45,355)
----------- ---------- ----------
Net income (loss).......................................................... $ 33,383 $ 4,802 $ (5,722)
=========== ========== ==========
Consolidated
Elimination Consolidated
Entries Total
-------------- --------------
Net revenue................................................................ $ (4,238) $ 346,379
Costs and expenses
Salaries, supplies and other operating expenses.................... (4,238) 274,536
Bad debt expense.................................................... -- 18,886
Depreciation and amortization....................................... -- 12,886
Interest, net....................................................... -- 13,065
Stock option expense (credit)....................................... -- (210)
Unusual items....................................................... -- 33,959
----------- ----------
(4,238) 353,122
----------- ----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................ -- (6,743)
Provision for (benefit from) income taxes.................................. (5,705) (2,698)
----------- ----------
Income (loss) before equity in earnings (loss of subsidiaries)............. 5,705 (4,045)
Equity in earnings (loss) of subsidiaries.................................. 43,890 1,677
----------- ----------
Net income (loss).......................................................... $ (38,185) $ (5,722)
=========== ===========
For the Quarter ended June 30, 1995
------------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
-------------- ---------------- --------------
Net revenue................................................................ $ 273,854 $ 33,657 $ 3,592
Costs and expenses
Salaries, supplies and other operating expenses.................... 192,826 33,065 5,898
Bad debt expense.................................................... 24,868 1,262 --
Depreciation and amortization....................................... 8,229 1,140 707
Amortization of reorganization value in excess of amounts
allocable to identifiable assets.................................. -- -- 7,800
Interest, net....................................................... (7,946) (115) 21,850
ESOP expense........................................................ 13,324 -- 841
Stock option expense (credit)....................................... -- -- (841)
----------- ---------- ----------
231,301 35,352 36,255
----------- ---------- ----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................ 42,553 (1,695) (32,663)
Provision for (benefit from) income taxes.................................. (136) -- --
----------- ---------- ----------
Income (loss) before equity in earnings (loss of subsidiaries)............. 42,689 (1,695) (32,663)
Equity in earnings (loss) of subsidiaries.................................. (997) 115 (34,345)
----------- ---------- ----------
Net income (loss).......................................................... $ 43,686 $ (1,810) $ 1,682
=========== ========== ==========
Consolidated
Elimination Consolidated
Entries Total
-------------- --------------
Net revenue................................................................ $ (6,358) $ 304,745
Costs and expenses
Salaries, supplies and other operating expenses.................... (6,211) 225,578
Bad debt expense.................................................... -- 26,130
Depreciation and amortization....................................... (147) 9,929
Amortization of reorganization value in excess of amounts
allocable to identifiable assets.................................. -- 7,800
Interest, net....................................................... -- 13,789
ESOP expense........................................................ -- 14,165
Stock option expense (credit)....................................... -- (841)
----------- ----------
(6,358) 296,550
----------- ----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................ -- 8,195
Provision for (benefit from) income taxes.................................. 6,534 6,398
----------- ----------
Income (loss) before equity in earnings (loss of subsidiaries)............. (6,534) 1,797
Equity in earnings (loss) of subsidiaries.................................. 35,342 115
----------- ----------
Net income (loss).......................................................... $ (41,876) $ 1,682
=========== ==========
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Nine Months ended June 30, 1996
----------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
-------------- -------------- ---------------
<S> <C> <C> <C>
Net revenue............................................................... $ 765,388 $ 235,720 $ 9,403
Costs and expenses
Salaries, supplies and other operating expenses................... 586,180 204,112 4,102
Bad debt expense................................................... 62,520 3,659 (4,886)
Depreciation and amortization...................................... 27,043 8,346 797
Interest, net...................................................... (31,309) (575) 67,343
Stock option expense (credit)...................................... -- -- 1,204
Unusual items...................................................... 3,959 -- 30,000
----------- --------- ---------
648,393 215,542 98,560
----------- --------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries.............................. 116,995 20,178 (89,157)
Provision for income taxes.............................................. 1,538 4,845 219
----------- --------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries........... 115,457 15,333 (89,376)
Equity in earnings (loss) of subsidiaries................................ 1,172 2,747 (113,471)
----------- --------- ---------
Net income (loss)........................................................ $ 114,285 $ 12,586 $ 24,095
=========== ========== =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities............................ $ 6,702 $ 29,922 $ 23,833
----------- ---------- ----------
Cash Flows from Investing Activities:
Capital expenditures................................................ (17,359) (2,320) (4,938)
Proceeds from sale of assets........................................ 1,253 -- --
Acquisitions of businesses, net of cash acquired.................... (438) 36,229 (85,890)
Increase in assets restricted for the settlement of unpaid claims... -- (7,059) (1,508)
----------- ---------- ----------
Cash provided by (used in) investing activities............................ (16,544) 26,850 (92,336)
----------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt.................................. -- 125 68,000
Payments on debt and capital obligations............................ (12,465) (4,027) (68,000)
Proceeds from issuance of Common Stock, net of issuance costs....... -- -- 68,561
Income tax payments made on behalf of stock optionees............... -- -- (1,678)
Proceeds from exercise of stock option and warrants................. -- -- 2,147
----------- ---------- ----------
Cash provided by (used in) financing activities............................ (12,465) (3,902) 69,030
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....................... (22,307) 52,870 527
Cash and cash equivalents at beginning of period........................... 60,719 10,279 34,516
----------- ---------- ----------
Cash and cash equivalents at end of period................................. $ 38,412 $ 63,149 $ 35,043
=========== ========== ==========
Consolidated
Elimination Consolidated
Entries Total
-------------- --------------
Net revenue............................................................... $ (13,514) $ 996,997
Costs and expenses
Salaries, supplies and other operating expenses................... (13,514) 780,880
Bad debt expense................................................... -- 61,293
Depreciation and amortization...................................... -- 36,186
Interest, net...................................................... -- 35,459
Stock option expense (credit)...................................... -- 1,204
Unusual items...................................................... -- 33,959
----------- ----------
(13,514) 948,981
----------- ----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries.............................. -- 48,016
Provision for income taxes.............................................. 13,072 19,674
----------- ----------
Income (loss) before equity in earnings (loss) of subsidiaries........... (13,072) 28,342
Equity in earnings (loss) of subsidiaries................................ 113,799 4,247
----------- ----------
Net income (loss)........................................................ $ (126,871) $ 24,095
=========== ==========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities............................ $ -- $ 60,457
----------- ----------
Cash Flows from Investing Activities:
Capital expenditures................................................ -- (24,617)
Proceeds from sale of assets........................................ -- 1,253
Acquisitions of businesses, net of cash acquired.................... -- (50,099)
Increase in assets restricted for the settlement of unpaid claims... -- (8,567)
----------- ----------
Cash provided by (used in) investing activities............................ -- (82,030)
----------- ----------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt.................................. -- 68,125
Payments on debt and capital obligations............................ -- (84,492)
Proceeds from issuance of Common Stock, net of issuance costs....... -- 68,561
Income tax payments made on behalf of stock optionees............... -- (1,678)
Proceeds from exercise of stock option and warrants................. -- 2,147
----------- ----------
Cash provided by (used in) financing activities............................ -- 52,663
----------- ----------
Net increase (decrease) in cash and cash equivalents....................... -- 31,090
Cash and cash equivalents at beginning of period........................... -- 105,514
----------- ----------
Cash and cash equivalents at end of period................................. $ -- $ 136,604
=========== ==========
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 Nine Months ended June 30, 1995
-----------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------- -------------- ---------------
<S> <C> <C> <C>
Net revenue................................................................ $ 827,011 $ 58,523 $ (88)
Costs and expenses
Salaries, supplies and other operating expenses.................... 589,771 56,876 16,424
Bad debt expense.................................................... 71,664 1,439 (2,011)
Depreciation and amortization....................................... 26,352 1,862 503
Amortization of reorgnization value in excess of amounts
allocable to identifiable assets.................................. -- -- 23,400
Interest, net....................................................... (23,746) (77) 65,013
ESOP expense........................................................ 40,293 -- 650
Unusual items....................................................... -- -- 26,840
Stock option expense (credit)....................................... -- -- (4,158)
----------- ---------- ----------
704,334 60,100 126,661
----------- ---------- ----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................ 122,677 (1,577) (126,749)
Provision for income taxes................................................ 418 -- --
----------- ---------- ----------
Income (loss) before equity in earnings (loss) of subsidiaries............. 122,259 (1,577) (126,749)
Equity in earnings (loss) of subsidiaries.................................. (2,252) 322 (113,680)
----------- ---------- ----------
Net income (loss).......................................................... $ 124,511 $ (1,899) $ (13,069)
=========== ========== ==========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities............................ $ 61,387 $ 17,483 $ (39,672)
----------- ---------- ----------
Cash Flows from Investing Activities:
Capital expenditures................................................ (8,992) (2,052) (1,033)
Proceeds from sale of assets........................................ -- -- 5,879
Acquisitions of businesses, net of cash acquired.................... (57,783) (3,690) --
Increase in assets restricted for the settlement of unpaid claims... -- (11,711) (3,683)
----------- ---------- -----------
Cash provided by (used in) investing activities............................ (66,775) (17,453) 1,163
----------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt.................................. 28,009 -- --
Payments on debt and capital obligations............................ (57,972) 864 15,017
Treasury stock transactions......................................... -- (3,983) (729)
Proceeds from exercise of stock option and warrants................. -- -- 517
----------- ---------- ----------
Cash provided by (used in) financing activities............................ (29,963) (3,119) 14,805
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....................... (35,351) (3,089) (23,704)
Cash and cash equivalents at beginning of period........................... 71,850 8,606 49,147
----------- ---------- ----------
Cash and cash equivalents at end of period................................. $ 36,499 $ 5,517 $ 25,443
=========== ========== ==========
Consolidated
Elimination Consolidated
Entries Total
------------- --------------
Net revenue................................................................ $ (17,043) $ 868,403
Costs and expenses
Salaries, supplies and other operating expenses.................... (16,672) 646,399
Bad debt expense.................................................... -- 71,092
Depreciation and amortization....................................... (370) 28,347
Amortization or reorgnization value in excess of amounts
allocable to identifiable assets.................................. -- 23,400
Interest, net....................................................... -- 41,190
ESOP expense........................................................ (5) 40,938
Unusual items....................................................... -- 26,840
Stock option expense (credit)....................................... -- (4,158)
----------- ----------
(17,047) 874,048
----------- ----------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries................................ 4 (5,645)
Provision for income taxes................................................ 6,684 7,102
----------- ----------
Income (loss) before equity in earnings (loss) of subsidiaries............. (6,680) (12,747)
Equity in earnings (loss) of subsidiaries.................................. 115,932 322
----------- ----------
Net income (loss).......................................................... $ (122,612) $ (13,069)
=========== ==========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities............................ $ -- $ 39,198
----------- --------------
Cash Flows from Investing Activities:
Capital expenditures................................................ -- (12,077)
Proceeds from sale of assets........................................ -- 5,879
Acquisitions of businesses, net of cash acquired.................... -- (61,473)
Increase in assets restricted for the settlement of unpaid claims... -- (15,394)
----------- ----------
Cash provided by (used in) investing activities............................ -- (83,065)
----------- ----------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt.................................. -- 28,009
Payments on debt and capital obligations............................ -- (42,091)
Treasury stock transactions......................................... -- (4,712)
Proceeds from exercise of stock option and warrants................. -- 517
----------- ----------
Cash provided by (used in) financing activities............................ -- (18,277)
----------- ----------
Net increase (decrease) in cash and cash equivalents....................... -- (62,144)
Cash and cash equivalents at beginning of period........................... -- 129,603
----------- ----------
Cash and cash equivalents at end of period................................. $ -- $ 67,459
=========== ==========
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements.
</TABLE>
14
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
June 30, 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 June 30, 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 have continued as customers of Green Spring. As of June 30,
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:
15
<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 96 (11)
September 30.......................... 102
Average licensed beds at:
Quarter:
First............................ 9,198 9,110 (1)%
Second........................... 9,567 9,040 (6)
Third............................ 9,585 8,677 (9)
Fourth........................... 9,130
Year.................................. 9,368
Net revenue (in thousands):
Quarter:
First............................ $ 249,105 $ 253,565 2 %
Second........................... 269,854 257,690 (5)
Third............................ 272,510 249,145 (9)
Fourth........................... 250,891
----------
Year.................................. 1,042,360
==========
Patient days:
Quarter:
First............................ 415,122 432,474 4 %
Second........................... 456,885 463,327 1
Third............................ 456,698 452,864 (1)
Fourth........................... 429,374
----------
Year.................................. 1,758,079
==========
Equivalent patient days:
Quarter:
First............................ 462,663 478,693 3 %
Second........................... 509,222 513,502 1
Third............................ 509,354 503,622 (1)
Fourth........................... 476,270
----------
Year.................................. 1,957,509
==========
Net revenue per equivalent patient day:
Quarter:
First............................ $ 538 530 (1)%
Second........................... 530 502 (5)
Third............................ 535 495 (7)
Fourth........................... 527
Year.................................. 532
Admissions:
Quarter:
First............................ 30,626 32,865 7 %
Second........................... 34,772 37,966 9
Third............................ 33,790 35,854 6
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 12.5 (2)
Fourth........................... 12.9
Year.................................. 12.9
</TABLE>
16
<PAGE>
Results of Operations
The following table summarizes, for the periods indicated, changes in
selected operating indicators.
<TABLE>
<CAPTION>
Percentage of Net Revenue
----------------------------------------------------------------------
Quarter ended June 30, Nine Months ended June 30,
------------------------------- -------------------------------
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.... 74.0 79.3 74.4 78.3
Bad debt expense................................... 8.6 5.4 8.2 6.2
---------- --------- ---------- ---------
Total operating expenses........................... 82.6 84.7 82.6 84.5
Operating margin................................... 17.4 15.3 17.4 15.5
========== ========= ========== =========
</TABLE>
Patient days at the Company's hospitals decreased 1% for the quarter ended
June 30, 1996 and increased 2% for the nine months ended June 30, 1996 compared
to the same periods of fiscal 1995. These changes 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 and 1996. Total admissions
increased 6% and 8% for the quarter and the nine months ended June 30, 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 nine months ended June
30, 1996 increased 13.7% and 14.8%, 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 $17.5 million and
$50.6 million for the quarter and the nine months ended June 30, 1996 compared
to $14.9 million and $28.8 million for the same periods in fiscal 1995. Green
Spring (excluding GPA), which was acquired on December 13, 1995, had revenues of
approximately $62.4 million and $134.3 million for the quarter and the nine
months ended June 30, 1996, respectively. Net revenue for the quarters ended
June 30, 1995 and 1996 included $10.3 million and $3.3 million, respectively,
for the normal settlement and adjustments of reimbursement issues related to
earlier fiscal periods ("reimbursement issues"). Net revenue for the nine months
ended June 30, 1995 and 1996 included $22.3 million and $14.4 million,
respectively, related to reimbursement issues. Net revenue per equivalent
patient day at the Company's psychiatric hospitals decreased in the quarter and
the nine months ending June 30, 1996 by 7% and 5%, respectively, compared to the
same periods in the prior year. The decreases were primarily due to (i)
continued shift in payer mix from private payer sources to managed care payers
and governmental payers, (ii) pricing pressure from certain payers, primarily
related to the denial of claims payable to the hospitals, and (iii) 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
21.7% and 20.8% in the quarter and the nine months ended June 30, 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) adjustments, as a result of updated actuarial
estimates to malpractice claim reserves, which resulted in a reduction of
expenses of approximately $4.8 million and $12.3 million during the quarter and
the nine months ended June 30, 1996, respectively. Expenses incurred by Mentor
increased to $15.0 million and $43.4 million for the quarter and the nine months
ended June 30, 1996 compared to $12.6 million and $24.9 million for the same
periods in fiscal 1995. Green Spring expenses (excluding GPA) were approximately
$53.8 million and $118.5 million, respectively, in the quarter and the nine
months ended June 30, 1996.
17
<PAGE>
The Company's bad debt expense decreased 27.7% and 13.8% in the quarter and
the nine months ended June 30, 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 and
improved collections were partially offset by the increase in bad debt expense
related to hospital-based acquisitions. Mentor and Green Spring bad debt expense
was 1% or less 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 29.8% and 27.7% in the quarter and
the nine months ended June 30, 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
$668,000 and $1.9 million in the quarter and the nine months ended June 30,
1996, respectively, compared to $579,000 and $1.2 million for the same periods
in fiscal 1995. Green Spring (excluding GPA) had depreciation and amortization
of $2.7 million and $5.8 million for the quarter and the nine months ended June
30, 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 nine months ended June 30, 1996.
Interest expense, net, decreased 5.3% and 13.9% for the quarter and the
nine months ended June 30, 1996 compared to the same periods in fiscal 1995. The
decrease for the nine months ended June 30, 1996 resulted primarily from
approximately $5.0 million of interest income recorded during the quarter 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 nine months ended June 30, 1996 was $0
compared to $14.2 million and $40.9 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 nine months ended June 30,
1996 increased $631,000 and $5.4 million, respectively, from the previous year
periods primarily due to fluctuations in the market price of the Company's
common stock.
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
and the third quarter of fiscal 1996, the Company recorded unusual items of
$29.8 million and $30.0 million, respectively, related to the settlement of
insurance claims. Also during the third quarter of fiscal 1996, the Company
recorded unusual items of $2.8 million related to the closure of three hospitals
and $1.2 million for an impairment loss. See Note G for further information
regarding unusual items.
The Company's effective tax rate was 40.0% and 40.9% in the quarter and the
nine months ended June 30, 1996, respectively. 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 $1.6 million and $3.9 million in the quarter
and the nine months ended June 30, 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.
18
<PAGE>
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 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 plans to adopt FAS 123 in the fiscal year ended September 30, 1997
on a pro forma disclosure basis.
Liquidity and Sources of Capital
Operating Activities. The Company's net cash provided by operating
activities was approximately $39.2 million and $60.5 million for the nine months
ended June 30, 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 nine months ended June 30, 1996. The consideration paid
for Green Spring and related acquisition costs have resulted in the use of cash
of approximately $87.2 million compared to approximately $61.5 million in
acquisition expenditures during the nine months ended June 30, 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 from time to time 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 nine months ended June 30, 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 $68.6 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 June 30, 1996, the Company had approximately $101 million of
availability under the Revolving Credit Agreement. The Company was in compliance
with all debt covenants at June 30, 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 nine months of fiscal 1996, the Company
consolidated or closed six hospitals. See Note G for further information
regarding facility closures. Management expects to consolidate services in
selected
19
<PAGE>
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.
Management has begun the implementation of various cost containment
measures during the fourth quarter of fiscal 1996. Such measures will result in
severance and other termination benefits for certain employees and will result
in a charge in the fourth quarter of fiscal 1996 for such costs.
During the fourth quarter of fiscal 1995 and the third quarter of
fiscal 1996, the Company recorded impairment losses on property and equipment
and intangible assets of approximately $27.0 million and $1.2 million,
respectively. The impairment losses in fiscal 1995 were primarily related to
assets to be held and used in future periods. 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 June 30, 1996 had negative
operating income (net revenue less salaries, supplies and other operating
expenses and bad debt expense) in aggregate during the nine months ended June
30, 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 hospital operations.
In addition, the Company's hospitals have experienced pricing pressure related
to an increasing rate of claims denials by third party payers, which contributed
to a reduction in revenue per equivalent day compared to prior periods.
Management expects the pricing pressure to continue into fiscal 1997, which
could result in lower revenue per equivalent patient day in future quarterly
periods. Management intends to vigorously contest third party denials that
relate to valid pre-certified medical procedures and review or renegotiate
contractual relationships with certain third party payers.
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.
20
<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.
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 portion of the stockholder's interest in Green Spring. The
Company has 61% ownership interest in Green Spring as of June 30, 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 have continued as customers of Green Spring. As of June 30,
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 June 30, 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.
21
<PAGE>
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 June 30, 1996, Green Spring's risk and non-risk membership was
approximately 4.0 million and 8.6 million, respectively. During the quarter and
the nine months ended June 30, 1996, risk and non-risk business comprised
approximately 70% and 30%, respectively, of Green Spring revenues.
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 nine months ended June 30, 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.
22
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Amendment No. 9, dated as of June 30, 1996, to Second Amended
and Restated Credit Agreement, dated as of May 2, 1994, among
the Company, Bankers Trust Company, as agent, First Union
National Bank, as co-agent.
4(b) Amendment No. 10, dated as of July 31, 1996, to Second Amended
and Restated Credit Agreement, dated as of May 2, 1994, among
the Company, Bankers Trust Company, as agent, First Union
National Bank as co-agent.
*10(a) Employment Agreement dated May 1, 1996, between the Company and
Dr. Danna Mauch, President and Chief Operating Officer of
Magellan Public Solutions, Inc. and Executive Vice President of
the Company.
*10(b) Employment Agreement dated April 15, 1996, between the Company
and John M. DeStefanis, President and Chief Operating Officer
of Charter Behavioral Health Systems, Inc. and Executive Vice
President of the Company.
*10(c) Employment Agreement dated May 7, 1996, between the Company and
Steve J. Davis, Executive Vice President, Administrative
Services and General Counsel
27 Financial Data Schedule
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 June 30, 1996.
23
<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: August 12, 1996 /s/ Craig L. McKnight
--------------------------- ---------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
Date: August 12, 1996 /s/ Howard A. McLure
-------------------------- --------------------
Howard A. McLure
Vice President and Controller
(Principal Accounting Officer)
24
<PAGE>
AMENDMENT NO. 9
TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT NO. 9 dated as of June 30, 1996 (this "Amendment")
to the SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 2, 1994 (as
amended by Amend ment No. 1 thereto dated as of June 9, 1994, Amendment No. 2
thereto dated as of September 30, 1994, Amendment No. 3 thereto dated as of
December 12, 1994, Amendment No. 4 thereto dated as of January 11, 1995,
Amendment No. 5 thereto dated as of March 17, 1995, Amendment No. 6 thereto
dated as of October 17, 1995, Amendment No. 7 thereto dated as of November 30,
1995, and Amendment No. 8 thereto dated as of January 24, 1996, the "Credit
Agreement"), each among MAGELLAN HEALTH SERVICES, INC., a Delaware corporation
formerly known as CHARTER MEDICAL CORPORATION (the "Company"), the banking and
other finan cial institutions from time to time party thereto (the "Lenders"),
BANKERS TRUST COMPANY, as Agent for the Lend ers, and FIRST UNION NATIONAL BANK
OF NORTH CAROLINA, as Co-Agent. Capitalized terms used herein and not defined
herein shall have the respective meanings set forth for such terms in the Credit
Agreement after giving effect to the amendments thereto set forth herein.
W I T N E S S E T H :
WHEREAS, the Company has requested that the Credit Agreement
be amended to, among other things, include the earnings of certain Domestic
Subsidiaries and certain joint ventures of the Company for purposes of the
definition of Core EBITDA;
WHEREAS, the Company has requested that the Lenders consent to
the release of certain Collateral pledged to the Collateral Agent by Charter
Hospital of Mobile, Inc.; and
1
<PAGE>
WHEREAS, subject to and upon the terms and conditions
hereinafter set forth and in the Credit Agree ment as amended hereby, the
Lenders party hereto are willing to agree to the foregoing;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Consent. The Lenders party hereto hereby consent to
the release by the Collateral Agent, upon request therefor from the Company, of
the Collateral consisting of the equipment pledged to the Collateral Agent by
Charter Hospital of Mobile, Inc. and any succes sor thereto; provided that the
Company certifies to the Agent at the time of such release that both before and
after giving effect to such release, no Default or Event of Default will have
occurred and be continuing.
Section 2. Amendments to Credit Agreement.
The Credit Agreement is amended as follows:
The definition of the term "Core EBITDA" in Section 10 of the
Credit Agreement is amended by insert ing the following before the period at the
end thereof ", plus, without duplication, (f) the Company's pro rata interest in
the consolidated EBITDA of Domestic Subsid iaries (other than Wholly-Owned
Restricted Subsidiaries) and joint ventures of the Company that are consolidated
with, and are at least 50% owned (directly or indirectly) by, the Company,
provided that (i) the amount added pursuant to this clause (f) shall not at any
time exceed 33-1/3% of the aggregate amount of Core EBITDA at such time after
giving effect to such addition and (ii) no amount shall be added pursuant to
this clause (f) if the aggregate outstanding principal amount of Indebtedness of
all such Domestic Subsidiaries and joint ventures exceeds $25,000,000 at any
time during such period".
2
<PAGE>
Section 3. Representations and Warranties.
The Company hereby represents and warrants to the Agent and the Lenders that:
(a) The execution and delivery by the Company of this
Amendment and the performance by the Company of the Credit Agreement as amended
hereby are within the Company's corporate powers, have been duly authorized by
all necessary corporate or other action and will not (i) contravene the
certificate or articles of incorporation or the bylaws of the Company, (ii)
contravene any law, regulation, order, writ, judgment, decree, determination or
award currently in effect binding on or affecting the Company or any of its
Subsidiaries or any of their re spective assets, except where such contravention
would not have a Material Adverse Effect, or (iii) conflict with or result in
any breach of any of the terms, cove nants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of any Lien
(except pursuant to the Security Documents) upon any of the property or assets
of the Company or any of its Subsidiaries pursuant to the terms of, any
indenture, mortgage, deed of trust, agreement or other instrument (including,
without limitation, the Senior Subordinated Notes Indenture) to which the
Company or any of its Sub sidiaries is a party or by which the Company, any of
its Subsidiaries or any of their respective properties or assets is bound or
subject to, except to the extent such conflict, breach, default or creation or
imposition would not have a Material Adverse Effect.
(b) This Amendment, the Credit Agreement as amended hereby,
and after giving effect to this Amend ment, the other Credit Documents
constitute the legal, valid and binding obligations of the Company and the other
Credit Parties party thereto, enforceable against the Company and such Credit
Parties in accordance with their respective terms, except to the extent such en
forceability may be limited by applicable bankruptcy,
3
<PAGE>
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally, and by general principles of equity (regardless
of wheth er enforcement is sought in a proceeding in equity or at law).
(c) On and as of the date hereof, and both before and after
giving effect to this Amendment, no De fault or Event of Default has occurred
and is continuing.
(d) The representations and warranties of the Company and the
other Credit Parties contained in the Credit Agreement and the other Credit
Documents are true and correct on and as of the date hereof as if made on and as
of the date hereof both before and after giving effect to the effectiveness of
this Amendment, except to the extent such representations and warranties
expressly relate to a specific date.
Section 4. Effectiveness. This Amendment shall become
effective when the Agent shall have received duly executed counterparts of this
Amendment from the Company, each Subsidiary of the Company that is a party to
any Credit Document and as many of the Lenders as shall be necessary to comprise
the "Required Lenders".
Section 5. Status of Credit Documents. This Amendment is
limited solely for the purposes and to the extent expressly set forth herein,
and, except as ex pressly modified hereby, the terms, provisions and condi tions
of the Credit Documents and the Liens granted thereunder shall continue in full
force and effect and are hereby ratified and confirmed in all respects.
Section 6. Counterparts. This Amendment may be executed and
delivered in any number of counterparts and by the different parties hereto on
separate counter parts, each of which when so executed and delivered shall be an
original, but all of which shall together consti-
4
<PAGE>
tute one and the same instrument. A complete set of counterparts shall be
lodged with the Company and the Agent.
Section 7. Governing Law. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH, AND SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK
(WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF).
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their
respective duly authorized officers to execute and deliver this Amendment No. 9
to the Second Amended and Restated Credit Agreement as of the date first above
written.
MAGELLAN HEALTH SERVICES, INC.
By:________________________
Name:
Title:
BANKERS TRUST COMPANY,
as Agent and a Lender
By:________________________
Name:
Title:
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Co-Agent
and a Lender
By:________________________
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:________________________
Name:
Title:
6
<PAGE>
BANK OF IRELAND
By:________________________
Name:
Title:
BANQUE FRANCAISE DU COMMERCE
EXTERIEUR
By:________________________
Name:
Title:
By:________________________
Name:
Title:
CREDIT LYONNAIS,
Cayman Islands Branch
By:________________________
Name:
Title:
DRESDNER BANK AG, New York and
Grand Cayman Islands Branches
By:________________________
Name:
Title:
7
<PAGE>
By:________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION
By:________________________
Name:
Title:
GIROCREDIT BANK AG DER
SPARKESSEN
By:________________________
Name:
Title:
THE BANK OF NEW YORK
By:________________________
Name:
Title:
THE BANK OF TOKYO-MITSUBISHI
LIMITED, New York Branch,
successor by merger to THE
MITSUBISHI BANK, LIMITED
By:________________________
Name:
Title:
8
<PAGE>
Consented and agreed to as of
the date first above written:
By each of the entities listed
on Schedule I hereto:
By:____________________
Name:
Title: ,
of each of the entities
listed on Schedule I hereto
By each of the entities listed
on Schedule II hereto:
By:____________________
Name:
Title: ,
of each of the entities
listed on Schedule II hereto
9
<PAGE>
AMENDMENT NO. 10
TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT NO. 10 dated as of July 31, 1996 (this "Amendment")
to the SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 2, 1994 (as
amended by Amendment No. 1 thereto dated as of June 9, 1994, Amend ment No. 2
thereto dated as of September 30, 1994, Amend ment No. 3 thereto dated as of
December 12, 1994, Amend ment No. 4 thereto dated as of January 11, 1995, Amend
ment No. 5 thereto dated as of March 17, 1995, Amendment No. 6 thereto dated as
of October 17, 1995, Amendment No. 7 thereto dated as of November 30, 1995,
Amendment No. 8 thereto dated as of January 24, 1996, and Amendment No. 9
thereto dated as of June 30, 1996, the "Credit Agree ment"), each among MAGELLAN
HEALTH SERVICES, INC., a Delaware corporation formerly known as CHARTER MEDICAL
CORPORATION (the "Company"), the banking and other finan cial institutions from
time to time party thereto (the "Lenders"), BANKERS TRUST COMPANY, as Agent for
the Lend ers, and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Co-Agent.
Capitalized terms used herein and not defined herein shall have the respective
meanings set forth for such terms in the Credit Agreement after giving effect to
the amendments thereto set forth herein.
W I T N E S S E T H :
WHEREAS, the Company has requested that the Credit Agreement
be amended to permit the Company to repurchase up to $35,000,000 of its capital
stock on the open market at the fair market value thereof during its 1996 and
1997 fiscal years; and
WHEREAS, subject to and upon the terms and conditions
hereinafter set forth and in the Credit Agree ment as amended hereby, the
Lenders party hereto are willing to agree to the foregoing;
1
<PAGE>
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Amendments to Credit Agreement.
The Credit Agreement is amended as follows:
Section 8.3 of the Credit Agreement is hereby amended by (i)
replacing the "1995" in the fourth line of clause (v) thereof with "1997", (ii)
replacing the phrase "pursuant to clauses (xi) and (xii) below" in the eighth
and ninth lines of clause (v) thereof with the phrase "pursuant to clauses (xi),
(xii) and (xiii) below", (iii) replacing the phrase "pursuant to clauses (xi)
and (xii) below" in the fifth and sixth lines of clause (x) thereof with the
phrase "pursuant to clauses (xi), (xii) and (xiii) below", (iv) deleting the
"and" at the end of clause (xi) thereof, (v) replacing the period at the end
thereof with "; and", and (vi) inserting the following at the end of such
Section as clause (xiii) thereof:
"(xiii) so long as no Default
or Event of Default shall have occurred and be continuing, the Company
may, in addition to the purchases permitted to be made pursuant to
clauses (i), (ii), (v), (xi) and (xii) above, repurchase on the open
market from time to time during its 1996 and 1997 fiscal years Company
Common Stock for a price not to exceed the then fair market value
thereof; provided that the aggregate purchase price paid by the Company
and its Restricted Subsidiaries in connection with all such repurchases
shall not exceed $35,000,000."
Section 2. Representations and Warranties.
The Company hereby represents and warrants to the Agent
and the Lenders that:
2
<PAGE>
(a) The execution and delivery by the Company of this
Amendment and the performance by the Company of the Credit Agreement as amended
hereby are within the Company's corporate powers, have been duly authorized by
all necessary corporate or other action and will not (i) contravene the
certificate or articles of incorporation or the bylaws of the Company, (ii)
contravene any law, regulation, order, writ, judgment, decree, determination or
award currently in effect binding on or affecting the Company or any of its
Subsidiaries or any of their re spective assets, except where such contravention
would not have a Material Adverse Effect, or (iii) conflict with or result in
any breach of any of the terms, cove nants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of any Lien
(except pursuant to the Security Documents) upon any of the property or assets
of the Company or any of its Subsidiaries pursuant to the terms of, any
indenture, mortgage, deed of trust, agreement or other instrument (including,
without limitation, the Senior Subordinated Notes Indenture) to which the
Company or any of its Sub sidiaries is a party or by which the Company, any of
its Subsidiaries or any of their respective properties or assets is bound or
subject to, except to the extent such conflict, breach, default or creation or
imposition would not have a Material Adverse Effect.
(b) This Amendment, the Credit Agreement as amended hereby,
and after giving effect to this Amend ment, the other Credit Documents
constitute the legal, valid and binding obligations of the Company and the other
Credit Parties party thereto, enforceable against the Company and such Credit
Parties in accordance with their respective terms, except to the extent such en
forceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally, and by general principles of equity (regardless of
wheth-
3
<PAGE>
er enforcement is sought in a proceeding in equity or at law).
(c) On and as of the date hereof, and both before and after
giving effect to this Amendment, no De fault or Event of Default has occurred
and is continuing.
(d) The representations and warranties of the Company and the
other Credit Parties contained in the Credit Agreement and the other Credit
Documents are true and correct on and as of the date hereof as if made on and as
of the date hereof both before and after giving effect to the effectiveness of
this Amendment, except to the extent such representations and warranties
expressly relate to a specific date.
Section 3. Effectiveness. This Amendment shall become
effective when the Agent shall have received duly executed counterparts of this
Amendment from the Company, each Subsidiary of the Company that is a party to
any Credit Document and as many of the Lenders as shall be necessary to comprise
the "Required Lenders".
Section 4. Status of Credit Documents. This Amendment is
limited solely for the purposes and to the extent expressly set forth herein,
and, except as ex pressly modified hereby, the terms, provisions and condi tions
of the Credit Documents and the Liens granted thereunder shall continue in full
force and effect and are hereby ratified and confirmed in all respects.
Section 5. Counterparts. This Amendment may be executed and
delivered in any number of counterparts and by the different parties hereto on
separate counter parts, each of which when so executed and delivered shall be an
original, but all of which shall together consti tute one and the same
instrument. A complete set of counterparts shall be lodged with the Company and
the Agent.
4
<PAGE>
Section 6. Governing Law. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH, AND SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK
(WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF).
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their
respective duly authorized officers to execute and deliver this Amendment No. 10
to the Second Amended and Restated Credit Agreement as of the date first above
written.
MAGELLAN HEALTH SERVICES, INC.
By:________________________
Name:
Title:
BANKERS TRUST COMPANY,
as Agent and a Lender
By:________________________
Name:
Title:
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Co-Agent
and a Lender
By:________________________
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:________________________
Name:
Title:
6
<PAGE>
BANK OF IRELAND
By:________________________
Name:
Title:
BANQUE FRANCAISE DU COMMERCE
EXTERIEUR
By:________________________
Name:
Title:
By:________________________
Name:
Title:
CREDIT LYONNAIS,
Cayman Islands Branch
By:________________________
Name:
Title:
DRESDNER BANK AG, New York and
Grand Cayman Islands Branches
By:________________________
Name:
Title:
7
<PAGE>
By:________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION
By:________________________
Name:
Title:
GIROCREDIT BANK AG DER
SPARKESSEN
By:________________________
Name:
Title:
THE BANK OF NEW YORK
By:________________________
Name:
Title:
THE BANK OF TOKYO-MITSUBISHI
LIMITED, New York Branch,
successor by merger to THE
MITSUBISHI BANK, LIMITED
By:________________________
Name:
Title:
8
<PAGE>
Consented and agreed to as of
the date first above written:
By each of the entities listed
on Schedule I hereto:
By:____________________
Name:
Title: ,
of each of the entities
listed on Schedule I hereto
By each of the entities listed
on Schedule II hereto:
By:____________________
Name:
Title: ,
of each of the entities
listed on Schedule II hereto
8
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and
between Dr. Danna Mauch, an individual ("Officer"), and Magellan Health
Services, Inc., a Delaware corporation ("Employer").
WHEREAS, Employer desires to obtain the services of Officer and Officer
desires to render services to Employer; and
WHEREAS, Employer and Officer desire to set forth the terms and
conditions of Officer's employment with Employer under this Agreement; and
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and agreements contained in this Agreement, the parties agree
as follows:
STATEMENT OF AGREEMENT
----------------------
1. Employment. Employer agrees to employ Officer, and Officer accepts
such employment, for a period of three (3) years, beginning on May 1, 1996,
subject to earlier termination pursuant to Section 6 below. After the initial
three (3) year term has expired, this Agreement will automatically renew on May
1 of each year for a one (1) year term. If either party desires not to renew the
Agreement, they will provide the other party with thirty (30) days written
notice of their intent not to renew the Agreement on its next anniversary date.
2. Position and Duties of Officer. Officer will serve as the President
and Chief Operating Officer for Magellan Public Solutions, Inc., a wholly owned
subsidiary of Employer. Officer shall also serve as an Executive Vice President
of Employer. Officer agrees to serve in such position or in such other officer
level position as determined by Employer from time to time, and to perform the
officer level duties as from time to time as may be assigned to Officer by
Employer until the expiration of the term or such time as Officer's employment
with Employer is terminated.
3. Time Devoted and Location of Officer.
(a) Except as set forth in Exhibit A to this Agreement,
Officer shall devote her full business time and energy to the business, affairs
and interests of Employer and related matters, and shall use her best efforts
and abilities to promote Employer's interests. Officer agrees that she will
diligently endeavor to perform services contemplated by this Agreement in
accordance with the policies established by the Employer's Chief Executive
Officer and the Board of Directors.
-1-
<PAGE>
(b) Officer acknowledges the Employer considers her
physical presence at Magellan's Corporate Offices located in Atlanta, Georgia
("Atlanta") to be essential. As such, Officer will use her best efforts to
relocate her primary residence to the greater Atlanta area. Both in the
interim and in the event Officer is unable to relocate to Atlanta, Officer
understands she will be physically present in Employer's Atlanta and
Boston Offices on an as needed basis as reasonably required by and at the
discretion of Employer's Chief Executive Officer. Employer shall not
consider Officer's inability to relocate to Atlanta as a basis for
terminating this Agreement for cause.
4. Compensation. Employer shall pay Officer a salary in the amount of
three hundred thousand dollars ($300,000.00) per year which amount shall be paid
in semi-monthly intervals less appropriate withholdings for federal and state
taxes, and deductions authorized by Officer. Such salary shall be subject to
review and adjustment by Employer's Chief Executive Officer and Board of
Directors from time to time consistent with past practice and consistent with
other officers at her level.
5. Benefits.
(a) Benefits. In addition to the compensation provided for in
Section 4, Officer shall be entitled during the term of this Agreement to such
other benefits of employment with Employer as are now or may later be in effect
for (i) salaried officers of Employer or (ii) senior executives of Employer with
duties comparable to those of Officer, including, without limitation, all bonus,
incentive and deferred compensation, pension, stock option, life and other
insurance, disability (insured and uninsured), medical and dental, vacation and
other benefit plans or programs consistent with those described in Exhibit A
attached to this Agreement.
(b) Expenses. During the term of this Agreement, Employer
shall reimburse Officer promptly for all reasonable travel, entertainment,
parking, business meeting and similar expenditures in pursuance and furtherance
of Employer's business upon receipt of reasonably supporting documentation as
required by Employer's policies applicable to its officers generally. This shall
include any reasonable expenses incurred commuting between her residence in
Boston and Employer's offices in Atlanta, including airfare, lodging, food and
transportation.
6. Termination.
(a) Termination Due to Resignation and Termination with Cause.
Officer's employment under this Agreement and all of her rights to receive the
salary and benefits, set forth in Sections 4 and 5, will cease upon the
occurrence of any of the following events: (i) The effective date of Officer's
resignation, or (ii) termination for cause at the discretion of Employer under
the following circumstances: (A) Officer shall be guilty of fraud or dishonesty
involving her duties on behalf of Employer; (B) Officer shall have willfully
failed or refused to faithfully and diligently perform significant duties
assigned to Officer or otherwise to have breached any material term under this
Agreement; (C) Officer shall have willfully failed or refused to abide by
-2-
<PAGE>
Employer's policies, rules, procedures or directives; or (D) Officer shall be
convicted of a felony or a misdemeanor involving moral turpitude.
For the events in subsections (B) and (C), Employer shall give Officer
written notice of such event and an opportunity to cure such situation for a
period of thirty (30) days. Provided, however, such opportunity to cure must
only be given once in any thirty (30) day period.
(b) Termination without Cause. Employer may terminate this
Agreement without cause at any time upon the giving of thirty (30) days prior
written notice to Officer. If Employer terminates this Agreement without cause,
Employer may direct Officer to immediately cease from providing services. If
Employer terminates this Agreement without cause, Employer shall continue to pay
Officer the compensation provided for pursuant to Section 4 of this Agreement
for the remaining balance of the period of employment set forth in Section 1 or
for a period of one (1) year, whichever is greater in length of time upon the
effective termination date. No other benefits, pursuant to Section 5 of this
Agreement or otherwise, shall be paid, unless otherwise provided in the terms of
the applicable plan or benefit.
(c) Automatic Termination. This Agreement shall automatically
terminate upon the death or permanent disability of Officer. Officer shall be
deemed to be "Disabled" or to suffer from a "Disability" within the meaning of
this Agreement if Officer is deemed to be permanently disabled within the
meaning of any disability insurance policy maintained by Employer for Officer
or, in the absence of such policy, if Officer is, by reason of any medically
determinable physical or mental condition, unable to perform a substantial
portion of her essential duties pursuant to this Agreement for a period of six
(6) consecutive months. The term "essential duties" is defined as the ability to
consistently perform her assigned duties, including travel requirements, with or
without reasonable accommodation.
(d) Effect of Termination. Upon termination of this Agreement,
all rights and obligations under this Agreement shall cease except for the
rights and obligations under paragraphs 4 and 5 of this Agreement to the extent
Officer has not been compensated for services performed prior to termination
(the amount to be prorated for the portion of the pay period prior to
termination), and the rights and obligations under paragraphs 6(b), 7, 8 and 9
and all procedural and remedial provisions of this Agreement. A termination of
this Agreement shall constitute a termination of Officer's employment with
Employer for all purposes of this Agreement.
(e) Termination Upon a Change of Control. Officer shall be
entitled to terminate her employment upon a change of control and shall be
entitled to all of the salary, benefits and other rights provided in this
Agreement as though the termination had been initiated by Employer without cause
upon the occurrence of any of the following events: (a) the acquisition after
the beginning of the Term in one or more transactions, of beneficial ownership
(within the meaning of Rule 13d-3(a)(1) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) by any person or entity (other than
Officer or E. Mac Crawford) or any group
-3-
<PAGE>
of persons or entities (other than Officer) who constitute a group (within the
meaning of Section 13d-5 of the Exchange Act) of any securities of Employer such
that as a result of such acquisition such person or entity or group beneficially
owns (within the meaning of Rule 13d-3(a)(1) under the Exchange Act) more than
50% of Employer's then outstanding voting securities entitled to vote on a
regular basis for a majority of the Board of Directors of Employer; or (b) the
sale of all or substantially all of the assets of Employer (including, without
limitation, by way of merger, consolidation, lease or transfer) in a transaction
(except for a sale-leaseback transaction) where Employer or the holders of
common stock of Employer do not receive (i) voting securities representing a
majority of the voting power entitled to vote on a regular basis for the Board
of Directors of the acquiring entity or of an affiliate which controls the
acquiring entity, or (ii) securities representing a majority of the equity
interest in the acquiring entity or of an affiliate that controls the acquiring
entity, if other than a corporation; provided, that if Officer becomes entitled
to any payments (whether hereunder or otherwise) by reason of an event described
in Internal Revenue Code Section 280G (a "Parachute Event") that would
constitute "excess parachute payments" (as defined in Internal Revenue Code
Section 280G) if paid, then Officer's entitlement to such payments shall be
reduced by such amount as will cause none of such payments to constitute excess
parachute payments, if, and only if, the net amount received by Officer by
reason of the Parachute Event, after imposition of all applicable taxes
(including taxes under Internal Revenue Code Section 4099), would be greater
after such reduction than if such reduction were not made.
7. Protection of Confidential Information/Non-Competition/Non-
Solicitation.
Officer covenants and agrees as follows:
(a) During the period beginning upon the execution of this
Agreement and continuing for a period of two (2) years after the term or
termination for any reason, Officer shall not use or disclose, directly or
indirectly, for any reason whatsoever or in any way, other than at the direction
of Employer during the course of Officer's employment or after receipt of the
prior written consent of Employer, any confidential information or other
information of Employer deemed to be trade secrets of Employer, including, but
not limited to, information with respect to Employer and its Subsidiaries as
follows: the lists of past, current or potential customers of Employer and its
Subsidiaries, all systems, manuals, materials, processes and other intellectual
property of any type used by Employer or its Subsidiaries in connection with
their respective business operations; financial statements, cost reports and
other financial information; contract proposals and bidding information; rate
and fee structures; policies and procedures developed as part of a confidential
business plan; and management systems and procedures, including manuals and
supplements (collectively, the "Confidential Information"). The obligation not
to use or disclose any of the Confidential Information shall not apply, to: (i)
any Confidential Information known by Officer before commencing employment with
Employer, or (ii) Confidential Information which Officer obtains from a third
party, provided, Officer has no knowledge that the third party obtained the
Confidential Information by wrongful or inappropriate means, or (iii) following
the termination of the employment of Officer with Employer, to any information
that
-4-
<PAGE>
is or becomes public knowledge, through no fault of Officer, and that may be
utilized by the public without any direct or indirect obligation to Employer,
but the termination of the obligation for non-use or nondisclosure by reason of
such information becoming public shall be only from the date such information
becomes public knowledge. The above shall be without prejudice to any rights or
remedies of Employer under any state law protecting trade secrets or
information.
(b) During Employer's employment of Officer and for a period
of two (2) years following the term or termination of Officer's employment with
Employer for any reason, Officer shall not, within a radius of fifty (50) miles
of any existing operation of Employer's Subsidiary, engage, directly or
indirectly, in any commercial capacity, whether in an executive, operational,
consulting or sales capacity, in the delivery of mental health and/or social
services to the public sector, or have any material ownership interest in any
business owning, operating, contracting or providing such mental health and/or
social services to the public sector. The term "public sector" is defined as any
entity owned, operated or controlled, in whole or part, by a federal, state or
local government agency or entity. For purposes of this sub-paragraph, the term
"Employer's Subsidiary" is defined as Magellan Public Solutions, Inc. and its
subsidiaries. Notwithstanding the foregoing, nothing in this agreement shall
prohibit Officer from any of the following activities: (i) being directly
employed by a federal, state or local agency which provides mental health and/or
social services; (ii) resuming work as a private consultant providing services
to persons or entities involved with the delivery of mental health and/or social
services to the public sector, provided that she shall not, for the term and
within the geographic limits specified in this subparagraph, provide consulting
services which directly support such person or entity in competing with
Employer's Subsidiary for the delivery of mental health and/or social services
to the public sector; or (iii) being employed by any private health care entity
in a capacity in which it is not one of her duties to perform services that
directly support that entity in competing with Employer's Subsidiary for the
delivery of mental health and/or social services to the public sector.
(c) During Employer's employment of Officer and for a period
of one (1) year following the termination of Officer's employment with Employer
for any reason, Officer shall not solicit for employment or employ, directly or
indirectly, any employee of Employer or any of its Subsidiaries who was employed
with Employer or its Subsidiaries within the one (1) year period immediately
prior to such solicitation or employment.
8. Work Made for Hire. Officer agrees that any written program
materials, protocols, research papers and all other writings (the "Work"), which
Officer develops for Employer's use during the term of this Agreement, will be
considered "work made for hire" within the meaning of the United States
Copyright Act, Title 17, United States Code, which vests all copyright interest
in and to the Work in the Employer. In the event, however, that any court of
competent jurisdiction finally declares that the Work is not or was not a work
made for hire as agreed, Officer agrees to assign, convey, and transfer to the
Employer all right, title and interest Officer may presently have or may have or
be deemed to have in and to any such Work and in the copyright of such work,
including but not limited to, all rights of reproduction, distribution,
publication, public performance, public display and preparation of derivative
works,
-5-
<PAGE>
and all rights of ownership and possession of the original fixation of the Work
and any and all copies. Additionally, Officer agrees to execute any documents
necessary for Employer to record and/or perfect its ownership of the Work and
the applicable copyright. The foregoing will not apply to any writings Officer
develop which are not for Employer's use or are in each instance specifically
excluded in advance of publication from the coverage of the foregoing by
Employer's Board of Directors.
9. Property of Employer. Officer agrees that, upon the termination of
Officer's employment with Employer, Officer will immediately surrender to
Employer all property, equipment, funds, lists, books, records and other
materials of Employer in the possession of or provided to Officer.
10. Governing Law. This Agreement and all issues relating to
the validity, interpretation and performance shall be governed by and
interpreted under the laws of the State of Georgia.
11. Remedies. With respect to each and every breach, violation or
threatened breach or violation by Officer of any of the covenants set forth in
this Agreement, Employer, in addition to all other remedies available at law or
in equity, including specific performance of the Agreement's provisions, shall
be entitled to enjoin the commencement or continuance of such conduct and may
apply for entry of an immediate restraining order or injunction, subject to
Section 12 of this Agreement. Employer may pursue any of the remedies described
in this paragraph 11 concurrently or consecutively, in any order, as to any such
breach or violation, and the pursuit of one of such remedies at any time will
not be deemed an election of remedies or waiver of the right to pursue any of
the other such remedies.
12. Arbitration. Except for an action for injunctive relief, any
disputes or controversies arising under this Agreement shall be settled by
arbitration in Atlanta, Georgia in accordance with the rules of the American
Arbitration Association relating to the arbitration of commercial disputes. The
determination and findings of such arbitrators shall be final and binding on all
parties and may be enforced, if necessary, in the courts of the State of
Georgia.
13. Notices. Any notice or request required or permitted to be given to
any party shall be given in writing and shall be personally delivered or sent to
such party by United States mail at the address set forth below or at such other
address as such other address as such party may designate by written
communication to the other party to this Agreement:
To Officer: Dr. Danna Mauch
42 Campbell Road
Wayland, Massachusetts 01778
With a copy to: Barry White, Esquire
Foley, Hoag & Elliot
-6-
<PAGE>
1 Post Office Square
17th Floor
Boston, Massachusetts 02109
To Employer: Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: Chief Executive Officer
With a copy to: Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
Each notice given in accordance with this paragraph shall be deemed to have been
given, if personally delivered, on the date personally delivered, if delivered
by facsimile transmission, be deemed given when sent and confirmation of receipt
is received, or, if mailed, on the third (3rd) day following the day on which it
is deposited in the United States mail, certified or registered mail, return
receipt requested, with postage prepaid, to the address last given in accordance
with this paragraph.
14. Headings. The headings of the paragraphs of this Agreement
have been inserted for convenience of reference only and shall not be construed
or interpreted to restrict or modify any of the terms or provisions of this
Agreement.
15. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provision shall be fully severable and this
Agreement and each separate provision shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of this
Agreement, and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement. In addition, in
lieu of such illegal, invalid or unenforceable provision, there shall be added
automatically, as a part of this Agreement, a provision as similar in terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable, if such reformation is allowable under applicable
law.
16. Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of each party and each party's respective successors,
heirs, assigns and legal representatives.
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<PAGE>
17. Employer Policies, Regulations and Guidelines for Officers.
Employer may issue policies, rules, regulations, guidelines, procedures or other
informational material, whether in the form of handbooks, memoranda, or
otherwise, relating to its Officers. These materials are general guidelines for
Officer's information and shall not be construed to alter, modify or amend this
Agreement for any purpose whatsoever.
18. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties with respect to the subject matter and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter, unless expressly provided otherwise within this
Agreement. No amendment, modification or termination of this Agreement, unless
expressly provided otherwise, shall be valid unless made in writing and signed
by each of the parties whose rights, duties or obligations would in any way be
affected by an amendment, modification or termination. No representations,
inducements or agreements have been made to induce either Officer or Employer to
enter into this Agreement which are not expressly set forth within this
Agreement. This Agreement is the sole source of rights and duties as between
Employer and Officer relating to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 19th day of March, 1996.
----
DR. DANNA MAUCH
"Officer"
/s/ Dr. Danna Mauch
-----------------------------------
MAGELLAN HEALTH SERVICES, INC.
"Employer"
By:/s/ E. M. Crawford
---------------------------------
Title: CEO
-------------------------------
-8-
<PAGE>
EXHIBIT A TO EMPLOYMENT AGREEMENT
---------------------------------
Time Devoted
- ------------
Employer recognizes Officer will be required to devote some amount of
her time and efforts to the activities listed below. Nonetheless, Officer agrees
she will use her best efforts not to allow these activities to interfere with
her duties under this Agreement.
Activities:
-----------
(1) Officer will endeavor to sell her consulting
business, Integrated Health Strategies, Inc., which
will require her to wind down and assist in the
transition of her business to its purchasers.
(2) Officer has been appointed a Special Master in a
matter in the Washington D.C. area. Officer
anticipates her duties as Special Master to conclude
by the end of July, 1996.
A-1
<PAGE>
SENIOR OFFICER
BENEFITS PLAN
The Charter Medical Corporation Execu-FLEX Benefit Plan was installed January 1,
1994. The Board of Directors approved a competitive expenditure level for all
benefits, with 11% of salary being allocated to the participants FLEX Allowance.
The flexible format increases the efficiency and value of employer benefit
expenditures to Plan participants.
The Plan is administered on a Plan year basis of January 1 to December 31.
Changes in FLEX Benefit Options will be permitted annually, effective each
January 1 enrollment period.
All benefits described are permissible under current IRS regulations; future
changes in Tax Law may necessitate revisions in the Execu-FLEX Benefit Plan.
The Executive Benefit Plan is divided into three components:
Basic Benefits - The foundation of care benefits provided to all employees
without choice.
------- ------
Executive Benefits - Additional benefits designed to
meet competitive standards for executives.
Executive benefits are not subject to
individual choice.
FLEX Benefits - Each participant is allowed to choose among tax-sheltered
options to create a benefit package of the greatest value.
B-4
<PAGE>
HEALTH CARE BENEFITS
Basic Benefits
- --------------
Benefits Plus Plan - Charter sponsors a section 125 Plan which allows
participants to choose the benefits they want and need for their families.
Medical Insurance - Provides choice of 2 comprehensive health care plans for
participants and their dependents with various dependents with various
deductibles and co-payments. Charter pays the majority of the cost of this
benefit. Participant pays the remainder of the cost with pre-tax salary
reductions. Also provides for local HMO participation, if available.
Dental Plan - Provides a choice of 2 Dental Plans for participants and their
dependents. Charter pays the majority of the cost of this benefit. Participant
pays the remainder of the cost with pre-tax salary reductions.
Executive Benefits
- ------------------
Physical Examination - Provides participants with a physical examination with
the physician of their choice according to the following schedule:
Under age 40 - Every two years
Age 40 and over - Annually
Charter pays the full cost of this benefit.
FLEX Benefits
- -------------
None
B-5
<PAGE>
DISABILITY BENEFITS
Basic Benefits
- --------------
Group Long-Term Disability Plan - Participant may elect to purchase Group
Long-Term Disability coverage under the Section 125 plan as follows:
o Benefit Level Benefit Maximum
35% $5,250
50% $7,500
65% $9,750
o 90-day waiting period
o Offset for Family Social Security and other employer sponsored
payments
Executive Benefits
- ------------------
Salary Continuation - 100% of salary for 6 months, integrated with any employer
sponsored insured benefits received.
FLEX Benefits
- -------------
Individual Long-Term Disability Policy
o Insure high percentage of salary, depending on age and income
o 180-day waiting period o Benefits paid in own occupation to age 65
o Residual (Partial) Benefits paid for loss of earnings to age 65
o Monthly benefit increases with salary, up to 15% maximum per year,
$15,000 monthly benefit maximum.
Available Riders -
o Inflation Adjustment Rider - Benefit increased by CPI each
year after disability. (Minimum average increase - 4%,
maximum average increase - 7%)
o Lifetime Accident Rider - Extends benefit period for
disabilities resulting from accidents to lifetime.
o Premium Refund Rider - If benefit payments over a
five year period are less than one annual premium,
you will receive a return of the differential up to
one annual premium.
o Opportunity to tax-shelter benefits through personal contributions
B-6
<PAGE>
SURVIVOR BENEFITS
Basic Benefits
- --------------
Group Term Life & AD&D Insurance - Participant may elect to purchase from
$10,000 up to four times base salary ($500,000 maximum) additional Group Term
Life and AD&D insurance. Additional personal and family AD&D coverage is also
available under the voluntary AD&D plan to a maximum of $250,000.
Executive Benefits
- ------------------
Executive Survivor Benefit - 2 X Annual Salary (above Charter provided Benefits
Plus Plan) pre-retirement coverage provided under split dollar benefit delivery
system.
FLEX Benefits
- -------------
None
B-7
<PAGE>
RETIREMENT
Basic Benefits
- --------------
Qualified Defined Contribution Plan - Provides retirement income based on
participant's pre-tax contributions and matching contributions made by Charter.
Participant may contribute up to 5% of Salary on a pre-tax basis to the plan.
Charter matched participant's contribution $.50 per $1.00 deferred up to a
maximum matching contribution of 1.5% of Salary to the legislative cap. In
addition, Charter makes a discretionary contribution each year. This deposit is
currently 2% of Salary per year. Participant is always 100% vested in their
account.
Employee Stock Option Plan (ESOP) - Charter makes discretionary contributions to
the plan.
Executive Benefits
- ------------------
Annual Incentive Match - As of 01/01/94, participant's annual incentive plan
award will be matched by a 33 1/3% contribution by Charter. This benefit is in
addition to participant's earned incentive and participant's Charter provided
Benefits Plus Plan.
o Deposit will be made annually in January based on previous year's
incentive award. Participant can elect from the following mutual funds:
- Fidelity Advisor Growth
- Fidelity Advisor Income and Growth
- Fidelity Advisor Government Investment
- Money Market Portfolio
o Deposits and earnings are tax-sheltered until participant's vesting
date. Upon vesting, participant's account balance will be distributed
and participant will be taxed on the full value of the account.
o In the event of employer insolvency, participant is an unsecured
creditor and will have no preferential claim to Plan assets. A special
Trust will safeguard funds from other contingencies, such as change of
heart or control.
o Participants elect a vesting date from one of three options:
- Two years
- Mid-term date
- Specified retirement date
B-8
<PAGE>
o Vesting will be the earliest of the following:
- Date elected
- Death
- Termination as a result of disability
- Involuntary termination without cause
Or in the case of any other termination, whether voluntary or
terminated with cause:
- Twenty-four months following any other termination, provided
you fulfill the terms of the Noncompetition Agreement.
Participants will be able to re-defer each year's deposit one time to a
later date, provided the election is a least one year prior to original
date and the deferral is at least 24 months.
FLEX Benefits
- -------------
Capital Accumulation Account
Any Tax-Sheltered FLEX Allowance dollars that participant does not spend on
other FLEX Benefit Options may be directed to their choice of the following
mutual fund(s):
- Fidelity Advisor Growth
- Fidelity Advisor Income and Growth
- Fidelity Advisor Government Investment
- Money Market Portfolio
o Deposits will be made as soon as possible each Plan year. However,
deposits are earned one-twelfth each month during the Plan year. If
participant terminated employment during the Plan year, the account
balance will be adjusted accordingly.
o In the event of employer insolvency, participant is an unsecured
creditor and will have no preferential claim to Plan assets. A special
Trust will safeguard funds from other contingencies, such as change of
heart or control.
o Deposits and earnings are tax-sheltered until participant's vesting
date. Upon vesting, participant's account balance will be distributed
and participant will be taxed on the full value of the account.
o Participants elect a vesting date from one of three options:
B-9
<PAGE>
- Two years
- Mid-term date
- Specified retirement date
o Vesting will be the earliest of the following:
- Date elected
- Death
- Termination as a result of disability
- Involuntary termination without cause
Or in the case of any other termination, whether voluntary or
terminated with cause:
- Twenty-four months following any other termination, provided
you fulfill the terms of the Noncompetition Agreement.
B-10
<PAGE>
OTHER BENEFITS
Basic Benefits
- --------------
Vacation/Holidays - Participants receive 29 days each calendar year.
Executive Benefits
- ------------------
Automobile Program - Charter provides an auto allowance of $12,000 annually plus
gas reimbursement.
Club Memberships - Charter reimburses the cost of joining and maintaining
memberships (level subject to approval).
Financial Counseling - Charter provides a $5,000 annual allowance. Participant
may elect a one-time option to defer any portion of the annual flex allowance to
increase their tax-sheltered Flex dollars.
Severance - In the event of involuntary termination without cause, participant
will continue to receive salary, medical, and dental insurance, Auto Allowance
and Flex Benefits for a period of 12 months.
o No offsets to participant's severance payments for six months. After
six months, severance payments will be offset by any amount participant
earns from other employment.
B-11
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement') is made and entered into by and
between John M. DeStefanis, an individual ("Officer"), and Magellan Health
Services, Inc., a Delaware corporation ("Employer").
WHEREAS, Employer desires to obtain the continued services of Officer
and Officer desires to continue to render services to Employer; and
WHEREAS, Employer and Officer desire to set forth the terms and
conditions of Officer's employment with Employer under this Agreement; and
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and agreements contained in this Agreement, the parties agree
as follows:
STATEMENT OF AGREEMENT
----------------------
1. Employment. Employer agrees to employ Officer, and Officer accepts
such employment, for a period of three (3) years, beginning on April 15, 1996,
subject to earlier termination pursuant to Section 6 below. After the initial
three (3) year term has expired, this Agreement will automatically renew on
April 15th of each year for a one (1) year term. If either party desires not to
renew the Agreement, they will provide the other party with thirty (30) days'
written notice of their intent not to renew the Agreement on its next
anniversary date
2. Position and Duties of Officer. Officer will serve as the President
and Chief Operating Officer for Charter Behavioral Health Services, Inc., a
wholly owned subsidiary of Employer. Officer shall also serve as an Executive
Vice President of Employer. Officer agrees to serve in such position or in such
other officer level position as Employer determines from time to time, and to
perform the officer level duties as Employer may assign from time to time to
Officer until the expiration of the term or such time as Officer's employment
with Employer is terminated.
3. Time Devoted and Location of Officer.
(a) Officer shall devote his full business time and energy to
the business, affairs and interests of Employer and related matters, and shall
use his best efforts and abilities to promote Employer's interests. Officer
agrees that he will diligently endeavor to perform services contemplated by this
Agreement in accordance with the policies established by the Employer's Chief
Executive Officer and the Board of Directors.
(b) Officer's primary business office will be located in
Employer's Corporate Offices located in Atlanta, Georgia ("Atlanta").
-1-
<PAGE>
4. Compensation. Employer shall pay Officer a salary in the amount of
three hundred fifty thousand dollars ($350.000.00) per year which amount shall
be paid in semi-monthly intervals less appropriate withholdings for federal and
state taxes, and deductions authorized by Officer. Such salary shall be subject
to review and adjustment by Employer's Chief Executive Officer and Board of
Directors from time to time consistent with past practice and consistent with
other officers at his level.
5. Benefits.
(a) Benefits. In addition to the compensation provided for in
Section 4, Officer shall be entitled during the term of this Agreement to such
other benefits of employment with Employer as are now or may later be in effect
for (i) salaried officers of Employer or (ii) senior executives of Employer with
duties comparable to those of Officer, including, without limitation, all bonus,
incentive and deferred compensation, pension, stock option, life and other
insurance, disability (insured and uninsured), medical and dental, vacation and
other benefit plans or programs.
(b) Expenses. During the term of this Agreement, Employer
shall reimburse Officer promptly for all reasonable travel, entertainment,
parking, business meeting and similar expenditures in pursuance and furtherance
of Employer's business upon receipt of reasonably supporting documentation as
required by Employer's policies applicable to its officers generally.
6. Termination.
(a) Termination Due to Resignation and Termination with Cause.
Officer's employment under this Agreement and all of his rights to receive the
salary and benefits, set forth in Sections 4 and 5, will cease upon the
occurrence of any of the following events: (i) the effective date of Officer's
resignation, or (ii) termination for cause at the discretion of Employer under
the following circumstances: (A) Officer shall be guilty of fraud or dishonesty
involving his duties on behalf of Employer; (B) Officer shall have willfully
failed or refused to faithfully and diligently perform significant duties
assigned to Officer or otherwise to have breached any material term under this
Agreement; (C) Officer shall have willfully failed or refused to abide by
Employer's policies, rules, procedures or directives; or (D) Officer shall be
convicted of a felony or a misdemeanor involving moral turpitude.
For the events in subsections (B) and (C), Employer shall give Officer
written notice of such event and an opportunity to cure such situation for a
period of thirty (30) days, provided that such opportunity to cure is required
to be given only once in any thirty (30) day period.
(b) Termination without Cause. Employer may terminate this
Agreement without cause at any time upon the giving of thirty (30) days' prior
written notice to Officer. If Employer terminates this Agreement without cause,
Employer may direct Officer to immediately cease from providing services. If
Employer terminates this Agreement without cause, Employer shall continue to pay
Officer the compensation provided for pursuant to Section 4 of this Agreement
for (i) the remaining balance of the initial three-year term of employment or a
one-year renewal term of
-2-
<PAGE>
employment, whichever is then in effect, set forth in Section 1 or (ii) for a
period of one (1) year, whichever of (i) and (ii) is greater in length of time
upon the effective termination date. No other benefits, pursuant to Section 5 of
this Agreement or otherwise, shall be paid, unless otherwise provided in the
terms of the applicable plan or benefit.
(c) Automatic Termination. This Agreement shall automatically
terminate upon the death or permanent disability of Officer. Officer shall be
deemed to be "Disabled" or to suffer from a "Disability" within the meaning of
this Agreement if Officer is deemed to be permanently disabled within the
meaning of any disability insurance policy maintained by Employer for Officer
or, in the absence of such policy, if Officer is, by reason of any medically
determinable physical or mental condition, unable to perform a substantial
portion of his essential duties pursuant to this Agreement for a period of six
(6) consecutive months. The term "essential duties" is defined as the ability to
consistently perform his assigned duties, including travel requirements, with or
without reasonable accommodation.
(d) Effect of Termination. Upon termination of this Agreement,
all rights and obligations under this Agreement shall cease except for the
rights and obligations under Sections 4 and 5 of this Agreement to the extent
Officer has not been compensated for services performed prior to termination
(the amount to be prorated for the portion of the pay period prior to
termination), and the rights and obligations under Sections 6(b), 7, 8 and 9 and
all procedural and remedial provisions of this Agreement. A termination of this
Agreement shall constitute a termination of Officer's employment with Employer
for all purposes of this Agreement.
(e) Termination Upon a Change of Control. Officer shall be
entitled to terminate his employment upon a change of control and shall be
entitled to all of the salary, benefits and other rights provided in this
Agreement as though the termination had been initiated by Employer without cause
upon the occurrence of any of the following events: (a) the acquisition after
the beginning of the term of this Agreement in one or more transactions, of
beneficial ownership (within the meaning of Rule 13d-3(a)(1) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) by any person
or entity (other than Officer or E. Mac Crawford) or any group of persons or
entities (other than Officer) who constitute a group (within the meaning of
Section 13d-5 of the Exchange Act) of any securities of Employer such that as a
result of such acquisition such person or entity or group beneficially owns
(within the meaning of Rule 13d-3(a)( 1) under the Exchange Act) more than 50%
of Employer's then outstanding voting securities entitled to vote on a regular
basis for a majority of the Board of Directors of Employer; or (b) the sale of
all or substantially all of the assets of Employer (including, without
limitation, by way of merger, consolidation, lease or transfer) in a transaction
(except for a sale-leaseback transaction) where Employer or the holders of
common stock of Employer do not receive (i) voting securities representing a
majority of the voting power entitled to vote on a regular basis for the Board
of Directors of the acquiring entity or of an affiliate which controls the
acquiring entity, or (ii) securities representing a majority of the equity
interest in the acquiring entity or of an affiliate that controls the acquiring
entity, if other than a corporation; provided, that if Officer becomes entitled
to any payments (whether hereunder or otherwise) by reason of an event described
in Internal Revenue Code Section 280G (a "Parachute Event") that would
constitute "excess parachute payments" (as defined in Internal Revenue Code
Section 280G)
-3-
<PAGE>
if paid, then Officer's entitlement to such payments shall be reduced by such
amount as will cause none of such payments to constitute excess parachute
payments, if, and only if, the net amount received by Officer by reason of the
Parachute Event, after imposition of all applicable taxes (including taxes under
Internal Revenue Code Section 4099), would be greater after such reduction than
if such reduction were not made.
7. Protection of Confidential Information/Non-Competition/Non-
Solicitation.
Officer covenants and agrees as follows:
(a) During the period beginning upon the execution of this
Agreement and continuing for a period of two (2) years after the term or
termination for any reason, Officer shall not use or disclose, directly or
indirectly, for any reason whatsoever or in any way, other than at the direction
of Employer during the course of Officer's employment or after receipt of the
prior written consent of Employer, any confidential information or other
information of Employer deemed to be trade secrets of Employer, including, but
not limited to, information with respect to Employer and its Subsidiaries as
follows: the lists of past, current or potential customers of Employer and its
Subsidiaries, all systems, manuals, materials, processes and other intellectual
property of any type used by Employer or its Subsidiaries in connection with
their respective business operations; financial statements, cost reports and
other financial information; contract proposals and bidding information; rate
and fee structures; policies and procedures developed as part of a Confidential
business plan; and management systems and procedures, including manuals and
supplements (collectively, the "Confidential Information"). The obligation not
to use or disclose any of the Confidential Information shall not apply to: (i)
any Confidential Information known by Officer before commencing employment with
Employer, or (ii) Confidential Information which Officer obtains from a third
party, provided, Officer has no knowledge that the third party obtained the
Confidential Information by wrongful or inappropriate means, or (iii) following
the termination of the employment of Officer with Employer, any information that
is or becomes public knowledge, through no fault of Officer, and that may be
utilized by the public without any direct or indirect obligation to Employer,
but the termination of the obligation for non-use or nondisclosure by reason of
such information becoming public shall be only from the date such information
becomes public knowledge. The above shall be without prejudice to any rights or
remedies of Employer under any state law protecting trade secrets or
information.
(b) During Employer's employment of Officer and for a period
of two (2) years following the term or termination of Officer's employment with
Employer for any reason, Officer shall not, within a radius of fifty (50) miles
of any existing operation of Employer's Subsidiary, engage, directly or
indirectly, in any commercial capacity, whether in an executive, operational,
consulting or sales capacity, in the delivery of behavioral health services, or
have any material ownership interest in any business owning, operating,
contracting or providing such behavioral health services. For purposes of this
subparagraph, the term "Employer's Subsidiary" is defined as Charter Behavioral
Health Systems, Inc. and its subsidiaries.
-4-
<PAGE>
(c) During Employer's employment of Officer and for a
period of one (1) year following the termination of Officer's employment with
Employer for any reason, Officer shall not
solicit for employment or employ, directly or indirectly, any employee of
Employer or any of its Subsidiaries who was employed with Employer or its
Subsidiaries within the one (1) year period immediately prior to such
solicitation or employment
8. Work Made for Hire. Officer agrees that any written program
materials, protocols, research papers and all other writings (the "Work"), which
Officer develops for Employer's use during the term of this Agreement, will be
considered "work made for hire" within the meaning of the United States
Copyright Act, Title 17, United States Code, which vests all copyright interest
in and to the Work in the Employer. In the event, however, that any court of
competent jurisdiction finally declares that the Work is not or was not a work
made for hire as agreed, Officer agrees to assign, convey, and transfer to the
Employer all right, title and interest Officer may presently have or may have or
be deemed to have in and to any such Work and in the copyright of such work,
including but not limited to, all rights of reproduction, distribution,
publication, public performance, public display and preparation of derivative
works, and all rights of ownership and possession of the original fixation of
the Work and any and all copies. Additionally, Officer agrees to execute any
documents necessary for Employer to record and/or perfect its ownership of the
Work and the applicable copyright. The foregoing will not apply to any writings
Officer develop which are not for Employer's use or are in each instance
specifically excluded in advance of publication from the coverage of the
foregoing by Employer's Board of Directors.
9. Property of Employer. Officer agrees that, upon the termination of
Officer's employment with Employer, Officer will immediately surrender to
Employer all property, equipment, funds, lists, books, records and other
materials of Employer in the possession of or provided to Officer.
10. Governing Law. This Agreement and all issues relating to the
validity, interpretation and performance shall be governed by and interpreted
under the laws of the State of Georgia
11. Remedies. With respect to each and every breach, violation or
threatened breach or violation by Officer of any of the covenants set forth in
this Agreement, Employer, in addition to all other remedies available at law or
in equity, including specific performance of the Agreement's provisions, shall
be entitled to enjoin the commencement or continuance of such conduct and may
apply for entry of an immediate restraining order or injunction, subject to
Section 12 of this Agreement. Employer may pursue any of the remedies described
in this Section 11 concurrently or consecutively, in any order, as to any such
breach or violation, and the pursuit of one of such remedies at any time will
not be deemed an election of remedies or waiver of the right to pursue any of
the other such remedies.
12. Arbitration. Except for an action for injunctive relief, any
disputes or controversies arising under this Agreement shall be settled by
arbitration in Atlanta, Georgia in accordance with the rules of the American
Arbitration Association relating to the arbitration of commercial disputes.
-5-
<PAGE>
The determination and findings of such arbitrators shall be final and binding on
all parties and may be enforced, if necessary, in the courts of the
State of Georgia.
13. Notices. Any notice or request required or permitted to be given to
any party shall be given in writing and shall be personally delivered or sent to
such party by United States mail at the address set forth below or at such other
address as such other address as such party may designate by written
communication to the other party to this Agreement:
To Officer: John M. DeStefanis
8220 Sentinae Chase Drive
Roswell, Georgia 30076
To Employer: Magellan
Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: Chief Executive Officer
With a copy to: Magellan
Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
Each notice given in accordance with this paragraph shall be deemed to have been
given, if personally delivered, on the date personally delivered, if delivered
by facsimile transmission, be deemed given when sent and confirmation of receipt
is received, or, if mailed, on the third (3rd) day following the day on which it
is deposited in the United States mail, certified or registered mail, return
receipt requested, with postage prepaid, to the address last given in accordance
with this paragraph.
14. Heading. The headings of the paragraphs of this Agreement
have been inserted for convenience of reference only and shall not be construed
or interpreted to restrict or modify any of the terms or provisions of this
Agreement.
15. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provision shall be fully severable and this
Agreement and each separate provision shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of this
Agreement, and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement. In addition, in
lieu of such illegal, invalid
-6-
<PAGE>
or unenforceable provision, there shall be added automatically, as a part of
this Agreement, a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable, if such reformation is allowable under applicable law.
16. Succession. This Agreement shall inure to the benefit of and shall
be binding upon Employer, its successors and assigns, but Employer shall not
have the right to assign this Agreement without the prior written consent of
Officer. The obligations and duties of Officer under this Agreement shall be
personal and not assignable.
17. Employer Policies, Relations and Guidelines for Officers. Employer
may issue policies, rules, regulations, guidelines, procedures or other
informational material, whether in the form of handbooks, memoranda, or
otherwise, relating to its Officers. These materials are general guidelines for
Officer's information and shall not be construed to alter, modify or amend this
Agreement for any purpose whatsoever.
18. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties with respect to the subject matter and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter, unless expressly provided otherwise within this
Agreement. No amendment, modification or termination of this Agreement, unless
expressly provided otherwise, shall be valid unless made in writing and signed
by each of the parties whose rights, duties or obligations would in any way be
affected by an amendment, modification or termination. No representations,
inducements or agreements have been made to induce either Officer or Employer to
enter into this Agreement which are not expressly set forth within this
Agreement. This Agreement is the sole source of rights and duties as between
Employer and Officer relating to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 8th day of May, 1996.
-----
JOHN M. DeSTEFANIS MAGELLAN HEALTH SERVICES, INC.
"Officer" "Employer"
/s/ John M. DeStefanis /s/ E. M. Crawford
- ------------------------------- -----------------------------------
Title: CEO
________________________
-7-
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement') is made and entered into by and
between Steve J. Davis, an individual ("Officer"), and Magellan Health Services,
Inc., a Delaware corporation ("Employer").
WHEREAS, Employer desires to obtain the continued services of Officer
and Officer desires to continue to render services to Employer; and
WHEREAS, Employer and Officer desire to set forth the terms and
conditions of Officer's employment with Employer under this Agreement; and
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and agreements contained in this Agreement, the parties agree
as follows:
STATEMENT OF AGREEMENT
----------------------
1. Employment. Employer agrees to employ Officer, and Officer accepts
such employment, for a period of three (3) years, beginning on May 7, 1996,
subject to earlier termination pursuant to Section 6 below. After the initial
three (3) year term has expired, this Agreement will automatically renew on May
7 of each year for a one (1) year term. If either party desires not to renew the
Agreement, they will provide the other party with thirty (30) days' written
notice of their intent not to renew the Agreement on its next anniversary date
2. Position and Duties of Officer. Officer will serve as the Executive
Vice President, Administrative Services (Chief Administrative Officer) and
General Counsel of Employer. Officer agrees to serve in such position or in such
other officer level position as Employer determines from time to time, and to
perform the officer level duties as Employer may assign from time to time to
Officer until the expiration of the term or such time as Officer's employment
with Employer is terminated.
3. Time Devoted and Location of Officer.
(a) Officer shall devote his full business time and energy to
the business, affairs and interests of Employer and related matters, and shall
use his best efforts and abilities to promote Employer's interests. Officer
agrees that he will diligently endeavor to perform services contemplated by this
Agreement in accordance with the policies established by the Employer's Chief
Executive Officer and the Board of Directors.
-1-
<PAGE>
(b) Officer's primary business office will be located in
Employer's Corporate Offices located in Atlanta, Georgia ("Atlanta").
4. Compensation. Employer shall pay Officer a salary in the amount of
three hundred thousand dollars ($300,000.00) per year which amount shall be paid
in semi-monthly intervals less appropriate withholdings for federal and state
taxes, and deductions authorized by Officer. Such salary shall be subject to
review and adjustment by Employer's Chief Executive Officer and Board of
Directors from time to time consistent with past practice and consistent with
other officers at his level.
5. Benefits.
(a) Benefits. In addition to the compensation provided for in
Section 4, Officer shall be entitled during the term of this Agreement to such
other benefits of employment with Employer as are now or may later be in effect
for (i) salaried officers of Employer or (ii) senior executives of Employer with
duties comparable to those of Officer, including, without limitation, all bonus,
incentive and deferred compensation, pension, stock option, life and other
insurance, disability (insured and uninsured), medical and dental, vacation and
other benefit plans or programs.
(b) Expenses. During the term of this Agreement, Employer
shall reimburse Officer promptly for all reasonable travel, entertainment,
parking, business meeting and similar expenditures in pursuance and furtherance
of Employer's business upon receipt of reasonably supporting documentation as
required by Employer's policies applicable to its officers generally.
6. Termination.
(a) Termination Due to Resignation and Termination with Cause.
Officer's employment under this Agreement and all of his rights to receive the
salary and benefits, set forth in Sections 4 and 5, will cease upon the
occurrence of any of the following events: (i) the effective date of Officer's
resignation, or (ii) termination for cause at the discretion of Employer under
the following circumstances: (A) Officer shall be guilty of fraud or dishonesty
involving his duties on behalf of Employer; (B) Officer shall have willfully
failed or refused to faithfully and diligently perform significant duties
assigned to Officer or otherwise to have breached any material term under this
Agreement; (C) Officer shall have willfully failed or refused to abide by
Employer's policies, rules, procedures or directives; or (D) Officer shall be
convicted of a felony or a misdemeanor involving moral turpitude.
For the events in subsections (B) and (C), Employer shall give Officer
written notice of such event and an opportunity to cure such situation for a
period of thirty (30) days, provided that such opportunity to cure is required
to be given only once in any thirty (30) day period.
(b) Termination without Cause. Employer may terminate this
Agreement without cause at any time upon the giving of thirty (30) days' prior
written notice to Officer. If Employer terminates this Agreement without cause,
Employer may direct Officer to immediately cease from
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<PAGE>
providing services. If Employer terminates this Agreement without cause,
Employer shall continue to pay Officer the compensation provided for pursuant to
Section 4 of this Agreement for (i) the remaining balance of the initial
three-year term of employment or a one-year renewal term of employment,
whichever is then in effect, set forth in Section 1 or (ii) for a period of one
(1) year, whichever of (i) and (ii) is greater in length of time upon the
effective termination date. No other benefits, pursuant to Section 5 of this
Agreement or otherwise, shall be paid, unless otherwise provided in the terms of
the applicable plan or benefit.
(c) Automatic Termination. This Agreement shall automatically
terminate upon the death or permanent disability of Officer. Officer shall be
deemed to be "Disabled" or to suffer from a "Disability" within the meaning of
this Agreement if Officer is deemed to be permanently disabled within the
meaning of any disability insurance policy maintained by Employer for Officer
or, in the absence of such policy, if Officer is, by reason of any medically
determinable physical or mental condition, unable to perform a substantial
portion of his essential duties pursuant to this Agreement for a period of six
(6) consecutive months. The term "essential duties" is defined as the ability to
consistently perform his assigned duties, including travel requirements, with or
without reasonable accommodation.
(d) Effect of Termination. Upon termination of this Agreement,
all rights and obligations under this Agreement shall cease except for the
rights and obligations under Sections 4 and 5 of this Agreement to the extent
Officer has not been compensated for services performed prior to termination
(the amount to be prorated for the portion of the pay period prior to
termination), and the rights and obligations under Sections 6(b), 7, 8 and 9 and
all procedural and remedial provisions of this Agreement. A termination of this
Agreement shall constitute a termination of Officer's employment with Employer
for all purposes of this Agreement.
(e) Termination Upon a Change of Control. Officer shall be
entitled to terminate his employment upon a change of control and shall be
entitled to all of the salary, benefits and other rights provided in this
Agreement as though the termination had been initiated by Employer without cause
upon the occurrence of any of the following events: (a) the acquisition after
the beginning of the term of this Agreement in one or more transactions, of
beneficial ownership (within the meaning of Rule 13d-3(a)(1) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) by any person
or entity (other than Officer or E. Mac Crawford) or any group of persons or
entities (other than Officer) who constitute a group (within the meaning of
Section 13d-5 of the Exchange Act) of any securities of Employer such that as a
result of such acquisition such person or entity or group beneficially owns
(within the meaning of Rule 13d-3(a)( 1) under the Exchange Act) more than 50%
of Employer's then outstanding voting securities entitled to vote on a regular
basis for a majority of the Board of Directors of Employer; or (b) the sale of
all or substantially all of the assets of Employer (including, without
limitation, by way of merger, consolidation, lease or transfer) in a transaction
(except for a sale-leaseback transaction) where Employer or the holders of
common stock of Employer do not receive (i) voting securities representing a
majority of the voting power entitled to vote on a regular basis for the Board
of Directors of the acquiring entity or of an affiliate which controls the
acquiring entity, or (ii) securities representing a majority of the equity
interest in the acquiring entity or of an affiliate that controls the acquiring
entity, if other than a corporation;
-3-
<PAGE>
provided, that if Officer becomes entitled to any payments (whether hereunder or
otherwise) by reason of an event described in Internal Revenue Code Section 280G
(a "Parachute Event") that would constitute "excess parachute payments" (as
defined in Internal Revenue Code Section 280G) if paid, then Officer's
entitlement to such payments shall be reduced by such amount as will cause none
of such payments to constitute excess parachute payments, if, and only if, the
net amount received by Officer by reason of the Parachute Event, after
imposition of all applicable taxes (including taxes under Internal Revenue Code
Section 4099), would be greater after such reduction than if such reduction were
not made.
7. Protection of Confidential Information/Non-Competition/Non-
Solicitation.
Officer covenants and agrees as follows:
(a) During the period beginning upon the execution of this
Agreement and continuing for a period of two (2) years after the term or
termination for any reason, Officer shall not use or disclose, directly or
indirectly, for any reason whatsoever or in any way, other than at the direction
of Employer during the course of Officer's employment or after receipt of the
prior written consent of Employer, any Confidential information or other
information of Employer deemed to be trade secrets of Employer, including, but
not limited to, information with respect to Employer and its Subsidiaries as
follows: the lists of past, current or potential customers of Employer and its
Subsidiaries, all systems, manuals, materials, processes and other intellectual
property of any type used by Employer or its Subsidiaries in connection with
their respective business operations; financial statements, cost reports and
other financial information; contract proposals and bidding information; rate
and fee structures; policies and procedures developed as part of a Confidential
business plan; and management systems and procedures, including manuals and
supplements (collectively, the "Confidential Information"). The obligation not
to use or disclose any of the Confidential Information shall not apply to: (i)
any Confidential Information known by Officer before commencing employment with
Employer, or (ii) Confidential Information which Officer obtains from a third
party, provided, Officer has no knowledge that the third party obtained the
Confidential Information by wrongful or inappropriate means, or (iii) following
the termination of the employment of Officer with Employer, any information that
is or becomes public knowledge, through no fault of Officer, and that may be
utilized by the public without any direct or indirect obligation to Employer,
but the termination of the obligation for non-use or nondisclosure by reason of
such information becoming public shall be only from the date such information
becomes public knowledge. The above shall be without prejudice to any rights or
remedies of Employer under any state law protecting trade secrets or
information.
(b) During Employer's employment of Officer and for a period
of two (2) years following the term or termination of Officer's employment with
Employer for any reason, Officer shall not, within a radius of fifty (50) miles
of any existing operation of Employer's Subsidiary, engage, directly or
indirectly, in any commercial capacity, whether in an executive, operational,
consulting or sales capacity, in the delivery of behavioral health services, or
have any material ownership interest in any business owning, operating,
contracting or providing such behavioral
-4-
<PAGE>
health services. For purposes of this subparagraph, the term "Employer's
Subsidiary" is defined as Charter Behavioral Health Systems, Inc. and its
subsidiaries.
(c) During Employer's employment of Officer and for a period
of one (1) year following the termination of Officer's employment with Employer
for any reason, Officer shall not solicit for employment or employ, directly or
indirectly, any employee of Employer or any of its Subsidiaries who was employed
with Employer or its Subsidiaries within the one (1) year period immediately
prior to such solicitation or employment
8. Work Made for Hire. Officer agrees that any written program
materials, protocols, research papers and all other writings (the "Work"), which
Officer develops for Employer's use during the term of this Agreement, will be
considered "work made for hire" within the meaning of the United States
Copyright Act, Title 17, United States Code, which vests all copyright interest
in and to the Work in the Employer. In the event, however, that any court of
competent jurisdiction finally declares that the Work is not or was not a work
made for hire as agreed, Officer agrees to assign, convey, and transfer to the
Employer all right, title and interest Officer may presently have or may have or
be deemed to have in and to any such Work and in the copyright of such work,
including but not limited to, all rights of reproduction, distribution,
publication, public performance, public display and preparation of derivative
works, and all rights of ownership and possession of the original fixation of
the Work and any and all copies. Additionally, Officer agrees to execute any
documents necessary for Employer to record and/or perfect its ownership of the
Work and the applicable copyright. The foregoing will not apply to any writings
Officer develop which are not for Employer's use or are in each instance
specifically excluded in advance of publication from the coverage of the
foregoing by Employer's Board of Directors.
9. Property of Employer. Officer agrees that, upon the termination of
Officer's employment with Employer, Officer will immediately surrender to
Employer all property, equipment, funds, lists, books, records and other
materials of Employer in the possession of or provided to Officer.
10. Governing Law. This Agreement and all issues relating to the
validity, interpretation and performance shall be governed by and interpreted
under the laws of the State of Georgia
11. Remedies. With respect to each and every breach, violation or
threatened breach or violation by Officer of any of the covenants set forth in
this Agreement, Employer, in addition to all other remedies available at law or
in equity, including specific performance of the Agreement's provisions, shall
be entitled to enjoin the commencement or continuance of such conduct and may
apply for entry of an immediate restraining order or injunction, subject to
Section 12 of this Agreement. Employer may pursue any of the remedies described
in this Section 11 concurrently or consecutively, in any order, as to any such
breach or violation, and the pursuit of one of such remedies at any time will
not be deemed an election of remedies or waiver of the right to pursue any of
the other such remedies.
-5-
<PAGE>
12. Arbitration. Except for an action for injunctive relief, any
disputes or controversies arising under this Agreement shall be settled by
arbitration in Atlanta, Georgia in accordance with the rules of the American
Arbitration Association relating to the arbitration of commercial disputes. The
determination and findings of such arbitrators shall be final and binding on all
parties and may be enforced, if necessary, in the courts of the State of
Georgia.
13. Notices. Any notice or request required or permitted to be given to
any party shall be given in writing and shall be personally delivered or sent to
such party by United States mail at the address set forth below or at such other
address as such other address as such party may designate by written
communication to the other party to this Agreement:
To Officer: Steve J. Davis
4051 St. Andrews Sq.
Duluth, Georgia 30076
To Employer: Magellan
Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: Chief Executive Officer
With a copy to: Magellan
Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
Each notice given in accordance with this paragraph shall be deemed to have been
given, if personally delivered, on the date personally delivered, if delivered
by facsimile transmission, be deemed given when sent and confirmation of receipt
is received, or, if mailed, on the third (3rd) day following the day on which it
is deposited in the United States mail, certified or registered mail, return
receipt requested, with postage prepaid, to the address last given in accordance
with this paragraph.
14. Heading. The headings of the paragraphs of this Agreement
have been inserted for convenience of reference only and shall not be construed
or interpreted to restrict or modify any of the terms or provisions of this
Agreement.
15. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provision shall be fully severable and this
Agreement and each separate provision shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of this
Agreement, and the remaining provisions of this Agreement shall remain in full
force and effect and
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<PAGE>
shall not be affected by the illegal, invalid or unenforceable provision
or by its severance from this Agreement. In addition, in lieu of such illegal,
invalid or unenforceable provision, there shall be added automatically, as a
part of this Agreement, a provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible and be legal, valid and
enforceable, if such reformation is allowable under applicable law.
16. Succession. This Agreement shall inure to the benefit of and shall
be binding upon Employer, its successors and assigns, but Employer shall not
have the right to assign this Agreement without the prior written consent of
Officer. The obligations and duties of Officer under this Agreement shall be
personal and not assignable.
17. Employer Policies, Relations and Guidelines for Officers. Employer
may issue policies, rules, regulations, guidelines, procedures or other
informational material, whether in the form of handbooks, memoranda, or
otherwise, relating to its Officers. These materials are general guidelines for
Officer's information and shall not be construed to alter, modify or amend this
Agreement for any purpose whatsoever.
18. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties with respect to the subject matter and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter, unless expressly provided otherwise within this
Agreement. No amendment, modification or termination of this Agreement, unless
expressly provided otherwise, shall be valid unless made in writing and signed
by each of the parties whose rights, duties or obligations would in any way be
affected by an amendment, modification or termination. No representations,
inducements or agreements have been made to induce either Officer or Employer to
enter into this Agreement which are not expressly set forth within this
Agreement. This Agreement is the sole source of rights and duties as between
Employer and Officer relating to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 15th day of May, 1996.
----
STEVE J. DAVIS MAGELLAN HEALTH SERVICES, INC.
"Officer" "Employer"
/s/ Steve J. Davis /s/ E. M. Crawford
- ------------------------------- -----------------------------------
Title: CEO
_______________________
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<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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 136,604,000
<SECURITIES> 0
<RECEIVABLES> 208,574,000
<ALLOWANCES> 0
<INVENTORY> 5,314,000
<CURRENT-ASSETS> 370,545,000
<PP&E> 614,033,000
<DEPRECIATION> 119,178,000
<TOTAL-ASSETS> 1,170,187,000
<CURRENT-LIABILITIES> 255,516,000
<BONDS> 532,100,000
0
0
<COMMON> 8,234,000
<OTHER-SE> 177,481,000
<TOTAL-LIABILITY-AND-EQUITY> 1,170,187,000
<SALES> 996,997,000
<TOTAL-REVENUES> 996,997,000
<CGS> 0
<TOTAL-COSTS> 780,880,000
<OTHER-EXPENSES> 37,390,000
<LOSS-PROVISION> 61,293,000
<INTEREST-EXPENSE> 35,459,000
<INCOME-PRETAX> 48,016,000
<INCOME-TAX> 19,674,000
<INCOME-CONTINUING> 24,095,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,095,000
<EPS-PRIMARY> .79
<EPS-DILUTED> 0
</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
income from continuing operations of approximately $304.7 million and $1.7
million, respectively, for the quarter ended March 31, 1995 compared to net
revenue and loss from continuing operations of approximately $346.4 million and
$5.7 million, respectively, for the quarter ended March 31, 1996. The Company
also reported net revenue and loss from continuing operations of approximately
$868.4 million and $13.1 million, respectively, for the nine months ended June
30, 1995 compared to net revenue and income from
<PAGE>
continuing operations of approximately $997.0 million and $24.1 million,
respectively, for the nine months ended June 30, 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 nine months ended June 30, 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. During the first nine months of fiscal 1996, the Company
has consolidated or closed six psychiatric hospitals. The Company recorded
charges of approximately $200,000 in the quarterly period ended March 31, 1996
and recorded a charge of approximately $2.8 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 hereof, 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 June 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.
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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 June 30, 1996, approximately
30% of Green Spring's managed care members were under capitated arrangements.
During fiscal 1996, 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.
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