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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
The number of shares of the Registrant's Common Stock outstanding as of April
30, 1997, was 28,807,931.
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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>
Behavioral Heath Systems Indiana 35-1990127 3414 Peachtree Rd., N.E.
of Indiana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Beltway Community Hospital, Texas 58-1324281 3414 Peachtree Rd., N.E.
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 Behavioral California 58-1394959 7050 Parkway Drive
Health System, Inc. La Mesa, CA 91942-2352
(619) 465-4411
Charter Asheville North Carolina 58-2097827 60 Caledonia Road
Behavioral Health System, Inc. Asheville, NC 28803
(704) 253-3681
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
- -------------------- -------------- -------------- ------------------------
The Charter Arbor Indy Delaware 58-2265776 3414 Peachtree Rd., N.E.
Behavioral Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Augusta Behavioral Georgia 58-1615676 3100 Perimeter Parkway
Health System, Inc. P.O. Box 14939
Augusta, GA 30909
(404) 868-6625
Charter Bay Harbor Behavioral Florida 58-1640244 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
The Charter Beacon Behavioral Delaware 35-1994155 1720 Beacon Street
Health System, LLC Fort Wayne, IN 46805
(219) 423-3651
Charter Behavioral Health System New Jersey 58-2097832 19 Prospect Street
at Fair Oaks, Inc. Summit, NJ 07901
(908) 277-9102
Charter Behavioral Health System Maryland 52-1866212 3414 Peachtree Rd., N.E.
at Hidden Brook, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 33-0606642 3414 Peachtree Rd., N.E.
at Los Altos, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Florida 65-0519663 1324 37th Avenue, East
at Manatee Adolescent Treatment Bradenton, FL 34208
Services, Inc. (813) 746-1388
Charter Behavioral Health System Maryland 52-1866221 14901 Broschart Road
at Potomac Ridge, Inc. Rockville, MD 20850
(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 System Georgia 58-1513304 240 Mitchell Bridge Road
of Athens, Inc. Athens, GA 30606
(404) 546-7277
Charter Behavioral Health System Texas 58-1440665 8402 Cross Park Drive
of Austin, Inc. Austin, TX 78754
(512) 837-1800
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 System Texas 76-0430571 3414 Peachtree Rd., N.E.
of Baywood, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Florida 58-1527678 4480 51st Street, West
of Bradenton, Inc. Bradenton, FL 34210
(813) 746-1388
Charter Behavioral Health System Georgia 58-1408670 3500 Riverside Drive
of Central Georgia, Inc. Macon, GA 31210
(912) 474-6200
Charter Behavorial Health System Virginia 54-1765921 1500 Westbrook Avenue
of Central Virginia, Inc. Richmond, VA 23227
(804) 266-9671
Charter Behavioral Health System South Carolina 58-1761157 2777 Speissegger Drive
of Charleston, Inc. Charleston, SC 29405-8299
(803) 747-5830
Charter Behavioral Health System Virginia 58-1616917 2101 Arlington Boulevard
of Charlottesville, Inc. Charlottesville, VA 22903-1593
(804) 977-1120
Charter Behavioral Health System Illinois 58-1315760 3414 Peachtree Rd., N.E.
of Chicago, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 58-1473063 3414 Peachtree Rd., N.E.
of Chula Vista, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Missouri 61-1009977 200 Portland Street
of Columbia, Inc. Columbia, MO 65201
(314) 876-8000
Charter Behavioral Health System Texas 58-1513305 3126 Rodd Field Road
of Corpus Christi, Inc. Corpus Christi, TX 78414
(512) 993-8893
Charter Behavioral Health System Texas 58-1513306 6800 Preston Road
of Dallas, Inc. Plano, TX 75024
(214) 964-3939
Charter Behavioral Health System Maryland 52-1866214 3680 Warwick Road, Route 1
of Delmarva, Inc. East New Market, MD 21631
(410) 943-8108
The Charter Behavioral Health SystemDelaware 35-1994080 7200 East Indiana
of Evansville, LLC Evansville, IN 47715
(812) 475-7200
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 System Texas 58-1643151 3414 Peachtree Rd., N.E.
of Fort Worth, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Mississippi 58-1616919 3531 Lakeland Drive
of Jackson, Inc. Jackson, MS 39208
(601) 939-9030
Charter Behavioral Health System Florida 58-1483015 3414 Peachtree Rd., N.E.
of Jacksonville, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health SystemDelaware 35-1994087 2700 River City Park Drive
of Jefferson, LLC Jeffersonville, IN 47130
(812) 284-3400
Charter Behavioral Health System Kansas 58-1603154 8000 West 127th Street
of Kansas City, Inc. Overland Park, KS 66213
(913) 897-4999
Charter Behavioral Health System Louisiana 72-0686492 302 Dulles Drive
of Lafayette, Inc. Lafayette, LA 70506
(318) 233-9024
Charter Behavioral Health System Louisiana 62-1152811 3414 Peachtree Rd., N.E.
of Lake Charles, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health SystemDelaware 35-1994736 3414 Peachtree Rd., N.E.
of Michigan City, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Mississippi 58-2138622 8135 Goodman Rd.
of Mississippi, Inc. Olive Branch, MS 38654
(901) 521-1400
Charter Behavioral Health System Alabama 58-1569921 3414 Peachtree Rd., N.E.
of Mobile, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System New Hampshire 02-0470752 29 Northwest Boulevard
of Nashua, Inc. Nashua, NH 03063
(603) 886-5000
Charter Behavioral Health System Nevada 58-1321317 7000 West Spring Mountain Rd.
of Nevada, Inc. Las Vegas, NV 89117
(702) 876-4357
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 System New Mexico 58-1479480 5901 Zuni Road, SE
of New Mexico, Inc. Albuquerque, NM 87108
(505) 265-8800
Charter Behavioral Health System North Carolina 56-1908581 3414 Peachtree Rd., N.E.
of North Carolina, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 58-1857277 101 Cirby Hills Drive
of Northern California, Inc. Roseville, CA 95678
(916) 969-4666
Charter Behavioral Health System Arkansas 58-1449455 4253 Crossover Road
of Northwest Arkansas, Inc. Fayetteville, AR 72703
(501) 521-5731
The Charter Behavioral Health SystemDelaware 35-1994154 101 West 61st Avenue
of Northwest Indiana, LLC State Road 51
Hobart, IN 46342
(219) 947-4464
Charter Behavioral Health System Kentucky 61-1006115 435 Berger Road
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 System California 58-1747020 455 Silicon Valley Boulevard
of San Jose, Inc. San Jose, CA 95138
(408) 224-2020
Charter Behavioral Health System Georgia 58-1750583 1150 Cornell Avenue
of Savannah, Inc. Savannah, GA 31406
(912) 354-3911
Charter Behavioral Health System Arkansas 71-0752815 3414 Peachtree Rd., N.E.
of Texarkana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 95-2685883 2055 Kellogg Drive
of the Inland Empire, Inc. Corona, CA 91719
(714) 735-2910
Charter Behavioral Health System Ohio 58-1731068 1725 Timberline Road
of Toledo, Inc. Maumee, Ohio 43537
(419) 891-9333
Charter Behavioral Health System Arizona 86-0757462 3414 Peachtree Rd., N.E.
of Tucson, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
v
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Behavioral Health System California 33-0606644 3414 Peachtree Rd., N.E.
of Visalia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Minnesota 41-1775626 109 North Shore Drive
of Waverly, Inc. Waverly, MN 55390
(612) 658-4811
Charter Behavioral Health System North Carolina 56-1050502 3637 Old Vineyard Road
of Winston-Salem, Inc. Winston-Salem, NC 27104
(919) 768-7710
Charter Behavioral Health System California 33-0606646 3414 Peachtree Rd., N.E.
of Yorba Linda, Inc. Suite 1400
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 Talbott 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, Inc. St. Simons Island, GA 31522
(912) 638-1999
Charter Canyon Behavioral Health Utah 58-1557925 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Canyon Springs California 33-0606640 69696 Ramon Road
Behavioral Health System, Inc. Cathedral City, CA 92234
(619) 321-2000
Charter Centennial Peaks Colorado 58-1761037 2255 South 88th Street
Behavioral Health System, Inc. Louisville, CO 80027
(303) 673-9990
Charter Community Hospital, California 58-1398708 21530 South Pioneer Boulevard
Inc. Hawaiian Gardens, CA 90716
(310) 860-0401
Charter Contract Services, Inc. Georgia 58-2100699 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
vi
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Cove Forge Behavioral Pennsylvania 25-1730464 New Beginnings Road
Health System, Inc. Williamsburg, PA 16693
(814) 832-2121
Charter Fairmount Behavioral Pennsylvania 58-1616921 561 Fairthorne Avenue
Health System, Inc. Philadelphia, PA 19128
(215) 487-4000
Charter Fenwick Hall South Carolina 57-0995766 3414 Peachtree Rd., N.E.
Behavioral Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Financial Offices, Inc. Georgia 58-1527680 3414 Peachtree Rd., N.E.
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 Franchise Services,LLC Delaware 58-2292977 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Grapevine Behavioral Texas 58-1818492 2300 William D. Tate Ave.
Health System, Inc. Grapevine, TX 76051
(817) 481-1900
Charter Greensboro Behavioral North Carolina 58-1335184 700 Walter Reed Drive
Health System, Inc. Greensboro, NC 27403
(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 Denver, Colorado 58-1662413 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Ft. Collins, Colorado 58-1768534 3414 Peachtree Rd., N.E.
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 Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Miami, Inc. Florida 61-1061599 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Mobile, Inc. Alabama 58-1318870 5800 Southland Drive
Mobile, AL 36693
(334) 661-3001
Charter Hospital of Santa New Mexico 58-1584861 3414 Peachtree Rd., N.E.
Teresa, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of St. Louis, Inc. Missouri 58-1583760 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Torrance, Inc. California 58-1402481 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Indiana BHS Indiana 58-2247985 3414 Peachtree Rd., N.E.
Holding, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Indianapolis Behavioral Delaware 35-1994923 5602 Caito Drive
Health System, LLC Indianapolis, IN 46226
(317) 545-2111
The Charter Lafayette Behavioral Delaware 35-1994151 3700 Rome Drive
Health System, LLC Lafayette, IN 47905
(317) 448-6999
Charter Lakehurst New Jersey 22-3286879 3414 Peachtree Rd., N.E.
Behavioral Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Behavioral Tennessee 62-0892645 2911 Brunswick Road
Health System, Inc. Memphis, TN 38134
(901) 377-4700
Charter Laurel Heights Georgia 58-1558212 3414 Peachtree Rd., N.E.
Behavioral Health System, Inc. Suite 1400
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 Linden Oaks Illinois 36-3943776 852 West Street
Behavioral Health System, Inc. Naperville, IL 60540
(708) 305-5500
Charter Little Rock Behavioral Arkansas 58-1747019 1601 Murphy Drive
Health System, Inc. Maumelle, AR 72113
(501) 851-8700
Charter Louisiana Behavioral Louisiana 72-1319231 1514 Doctor's Drive
Health System, Inc. Suite 102
Bossier City, LA 71111
(318) 747-4362
Charter Louisville Behavioral Kentucky 58-1517503 1405 Browns Lane
Health System, Inc. Louisville, KY 40207
(502) 896-0495
Charter Meadows Behavioral Maryland 52-1866216 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - California, Inc. Georgia 58-1357345 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - Clayton Georgia 58-1579404 3414 Peachtree Rd., N.E.
County, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - Cleveland, Inc. Texas 58-1448733 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(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, Inc. New York 58-1761153 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical (Cayman Cayman Islands, BWI 58-1841857 Caledonian Bank & Trust
Islands) Ltd. 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 Executive Georgia 58-1538092 3414 Peachtree Rd., N.E.
Corporation Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical Information Georgia 58-1530236 3414 Peachtree Rd., N.E.
Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical International, Cayman Islands, BWI N/A Caledonian Bank & Trust
Inc. Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical International, Nevada 58-1605110 3414 Peachtree Rd., N.E.
S.A., Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Managed Care Sales and Georgia 58-1195352 3414 Peachtree Rd., N.E.
Services, Inc. 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 England United Kingdom N/A 111 Kings Road
Limited Box 323
London SW3 4PB
London, England
44-71-351-1272
Charter Medical of Florida, Inc. Florida 58-2100703 3414 Peachtree Rd., N.E.
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 Milwaukee Behavioral Wisconsin 58-1790135 11101 West Lincoln Avenue
Health System, Inc. West Allis, WI 53227
(414) 327-3000
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 Mission Viejo Behavioral California 58-1761156 23228 Madero
Health System, Inc. Mission Viejo, CA 92691
(714) 830-4800
Charter MOB of Virginia 58-1761158 1023 Millmont Avenue
Charlottesville, Inc. Charlottesville, VA 22901
(804) 977-1120
Charter North Behavioral Alaska 58-1474550 2530 DeBarr Road
Health System, Inc. Anchorage, AK 99508-2996
(907) 258-7575
Charter Northbrooke Wisconsin 39-1784461 46000 W. Schroeder Drive
Behavioral Health System, Inc. Brown Deer, WI 53223
(414) 355-2273
Charter North Counseling Alaska 58-2067832 2530 DeBarr Road
Center, Inc. Anchorage, AK 99508-2996
(907) 258-7575
Charter Northridge Behavioral North Carolina 58-1463919 400 Newton Road
Health System, Inc. Raleigh, NC 27615
(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, Georgia 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 Behavioral Georgia 58-1086165 2151 Peachford Road
Health System, Inc. Atlanta, GA 30338
(404) 455-3200
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
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 Real Behavioral Texas 58-1485897 8550 Huebner Road
Health System, Inc. San Antonio, TX 78240
(512) 699-8585
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 100 Rockford Drive
Health System, Inc. Newark, DE 19713
(302) 996-5480
Charter San Diego Behavioral California 58-1669160 11878 Avenue of Industry
Health System, Inc. San Diego, CA 92128
(619) 487-3200
Charter Sioux Falls Behavioral South Dakota 58-1674278 2812 South Louise Avenue
Health System, Inc. Sioux Falls, SD 57106
(605) 361-8111
The Charter South Bend Behavioral Delaware 35-1994307 6704 N. Gumwood Drive
Health System, LLC Granger, IN 46530
(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, Inc. Leesburg, VA 22075
(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
The Charter Terre Haute Behavioral Delaware 35-1994308 1400 Crossing Boulevard
Health System, LLC Terre Haute, IN 47802
(812) 299-4196
Charter Thousand Oaks Behavioral California 58-1731069 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Westbrook Behavioral Virginia 54-0858777 1500 Westbrook Avenue
Health System, Inc. Richmond, VA 23227
(804) 266-9671
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 White Oak Behavioral Maryland 52-1866223 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
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 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
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, Inc. Suite 410
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, Inc. Nevada 88-0117696 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Employee Assistance Services, Inc. Georgia 58-1501282 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Florida Health Facilities, Inc. Florida 58-1860493 21808 State Road 54
Lutz, FL 33549
(813) 948-2441
Gulf Coast EAP Services, Inc. Alabama 58-2101394 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
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
- -------------------- -------------- -------------- ------------------------
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 Solutions, Inc. Delaware 58-2227841 3414 Peachtree Rd., N.E.
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, Inc. Delaware 51-0374654 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Massachusetts Mentor, Inc. Massachusetts 04-2799071 313 Congress St.
Boston, MA 02210
(617) 790-4800
Metroplex Behavioral Healthcare Texas 58-2138596 1000 South Main Street
Services, Inc. Suite 100
Grapevine, TX 76051
(817) 540-6948
National Mentor, Inc. Delaware 04-3250732 313 Congress St.
Boston, MA 02210
(617) 790-4800
National Mentor Healthcare, Inc. Massachusetts 04-2893910 313 Congress St.
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
Nevada Behavioral Services, Inc. Nevada Applied for 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
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
- -------------------- -------------- -------------- ------------------------
Ohio Mentor, Inc. Ohio 31-1098345 313 Congress St.
Boston, MA 02210
(617) 790-4800
Pacific-Charter Medical, Inc. California 58-1336537 3414 Peachtree Rd., N.E.
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 Systems, Georgia 58-2100700 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Schizophrenia Treatment and Georgia 58-1672912 209 Church Street
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
Wisconsin Mentor, Inc. Wisconsin 39-1840054 313 Congress St.
Boston, MA 00210
(617) 790-4800
</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, 1996 and March 31, 1997................................1
Condensed Consolidated Statements of Operations -
For the Six Months and the Six Months ended March 31, 1996 and 1997..3
Condensed Consolidated Statements of Cash Flows -
For the Six Months ended March 31, 1996 and 1997.....................4
Notes to Condensed Consolidated Financial Statements..................5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................16
PART II - Other Information:
Item 1. - Legal Preceedings..........................................23
Item 5. - Other Information..........................................23
Item 6. - Exhibits and Reports on Form 8-K...........................24
Signatures...........................................................25
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I - FINANCIAL INFORMATION
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, March 31,
1996 1997
------------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................. $ 120,945 $ 114,245
Accounts receivable, net .................. 189,878 192,394
Supplies .................................. 4,753 4,465
Refundable income taxes ................... 1,323 --
Other current assets ...................... 21,251 25,299
----------- -----------
Total Current Assets ................. 338,150 336,403
Property and Equipment:
Land ...................................... 83,431 82,705
Buildings and improvements ................ 388,821 393,814
Equipment ................................. 146,915 154,831
----------- -----------
619,167 631,350
Accumulated depreciation .................. (126,053) (143,724)
----------- -----------
493,114 487,626
Construction in progress .................. 2,276 3,735
----------- -----------
495,390 491,361
Assets Restricted for Settlement of Unpaid Claims
and Other Long-Term Liabilities ........... 105,303 96,402
Other Long-Term Assets ........................... 30,755 32,126
Goodwill, net .................................... 128,012 125,329
Other Intangible Assets, net ..................... 42,527 40,766
----------- -----------
$ 1,140,137 $ 1,122,387
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
September 30, March 31,
1996 1997
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable ........................................................ $ 78,966 $ 69,920
Accrued liabilities ..................................................... 189,599 165,358
Current maturities of long-term debt and
capital lease obligations ............................................ 5,751 5,845
----------- -----------
Total Current Liabilities ...................................... 274,316 241,123
Long-Term Debt and Capital Lease Obligations ................................... 566,307 580,536
Deferred Income Taxes .......................................................... 12,368 15,295
Reserve for Unpaid Claims ...................................................... 73,040 62,316
Deferred Credits and Other Long-Term Liabilities ............................... 39,769 24,211
Minority Interest .............................................................. 52,520 56,698
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, without par value
Authorized - 10,000 shares
Issued and outstanding - none ........................................ -- --
Common Stock, par value $0.25 per share
Authorized - 80,000 shares
Issued and outstanding - 33,007 shares at
September 30, 1996 and 33,221 shares
at March 31, 1997 .............................................. 8,252 8,307
Other Stockholders' Equity:
Additional paid-in capital ........................................... 327,681 332,905
Accumulated deficit .................................................. (129,457) (113,374)
Warrants outstanding ................................................. 54 50
Common Stock in Treasury, 4,424 shares at September
30, 1996 and March 31, 1997 .................................... (82,731) (82,731)
Cumulative foreign currency adjustments .............................. (1,982) (2,949)
----------- -----------
Stockholders' Equity ........................................... 121,817 142,208
----------- -----------
$ 1,140,137 $ 1,122,387
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets
2
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
For the Three Months For the Six Months
ended ended
March 31, March 31,
-------------------------- ------------------------
1996 1997 1996 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 354,953 $ 349,922 $650,618 $ 696,741
--------- --------- -------- ---------
Costs and expenses:
Salaries, supplies and other operating expenses .......... 275,018 282,210 506,344 566,333
Bad debt expense .......................................... 22,619 15,140 42,407 35,375
Depreciation and amortization ............................. 13,120 13,088 23,300 26,187
Interest, net ............................................. 8,572 13,153 22,394 26,722
Stock option expense (credit) ............................. (409) 829 1,414 1,433
Unusual items ............................................. -- 1,395 -- 1,395
--------- --------- --------- ---------
318,920 325,815 595,859 657,445
--------- --------- --------- ---------
Income before provision for income taxes,
minority interest and extraordinary item .................. 36,033 24,107 54,759 39,296
Provision for income taxes ....................................... 14,413 9,643 22,372 15,718
--------- --------- --------- ---------
Income before minority interest and extraordinary item ........... 21,620 14,464 32,387 23,578
Minority interest ................................................ 1,551 2,572 2,570 4,545
--------- --------- --------- ---------
Income before extraordinary item ................................. 20,069 11,892 29,817 19,033
Extraordinary item - loss on early extinquishment of debt
(net of income tax benefit of $1,967) ..................... -- -- -- (2,950)
--------- --------- --------- ---------
Net income ....................................................... $ 20,069 $ 11,892 $ 29,817 $ 16,083
========= ========= ========= =========
Income per common share - Primary:
Income before extraordinary item .......................... $ 0.63 $ 0.41 $ 0.99 $ 0.66
Extraordinary loss on early extinguishment of debt ........ -- -- -- (0.10)
--------- --------- --------- ---------
Net income ....................................................... $ 0.63 $ 0.41 $ 0.99 $ 0.56
========= ========= ========= =========
Income per common share - Fully Diluted:
Income before extraordinary item .......................... $ 0.59 $ 0.41 $ 0.96 $ 0.66
Extraordinary loss on early extinguishment of debt ........ -- -- -- (0.10)
--------- --------- --------- ---------
Net income ....................................................... $ 0.59 $ 0.41 $ 0.96 $ 0.56
========= ========= ========= =========
Weighted average number of common shares outstanding:
Primary ................................................... 31,882 28,726 30,099 28,657
========= ========= ========= =========
Fully Diluted ............................................. 34,715 28,726 31,851 28,657
========= ========= ========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
ended
March 31,
----------------------------
1996 1997
--------- ---------
Cash Flows from Operating Activities
<S> <C> <C>
Net income .............................................................................. $ 29,817 $ 16,083
--------- ---------
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization .................................................... 23,300 26,187
Stock option expense ............................................................. 1,414 1,433
Non-cash interest expense ........................................................ 1,202 882
Gain on sale of assets ........................................................... (503) (3,302)
Extraordinary loss on early extinguishment of debt ............................... -- 4,917
Cash flows from changes in assets and liabilities, net
of effects from sales and acquisitions of businesses:
Accounts receivable, net .................................................. (16,993) (2,474)
Other assets .............................................................. 1,094 (4,214)
Accounts payable and other accrued liabilities ............................ (10,048) (30,981)
Reserve for unpaid claims ................................................. (10,625) (13,694)
Income taxes payable ...................................................... 10,188 4,638
Other liabilities ......................................................... (5,669) (15,154)
Minority interest, net of dividends paid .................................. 4,099 5,219
Other ..................................................................... 121 (1,063)
--------- ---------
Total adjustments .................................................... (2,420) (27,606)
--------- ---------
Net cash provided by (used in) operating activities ............. 27,397 (11,523)
--------- ---------
Cash Flows From Investing Activities
Capital expenditures .................................................................... (12,787) (14,373)
Acquisitions and investments in businesses, net of cash acquired ........................ (47,920) (12,962)
Decrease (increase) in assets restricted for settlement of
unpaid claims ......................................................................... (6,070) 8,626
Proceeds from sale of assets ............................................................ 653 10,386
--------- ---------
Net cash used in investing activities .......................... (66,124) (8,323)
--------- ---------
Cash Flows From Financing Activities
Proceeds from issuance of debt, net of issuance costs ................................... 68,125 126,825
Payments on debt and capital lease obligations .......................................... (80,037) (117,521)
Proceeds from issuance of common stock, net of issuance costs ........................... 68,669 --
Proceeds from exercise of stock options and warrants .................................... 1,808 3,842
Income tax payments made on behalf of stock optionees ................................... (1,678) --
--------- ---------
Net cash provided by financing activities ....................... 56,887 13,146
--------- ---------
Net increase (decrease) in cash and cash equivalents ........................................... 18,160 (6,700)
Cash and cash equivalents at beginning of period ............................................... 105,514 120,945
--------- ---------
Cash and cash equivalents at end of period ..................................................... $ 123,674 $ 114,245
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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, 1996, included in the Company's Annual Report on Form 10-K, as amended.
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 business is also
subject to general economic conditions and other factors. Accordingly, the
results of operations for the interim periods are not necessarily indicative of
the actual results expected for the year.
NOTE C - Supplemental Cash Flow Information
Below is supplemental cash flow information related to the six months
ended March 31, 1996 and 1997:
<TABLE>
<CAPTION>
For the Six Months ended
March 31,
1996 1997
------- -------
(In thousands)
<S> <C> <C>
Income taxes paid, net of refunds received ..................................... $ 2,698 $ 9,064
Interest paid, net of amounts capitalized ...................................... 28,080 28,704
Notes payable assumed in connection with acquisitions of businesses ............ 12,100 --
</TABLE>
5
<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, 1996 and March 31, 1997 is as follows:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
------------ ----------
(In thousands)
<S> <C> <C>
Revolving Credit Agreement due through 2001
(6.9375% at March 31, 1997) .......................................... $105,593 $121,000
11.25% Senior Subordinated Notes due 2004 ................................... 375,000 375,000
6.56% to 10.75% Mortgage and other notes
payable through 1999 ................................................. 12,163 11,725
Variable rate secured notes due through 2013
(3.4% to 3.6% at March 31, 1997)...................................... 60,875 60,425
7.5% Swiss Bonds ............................................................ 6,443 6,443
3.6% to 15.8% capital lease obligations due through 2014 .................... 12,333 12,094
-------- --------
572,407 586,687
Less amounts due within one year ..................................... 5,751 5,845
Less debt service funds .............................................. 349 306
-------- --------
$566,307 $580,536
======== ========
</TABLE>
On October 28, 1996, the Company entered into a new Credit Agreement with
certain financial institutions for a five-year senior secured reducing revolving
credit facility in an aggregate committed amount of $400 million (the "New
Revolving Credit Agreement"). The Company borrowed approximately $121.0 million
under the New Revolving Credit Agreement in October 1996 to (i) pay-off the
existing borrowings outstanding under the previous Revolving Credit Agreement
that was terminated and (ii) pay for fees and expenses related to the New
Revolving Credit Agreement.
The loans outstanding under the New Revolving Credit Agreement bear
interest (subject to certain potential adjustments) at a rate per annum equal to
one, two, three or six-month LIBOR plus 1.25% or the Prime Lending Rate.
Interest on Prime Lending Rate Loans is payable at the end of each fiscal
quarter and upon conversion to a LIBOR based loan. Interest on LIBOR based loans
is payable at the end of their respective one, two, three or six-month terms.
The Company recorded an extraordinary loss from the early extinguishment
of debt of approximately $3.0 million, net of tax, during the quarter ended
December 31, 1996 to write off unamortized deferred financing costs related to
its previous Revolving Credit Agreement.
NOTE E - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
------------ ---------
<S> <C> <C>
Salaries and wages ............................... $ 39,841 $ 35,949
Amounts due health insurance programs ............ 27,223 13,743
Medical claims payable ........................... 26,552 31,032
Interest ......................................... 20,348 20,312
Other ............................................ 75,635 64,322
-------- --------
$189,599 $165,358
======== ========
</TABLE>
6
<PAGE>
NOTE F - Unusual Items
Facility Closures
During fiscal 1996, the Company consolidated, closed or sold nine
psychiatric facilities (the "1996 Closed Facilities"). The 1996 Closed
Facilities that are still owned by the Company will be sold, leased or used for
alternative purposes depending on the market conditions in each geographic area.
The Company recorded charges of approximately $4.1 million related to facility
closures in fiscal 1996.
Severance and benefits related to the 1996 Closed Facilities were fully
paid as of December 31, 1996. Other exit costs paid and applied against the
resulting liabilities recorded during fiscal 1996 were approximately $81,000 and
$250,000 during the quarter and the six months ended March 31, 1997,
respectively.
During the second quarter of fiscal 1997, the Company consolidated or
closed three psychiatric facilities and its one general hospital (the "1997
Closed Facilities"). The 1997 Closed Facilities which are owned by the Company
are expected to be sold as part of the Crescent Transactions, as hereinafter
defined. The Company recorded charges of approximately $4.2 million related to
facility closures in the second quarter of fiscal 1997, which consisted of
approximately $3.0 million for severance and related benefits and $1.2 million
for contract terminations and other costs.
Approximately 700 employees were terminated at the 1997 Closed Facilities.
Severance and related benefits paid and applied against the resulting liability
were approximately $2.3 million during the quarter ended March 31, 1997. Other
exit costs paid and applied against the resulting liability were approximately
$280,000.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expenses and depreciation and amortization of
the 1996 Closed Facilities and the 1997 Closed Facilities (in thousands):
<TABLE>
<CAPTION>
Quarter Ended March 31, Six Months Ended March 31,
1996 1997 1996 1997
----------------------- --------------------------
<S> <C> <C> <C> <C>
Net Revenue .....................................$26,722 $ 7,687 $51,635 $18,666
Salaries, supplies and other operating
expenses and bad debt expenses ........... 27,082 8,736 52,222 21,219
Depreciation and Amortization ................... 551 91 1,103 272
</TABLE>
The Company recorded a charge of approximately $2.0 million in the fourth
quarter of fiscal 1996 related to severance and related benefits for employees
who were terminated pursuant to planned overhead reductions. Substantially all
of such severance and benefits was paid as of December 31, 1996.
Facility Sales
The Company sold two psychiatric facilities during the quarter ended March
31, 1997 that were closed during fiscal 1995. The Company received approximately
$5.6 million in proceeds from the sales and recorded an aggregate gain on such
sales of approximately $2.8 million during the quarter ended March 31, 1997.
NOTE G - Income per Common Share
Primary income per common share equals net income divided by the weighted
average number of shares outstanding, after giving effect to dilutive common
stock equivalents. Fully diluted income per common share gives effect to
dilutive common stock equivalents and other potentially dilutive securities.
7
<PAGE>
The minority stockholders of Green Spring Health Services, Inc. ("Green
Spring"), the Company's 61% owned managed care subsidiary, have the option,
under certain circumstances, to exchange their ownership interests ("Exchange
Option") 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.
The Exchange Option is classified as a potentially dilutive security for the
purpose of computing fully diluted income per common share. A reconciliation of
the calculation of fully diluted income per common share for the three months
and the six months ended March 31, 1996, assuming conversion of the Exchange
Option as of the beginning of the periods presented or December 13, 1995,
whichever date is later, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, 1996 March 31, 1996
------------------ -----------------
(in thousands)
<S> <C> <C>
Net income ................................................................ $ 20,069 $ 29,817
Adjustments for the assumed conversion of the Exchange Option:
Minority interest .................................................. 811 1,082
Amortization ....................................................... (276) (341)
-------- --------
Adjusted net income - Fully diluted income per share ...................... $ 20,604 $ 30,558
======== ========
Three Months Ended Six Months Ended
March 31, 1996 March 31, 1996
-----------------------------------------
(in thousands, except per share data)
Weighted average number of common shares outstanding
for fully diluted income per share, excluding the assumed
conversion of the Exchange Option .................................... 31,883 30,137
Assumed conversion of the Exchange Option ................................. 2,832 1,714
------ ------
Weighted average number of common shares outstanding -
Fully diluted ........................................................ 34,715 31,851
====== ======
Fully diluted income per common share ..................................... $ 0.59 $ 0.96
====== ======
</TABLE>
Common stock equivalents were less than 3% dilutive and the Exchange
Option was anti-dilutive for the three months and the six months ended March 31,
1997. Accordingly, primary and fully diluted income per common share were
computed excluding common stock equivalents and the Exchange Option for the
three months and the six months ended March 31, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings per Share" ("FAS 128"), which is more fully
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Accounting Pronouncements". The Company is
required to adopt FAS 128 in the first quarter of fiscal 1998. Income per common
share under FAS 128, if applied to the three months and the six months ended
March 31, 1996 and 1997, is as follows:
8
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended March 31, Ended March 31,
---------------------------- ---------------------------
1996 1997 1996 1997
---------- ----------- ---------- -----------
(in thousands, expept per share data)
<S> <C> <C> <C> <C>
Income per common share - Basic
Income before extraordinary item ........................... $ 0.64 $ 0.41 $ 1.01 $ 0.66
Extraordinary loss on early extinguishment of debt ......... -- -- -- (0.10)
---------- ---------- ---------- ----------
Net Income ........................................................ $ 0.64 $ 0.41 $ 1.01 $ 0.56
========== ========== ========== ==========
Income per common share - Diluted
Income before extraordinary item ........................... $ 0.59 $ 0.41 $ 0.96 $ 0.65
Extraordinary loss on early extinguishment of debt ......... -- -- -- (0.10)
---------- ---------- ---------- ----------
Net Income ........................................................ $ 0.59 $ 0.41 $ 0.96 $ 0.55
========== ========== ========== ==========
Weighted average number of common shares outstanding:
Basic ...................................................... 31,247 28,726 29,612 28,657
========== ========== ========== ==========
Diluted .................................................... 34,714 29,343 31,813 29,155
========== ========== ========== ==========
A reconciliation of the calculation of Diluted income per common share is as follows:
For the Three Months For the Six Months
Ended March 31, Ended March 31,
---------------------------- -------------------------
1996 1997 1996 1997
---------- ------------ ---------- ----------
(in thousands, except per share data)
Income before extraordinary item .................................. $ 20,069 $ 11,892 $ 29,817 $ 19,033
Adjustments for the assumed conversion of the Exchange Option:
Minority interest .......................................... 811 -- 1,082 --
Amortization ............................................... (276) -- (341) --
-------- -------- -------- --------
Adjusted income before extraordinary item - Diluted ............... 20,604 11,892 30,558 19,033
Extraordinary loss on early extinguishment of debt ......... -- -- -- (2,950)
-------- -------- -------- --------
Adjusted net income - Diluted ..................................... $ 20,604 $ 11,892 $ 30,558 $ 16,083
======== ======== ======== ========
Weighted average number of common shares outstanding - Diluted:
Basic ...................................................... 31,247 28,726 29,612 28,657
Common stock equivalents ................................... 635 617 487 498
Assumed conversion of the Exchange Option .................. 2,832 -- 1,714 --
-------- -------- -------- --------
34,714 29,343 31,813 29,155
======== ======== ======== ========
Income per common share - Diluted
Income before extraordinary item ........................... $ 0.59 $ 0.41 $ 0.96 $ 0.65
Extraordinary loss on early extinguishment of debt ......... -- -- -- (0.10)
-------- -------- -------- --------
Net Income ........................................................ $ 0.59 $ 0.41 $ 0.96 $ 0.55
======== ======== ======== ========
</TABLE>
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 reserve for unpaid claims is adjusted periodically
as such claims mature, to reflect changes in actuarial estimates based on actual
experience. The Company recorded reductions of expenses of approximately $7.5
million and $5.0 million during the quarter and the six months ended March 31,
1996 and 1997, respectively. These reductions resulted primarily from
updates to actuarial assumptions regarding the Company's
9
<PAGE>
expected losses for more recent policy years. These revisions are based on
changes in expected values of ultimate losses resulting from the Company's claim
experience, and increased reliance on such claim experience. While management
and its actuaries believe that the present reserve is reasonable, ultimate
settlement of losses may vary from the amount provided.
The Company and certain of its subsidiaries are subject 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.
On August 1, 1996, the United States Department of Justice, Civil
Division, filed its First Amended Complaint in a civil qui tam action initiated
in November of 1994 against the Company and its Orlando South hospital
subsidiary ("Charter Orlando") by two former employees. The First Amended
Complaint alleges that Charter Orlando violated the civil False Claims Act (the
"Act") in billing for inpatient treatment provided to elderly patients. The
Court granted the Company's motion to dismiss the government's First Amended
Complaint yet granted the government leave to its First Amended Complaint. The
government filed a Second Amended Complaint on December 12, 1996 which, similar
to the First Amended Complaint alleges that the Company and its subsidiary
violated the Act in billing for the treatment of geriatric patients. Like the
First Amended Complaint, the Second 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,therefore, have filed a
motion to dismiss the Second Amended Complaint. The Company and its subsidiary
deny the allegations made in the Second Amended Complaint and will vigorously
defend against its claims. The Company does not believe this matter will have a
material adverse effect on its financial position or results of operations.
10
<PAGE>
<TABLE>
<CAPTION>
NOTE I - Guarantor Condensed Consolidating Financial Statements
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, 1996
-----------------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
ASSETS Subsidiaries Subsidiaries Corporation)
------------ ------------ --------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents .......................................... $ 29,751 $ 79,552 $ 11,642
Accounts receivable, net ........................................... 139,523 44,904 5,451
Supplies ........................................................... 4,091 394 268
Other current assets ............................................... 8,379 121 14,074
----------- ----------- -----------
Total Current Assets ............................... 181,744 124,971 31,435
Assets restricted for settlement of unpaid claims and
other long-term liabilities ........................................ -- 78,542 26,761
Property and Equipment
Land ............................................................... 74,790 6,657 1,984
Buildings and improvements ......................................... 350,187 33,493 5,141
Equipment .......................................................... 112,748 25,206 8,961
----------- ----------- -----------
537,725 65,356 16,086
Accumulated depreciation ........................................... (111,556) (10,313) (4,184)
Construction in progress ........................................... 1,586 621 69
----------- ----------- -----------
427,755 55,664 11,971
Other Long-Term Assets (1) ................................................ 92,978 (78,517) 1,172,069
Goodwill, net ............................................................. 20,645 94,682 12,685
Other Intangible Assets, net .............................................. 5,213 22,341 14,973
----------- ----------- -----------
$ 728,335 $ 297,683 $ 1,269,894
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................... $ 32,644 $ 34,057 $ 12,265
Accrued liabilities and income tax payable ......................... 57,948 55,208 76,443
Current maturities of long-term debt and capital lease obligations . 2,620 3,131 --
----------- ----------- -----------
Total Current Liabilities .......................... 93,212 92,396 88,708
Long-Term Debt and Capital Lease Obligations .............................. (455,333) 8,815 1,012,825
Deferred Income Tax Liabilities .......................................... -- (4,252) 16,620
Reserve for Unpaid Claims ................................................. -- 72,494 546
Deferred Credits and Other Long-Term Liabilities(1) ....................... 352,044 43,565 29,378
Minority interest ......................................................... -- -- --
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,007 shares ............................ 2,764 (483) 8,252
Committments and contingencies
Other Stockholders' Equity
Additional paid-in capital ......................................... 609,627 30,237 327,681
Retained earnings (Accumulated deficit) ............................ 126,826 58,932 (129,457)
Warrants outstanding ............................................... -- -- 54
Common Stock in treasury, 4,424 shares ............................. -- (4,736) (82,731)
Cumulative foreign currency adjustments ............................ (805) 715 (1,982)
----------- ----------- -----------
738,412 84,665 121,817
----------- ----------- -----------
$ 728,335 $ 297,683 $ 1,269,894
=========== =========== ===========
Consolidated
Elimination Consolidated
Entries Total
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents .......................................... $ -- $ 120,945
Accounts receivable, net ........................................... -- 189,878
Supplies ........................................................... -- 4,753
Other current assets ............................................... -- 22,574
----------- -----------
Total Current Assets ............................... -- 338,150
Assets restricted for settlement of unpaid claims and
other long-term liabilities ........................................ -- 105,303
Property and Equipment
Land ............................................................... -- 83,431
Buildings and improvements ......................................... -- 388,821
Equipment .......................................................... -- 146,915
----------- -----------
-- 619,167
Accumulated depreciation ........................................... -- (126,053
Construction in progress ........................................... -- 2,276
----------- -----------
-- 495,390
Other Long-Term Assets (1) ................................................ (1,155,775) 30,755
Goodwill, net ............................................................. -- 128,012
Other Intangible Assets, net .............................................. -- 42,527
----------- -----------
$(1,155,775) $ 1,140,137
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................... $ -- $ 78,966
Accrued liabilities and income tax payable ......................... -- 189,599
Current maturities of long-term debt and capital lease obligations . -- 5,751
----------- -----------
Total Current Liabilities .......................... -- 274,316
Long-Term Debt and Capital Lease Obligations .............................. -- 566,307
Deferred Income Tax Liabilities .......................................... -- 12,368
Reserve for Unpaid Claims ................................................. -- 73,040
Deferred Credits and Other Long-Term Liabilities(1) ....................... (385,218) 39,769
Minority interest ......................................................... 52,520 52,520
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,007 shares ............................ (2,281) 8,252
Committments and contingencies
Other Stockholders' Equity
Additional paid-in capital ......................................... (639,864) 327,681
Retained earnings (Accumulated deficit) ............................ (185,758) (129,457
Warrants outstanding ............................................... -- 54
Common Stock in treasury, 4,424 shares ............................. 4,736 (82,731
Cumulative foreign currency adjustments ............................ 90 (1,982
----------- -----------
(823,077) 121,817
----------- -----------
$(1,155,775) $ 1,140,137
=========== ===========
</TABLE>
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
The accompanying Notes to Condensed Consolidating Financial Statements are
an integral part of these balance sheets.
11
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31, 1997
------------------------------------------
Guarantor Nonguarantor Consolidated
ASSETS Subsidiaries Subsidiaries Total
------------ ------------ ------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents .......................................... $ 30,800 $ 68,617 $ 14,828
Accounts receivable, net ........................................... 135,926 50,253 6,215
Supplies ........................................................... 3,838 330 297
Other current assets ............................................... 6,730 3,076 15,493
----------- ----------- -----------
Total Current Assets ............................... 177,294 122,276 36,833
Assets restricted for settlement of unpaid claims
and other long-term liabilities .................................... -- 76,153 20,249
Property and Equipment
Land ............................................................... 76,306 5,385 1,014
Buildings and improvements ......................................... 357,052 31,121 5,641
Equipment .......................................................... 117,227 28,338 9,266
----------- ----------- -----------
550,585 64,844 15,921
Accumulated depreciation ........................................... (125,090) (13,573) (5,061)
Construction in progress ........................................... 2,069 1,666 --
----------- ----------- -----------
427,564 52,937 10,860
Other Long-Term Assets (1) ................................................ 74,036 5,277 1,170,107
Goodwill, net ............................................................. 19,688 93,123 12,518
Other Intangible Assets, net .............................................. 4,332 23,050 13,384
----------- ----------- -----------
$ 702,914 $ 372,816 $ 1,263,951
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................... $ 44,583 $ 18,162 $ 7,175
Accrued liabilities ................................................ 48,591 62,620 54,147
Current maturities of long-term debt and capital lease obligations . 2,715 3,130 --
----------- ----------- -----------
Total Current Liabilities .......................... 95,889 83,912 61,322
Long-Term Debt and Capital Lease Obligations .............................. (497,042) 7,654 1,069,924
Deferred Income Tax Liabilities ........................................... -- (4,307) 19,602
Reserve for Unpaid Claims ................................................. -- 69,647 (7,331)
Deferred Credits and Other Long-Term Liabilities (1) ...................... 379,347 43,911 (21,774)
Minority interest ......................................................... -- -- --
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,221 shares ............................. 2,756 (483) 8,307
Commitments and contingencies
Other Stockholders' Equity
Additional paid-in capital ......................................... 723,068 130,809 332,905
Retained earnings (Accumulated deficit) ............................ (1,721) 44,039 (113,374)
Warrants outstanding ............................................... -- -- 50
Common stock in Treasury, 4,424 shares ............................. -- -- (82,731)
Cumulative foreign currency adjustments ............................ 617 (2,366) (2,949)
----------- ----------- -----------
724,720 171,999 142,208
----------- ----------- -----------
$ 702,914 $ 372,816 $ 1,263,951
=========== =========== ===========
Magellan
Health
Services, Inc. Consolidated
(Parent Elimination
Corporation) Entries
-------------- --------------
ASSETS
Current Assets
Cash and cash equivalents .......................................... $ -- $ 114,245
Accounts receivable, net ........................................... -- 192,394
Supplies ........................................................... -- 4,465
Other current assets ............................................... -- 25,299
----------- -----------
-- 336,403
Total Current Assets ...............................
Assets restricted for settlement of unpaid claims -- 96,402
and other long-term liabilities ....................................
Property and Equipment -- 82,705
Land ............................................................... -- 393,814
Buildings and improvements ......................................... -- 154,831
Equipment .......................................................... ----------- -----------
-- 631,350
-- (143,724)
-- 3,735
Accumulated depreciation ........................................... ----------- -----------
Construction in progress ...........................................
-- 491,361
(1,217,294) 32,126
-- 125,329
Other Long-Term Assets (1) ................................................ -- 40,766
Goodwill, net ............................................................. ----------- -----------
Other Intangible Assets, net .............................................. $(1,217,294) $ 1,122,387
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY $ -- $ 69,920
Current Liabilities -- 165,358
Accounts payable ................................................... -- 5,845
Accrued liabilities ................................................ ----------- -----------
Current maturities of long-term debt and capital lease obligations .
-- 241,123
-- 580,536
Total Current Liabilities .......................... -- 15,295
Long-Term Debt and Capital Lease Obligations .............................. -- 62,316
Deferred Income Tax Liabilities ........................................... (377,273) 24,211
Reserve for Unpaid Claims ................................................. 56,698 56,698
Deferred Credits and Other Long-Term Liabilities (1) ......................
Minority interest .........................................................
Stockholders' Equity (2,273) 8,307
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,221 shares .............................
Commitments and contingencies (853,877) 332,905
Other Stockholders' Equity (42,318) (113,374)
Additional paid-in capital ......................................... -- 50
Retained earnings (Accumulated deficit) ............................ -- (82,731)
Warrants outstanding ............................................... 1,749 (2,949)
Common stock in Treasury, 4,424 shares ............................. ----------- -----------
Cumulative foreign currency adjustments ............................ (896,719) 142,208
----------- -----------
$(1,217,294) $ 1,122,387
=========== ===========
</TABLE>
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
The accompanying Notes to Condensed Consolidating Financial Statements are
an integral part of these balance sheets.
12
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Three Months ended March 31, 1996
-------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------ ------------ -------------
<S> <C> <C> <C>
Net revenue ....................................................... $ 264,824 $ 95,161 $ (220)
Costs and expenses
Salaries, supplies and other operating expenses ........... 198,177 84,731 (3,078)
Bad debt expense ........................................... 21,074 1,319 226
Depreciation and amortization .............................. 9,283 3,647 190
Interest, net .............................................. (10,286) (348) 19,206
Stock option expense (credit) .............................. -- -- (409)
--------- --------- ---------
218,248 89,349 16,135
--------- --------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ....................... 46,576 5,812 (16,355)
Provision for income taxes ....................................... 688 1,414 (61)
--------- --------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries .... 45,888 4,398 (16,294)
Equity in earnings (loss) of subsidiaries ......................... 79 (844) 36,363
--------- --------- ---------
Net income (loss) ................................................. $ 45,967 $ 3,554 $ 20,069
========= ========= =========
Consolidated
Elimination Consolidated
Entries Total
------------ ------------
Net revenue ....................................................... $ (4,812) $ 354,953
Costs and expenses
Salaries, supplies and other operating expenses ........... (4,812) 275,018
Bad debt expense ........................................... -- 22,619
Depreciation and amortization .............................. -- 13,120
Interest, net .............................................. -- 8,572
Stock option expense (credit) .............................. -- (409)
--------- ---------
(4,812) 318,920
--------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ....................... -- 36,033
Provision for income taxes ....................................... 12,372 14,413
--------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries .... (12,372) 21,620
Equity in earnings (loss) of subsidiaries ......................... (37,149) (1,551)
--------- ---------
Net income (loss) ................................................. $ (49,521) $ 20,069
========= =========
For the Three Months ended March 31, 1997
-------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------ ------------- ---------------
Net revenue ...................................................... $ 243,746 $ 112,611 $ (5,735)
Costs and expenses
Salaries, supplies and other operating expenses .......... 184,458 90,018 8,434
Bad debt expense .......................................... 14,062 1,078 --
Depreciation and amortization ............................. 8,145 3,723 1,220
Interest, net ............................................. (13,056) (552) 26,761
Stock option expense ...................................... -- -- 829
Unusual items ............................................. 1,395 -- --
--------- --------- ---------
195,004 94,267 37,244
--------- --------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ...................... 48,742 18,344 (42,979)
Provision for income taxes ...................................... 203 3,331 6,109
--------- --------- ---------
Income (loss) from continuing operations before
equity in earnings (loss) of subsidiaries ...................... 48,539 15,013 (49,088)
Equity in earnings (loss) of continuing subsidiaries ............. (305) (2,138) 60,980
--------- --------- ---------
Net income (loss) ................................................ $ 48,234 $ 12,875 $ 11,892
========= ========= =========
Consolidated
Elimination Consolidated
Entries Total
------------ ------------
Net revenue ...................................................... $ (700) $ 349,922
Costs and expenses
Salaries, supplies and other operating expenses .......... (700) 282,210
Bad debt expense .......................................... -- 15,140
Depreciation and amortization ............................. -- 13,088
Interest, net ............................................. -- 13,153
Stock option expense ...................................... -- 829
Unusual items ............................................. -- 1,395
--------- ---------
(700) 325,815
--------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ...................... -- 24,107
Provision for income taxes ...................................... -- 9,643
--------- ---------
Income (loss) from continuing operations before
equity in earnings (loss) of subsidiaries ...................... -- 14,464
Equity in earnings (loss) of continuing subsidiaries ............. (61,109) (2,572)
--------- ---------
Net income (loss) ................................................ $ (61,109) $ 11,892
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements are an
integral part of these statements.
13
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Six Months ended March 31, 1996
----------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------ ------------ --------------
<S> <C> <C> <C>
Net revenue ............................................................ $ 512,578 $ 139,689 $ 7,627
Costs and expenses
Salaries, supplies and other operating expenses ................. 392,023 122,091 1,506
Bad debt expense ................................................ 41,038 1,988 (619)
Depreciation and amortization ................................... 18,028 4,903 369
Interest, net ................................................... (20,386) (268) 43,048
Stock option expense ............................................ -- -- 1,414
--------- --------- ---------
430,703 128,714 45,718
--------- --------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ............................ 81,875 10,975 (38,091)
Provision for income taxes ............................................. 1,341 2,046 208
--------- --------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries ......... 80,534 8,929 (38,299)
Equity in earnings (loss) of subsidiaries .............................. 368 (1,145) 54,438
========= ========= =========
Net income (loss) ...................................................... $ 80,902 $ 7,784 $ 16,139
========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities ........................ $ 14,420 $ 17,954 $ (4,977)
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................................ (12,043) (356) (388)
Proceeds from sale of assets .................................... 653 -- --
Acquisitions and investments in businesses, net of cash acquired (256) 38,226 (85,890)
Increase in assets restricted for the settlement of unpaid claims (7,615) 1,545 --
--------- --------- ---------
Cash provided by (used in) investing activities ........................ (11,646) 30,255 (84,733)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt .............................. -- 125 68,000
Payments on debt and capital obligations ........................ (11,566) (471) (68,000)
Proceeds from issuance of Common Stock, net of issuance costs ... -- -- 68,669
Income tax payments made on behalf of stock optionees ........... -- -- (1,678)
Proceeds from exercise of stock option and warrants ............. -- -- 1,808
-------- --------- ---------
Cash provided by (used in) financing activities ........................ (11,566) (346) 68,799
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................... (8,792) 47,863 (20,911)
Cash and cash equivalents at beginning of period ....................... 60,719 10,279 34,516
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 51,927 $ 58,142 $ 13,605
========= ========= =========
Consolidated
Elimination Consolidated
Entries Total
------------ -----------
Net revenue ............................................................ $ (9,276) $ 650,618
Costs and expenses
Salaries, supplies and other operating expenses ................. (9,276) 506,344
Bad debt expense ................................................ -- 42,407
Depreciation and amortization ................................... -- 23,300
Interest, net ................................................... -- 22,394
Stock option expense ............................................ -- 1,414
--------- ---------
(9,276) 595,859
--------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ............................ -- 54,759
Provision for income taxes ............................................. 18,777 22,372
--------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries ......... (18,777) 32,387
Equity in earnings (loss) of subsidiaries .............................. (56,231) (2,570)
========= =========
Net income (loss) ...................................................... $ (75,008) $ 29,817
========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities ........................ $ -- $ 27,397
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................................ -- (12,787)
Proceeds from sale of assets .................................... -- 653
Acquisitions and investments in businesses, net of cash acquired -- (47,920)
Increase in assets restricted for the settlement of unpaid claims (6,070)
--------- ---------
Cash provided by (used in) investing activities ........................ -- (66,124)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt .............................. -- 68,125
Payments on debt and capital obligations ........................ -- (80,037)
Proceeds from issuance of Common Stock, net of issuance costs ... -- 68,669
Income tax payments made on behalf of stock optionees ........... -- (1,678)
Proceeds from exercise of stock option and warrants ............. -- 1,808
--------- ---------
Cash provided by (used in) financing activities ........................ -- 56,887
--------- ---------
Net increase (decrease) in cash and cash equivalents ................... -- 18,160
Cash and cash equivalents at beginning of period ....................... -- 105,514
--------- ---------
Cash and cash equivalents at end of period ............................. $ -- $ 123,674
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements are an
integral part of these statements.
14
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Six Months ended March 31, 1997
-----------------------------------------
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------ ------------ --------------
<S> <C> <C> <C>
Net revenue ............................................................................ $ 467,268 $ 225,202 $ 4,971
Costs and expenses
Salaries, supplies and other operating expenses ................................ 361,784 190,278 14,971
Bad debt expense ................................................................ 33,086 7,473 1,952
Interest, net ................................................................... (25,162) (995) 52,879
Stock option expense (credit) ................................................... -- -- 1,433
Unusual Items ................................................................... 1,395 -- --
--------- --------- ---------
387,865 199,045 71,235
--------- --------- ---------
Income (loss) before income taxes, equity in earnings
(loss) of subsidiaries and extraordinary item ....................................... 79,403 26,157 (66,264)
Provision for income taxes ............................................................. 1,034 6,186 8,498
--------- --------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries
and extraordinary item .............................................................. 78,369 19,971 (74,762)
Equity in earnings (loss) of continuing subsidiaries before extraordinary item ......... (358) (3,980) 93,795
--------- --------- ---------
Income (loss) before extraordinary item ................................................ 78,011 15,991 19,033
Extraordinary item - loss on early extinguishment of debt (net of
income tax benefit of $1,967) ........................................................ (1,193) -- (2,950)
--------- --------- ---------
Net income (loss) ...................................................................... $ 76,818 $ 15,991 $ 16,083
========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities ........................................ $ 4,185 $ 677 $ (16,385)
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................................................ (8,170) (5,868) (335)
Acquisitions and investments in businesses, net of cash acquired ................ (4,944) (7,614) (404)
Decrease (increase) in assets restricted for the settlement of unpaid claims .... -- 2,389 6,237
Proceeds from the sale of assets ................................................ 10,386 -- --
--------- --------- ---------
Cash provided by (used in) investing activities ........................................ (2,728) (11,093) 5,498
--------- --------- ---------
Cash Flows from Financing Activities:
Payments on debt and capital lease obligations .................................. (72,024) (519) (44,978)
Proceeds from the issuance of debt .............................................. 71,616 -- 55,209
Proceeds from exercise of stock options and warrants ............................ -- -- 3,842
--------- --------- ---------
Cash provided by (used in) financing activities ........................................ (408) (519) 14,073
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................................... 1,049 (10,935) 3,186
Cash and cash equivalents at beginning of period ....................................... 29,751 79,552 11,642
--------- --------- ---------
Cash and cash equivalents at end of period ............................................. $ 30,800 $ 68,617 $ 14,828
========= ========= =========
Consolidated
Elimination Consolidated
Entries Total
------------ ------------
Net revenue ............................................................................ $ (700) $ 696,741
Costs and expenses
Salaries, supplies and other operating expenses ................................ (700) 566,333
Bad debt expense ................................................................ -- 26,187
Interest, net ................................................................... -- 26,722
Stock option expense (credit) ................................................... -- 1,433
Unusual Items ................................................................... -- 1,395
--------- ---------
(700) 657,445
--------- ---------
Income (loss) before income taxes, equity in earnings
(loss) of subsidiaries and extraordinary item ....................................... -- 39,296
Provision for income taxes ............................................................. -- 15,718
--------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries
and extraordinary item .............................................................. -- 23,578
Equity in earnings (loss) of continuing subsidiaries before extraordinary item ......... (94,002) (4,545)
--------- ---------
Income (loss) before extraordinary item ................................................ (94,002) 19,033
Extraordinary item - loss on early extinguishment of debt (net of
income tax benefit of $1,967) ........................................................ 1,193 (2,950)
--------- ---------
Net income (loss) ...................................................................... $ (92,809) $ 16,083
========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities ........................................ $ -- $ (11,523)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................................................ -- (14,373)
Acquisitions and investments in businesses, net of cash acquired ................ -- (12,962)
Decrease (increase) in assets restricted for the settlement of unpaid claims .... -- 8,626
Proceeds from the sale of assets ................................................ -- 10,386
--------- ---------
Cash provided by (used in) investing activities ........................................ -- (8,323)
--------- ---------
Cash Flows from Financing Activities:
Payments on debt and capital lease obligations .................................. -- (117,521)
Proceeds from the issuance of debt .............................................. -- 126,825
Proceeds from exercise of stock options and warrants ............................ -- 3,842
--------- ---------
Cash provided by (used in) financing activities ........................................ -- 13,146
--------- ---------
Net increase (decrease) in cash and cash equivalents ................................... -- (6,700)
Cash and cash equivalents at beginning of period ....................................... -- 120,945
--------- ---------
Cash and cash equivalents at end of period ............................................. $ -- $ 114,245
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements are an
integral part of these statements
15
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
March 31, 1997
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".
Actual results may differ materially from those projected in such
forward-looking statements. 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.
Green Spring 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 Magellan 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 ("Exchange Option") for a portion of the stockholder's
interest in Green Spring. Green Spring provides managed behavioral healthcare
services, which includes utilization management, care management and employee
assistance programs through a 50-state provider network covering approximately
15.5 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 $113 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 March 31, 1997, the
minority stockholders of Green Spring have the Exchange Option, under certain
circumstances, to exchange their ownership interest 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 1996 and fiscal
1997 are as follows:
16
<PAGE>
<TABLE>
<CAPTION>
Fiscal Fiscal %
1996 1997 Change
---------- ---------- -----------
<S> <C> <C> <C>
Hospitals in operation:
December 31 ................................. 102 95 (7)%
March 31 .................................... 99 93 (6)
June 30 ..................................... 96
September 30 ................................ 95
Average licensed beds at:
Quarter:
First .................................. 9,110 8,463 (7)%
Second ................................. 9,040 8,468 (6)
Third .................................. 8,677
Fourth ................................. 8,469
Year ........................................ 8,805
Net revenue (in thousands):
Quarter:
First .................................. $ 253,565 $ 229,064 (10)%
Second ................................. 257,690 225,494 (12)
Third .................................. 249,145
Fourth ................................. 228,597
----------
Year ........................................ $ 988,997
==========
Patient days:
Quarter:
First .................................. 432,474 392,352 (9)%
Second ................................. 463,327 402,929 (13)
Third .................................. 452,864
Fourth ................................. 404,346
----------
Year ........................................ 1,753,011
==========
Equivalent patient days:
Quarter:
First .................................. 478,693 437,960 (9)%
Second ................................. 513,502 447,551 (13)
Third .................................. 503,622
Fourth ................................. 450,708
----------
Year ........................................ 1,946,525
==========
Net revenue per equivalent patient day:
Quarter:
First .................................. $ 530 $ 523 (1)%
Second ................................. 502 504 --
Third .................................. 495
Fourth ................................. 507
Year ........................................ 508
Admissions:
Quarter:
First .................................. 32,865 32,326 (2)%
Second ................................. 37,966 34,643 (9)
Third .................................. 35,854
Fourth ................................. 33,861
----------
Year ........................................ 140,546
==========
Average length of stay (days):
Quarter:
First .................................. 12.4 11.5 (7)%
Second ................................. 12.2 11.1 (9)
Third .................................. 12.5
Fourth ................................. 12.5
Year ........................................ 12.4
</TABLE>
Note: Includes Northstar Hospital in Anchorage, Alaska that is managed pursuant
to a joint venture arrangement.
17
<PAGE>
Results of Operations
The following table summarizes, for the periods indicated, changes in
selected operating indicators.
<TABLE>
<CAPTION>
Percentage of Net Revenue
-------------------------------------------------------------
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- ---------------------------
1996 1997 1996 1997
------------ --------- ---------------------------
<S> <C> <C> <C> <C>
Net revenue ............................................... 100.0% 100.0% 100.0% 100.0%
Salaries, supplies and other operating expenses ........... 77.5 80.7 77.8 81.3
Bad debt expense .......................................... 6.4 4.3 6.5 5.1
------ ----- ----- -----
Total expenses ............................................ 83.9 85.0 84.3 86.4
Operating margin .......................................... 16.1% 15.0% 15.7% 13.6%
====== ===== ===== =====
</TABLE>
Patient days at the Company's hospitals decreased 13.0% and 11.2% for the
quarter and the six months ended March 31, 1997, respectively, as compared to
the same periods of fiscal 1996. The decrease resulted primarily from patient
days attributable to the hospitals closed during fiscal 1996 and 1997 and a
decline in average length of stay. Total admissions decreased 8.8% and 5.5% for
the quarter and the six months ended March 31, 1997, respectively, as compared
to the prior year periods. The decrease resulted primarily from the hospitals
closed in fiscal 1996 and 1997.
The Company's net revenue for the quarter ended March 31, 1997 decreased
1.4% as compared to the prior year quarter. The decrease was primarily
attributable to (i) the closure of hospitals during fiscal 1996 and 1997 and
(ii) reduced equivalent patient days at the Company's operating hospitals,
offset by revenue growth in the company's managed care (Green Spring) and public
sector (Public Solutions) businesses. Green Spring revenues were approximately
$90.6 million and $65.0 million for the quarters ended March 31, 1997 and 1996,
respectively. The 39.4% increase was primarily attributable to Green Spring
obtaining several new contracts, which became effective July 1, 1996 and January
1, 1997, to manage the behavioral healthcare component of certain state medicaid
programs and increases in services to an insurer. Public Solutions revenues were
approximately $22.4 million and $16.2 million for the quarters ended March 31,
1997 and 1996, respectively. The 38.3% increase was primarily attributable to a
44 % increase in placements in mentor homes and $1.4 million in new revenues
from correctional contracts.
The Company's net revenue for the six months ended March 31, 1997 increased
7.1 % as compared to the prior year period. The increase was primarily
attributable to the Green Spring acquisition and related internal growth (as
previously described) offset by (i) the closure of hospitals during fiscal 1996
and fiscal 1997 and (ii) reduced equivalent patient days at the Company's
operating hospitals. Green Spring revenues were approximately $173.5 million and
$79.0 million, for the six months ended March 31, 1997 and 1996, respectively.
The Company's salaries, supplies and other operating expenses increased
2.6% and 11.8% in the quarter and the six months ended March 31, 1997 compared
to the same periods in fiscal 1996. The increases resulted primarily from the
Green Spring acquisition and related internal growth less the effect of
hospitals closed during fiscal 1996 and 1997. Expenses incurred by Green Spring
were approximately $80.4 million and $59.3 million for the quarters ended March
31, 1997 and 1996, respectively, and $154.3 million and $71.4 million for the
six months ended March 31, 1997 and 1996, respectively.
The Company's bad debt expense decreased 33.1% and 16.6% in the quarter and
the six months ended March 31, 1997 compared to the same periods in fiscal 1996.
These decreases are primarily attributable to improvement in accounts receivable
agings and turnover compared to prior periods and shifts towards governmental
and managed
18
<PAGE>
care payers, which reduces the Company's credit risk associated with individual
patients. Bad debt expense decreased to 4.3% and 5.1% of revenue for the quarter
and the six months ended March 31, 1997, respectively. These decreases are
primarily attributable to lower bad debt expense in the provider business and
bad debt expense representing less than 1% of Green Spring revenues for the
periods presented.
Depreciation and amortization decreased 0.2% and increased 12.4% in the
quarter and the six months ended March 31, 1997 compared to the same periods in
fiscal 1996. The increase for the six months ended March 31, 1997 resulted
primarily from depreciation and amortization related to the Green Spring
Acquisition .
Interest expense, net, increased $4.6 million and $4.3 million for the
quarter and the six months ended March 31, 1997 compared to the same periods in
fiscal 1996. These increases resulted primarily from approximately $5.0 million
of interest income recorded during the quarter and the six months ended March
31, 1996 related to income tax refunds due from the State of California for the
Company's income tax returns for fiscal 1982 through 1989.
Stock option expense for the quarter and the six months ended March 31,
1997 increased $1.2 million and $19,000 from the previous year periods primarily
due to fluctuations in the market price of the Company's common stock.
The Company recorded unusual items, net, of $1.4 million, during the
quarter and the six months ended March 31, 1997, which consisted of a $2.8
million pre-tax gain on the sale of two psychiatric hospitals offset by a $4.2
million charge for the closure of three psychiatric hospitals and one general
hospital. See Note F for further information regarding facility closures.
Minority interest increased $1.0 million and $2.0 million in the quarter
and the six months ended March 31, 1997 as compared to the prior year periods.
The increases are primarily due to the Company acquiring a controlling interest
in Green Spring in December 1995 and Green Spring's internal growth subsequent
to the acquisition date.
Recent Accounting Pronouncements
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which
became effective for fiscal years beginning after December 15, 1995. FAS 123
established 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." Entities electing to remain with the accounting in
APB Opinion No. 25 will be required to make pro forma disclosures of net income
and earnings per share as if the provisions of FAS 123 had been applied. The
Company is adopting FAS 123 in fiscal 1997 on a proforma disclosure basis.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
FAS 128, which applies to entities with publicly held common stock or potential
common stock. FAS 128 replaces APB Opinion 15, "Earnings per Share" and related
interpretations. APB Opinion 15 required that entities with simple capital
structures present a single "earnings per common share" ("EPS") on the face of
the income statement, whereas those with complex capital structures present both
"primary" and "fully diluted" EPS. Primary EPS shows the amount of income
attributed to each share of common stock if every common stock equivalent were
converted into common stock. Fully diluted EPS considers common stock
equivalents and all other securities that could be converted into common stock.
Statement 128 simplifies the computation of EPS by replacing the
presentation of primary EPS with a presentation of basic EPS. The Statement
requires dual presentation of basic and diluted EPS by entities with complex
capital structures. Basic EPS includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of an entity, similar to fully
diluted EPS under APB Opinion 15.
FAS 128 becomes effective for financial statements for both interim and
annual periods ending after December
19
<PAGE>
15, 1997. Earlier application is not permitted. The Company will adopt FAS 128
during the quarter ended December 31, 1997, which is the first quarter of the
fiscal year ended September 30, 1998. The Company has disclosed pro forma EPS
amounts computed using FAS 128 in Note G to the financial statements for the
quarter and the six months ended March 31, 1996 and 1997. After the effective
date, all prior-period EPS data presented will be restated to conform with the
provisions of FAS 128.
The primary effect of FAS 128 on the Company's financial statements is
the required dual presentation of basic and diluted income per common share for
each interim and annual reporting period. APB Opinion No. 15 allowed entities
with complex capital structures to present income per common share excluding
common stock equivalents and other potentially dilutive securities if the
dilution was less than three percent.
Liquidity and Sources of Capital
Operating Activities. The Company's net cash provided by operating
activities was approximately $27.4 million for the six months ended March 31,
1996. Net cash used in operating activities was approximately $11.5 million for
the six months ended March 31,1997. The decrease in operating cash flows for the
six months ended March 31, 1997 was primarily the result of (i) higher insurance
settlement payments ($14.0 million and $21.2 million for the six months ended
March 31, 1996 and 1997, respectively), (ii) higher income tax payments and
(iii) reduced cash flows from its provider business. Management believes that
the Company will have positive cash flows from operations for the remainder of
fiscal 1997, which will be adequate to fund operations, capital expenditures and
debt service obligations.
Investing Activities. The Company acquired a 61% ownership interest in
Green Spring during the first quarter of fiscal 1996. The consideration paid for
Green Spring and related acquisition costs resulted in the use of cash of
approximately $87.2 million compared to approximately $13.0 million for
acquisitions and investments in businesses during the six months ended March 31,
1997.
Management believes that its cash on hand, future cash flows from
operations, borrowing capacity under the New Revolving Credit Agreement and its
ability to issue debt and equity securities under current market conditions will
provide adequate capital resources to support the Company's anticipated
investing strategies.
Financing Activities. The Company borrowed approximately $68.1 million
and $15.4 million (excluding borrowings of approximately $115.6 million to pay
off the previous Revolving Credit Agreement), respectively, during the six
months ended March 31, 1996 and 1997, primarily to fund the acquisition of Green
Spring in fiscal 1996 and to fund working capital needs and fees and expenses
related to the New Revolving Credit Agreement in fiscal 1997. The Company
believes that its businesses will generate sufficient cash flows from operations
to meet its future debt service requirements.
On September 27, 1996, the Company repurchased approximately 4.0
million shares of its Common Stock for approximately $73.5 million, including
transaction costs, pursuant to a "Dutch Auction" self-tender offer to its
stockholders. On November 1, 1996, the Company announced that its board of
directors approved the repurchase of an additional 3.0 million shares of its
Common Stock from time to time subject to the terms of the New Revolving Credit
Agreement. The Company expects to use cash on hand, future cash flows from
operations and borrowings under its New Revolving Credit Agreement to fund any
future treasury stock purchases.
As of March 31, 1997, the Company had approximately $209 million of
availability under the New Revolving Credit Agreement. The Company was in
compliance with all debt covenants at March 31, 1997.
Outlook
Crescent Transactions On January 30, 1997, the Company announced that
it had signed definitive agreements for a series of transactions (the "Crescent
Transactions") with Crescent Real Estate Equities Limited
20
<PAGE>
Partnership ("Crescent"), which are described in "Item 5 - Other Information"
and incorporated herein by reference. The Company expects to close the Crescent
Transactions in the third quarter of fiscal 1997.
The Crescent Transactions, if consummated, would result in the Company
relinquishing control of substantially all of its domestic provider business.
The Company expects to record a loss before income taxes of approximately $45
million to $55 million as a result of the Crescent Transactions. In addition,
the Company believes that the Crescent Transactions would allow the holders of
the Company's 11.25% Senior Subordinated Notes (the "Notes") to put their notes
to the Company at 101% of face value. If the Company is required to repurchase
all of the Notes, it would record an extraordinary loss for the early
extinguishment of debt of approximately $7.5 million to $8.0 million, net of
tax.
The Company expects to have approximately $272 million of net proceeds
remaining from the Crescent Transactions ("Remaining Proceeds"), assuming
consummation of the sale of the European Hospitals, after paying off long-term
debt, excluding any Notes repurchased. The Company also expects to enter into a
new credit agreement with a group of commercial banks simultaneous with the
closing of the Crescent Transactions. Under the terms of the new credit
agreement, the Company may borrow up to $200 million to repurchase all of the
Notes, if necessary. The Company anticipates that the Crescent Transactions
could result in reduced net income until the Remaining Proceeds are used to
repurchase Notes or are reinvested at an acceptable rate of return to the
Company.
If the Company is required to repurchase all the Notes as a result of
the Crescent Transactions, it would result in increased net income. However, the
Company's liquidity and capital resources would be significantly reduced, which
would limit the level of investing activities (e.g., acquisitions) the Company
may choose or be able to pursue.
Sale of European Hospitals. On March 19, 1997, the Company announced
that it signed definitive agreements with Priory Hospitals Holdings Limited and
Priory Hospitals Europe Limited for the sale of its two psychiatric hospitals in
London and its psychiatric hospital in Nyon, Switzerland. The sale of the
European Hospitals is subject to regulatory approval. In a separate agreement,
Magellan will allow Priory to continue to use the "Charter" name at the
facilities for seven years and the "Charter System", comprised of certain
intellectual and proprietary rights, for a six month period pending negotiation
of a potential franchise relationship. The total purchase price for the European
Hospitals and the license agreement is $76 million.
These transactions will provide the Company with approximately $72.5
million to reduce long-term debt. The Company expects to record a gain before
income taxes of approximately $45 million to $50 million as a result of selling
the European Hospitals. The Transaction is expected to close in the third
quarter of fiscal 1997.
Net Operating Loss Carryforwards. The Company expects to record a gain
for federal income tax purposes of approximately $100 million to $110 million as
a result of the Crescent Transactions and the sale of the European Hospitals.
The Company intends to utilize net operating loss carryforwards ("NOLs") to
offset such taxable gains to the extent NOLs are available. The expected
utilization of NOLs as a result of the Crescent Transactions and the sale of the
European hospitals will accelerate the payment of federal income taxes in future
periods, resulting in lower cash flows from operations.
Existing Operations. The remaining portion of "Outlook" is prepared
with a view toward the existing operating structure of the Company as of March
31, 1997 before the effects of the Crescent Transactions and the sale of the
European Hospitals:
Management continually assesses events and changes in circumstances
that could affect its business strategy and the viability of its provider
facilities. During fiscal 1995 and 1996, the Company consolidated, closed or
sold 15 and 9 psychiatric hospitals, respectively. During fiscal 1997, the
Company has consolidated or closed three psychiatric hospitals and its one
general hospital. See Note F for further information regarding facility closures
in fiscal 1996 and 1997. The Company plans to pursue acquisitions in its
provider segment during fiscal 1997 in markets
21
<PAGE>
where it does not currently have a presence and in markets where it has existing
hospital operations. Management expects to consolidate services in selected
markets as a result of acquisitions or overcapacity 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.
During fiscal 1995 and fiscal 1996, the Company recorded impairment
losses on property and equipment and intangible assets of approximately $27.0
million and $1.2 million, respectively. 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
affected businesses that were operating as of March 31, 1997 had operating
income of approximately $100,000 (net revenue less salaries, supplies and other
operating expenses and bad debt expense) in aggregate during fiscal 1996, and
operating income of approximately $1.0 million in aggregate during the six
months ended March 31, 1997, 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 additional 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 and average length of stay in fiscal 1996.
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 and average length of stay in future periods
for the Company's hospital operations. In addition, the Company's hospitals
experienced pricing pressure in fiscal 1996, which management expects to
continue in fiscal 1997, which could result in lower revenue per equivalent
patient day in future periods.
During fiscal 1994, 1995 and 1996, the Company recorded revenue of
$32.1 million, $35.6 million and $28.3 million, respectively, for settlements
and adjustments related to reimbursement issues. During the quarter and the six
months ended March 31, 1997, the Company recorded revenue of $2.8 million and
$13.8 million, respectively, for settlements and adjustments related to
reimbursement issues compared to $3.3 million and $11.1 million, respectively,
for the prior year periods. The settlements in fiscal 1994, 1995 and 1996
related primarily to certain reimbursable costs associated with the Company's
financial reorganization in fiscal 1992 and costs related to the early
extinguishment of long-term debt in fiscal 1994. Management anticipates that
revenue related to such settlements will decline in fiscal 1997, and that the
decline will be comparable to the reduction experienced in fiscal 1996.
During fiscal 1996, the Company recorded reductions of expenses of
approximately $15.3 million as a result of updated actuarial estimates related
to malpractice claim reserves. The Company recorded reductions of expenses of
approximately $7.5 million and $5.0 million during the quarter and the six
months ended March 31, 1996 and 1997, respectively. These reductions resulted
primarily from updates to actuarial assumptions regarding the Company's expected
losses for more recent policy years. These revisions are based on changes in
expected values of ultimate losses resulting from the Company's claim
experience, and increased reliance on such claim experience. While Management
and its actuaries believe that the present reserve is reasonable, ultimate
settlement of losses may vary from the amount recorded and result in additional
fluctuations in income in future periods.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
The Company and certain of its 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 or operations.
Item 5. - Other Information
On January 30, 1997, the Company announced that it had entered into a
definitive agreement to sell substantially all of its domestic hospital real
estate and related personal property (the "Assets") to Crescent. In addition,
the Company's domestic portion of its provider business segment will be operated
as a joint venture ("CBHS") that is initially owned equally by Magellan and an
affiliate of Crescent ("COI"). The Company will receive $400 million in cash,
subject to adjustment, and warrants in COI for the purchase of 2.5% of COI's
common stock, exercisable over 12 years, as consideration for the assets. In
addition to the Assets, Crescent and COI will each receive 1,283,311 warrants to
purchase Magellan Common Stock at $30 per share, exercisable over 12 years.
In related agreements, (i) Crescent will lease the real estate and
related assets to CBHS for annual rent beginning at $40 million, subject to
adjustment, with a 5% annual escalation clause compounded annually and (ii) CBHS
will pay Magellan approximately $81 million in annual franchise fees, subject to
increase, for the use of assets retained by Magellan and for support in certain
areas. The franchise fees to be paid by CBHS to the Company will be subordinated
to the lease obligations in favor of Crescent. The assets retained by Magellan
include, but are not limited to, the "CHARTER" name, intellectual property,
protocols and procedures, clinical quality management, operating processes and
the "1-800-CHARTER" telephone call center. Magellan will provide CBHS ongoing
support in areas including managed care contracting services, advertising and
marketing assistance, risk management services, outcomes monitoring, and
consultation on matters relating to reimbursement, government relations,
clinical strategies, regulatory matters, strategic planning and business
development.
The Company intends to initially use the proceeds from the sale of the
Assets to reduce its long-term debt, including borrowings under the New
Revolving Credit Agreement. Under the terms of the Notes indenture, the
Noteholders will have the right to put their Notes to the Company at 101% of
face value as a result of the Crescent transactions. The Company intends to
maintain adequate cash reserves and borrowing capacity to extinguish all the
Notes, if necessary. The Noteholder's right to put the Notes will expire up to
70 days subsequent to the consummation of the Crescent Transactions. The Company
intends to use the remaining proceeds from the sale of the Assets, if any after
debt reductions, to pursue acquisitions in its managed care and public sector
business segments, develop new products and increase managed care and public
sector marketing efforts.
The Company will account for its 50% investment in CBHS under the
equity method of accounting. The Company expects to record a loss before income
taxes of approximately $45 million to $55 million as a result of these proposed
transactions, including, but not limited to, the write-off of certain
hospital-based intangible assets, collection fees associated with accounts
receivable and certain commitments and exit costs offset by the expected gain or
loss on the sale of the Assets.
These transactions are subject to approval by Magellan stockholders and
other customary closing conditions, including the negotiation of certain
financing matters.
23
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re computation of per share earnings
27 Financial Data Schedule
99 Safe Harbor for Forward-Looking Statements under the
Private Litigation Reform Act of 1995: Certain
Cautionary Statements.
(b) Report on Form 8-K
There were no current reports on Form 8-K filed by
the Registrant with the Securities and Exchange
Commission during the quarter ended March 31, 1997.
24
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAGELLAN HEALTH SERVICES, INC.
(Registrant)
Date: May 12, 1997 /s/ Craig L. McKnight
------------------- ---------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
Date: May 12, 1997 /s/ Howard A. McLure
------------------- --------------------
Howard A. McLure
Senior Vice President and Controller
(Principal Accounting Officer)
25
<TABLE>
<CAPTION>
EXHIBIT 11
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 1996 March 31, 1997 March 31, 1996 March 31, 1997
-------------- -------------- -------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Income before extraordinary item ............................ $ 20,069 $ 11,892 $ 29,817 $ 19,033
============== ============== ============== ==============
Weighted average number of common shares
outstanding:
Common shares outstanding .......................... 31,247 28,726 29,612 28,657
Stock Options and Rights ........................... 615 -- 468 --
Warrants ........................................... 20 -- 19 --
-------------- -------------- -------------- -------------
31,882 28,726 30,099 28,657
============== ============== ============== =============
Primary income per share before extraordinary item ..... $ 0.63 $ 0.41 $ 0.99 $ 0.66
============== ============== ============== =============
Net income .................................................. $ 20,069 $ 11,892 $ 29,817 $ 16,083
============== ============== ============== =============
Weighted average number of common shares outstanding ........ 31,882 28,726 30,099 28,657
============== ============== ============== =============
Primary income per share ............................... $ 0.63 $ 0.41 $ 0.99 $ 0.56
============== ============== ============== =============
Income before extraordinary item ............................ $ 20,069 $ 11,892 $ 29,817 $ 19,033
Adjustments for the assumed conversion of the
Exchange Option:
Minority interest .................................. 811 -- 1,082 --
Amortization ....................................... (276) -- (341) --
------------- --------------- -------------- -------------
Adjusted income before extraordinary item ............. $ 20,604 $ 11,892 $ 30,558 $ 19,033
============= =============== ============== =============
Weighted average number of common shares
outstanding:
Common shares outstanding .......................... 31,247 28,726 29,612 28,657
Stock Options and Rights ........................... 616 -- 505 --
Warrants ........................................... 20 -- 20 --
Assumed conversion of the Exchange Option .......... 2,832 -- 1,714 --
------------ --------------- -------------- ------------
34,715 28,726 31,851 28,657
============ =============== ============== ============
Fully diluted income per share before extraordinary item $ 0.59 $ 0.41 $ 0.96 $ 0.66
============ =============== ============== ============
Adjusted net income ......................................... $ 20,604 $ 11,892 $ 30,558 $ 16,083
============ =============== ============== ============
Weighted average number of common shares outstanding ........ $ 34,715 $ 28,726 31,851 28,657
============ =============== ============== ============
Fully diluted income per share ......................... $ 0.59 $ 0.41 $ 0.96 $ 0.56
============ =============== ============== ============
</TABLE>
Note: Common stock equivalents(stock options,rights and warrants) were less
than three percent dilutive for the three months the six months ended
March 31, 1997. Accordingly, they are not presented herein. The
Exchange Option was anti-dilutive for the three months and the six
months ended March 31, 1997.
<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 1, 2, AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 114,245,000
<SECURITIES> 0
<RECEIVABLES> 192,394,000
<ALLOWANCES> 0
<INVENTORY> 4,465,000
<CURRENT-ASSETS> 336,403,000
<PP&E> 635,085,000
<DEPRECIATION> 143,724,000
<TOTAL-ASSETS> 1,122,387,000
<CURRENT-LIABILITIES> 241,123,000
<BONDS> 580,536,000
<COMMON> 8,307,000
0
0
<OTHER-SE> 133,901,000
<TOTAL-LIABILITY-AND-EQUITY> 1,122,387,000
<SALES> 696,741,000
<TOTAL-REVENUES> 696,741,000
<CGS> 0
<TOTAL-COSTS> 566,333,000
<OTHER-EXPENSES> 29,015,000
<LOSS-PROVISION> 35,375,000
<INTEREST-EXPENSE> 26,722,000
<INCOME-PRETAX> 39,296,000
<INCOME-TAX> 15,718,000
<INCOME-CONTINUING> 19,033,000
<DISCONTINUED> 0
<EXTRAORDINARY> 2,950,000
<CHANGES> 0
<NET-INCOME> 16,083,000
<EPS-PRIMARY> .56
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY
STATEMENTS
Magellan Health Services, Inc. (the "Company") and its representatives
may make forward looking statements (as such term is defined in the Private
Securities Litigation Reform Act) from time-to-time. The Company wants to invoke
to the fullest extent possible the protection of the Private Securities
Litigating Reform Act and the judicially created "bespeaks caution" doctrine
with respect to such statements. Accordingly, the Company is filing this Exhibit
99, which lists certain factors that may cause actual results to differ
materially from those in such forward looking statements.
This list is not necessarily exhaustive. The Company operates in a
rapidly changing business, and new risk factors emerge periodically. There can
be no assurance that this Exhibit lists all material risks to the Company at any
specific point in time. Readers are also referred to the risk factor disclosure
contained in the Company's Proxy Statement on Schedule 14A, filed on April 24,
1997.
On January 30, 1997, the Company announced that it had signed
definitive agreements for a series of transactions (the "Crescent Transactions")
with Crescent Real Estate Equities Limited Partnership ("Crescent"), which are
described in "Item 5 - Other Information". The Company expects to close the
Crescent Transactions in the third quarter of fiscal 1997. The following risk
factors are prepared with a view toward the existing operating structure of the
Company as of March 31, 1997 before the effects of the Crescent Transaction:
Limitations Imposed by the New Revolving 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 was terminated in October 1996 and
the Company entered into a new Credit Agreement (the "New Revolving Credit
Agreement"). The New Revolving 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 New
Revolving 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 New Revolving 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 New Revolving Credit Agreement.
Acquisition Growth Strategy
The Company has historically grown through acquisitions. 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.
<PAGE>
Historical Operating Losses
The Company experienced losses from continuing operations before
reorganization items, extraordinary items and the cumulative effect of a change
in accounting principle during each fiscal year since the completion of a
management buyout in 1988 through fiscal 1995. Such losses amounted to $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 $1.35 billion and $32.4 million, respectively, for
the year ended September 30, 1996. The Company also reported net revenue and
income from continuing operations before extraordinary items of approximately
$650.6 million and $29.8 million for the six months ended March 31, 1996,
respectively, compared to net revenue and income from continuing operations of
$696.7 million and $19.0 million, respectively, for the six months ended March
31, 1997. There can be no assurance that the Company's profitability for the
year ended September 30, 1996 and the six months ended March 31, 1997 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 effect its business strategy and the viability of its provider
facilities. During fiscal 1995 and 1996, the Company consolidated, closed or
sold 15 and 9 psychiatric hospitals, respectively. During fiscal 1997, the
Company has consolidated, closed or sold three psychiatric hospitals and one
general hospital. The Company records charges against income, as a result of
these consolidations, closures and sales. 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 Payer 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 deductibles and co-insurance for individual patients; (v)
pricing pressure related to increasing rate of claims denials by third party
payers; and (vi) a trend toward limiting employee health benefits, such as
reductions in annual and lifetime limits on mental health coverage. Any of these
factors could 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, 1996, the Company derived
approximately 21% of its gross psychiatric patient service revenue from managed
care organizations (primarily HMOs and PPOs, as hereinafter defined), 25% from
other private payers (primarily commercial insurance and Blue Cross), 28% from
Medicare, 17% from Medicaid, 3% 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 managed care
organizations, 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 payer 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.
From February 1991 until July 1992, the Company was in default in the payment of
interest and principal, or
<PAGE>
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.
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.
Potential Expiration and Realization Uncertainties Related
to Estimated Tax Net Operating Loss Carryforwards
As of September 30, 1996, the Company had estimated tax net operating
loss ('NOL") carryforwards of approximately $250 million available to reduce
future federal taxable income. These NOL carryforwards expire in 2006 through
2010 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 $102.2 million against the amount of the NOL deferred tax asset
that
<PAGE>
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.
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. 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. If enacted,
these proposals would generally reduce Medicare and Medicaid expenditures. 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.
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.
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 regulate the Company and its competitors' ability to build new
hospitals and to expand existing hospital facilities and services. These laws do
provide some protection from competition, as their interest is to prevent
duplication of services. In most cases, these laws do not restrict the ability
of the Company or its competitors to offer new outpatient services. As of March
31, 1997, the Company operated 38 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.
<PAGE>
Managed Care Business - Competition
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.
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.
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")
<PAGE>
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.
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.
Capitation Arrangements
The Company's managed care business contracts with companies holding
state HMO or insurance company licenses on a capitated or "at-risk" basis where
the risk of patient care is assumed by the Company in exchange for a monthly fee
per member regardless of utilization level. As of March 31, 1997, approximately
35% 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.
Mental Health Parity Legislation
In October 1996, President Clinton signed a bill submitted by the U.S.
Congress that prohibits health plans from setting annual or lifetime caps on
mental health coverage ("parity") at levels below those set for general
medical/surgical healthcare services. The bill does not require a health plan to
offer or provide mental health services and does not affect other terms and
conditions of health plans, such as inpatient day or outpatient visit limits or
scope of benefits, nor does this bill prohibit health plans from utilizing other
forms of cost containment. The definition of mental health services in the bill
excludes substance abuse and chemical dependency. The effective date for the
parity
<PAGE>
legislation is January 1, 1998. Other key components of the parity legislation
are as follows:
1) Employers with 50 or fewer employees are exempt from the parity
legislation.
2) Health plans that incur increased costs of 1% or more as a result of the
parity legislation will be exempt.
3) The parity legislation expires on September 30, 2001 unless extended by
Congress.
The Company views the parity legislation as an acknowledgment by the
Federal government of the importance of effective treatment of mental health
disorders for society in general. The parity legislation could result in cost
containment mechanisms by third party payers such as the elimination of mental
health benefit plans or encouraging the utilization of managed care
organizations to administer mental health benefit plans, which could both result
in lower demand and lower revenue per equivalent patient day in the Company's
provider business. However, this bill is subject to administrative and judicial
interpretation, neither of which the Company is able to predict. There can be no
assurance that such interpretations will not adversely effect the Company's
businesses.
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.
