SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: December 17, 1997
Date of earliest event
reported: December 4, 1997
MAGELLAN HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter).
Delaware 1-6639 58-1076737
- ----------------------- ---------------------- -------------------------------
(State of incorporation)(Commission File Number)(IRS Employer Identification No)
3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 841-9200
- ---------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On December 4, 1997, the Registrant (the "Company" or "Magellan")
acquired the outstanding common stock of Human Affairs International,
Incorporated ("HAI"), a wholly-owned subsidiary of Aetna Insurance Company of
Connecticut and a unit of Aetna U.S. Healthcare, Inc. ("AUSHC"), for
approximately $122.1 million in cash. HAI manages the care of over 15 million
covered lives through employee assistance programs and managed behavioral health
plans. The Company funded the acquisition of HAI with cash on hand and will
account for the acquisition of HAI using the purchase method of accounting.
Subsequent to the consummation of the HAI acquisition, the Company may
be required to make additional annual contingent payments over a five-year
period of up to $60 million per year for an aggregate of $300 million, to AUSHC
(the "Contingent Payments"). The amount and timing of the contingent payments
will depend upon HAI's receipt of additional covered lives under two separate
calculations. Under the first calculation, the Company may be required to pay up
to $25 million per year for each of five years following the acquisition based
on the net increase in "incremental lives" in specified products. Under the
second calculation, the Company may be required to pay up to $35 million per
year for each of five years based on the net cumulative increase in "HMO
incremental lives" in certain products. The Company expects to fund the
Contingent Payments, if any, with a combination of cash on hand, future cash
flows from operations and amounts borrowed pursuant to its Revolving Credit
Agreement.
The total consideration in the HAI acquisition, including the potential
Contingent Payments, was determined through arm's length negotiations between
representatives of Magellan and AUSHC . No directors or officers of Magellan and
its affiliates or AUSHC and its affiliates had any material relationship prior
to the HAI acquisition.
Magellan and its provider business affiliates and AUSHC and its health
insurance and behavioral managed care affiliates transacted business in the
ordinary course prior to the HAI acquisition.
The Company and HAI entered into a Master Service Agreement with AUSHC
whereby AUSHC and HAI will provide access to and coordinate the provision of
behavioral health care services to AUSHC members. The Master Service Agreement
covers approximately 58% of HAI's initial annual revenues.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
Financial Statements
The following HAI Financial Statements, together with the independent
auditors' reports thereon, are included herein:
1) Audited Consolidated Balance Sheets as of December 31, 1996 and 1995;
2) Audited Consolidated Statements of Income for the years ended
December 31, 1996 and 1995;
3) Audited Consolidated Statements of Stockholder's Equity for the years
ended December 31, 1996 and 1995;
4) Audited Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995;
5) Unaudited Consolidated Balance Sheet as of September 30, 1997;
6) Unaudited Consolidated Statements of Income for the nine months ended
September 30, 1997 and 1996;
7) Unaudited Consolidated Statement of Stockholder's Equity for the nine
months ended September 30, 1997 and
8) Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996.
2
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
3
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholder of
Human Affairs International, Incorporated:
We have audited the accompanying consolidated balance sheets of Human Affairs
International, Incorporated and subsidiaries, (a wholly owned subsidiary of
Aetna Inc.), as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholder's equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Human Affairs
International, Incorporated and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
February 7, 1997, except as to
note 10 which is as of
February 27, 1997
4
<PAGE>
<TABLE>
<CAPTION>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
--------------------------
1997 1996 1995
------------ ----------- -----------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $36,255,658 $33,446,435 $22,294,437
Receivables:
Contract service fees, less allowance for doubtful accounts of
$68,422 at September 30, 1997 and December 31, 1996 and
$375,748 at December 31, 1995 6,771,313 6,364,124 6,206,738
Related party (note 6) 5,547,515 2,957,865 2,250,953
Income taxes (note 3) 130,188 99,584 --
Other current assets 29,162 423,471 269,180
Deferred income taxes (note 3) 364,629 364,629 419,309
----------- ----------- -----------
Total current assets 49,098,465 43,656,108 31,440,617
----------- ----------- -----------
Property, equipment, and leasehold improvements, less accumulated
depreciation and amortization (note 2) 241,923 406,044 846,285
Cost in excess of net assets acquired of purchased subsidiaries, less
accumulated amortization of $205,006 at September 30, 1997 and $143,504
at December 31, 1996 and $61,502 at December 31, 1995 (note 8) 615,016 676,518 758,520
Noncurrent deferred income taxes (note 3) 56,751 364,498 808,821
Other assets 21,033 63,006 62,995
----------- ----------- -----------
$50,033,188 $45,166,174 $33,917,238
=========== =========== ===========
Liabilities and Stockholder's Equity
Current liabilities:
Unearned contract service fees $ 4,260,590 $ 4,591,431 $ 4,832,356
Accounts payable and accrued liabilities 11,776,208 8,231,292 6,948,838
Related party (note 6) 9,441,603 2,454,957 6,793,418
Current installments of note payable (note 8) -- 333,333 333,333
Current installments of noncompete and salary continuation
agreements (note 7) -- -- 500,932
Current installments of obligations under capital leases (note 5) 7,098 7,058 9,453
Income taxes payable (note 3) 1,328,814 -- 823,439
----------- ----------- -----------
Total current liabilities 26,814,313 15,618,071 20,241,769
Note payable, less current installments (note 8) -- -- 333,333
Obligations under capital leases, less current installments (note 5) 2,635 10,112 18,093
Other long-term liabilities 2,737 2,404 92,519
Stockholder's equity (notes 6 and 10):
Common stock, no par value. Authorized 50,000 shares;
issued and outstanding 10,000 shares 1,000 1,000 1,000
Additional paid-in capital -- 11,092,000 11,092,000
Retained earnings 23,212,503 18,442,587 2,138,524
----------- ----------- -----------
Total stockholder's equity 23,213,503 29,535,587 13,231,524
Commitments and contingencies (notes 5, 9 and 10)
----------- ----------- -----------
$50,033,188 $45,166,174 $33,917,238
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Consolidated Statements of Income
Nine Months ended
September 30, Year ended December 31,
------------------------------- -------------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Contract service fees (note 6) $ 88,845,581 $ 78,033,338 $105,923,687 $ 94,148,402
Interest 1,166,952 1,100,649 1,538,769 2,240,216
------------ ------------ ------------ ------------
Total revenues 90,012,533 79,133,987 107,462,456 96,388,618
------------ ------------ ------------ ------------
Expenses (note 6):
Operating costs 67,128,675 59,828,799 80,696,520 70,209,268
Interest 900 673 1,033 1,701
Depreciation and amortization 219,458 404,455 517,404 822,273
Noncompete employment agreement (note 7) -- 105,708 105,708 262,824
Minority interest -- -- -- 71,524
------------ ------------ ------------ ------------
Total expenses 67,349,033 60,339,635 81,320,665 71,367,590
------------ ------------ ------------ ------------
Income before income taxes 22,663,500 18,794,352 26,141,791 25,021,028
Income tax expense (note 3) 8,985,584 7,343,152 9,837,728 9,775,720
------------ ------------ ------------ ------------
Net income $ 13,677,916 $ 11,451,200 $ 16,304,063 $ 15,245,308
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Nine months ended September 30, 1997
(unaudited) and years ended
December 31, 1996 and 1995
Retained
Additional earnings Total
Common paid-in (accumulated stockholder's
stock capital deficit) equity
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ 1,000 $ 18,692,000 $ (706,784) $ 17,986,216
Dividend to parent -- -- (12,400,000) (12,400,000)
Return of capital to parent -- (7,600,000) -- (7,600,000)
Net income -- -- 15,245,308 15,245,308
------------ ------------ ------------ ------------
Balances at December 31, 1995 1,000 11,092,000 2,138,524 13,231,524
Net income -- -- 16,304,063 16,304,063
------------ ------------ ------------ ------------
Balances at December 31, 1996 1,000 11,092,000 18,442,587 29,535,587
Dividend to parent (unaudited) -- -- (8,908,000) (8,908,000)
Return of capital to parent (unaudited) -- (11,092,000) -- (11,092,000)
Net income (unaudited) -- -- 13,677,916 13,677,916
------------ ------------ ------------ ------------
Balances at September 30, 1997 (unaudited) $ 1,000 $ -- $ 23,212,503 $ 23,213,503
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Consolidated Statements of Cash Flows
Nine Months ended
September 30, Years ended December 31,
---------------------------- -----------------------------
1997 1996 1996 1995
------------ ------------ ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,677,916 $ 11,451,200 $ 16,304,063 $ 15,245,308
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 219,458 404,455 517,404 822,273
Loss on disposal of assets 41,776 10,378 32,066 77,260
Increase (decrease) in allowance for doubtful accounts 7,407 150,000 (314,733) 314,733
(Increase) decrease in contract service fees receivable (414,595) (2,127,925) 157,347 539,966
Decrease (increase) in related party receivable (2,589,650) (152,662) (706,912) (196,706)
Decrease (increase) in income tax receivable (30,604) 1,069,259 (99,584) --
Decrease (increase) in other current assets 394,308 175,582 (154,291) 13,674
Decrease in deferred tax assets 307,747 470,598 499,003 167,190
Decrease (increase) in other assets 41,971 (9) (11) 3,027
Decrease in unearned contract service fees (330,840) (557,382) (240,925) (234,116)
Increase (decrease) in accounts payable and accrued
liabilities 3,544,916 820,325 1,282,454 (1,497,670)
Increase (decrease) in payable to related party 6,986,646 (3,931,504) (4,338,461) (1,396,534)
Increase (decrease) in noncompete and salary
continuation agreements payable -- (500,932) (500,932) 34,180
Increase (decrease) in income taxes payable 1,328,814 1,050,060 (823,439) (3,133,475)
Increase (decrease) in other long-term liabilities 333 (72,764) (90,115) (331,729)
Increase in minority interest -- -- -- 71,524
------------ ------------ ------------ ------------
Net cash provided by operating activities 23,185,603 8,258,679 11,522,934 10,498,905
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (39,696) (44,698) (35,895) (209,328)
Proceeds from disposal of fixed assets 4,087 4,949 8,668 34,818
Distribution to minority interest -- -- -- (309,610)
Payment for purchase of minority interest (Note 8) (333,333) (333,333) (333,333) (333,334)
------------ ------------ ------------ ------------
Net cash used in investing activities (368,942) (373,082) (360,560) (817,454)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (7,438) -- (10,376) (16,839)
Return of capital to parent (11,092,000) -- -- (7,600,000)
Dividends paid to parent (8,908,000) -- -- (12,400,000)
------------ ------------ ------------ ------------
Net cash used in financing activities (20,007,438) -- (10,376) (20,016,839)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,809,223 7,885,597 11,151,998 (10,335,388)
Cash and cash equivalents, beginning of period 33,446,435 22,294,437 22,294,437 32,629,825
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 36,255,658 $ 30,180,034 $ 33,446,435 $ 22,294,437
============ ============ ============ ============
Supplemental Disclosures of Cash Flow Information
Interest paid $ 900 $ 673 $ 1,033 $ 1,701
Income taxes paid 7,138,190 5,559,681 11,647,990 12,742,005
Supplemental Disclosures of Noncash Investing and Financing Activities
Capital lease obligations incurred for office equipment $ -- $ -- $ -- $ 25,248
Note payable to a related party for acquisition of minority interest -- -- -- 666,666
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
Human Affairs International, Incorporated is a provider of
employee behavioral health assistance programs and a managed
behavioral health care company. The employee assistance
programs are provided for clients' employees and their
families and include the management of the delivery of
behavioral health services that deal with personal problems
that can interfere with an employee's well-being and job
performance. These problems may include, among other things,
psychological disorders, family or marital issues, alcohol
and/or other drug abuse, stress, depression, and anxiety. The
managed behavioral health care program manages the clinical
services delivered for the treatment of psychiatric and/or
substance abuse conditions through the process of negotiating
clinical quality at a reasonable price in order to achieve
optimal care. The Company provides services primarily
throughout the Continental United States, Alaska, and Hawaii.
(b) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Human Affairs International, Incorporated and its
wholly owned subsidiaries, Human Affairs International of
California, Incorporated and Human Affairs of Alaska which was
an unincorporated joint venture in 1994 (collectively referred
to as the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation. The
Company is a wholly owned subsidiary of Aetna Life Insurance
Company (ALIC). The Company's ultimate parent is Aetna Inc.
(the Parent). During 1996, Aetna Life and Casualty Company,
the Company's former parent, merged with U.S. Healthcare, Inc.
and each became a wholly owned subsidiary of a new holding
company, Aetna Inc.
The unaudited consolidated condensed financial statements of
the Company as of September 30, 1997, and for the nine-month
periods ended September 30, 1997 and 1996, were prepared by
the Company without audit. Certain information and
9
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of
management, all necessary adjustments (consisting only of
normal recurring adjustments) have been made to present fairly
the consolidated financial position and results of operations
and cash flows for these periods. The results of operations
for the period ended September 30, 1997, are not necessarily
indicative of the expected results for the year ending
December 31, 1997.
(c) Cash Equivalents
The Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash
equivalents. Cash equivalents consisted of money market funds
of $31,693,520 and $21,901,800 at December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, the book value of
cash equivalents approximates fair value.
(d) Cost in Excess of Net Assets Acquired of Purchased
Subsidiaries
These costs represent the excess purchase price over the fair
value of the net assets of acquired companies and are
amortized on a straight-line basis over a period of ten years.
During 1995, additional costs were incurred when the Company
acquired the remaining interest of the Alaska Joint Venture.
Amortization expense was $82,002 and $61,502 in 1996 and 1995,
respectively.
(e) Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements are recorded
at cost. Depreciation is calculated on a straight-line basis
over the estimated useful lives of the assets which range from
three to ten years.
(f) Revenue Recognition
Contract services fees are primarily determined on a monthly
per capita amount and
10
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
are recognized over the life of the contract. Unearned
contract service fees are billed or collected revenues that
have not been recognized as income pending the performance of
contract service obligations. These fees primarily represent 1
to 12 months of advance billings as specified in the
contracts.
(g) Contract Service Costs
The direct operating costs associated with servicing the
contracts are expensed as incurred and included in operating
costs. These costs are directly related to the level and
timing of the services provided. These direct operating costs
are accrued as services are rendered and include estimates of
the costs of services rendered but not yet reported. The
Company accrues for losses on contracts when it is probable
that the expected future service costs of a contract will
exceed the service fees expected on the contract.
(h) Income Taxes
The Company is included in the consolidated federal income tax
return of the Parent and the Parent's other subsidiaries. In
accordance with a tax sharing arrangement, the Company's
current federal income tax provisions are generally computed
as if the Company were filing a separate federal income tax
return; current income tax benefits, including those resulting
from carrybacks, are recognized to the extent realized in the
consolidated return.
Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences
between the income tax and financial statement reporting
amounts of assets and liabilities.
(i) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
11
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
accompanying notes. Actual results could differ from those
estimates.
(j) Reclassifications
Certain amounts in 1995 have been reclassified to conform to
the 1996 presentation.
(2) Property, Equipment, and Leasehold Improvements
The components of property, equipment, and leasehold improvements
follow:
1996 1995
---------------- ----------------
Property and equipment $ 3,785,868 $ 4,252,318
Leasehold improvements 180,693 186,111
---------------- ----------------
3,966,561 4,438,429
Less accumulated depreciation
and amortizaiton 3,560,517 3,592,144
---------------- ----------------
$ 406,044 $ 846,285
================ ================
(3) Income Taxes
Income tax expense consists of the following:
Current Deferred Total
---------- ---------- ----------
Year ended December 31, 1996:
U.S. federal $8,017,571 $ 192,764 $8,210,335
State and local 1,598,406 28,987 1,627,393
---------- ---------- ----------
$9,615,977 $ 221,751 $9,837,728
========== ========== ==========
Year ended December 31, 1995:
U.S. federal $8,109,809 $ 145,335 $8,255,144
State and local 1,498,721 21,855 1,520,576
---------- ---------- ----------
$9,608,530 $ 167,190 $9,775,720
========== ========== ==========
12
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The following schedule reconciles the computed "expected" tax
expense based on a U.S. federal corporate tax rate of 35 percent in
effect for the year, to the tax expense reflected in the accompanying
consolidated financial statements:
1996 1995
----------- ------------
Computed "expected" tax expense $ 9,149,627 $ 8,757,360
State tax (net of federal income tax benefit) 1,057,805 988,374
Change in beginning-of-year valuation allowance
allocated to income tax expense (389,395) (18,984)
Other 19,691 48,970
---------- -----------
Total tax expense $ 9,837,728 $ 9,775,720
========== =============
The significant components of deferred income tax expense for the years
ended December 31, 1996 and 1995, are as follows:
1996 1995
---------- ----------
Deferred tax expense (exclusive of the effects of
other components listed below) $ 611,146 $ 186,174
Decrease in beginning-of-year balance of the
valuation allowance for deferred tax assets (389,395) (18,984)
--------- ----------
$ 221,751 $ 167,190
========= ==========
13
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1996 and 1995, are presented
below:
1996 1995
----------- -------------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 23,338 $ 143,724
Deferred compensation, due to accrual for
financial reporting purposes -- 209,217
Accrued liabilities not deductible until paid
for tax reporting purposes 253,664 357,701
HMO claims accrued not yet reported 255,795 122,219
Rent payable on long-term lease forfeiture, due
to accrual for financial reporting purposes 32,558 93,407
Software expense 253,654 465,290
Amortization due to goodwill 18,278 7,842
Tax credit carryforwards 38,652 37,398
Net operating loss carryforward -- 368,337
------------ ------------
Total gross deferred tax assets 875,939 1,805,135
Less valuation allowance 136,957 526,352
------------ ------------
Total deferred tax assets 738,982 1,278,783
------------ ------------
Deferred tax liabilities-fixed assets, due to
differences in depreciation methods (9,855) (50,653)
------------ ------------
Net deferred tax assets $ 729,127 $ 1,228,130
============ ============
Net current deferred tax assets $ 364,629 $ 419,309
Net noncurrent deferred tax assets 364,498 808,821
------------ ------------
$ 729,127 $ 1,228,130
============ ============
The valuation allowance for deferred tax assets as of January 1, 1996 and 1995,
was $526,352 and $545,336, respectively. The change in the total valuation
allowance for the years ended December 31, 1996 and 1995, was a decrease of
$389,395 and $18,984, respectively. Subsequently recognized tax benefits
relating to the valuation allowance for deferred tax assets will be recognized
as an income tax benefit in the consolidated statements of operations.
Management believes that it is more
14
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
likely than not that the Company will realize the benefit of the net deferred
tax asset in the future. During 1996, the Company utilized net operating loss
carryforwards for tax return purposes of approximately $1,052,000.
(4) Employee Retirement Plans
The Company's employees are covered under the Parent's Employee Benefit
Plans and are entitled to benefits earned under the plan through
December 31, 1996. Eligible employees receive pension incentive
savings, post retirement health care, and life insurance benefits. The
aggregate charges to operations for all benefit plans are allocated by
the Parent based upon measures appropriate for the nature of the
service provided and are included in the overall benefits allocation
from the Parent which approximates 23 percent of the Company's salaries
and wages. The related liabilities are recorded on the Parent's
financial statements.
(5) Leases
The Company is obligated under capital leases for equipment that expire
at various dates during the next five years. At December 31, 1996 and
1995, equipment of $52,141 and $48,215 and related accumulated
amortization of $34,971 and $33,258, respectively, were recorded under
these capital leases. Amortization of assets held under capital leases
is included in depreciation expense.
The Company leases office space and equipment under operating lease
agreements. Rent expense under these leases was $4,092,214 and
$3,685,159 in 1996 and 1995, respectively.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of December 31, 1996 are as
follows:
15
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Operating
Operating Leases, net
Capital Operating sublease of sublease
leases leases rentals rentals
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Year ending December 31:
1997 $ 8,261 $ 2,909,298 $ (83,444) $ 2,825,854
1998 5,669 2,653,337 -- 2,653,337
1999 5,361 2,164,973 -- 2,164,973
2000 -- 1,698,488 -- 1,698,488
2001 -- 1,689,914 -- 1,689,914
Thereafter -- 5,913,232 -- 5,913,232
---------- ----------- ------------- ------------
Total minimum lease payments 19,291 $17,029,242 $ (83,444) $ 16,945,798
=========== ============= ============
Less amount representing interest at 9% 2,121
----------
Present value of net minimum
capital lease payments 17,170
Less current installments of obligations
under capital leases 7,058
----------
Obligations under capital leases,
excluding current installments $ 10,112
==========
</TABLE>
(6) Related Party Transactions
The Company utilizes its network of providers to service existing
contracts of the Parent in the area of focused psychiatric review
(FPR), health maintenance organizations (HMO), managed choice (MC), and
network services (NS). The Company provides behavioral health care and
utilization management services to the Parent's members at a capitated
rate per member per month. The Company recorded FPR revenue of
approximately $14.1 million and $14.5 million, HMO revenue of
approximately $16.8 million and $9.5 million, MC revenue of
approximately $27.8 million and $19.4 million, and NS revenue of
approximately $4.5 million and $4.3 million in 1996 and 1995,
respectively, from Parent company agreements. Related party receivables
of $2,957,865 and $2,250,953 at December 31, 1996 and 1995,
respectively, are due from the Parent for balances paid to the Parent
from customers of the Company.
16
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Certain administrative and support functions of the Company are
provided by the Parent and its affiliates. The consolidated financial
statements reflect allocated charges for these services based upon
measures appropriate for the type and nature of the services provided.
The year ended December 31, 1996, was the first full year following the
Parent company sale of its property/casualty division. As a result of
this sale, the methodology of allocating the administrative and support
functions performed by the Parent changed significantly. Accordingly,
the amount allocated to the Company for the year ending December 31,
1996 increased significantly over what it had been in prior years. The
Company was charged $15,159,017 and $8,399,540 during 1996 and 1995,
respectively, for these allocated charges.
The Company also rents furniture, fixtures, and equipment from the
Parent. The rental expense for these items totaled $1,062,068 and
$782,691 for December 31, 1996 and 1995, respectively. Additionally,
the Parent pays certain direct costs on behalf of the Company such as
payroll and office supplies which the Company then reimburses the
Parent. Balances of $2,454,957 and $6,793,418 were payable to the
Parent at December 31, 1996 and 1995, respectively, for these allocated
charges and direct costs.
(7) Non-Compete Employment Agreement
During 1990, the Company terminated the employment of the officer and
former sole stockholder of the Company. Pursuant to the terms of
employment and noncompete agreements, the officer received annual
compensation and benefits through June 9, 1996, paid ratably over the
period. During the year ended December 31, 1996, the Company paid all
remaining amounts due to this officer which amounted to $500,932.
(8) Acquisition of Joint Venture
On April 1, 1995, the Company purchased the remaining minority interest
of Human Affairs of Alaska Joint Venture for $1,000,000. Of the total
purchase price $333,334 was paid at closing, $333,333 was paid during
1996, and the remainder was paid in April 1997. The acquisition has
been accounted for using the purchase method of accounting and,
accordingly, the acquired interest in assets and liabilities is stated
at estimated fair values. This transaction resulted in costs in excess
of net assets acquired of approximately $820,000.
17
<PAGE>
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The Former Joint Venture Partner entered into Personal Services and
Bonus Agreements with the Company wherein the Former Joint Venture
Partner has agreed to serve as an employee of the Company through March
2000.
(9) Commitments and Contingencies
The Company is involved in certain legal actions arising in the normal
course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that their
outcome will not have a significant effect on the Company's
consolidated financial statements.
(10) Subsequent Event
On February 27, 1997, $20,000,000 was paid to the Parent. This payment
represented a return of capital of $11,092,000 and a dividend of
$8,908,000.
18
<PAGE>
Unaudited Pro Forma Consolidated Financial Information
The Unaudited Pro Forma Consolidated Financial Statements are based on
the historical presentation of the consolidated financial statements of Magellan
and the historical operating results and financial position of HAI. The
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
September 30, 1997 give effect to the HAI acquisition as if it had been
completed on October 1, 1996. The Unaudited Pro Forma Consolidated Statement of
Operations for the year ended September 30, 1997 also gives effect to the
Crescent Transactions (as hereinafter described), which were consummated on June
17, 1997. The Unaudited Pro Forma Consolidated Balance Sheet as of September 30,
1997 gives effect to the HAI acquisition as if it had occurred on September 30,
1997. The pro forma consolidated statements of operations and balance sheets do
not give effect to hospital acquisitions and closures (prior to the Crescent
Transactions) during fiscal 1997 as such transactions and events are not
considered material to the pro forma presentation.
The Crescent Transactions resulted in (i) the sale of substantially all
of the Company's domestic provider real estate and related equipment (the
"Purchased Facilities") to Crescent Real Estate Equities Limited Partnership
("Crescent") for $417.2 million (before costs estimated at $16.0 million) and
the Crescent Operating, Inc. ("COI") warrants ("COI Warrants") to acquire 2.5%
of the outstanding common stock of COI, (ii) the creation of Charter Behavioral
Health System, LLC ("CBHS"), which is 50% owned by both the Company and COI and
engages in the behavioral healthcare provider business, (iii) the Company's
entry into the healthcare franchising business and (iv) the issuance by Magellan
of 2,566,622 warrants to Crescent and COI (1,283,311 Warrants each) with an
exercise price of $30 per share. CBHS leases the Purchased Facilities from
Crescent under a twelve-year operating lease ("Facilities Lease) (subject to
renewal) for $41.7 million annually, subject to adjustment, with a 5% escalator,
compounded annually. The Warrants issued to Crescent and COI have been valued at
$25 million in the Company's Balance Sheet. The exercise price of the COI
Warrants is $18.32. The COI Warrants have been ascribed no value in the
Company's Balance Sheet as the COI Warrants have nominal fair value. The Company
accounts for its 50% investment in CBHS under the equity method of accounting,
which significantly reduces the revenues and related operating expenses
presented in the Company's Statement of Operations. Divested Operations in the
Pro Forma Statements of Operations represent the businesses that are being
operated by CBHS after the closing of the Crescent Transactions. CBHS includes a
significant portion of the business included in Magellan's provider business
segment and a portion of Magellan's corporate overhead. A summary of Magellan's
provider business operations for the year ended September 30, 1997 is as follows
(in thousands):
<TABLE>
<CAPTION>
Earnings
Before Interest,
Income Taxes
and Depreciation
Net Revenue Minority Interest and Amortization
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
CBHS $ 555,324 $ 63,169 $ 20,073
Hospital-based joint ventures 99,962 13,081 3,205
European hospitals 29,236 6,975 1,221
Other 45,130 31,249 29
--------------------- --------------------- ---------------------
$ 729,652 $ 114,474 $ 24,528
===================== ===================== =====================
</TABLE>
The Company incurred a loss before income taxes, minority interest and
extraordinary items of approximately $59.9 million as a result of the Crescent
Transactions, which was recorded during the year ended September 30, 1997.
19
<PAGE>
The Unaudited Pro Forma Statements of Operations presentation assumes
that the net proceeds from the Crescent Transactions are deposited with no
investment return after payment of indebtedness outstanding under the Company's
Revolving Credit Agreement and industrial revenue bonds for certain of the
Purchased Facilities. The remaining net proceeds from the Crescent Transactions
are assumed to be partially utilized to fund the HAI acquisition. If the
remaining net proceeds from the Crescent Transactions (after funding the HAI
acquisition) were assumed to be invested at Magellan's historic temporary cash
investment rate of 5.5% for the year ended September 30, 1997 pro forma
consolidated net income and net income per common share would be $47.4 million
and $1.61 (primary) and $1.57 (fully diluted), respectively, for the year ended
September 30, 1997.
The Unaudited Pro Forma Consolidated Financial Statements do not
purport to be indicative of the results that actually would have been obtained
if the operations had been conducted as presented and they are not necessarily
indicative of operating results to be expected in future periods. The Unaudited
Pro Forma Consolidated Financial Statements and notes thereto should be read in
conjunction with the historical consolidated financial statements and notes
thereto of Magellan, which are incorporated herein by reference and HAI, which
appear elsewhere herein.
20
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For The Year Ended September 30, 1997
(in thousands, except per share amounts)
Divested
Operations -
Magellan Crescent Pro Forma Pro Forma
As Reported Transactions Adjustments Combined HAI
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Revenue $ 1,210,696 $ (555,324) $ 55,463 (1) $ 710,835 $ 116,736
-------------- -------------- -------------- -------------- --------------
Salaries, cost of care and other
operating expenses 978,513 (426,862) 4,719 (2) 556,370 88,002
Bad debt expense 46,211 (42,720) 0 3,491 0
Depreciation and amortization 44,861 (20,073) (177)(3) 24,611 312
Interest, net 45,377 (3,233) (6,833)(4) 35,311 (1,604)
Stock option expense 4,292 0 0 4,292 0
Equity in loss of CBHS 8,122 0 12,028 (5) 20,150 0
Loss on Crescent Transactions 59,868 0 (59,868)(6) 0 0
Unusual items 357 (2,500) 0 (2,143) 0
-------------- -------------- -------------- -------------- --------------
1,187,601 (495,388) (50,131) 642,082 86,710
-------------- -------------- -------------- -------------- --------------
Income before income taxes
and minority interest 23,095 (59,936) 105,594 68,753 30,026
Provision for income taxes 9,238 (23,974) 42,238 (7) 27,502 11,480
-------------- -------------- -------------- -------------- --------------
Income before minority interest 13,857 (35,962) 63,356 41,251 18,546
Minority interest 9,102 0 0 9,102 0
-------------- -------------- -------------- -------------- --------------
Net income $ 4,755 $ (35,962) $ 63,356 $ 32,149 (4)$ 18,546
============== ============== ============== ============== ==============
Average number of common
shares outstanding - primary 29,474 29,474
============== ==============
Average number of common
shares outstanding-fully diluted 30,167 30,167
============== ==============
Net income per common
share - primary $ 0.16 $ 1.09 (4)
============== ==============
Net income per common
share - fully diluted $ 0.16 $ 1.07 (4)
============== ==============
Pro Forma Pro Forma
Adjustments Consolidated
-------------- ---------------
Net Revenue $ (13,885)(8)$ 813,686
-------------- ---------------
Salaries, cost of care and other
operating expenses (10,914)(9) 633,458
Bad debt expense 0 3,491
Depreciation and amortization 3,948 (10) 28,871
Interest, net 0 33,707
Stock option expense 0 4,292
Equity in loss of CBHS 0 20,150
Loss on Crescent Transactions 0 0
Unusual items 0 (2,143)
-------------- ---------------
(6,966) 721,826
-------------- ---------------
Income before income taxes
and minority interest (6,919) 91,860
Provision for income taxes (2,768)(11) 36,214
-------------- ---------------
Income before minority interest (4,151) 55,646
Minority interest 0 9,102
-------------- ---------------
Net income $ (4,151) $ 46,544 (12)
============== ===============
Average number of common
shares outstanding - primary 29,474
===============
Average number of common
shares outstanding-fully diluted 30,167
===============
Net income per common
share - primary $ 1.58 (12)
===============
Net income per common $ 1.54 (12)
share - fully diluted ===============
</TABLE>
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
21
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1997
(In thousands)
ASSETS
Magellan Pro Forma Pro Forma
as Reported HAI Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents .......................... $ 372,878 $ 36,256 $ (122,100)(13) $ 275,830
(4,500)(13)
(6,704)(13)
Accounts receivable, net ........................... 107,998 6,771 -- 114,769
Other .............................................. 26,162 524 (495)(15) 26,191
--------- --------- ---------- -----------
Total Current Assets .......................... 507,038 43,551 (133,799) 416,790
Assets Restricted for Settlement of Unpaid
Claims and Other Long-Term Liabilities ............. 87,532 -- -- 87,532
Property and Equipment:
Land ............................................... 11,667 -- -- 11,667
Buildings and improvements ......................... 70,174 179 -- 70,353
Equipment .......................................... 63,719 2,286 1,535 (14) 67,540
--------- --------- ---------- -----------
145,560 2,465 1,535 149,560
Accumulated depreciation ........................... (37,038) (2,224) 2,224 (14) (37,038)
--------- --------- ---------- -----------
108,522 241 3,759 112,522
Construction in progress ........................... 692 -- -- 692
--------- --------- ---------- -----------
109,214 241 3,759 113,214
Other long-term assets .................................... 20,893 21 -- 20,914
Deferred income tax assets ................................ 1,158 57 (57)(15) 1,158
Investment in CBHS ........................................ 16,878 -- -- 16,878
Goodwill, net ............................................. 114,234 615 82,673 (16) 197,522
Other intangible assets, net .............................. 38,673 -- 20,668 (16) 59,341
--------- --------- ---------- -----------
$ 895,620 $ 44,485 $ (26,756) $ 913,349
========= ========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................... $ 45,346 4,530 $ (3,894)(17) $ 45,982
Accrued liabilities ................................ 170,429 16,729 352 (18) 187,510
Current maturities of long-term debt and
capital lease obligations ...................... 3,601 7 -- 3,608
--------- --------- ---------- -----------
Total Current Liabilities ..................... 219,376 21,266 (3,542) 237,100
Long-term debt and capital lease obligations .............. 391,693 3 -- 391,696
Reserve for unpaid claims ................................. 49,113 -- -- 49,113
Deferred credits and other long-term liabilities .......... 16,110 2 -- 16,112
Minority interest ......................................... 61,078 -- -- 61,078
Commitments and contingencies
Stockholders' equity:
Common stock ....................................... 8,361 1 (1)(19) 8,361
Additional paid-in capital ......................... 340,645 -- -- 340,645
Accumulated deficit ................................ (129,955) 23,213 (23,213)(19) (129,955)
Warrants outstanding ............................... 25,050 -- -- 25,050
Common stock in treasury ........................... (82,731) -- -- (82,731)
Cumulative foreign currency adjustments ............ (3,120) -- -- (3,120)
--------- --------- ---------- -----------
Total stockholders' equity .................... 158,250 23,214 (23,214) 158,250
--------- --------- ---------- -----------
$ 895,620 $ 44,485 $ (26,756) $ 913,349
========= ========= ========== ===========
</TABLE>
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
22
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The pro forma adjustment to net revenue represents Franchise Fees paid to
Magellan by CBHS pursuant to the Master Franchise Agreement for the 259
days ended June 16, 1997. As part of the Crescent Transactions, CBHS leases
the Purchased Facilities from Crescent under the Facilities Lease. The
annual base rent under the Facilities Lease begins at $40 million for pro
forma purposes and escalates 5% per year, compounded annually. The
Subordination Agreement between the Company and Crescent provides that the
Franchise Fees are subordinated in payment to the $40 million annual base
rent, 5% escalator rent and the additional rent under the Facilities Lease
due Crescent, in certain circumstances. The Company will be entitled to
pursue all available remedies for breach of the Master Franchise Agreement,
except that the Company does not have the right to take any action that
could reasonably be expected to force CBHS into bankruptcy or receivership.
If CBHS encounters a decline in earnings or financial difficulties, such
amounts due Crescent will be paid before any Franchise Fees are paid. The
Company receives from CBHS initial Franchise Fees of $78.3 million, subject
to increase. The Company provides CBHS with an array of services, including
advertising and marketing assistance, risk management services, outcomes
monitoring, consultation with respect to matters relating to CBHS' business
in which the Company has expertise and the Company's operation of a
telephone call center utilizing the "1-800-CHARTER" telephone number.
(2) The pro forma adjustments to salaries, supplies and other operating
expenses represent fees payable to CBHS of $7.6 million for the 259 day
period ended June 16, 1997 for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by Magellan, net of
reductions in corporate overhead of $2.9 million for the 259 day period
ended June 16, 1997, related to the transfer of existing personnel and
functions between Magellan and CBHS. Magellan personnel transferred to CBHS
and incremental corporate overhead occurred primarily in the human
resources, legal and finance and accounting functions.
(3) The pro forma adjustment to depreciation and amortization represents the
amortization expense related to intangible assets that became impaired as a
result of the Crescent Transactions.
(4) The pro forma adjustment to interest expense, net, represents reductions in
interest expense as a result of paying off the outstanding borrowings under
the Revolving Credit Agreement with no assumed investment of the excess
proceeds from the Crescent Transactions. If the excess proceeds from the
Crescent Transactions were assumed to be invested at Magellan's historic
temporary cash investment rate of 5.5% for the year ended September 30,
1997, pro forma combined net income and net income per common share would
be $36.8 million and $1.25 (primary) and $1.22 (fully diluted)
respectively, for the year ended September 30, 1997.
(5) The pro forma adjustments to equity in loss of CBHS represent Magellan's
percentage interest (50%) in CBHS' pro forma loss for the 259 day period
ended June 16, 1997. Magellan's investment in CBHS is accounted for under
the equity method of accounting. The timing and terms of a 10% equity
interest grant to CBHS management will be addressed by the governing board
of CBHS at a later date. The Company anticipates that the granting of a 10%
equity interest to CBHS management will result in equally shared dilution
of ownership interest between Magellan and COI and that the grant will be
at an exercise price at least equal to the fair value of the underlying
equity at the date of grant, which will not result in compensation expense
under the provisions of APB Opinion 25. Magellan's ownership interest in
CBHS is reflected at its initial ownership percentage of 50% for the
purposes of computing pro forma equity in loss of CBHS. The Condensed Pro
Forma Statements of Operations are as follows (in thousands):
23
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended
September 30, 1997
------------------------------------------------------------------------
CBHS
Operations -
106 Days Ended
Divested September 30, Pro Forma Pro Forma
STATEMENTS OF OPERATIONS: Operations 1997 Adjustments Consolidated
---------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $ 555,324 $ 213,730 $ 2,565 (i) $ 771,619
----------- ------------ ------------ ------------
Salaries, supplies and other
operating expenses 426,862 210,277 103,723 (ii) 740,862
Bad debt expense 42,720 17,437 -- 60,157
Depreciation and amortization 20,073 668 (17,333)(iii) 3,408
Interest, net 3,233 1,592 167 (iv) 4,992
Unusual items 2,500 -- -- 2,500
----------- ------------ ------------ ------------
495,388 229,974 86,557 811,919
----------- ------------ ------------ ------------
Income (loss) before income taxes 59,936 (16,244) (83,992) (40,300)
Provision for income taxes 23,974 -- (23,974)(v) --
----------- ------------ ------------ ------------
Net income (loss) $ 35,962 $ (16,244) $ (60,018) $ (40,300)
=========== ============ ============ ============
</TABLE>
(i) Fees from Magellan for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by Magellan (See
Note 2) less non-recurring collection fees receivable from Magellan of
approximately $5.0 million during the 106 days ended September 30, 1997.
(ii) The pro forma adjustments to salaries, supplies and other operating
expenses are as follows (000's):
Franchise Fees (See Note 1) $ 55,463
Rent Expense under the Facilities Lease 44,665
Additional Corporate Overhead (See Note 2) 3,595
-----------------------
$ 103,723
=======================
(iii)The pro forma adjustment to depreciation and amortization represents the
decrease in depreciation expense as a result of the sale of property and
equipment to Crescent by Magellan and the elimination of amortization
expense related to impaired intangible assets.
(iv) The pro forma adjustment to interest, net, is computed as follows (000's):
Interest expense on serviced IRBs $ (3,233)
Interest expense for new borrowings 3,400
-----------------------
$ 167
=======================
Average borrowings 60,000
Borrowing rate 8.%
-----------------------
Annual Interest $ 4,800
=======================
259 Days Interest $ 3,400
=======================
(v) CBHS is a limited liability company. Accordingly, no tax benefit is
presented as the tax consequences of CBHS ownership will pass through to
Magellan and COI.
24
<PAGE>
(6) The pro forma adjustment to Loss on Crescent Transactions represents the
elimination of the non-recurring losses incurred by Magellan as a result of
consummating the Crescent Transactions on June 17, 1997.
(7) The pro forma adjustments to provision for income taxes represent the tax
expense related to the pro forma adjustments at the Company's historic
effective tax rate of 40%.
(8) The pro forma adjustments to net revenue represents the effect of
renegotiated contractual rates between HAI and AUSHC as a direct result of
the acquisition of HAI by Magellan.
(9) The pro forma adjustments to salaries, cost of care and other operating
expenses represents the elimination of AUSHC's overhead allocation to HAI
of $17.2 million for the year ended September 30, 1997, less bonus expense
of $1.1 million for the year ended September 30, 1997, that was reflected
in AUSHC's financial statements for HAI's benefit and expenses of $5.1
million that HAI will incur to absorb corporate functions previously
performed by AUSHC. The AUSHC corporate functions absorbed by HAI include,
but are not limited to, information technology, human resources and legal.
Magellan does not anticipate incurring any additional corporate overhead as
a result of the HAI acquisition.
(10) The pro forma adjustments to depreciation and amortization represents (i)
the change in the depreciation of HAI equipment relating to the adjustment
of HAI equipment to fair value and (ii) the change in amortization expense
which resulted from the adjustments to intangible assets recorded as part
of the HAI purchase price allocation. The calculation of the adjustments
are summarized below (in thousands):
Estimated Fair Value of Property and Equipment $ 4,000
Estimated Useful Life (Years) / 5
---------
Estimated Annual Depreciation $ 800
=========
Estimated Goodwill $ 83,288
Estimated Useful Life / 40
---------
Estimated Annual Amortization 2,082
=========
Estimated Other Intangible Assets (primarily client lists) $ 20,668
Estimated Useful Life / 15
---------
Estimated Annual Amortization $ 1,378
=========
Total Estimated Depreciation and Amortization $ 4,260
HAI Historical Depreciation and Amortization $ (312)
---------
Pro Forma Adjustment $ 3,948
=========
The allocation of the HAI purchase price to equipment, goodwill and
identifiable intangible assets above and estimated useful lives are
based on the Company's preliminary valuations, which are subject to
change upon receiving independent appraisals for such assets.
Subsequent to the consummation of the HAI acquisition, the Company may
be required to make Contingent Payments during the first five Contract
Years to AUSHC of up to an aggregate of $300 million. The Contingent
Payments, if any, would be recorded as goodwill and client lists,
which would result in estimated additional annual amortization expense
of $11 million to $13 million in future periods. The maximum
Contingent Payment attributable to each Contract Year is $60 million.
(11) The pro forma adjustments to provision for income taxes represent the
tax expense related to the pro forma adjustments at the Company's
historic effective tax rate of 40%.
25
<PAGE>
(12) If the remaining excess proceeds from the Crescent Transactions (after
the HAI acquisition) were assumed to be invested at Magellan's historic
temporary cash investment rate, pro forma consolidated net income and
net income per common share would be $48.0 million and $1.63 (primary)
and $1.59 (fully diluted), respectively, for the year ended September
30, 1997.
(13) The pro forma adjustments to cash and cash equivalents represent (i)
the use of cash on hand to fund the HAI purchase price of $122.1
million and related transaction costs of $4.5 million and (ii)
estimated working capital settlement payment to AUSHC as agreed to by
the parties in the Stock Purchase Agreement, as amended.
(14) The pro forma adjustments to equipment and accumulated depreciation
represents the changes necessary to value HAI equipment at fair value.
(15) The pro forma adjustment to other current assets and deferred income
tax assets represents the elimination of HAI tax obligations that will
remain with AUSHC after the closing.
(16) The pro forma adjustments to goodwill and other intangible assets
represents additions to effect for the HAI purchase price allocation.
See Note 10 for further information regarding the nature of HAI
intangible assets.
(17) The pro forma adjustments to accounts payable represents the
elimination of related party balances between HAI and AUSHC.
(18) The pro forma adjustment to accrued liabilities represents certain
liabilities assumed by Magellan from AUSHC that were reflected in
AUSHC's financial statements, including accrued vacation and accrued
incentive, offset by the elimination of current income taxes payable
that will remain with AUSHC after the closing.
(19) The pro forma adjustments to common stock and accumulated deficit
represent the elimination of the net balance of HAI's stockholder's
equity.
26
<PAGE>
Exhibits
2(a) Stock Purchase Agreement, dated August 5, 1997, between the Company and
Aetna Insurance Company of Connecticut.
2(b) Master Service Agreement, dated August 5, 1997, between the Company, Aetna
U.S. Healthcare, Inc. and Human Affairs International, Incorporated.
2(c) Amendment to Stock Purchase Agreement, dated December 4, 1997, between the
Company and Aetna Insurance Company of Connecticut.
2(d) First Amendment to Master Services Agreement, dated December 4, 1997,
between the Company, Aetna U.S. Healthcare, Inc. and Human Affairs
International, Incorporated.
23(a) Consent of KPMG Peat Marwick LLP.
99(a) Press release, dated August 5, 1997.
99(b) Press release, dated December 5, 1997
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 17, 1997 Magellan Health Services, Inc.
By: /s/ Craig L. McKnight
------------------------------
Executive Vice President and
Chief Financial Officer
28
Execution Copy
- ------------------------------------------------------------------------------
Stock Purchase Agreement
dated as of August 5, 1997
between
Aetna Insurance Company of Connecticut
and
Magellan Health Services, Inc.
- ------------------------------------------------------------------------------
<PAGE>
Table of Contents
Page
Introduction...................................................................1
ARTICLE I
Definitions
1.1. Definitions...............................................................1
1.2. Defined Terms.............................................................3
ARTICLE II
Closing Matters
2.1. Closing Payment...........................................................4
2.2. Closing...................................................................4
2.3. Closing Balance Sheet.....................................................5
2.4. Adjustment of Closing Payment.............................................6
ARTICLE III
Representations and Warranties of Seller
3.1. Corporate Existence and Power.............................................7
3.2. Corporate Authorization...................................................7
3.3. Governmental Authorization; Consents......................................7
3.4. Non-Contravention.........................................................8
3.5. Capitalization............................................................8
3.6. Subsidiaries..............................................................8
3.7. Financial Statements......................................................9
3.8. Properties................................................................9
3.9. No Undisclosed Material Liabilities......................................10
3.10. Litigation..............................................................10
3.11. Material Contracts......................................................10
3.12. Compliance with Laws....................................................12
3.13. Brokers' Fees...........................................................12
3.14. Intellectual Property...................................................12
3.15. Permits and Licenses....................................................12
3.16. Labor Matters...........................................................12
3.17. Insurance Policies......................................................13
3.18. Absence of Certain Commercial Practices.................................13
3.19. Assets..................................................................13
3.20. No Adverse Changes......................................................14
3.21. Disclosure..............................................................14
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ARTICLE IV
Representations And Warranties Of Purchaser
4.1. Organization and Existence...............................................14
4.2. Corporate Authorization..................................................14
4.3. Governmental Authorization; Consents.....................................15
4.4. Non-Contravention........................................................15
4.5. Brokers' Fees............................................................15
4.6. Financing................................................................15
4.7. Purchase for Investment..................................................15
4.8. Litigation...............................................................15
4.9. Inspections..............................................................16
ARTICLE V
Covenants Of Seller
5.1. Conduct of the Company...................................................16
5.2. Access to Information; Disclosure Supplements............................18
5.3. Notices of Certain Events................................................19
5.4. Resignations.............................................................19
5.5. No Shop..................................................................19
5.6. Contributed Assets.......................................................19
ARTICLE VI
Covenants Of Purchaser
6.1. Confidentiality..........................................................20
6.2. Access...................................................................20
6.3. Insurance...............................................................20
6.4. Use of Names.............................................................20
6.5. Headquarters Lease.......................................................21
6.6. Retention Arrangements...................................................21
ARTICLE VII
Covenants Of Both Parties
7.1. Reasonable Efforts.......................................................21
7.2. Certain Filings..........................................................21
7.3. Public Announcements.....................................................21
7.4. Related Agreements.......................................................22
7.5. Home Office Lease........................................................22
7.6. Co-Located Space.........................................................22
7.7. Transition Services Standard.............................................22
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ARTICLE VIII
Tax Matters
8.1. Tax Definitions..........................................................22
8.2. Tax Representations......................................................23
8.3. Elections................................................................24
8.4. Termination of Existing Tax Sharing Agreements...........................25
8.5. Tax Returns..............................................................25
8.6. Other Tax Matters........................................................26
8.7. Cooperation on Tax Matters...............................................26
8.8. Certain Disputes.........................................................26
8.9. Tax Indemnification......................................................27
ARTICLE IX
Employee Benefits
9.1. Employee Benefits Definitions............................................29
9.2. ERISA Representations....................................................29
9.3. Employees................................................................31
9.4. Pension Plan.............................................................31
9.5. Individual Account Plan..................................................31
9.6. Other Employee Plans and Benefit Arrangements............................31
9.7. Plans Following the Closing..............................................32
9.8. Medical and Dental Insurance Coverage....................................33
9.9. Assumption of Liabilities................................................33
9.10. Third Party Beneficiaries...............................................34
ARTICLE X
Conditions To Closing
10.1. Conditions to Obligations of Each Party.................................34
10.2. Conditions to Obligation of Purchaser...................................34
10.3. Conditions to Obligation of Seller......................................36
ARTICLE XI
Survival; Indemnification
11.1. Survival................................................................37
11.2. Indemnification.........................................................37
11.3. Procedures; Exclusivity.................................................39
11.4. Investigation...........................................................39
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ARTICLE XII
Termination
12.1. Grounds for Termination.................................................39
12.2. Effect of Termination...................................................40
ARTICLE XIII
Miscellaneous
13.1. Notices.................................................................40
13.2. Amendments; No Waivers..................................................41
13.3. Expenses................................................................41
13.4. Successors and Assigns..................................................41
13.5. Governing Law...........................................................41
13.6. Submission to Jurisdiction..............................................41
13.7. Waiver of Jury Trial....................................................42
13.8. Specific Performance....................................................42
13.9. Counterparts; Effectiveness.............................................42
13.10. Entire Agreement.......................................................42
13.11. Severability...........................................................42
13.12. Captions; Construction.................................................42
13.13. Third Party Beneficiaries..............................................42
13.14. No Set-off.............................................................42
Exhibits
Exhibit A Form of Guaranty of Aetna U.S. Healthcare Inc.
Exhibit B Form of Master Agreement
Exhibit C Form of Transition Services Agreement
Exhibit D Form of Non-Competition Covenant
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Stock Purchase Agreement, dated as of August 5, 1997 (the
"Agreement"), between Aetna Insurance Company of Connecticut, a Connecticut
insurance corporation ("Seller"), and Magellan Health Services, Inc., a Delaware
corporation ("Purchaser").
Introduction
Seller is the owner of 10,000 shares (the "Shares") of common
stock, no par value (the "Common Stock"), of Human Affairs International,
Incorporated, a Utah corporation (the "Company"), constituting all of the issued
and outstanding capital stock of the Company;
Purchaser desires to purchase the Shares from Seller, and
Seller desires to sell the Shares to Purchaser, upon the terms and subject to
the conditions set forth in this Agreement;
In consideration of the foregoing and the representations,
warranties, covenants, agreements and conditions contained in this Agreement,
the parties agree as follows:
ARTICLE I
Definitions
1.1. Definitions. (a) The following terms, as used herein, have the following
meanings:
"Affiliate" means, with respect to any Person, any Person directly or
indirectly controlling, controlled by, or under common control with such other
Person; provided that neither the Company nor any Subsidiary shall be considered
an Affiliate of Seller.
"Balance Sheet" means the consolidated balance sheet of the Company and its
consolidated Subsidiaries as of June 30, 1997 referred to in Section 3.7.
"Balance Sheet Date" means June 30, 1997.
"Base Stockholder's Equity" means $15,500,000.00.
"Closing Balance Sheet" means a consolidated balance sheet of the Company
and its consolidated Subsidiaries as at the close of business on the day
immediately preceding the Closing Date, together with the notes thereto.
"Closing Date" means the date of the Closing.
"Closing Stockholder's Equity" means the consolidated stockholder's equity
of the Company and its consolidated Subsidiaries as of the close of business on
the day immediately preceding the Closing Date as set forth on the Closing
Balance Sheet.
"Disclosure Schedule" means the disclosure schedule delivered by Seller to
Purchaser simultaneously with the execution of this Agreement.
"Final Stockholder's Equity" means Closing Stockholder's Equity (i) as
shown in Seller's
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calculation delivered pursuant to Section 2.3(a) if no notice of disagreement
with respect thereto is duly delivered pursuant to Section 2.3(b) or (ii) if
such a notice of disagreement is duly delivered, (A) as agreed by the parties
pursuant to Section 2.3(c) or (B) in the absence of such agreement, as shown in
the independent accountant's calculation delivered pursuant to Section 2.3(c);
provided that Final Stockholder's Equity shall not in any event be more than
Seller's calculation of Closing Stockholder's Equity delivered pursuant to
Section 2.3(a) nor less than Purchaser's calculation of Closing Stockholder's
Equity delivered pursuant to Section 2.3(b).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
"Intellectual Property Right" means any trademark, service mark,
registration thereof or application for registration therefor, trade name,
invention, patent, patent application, trade secret, know-how, copyright,
copyright registration, application for copyright registration, or any other
similar type of proprietary intellectual property right.
"knowledge of Seller" means the actual knowledge, on the date of this
Agreement, if any, of any of the officers, directors or employees of Seller or
the Company set forth in Section 1.1 of the Disclosure Schedule.
"Lien" means, with respect to any asset (including the Shares), any
mortgage, lien, pledge, charge, security interest, option, restriction on
transfer or other encumbrance of any kind in respect of such asset.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Purchaser Disclosure Schedule" means the disclosure schedule delivered by
Purchaser to Seller simultaneously with the execution of this Agreement.
"Subsidiary" means any entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are owned directly or
indirectly by the Company.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
---- -------
Accounting Referee 8.8
Benefit Arrangement 9.1
Closing 2.2
Closing Payment 2.1
Code 8.1
Combined State Tax 8.1
Common Stock Introduction
Company Introduction
Company Securities 3.5
Contracts 3.11
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Contributed Assets 3.19
Customer Contracts 3.11
Damages 11.2
De Minimis Claims 11.2
Direct Rollover 9.5
Employee Plans 9.2
ERISA 9.1
ERISA Affiliate 9.1
Federal Taxes 8.1
Guarantor 10.2(g)
Indemnified Party 11.2
Indemnifying Party 11.2
Individual Account Plan 9.1
Headquarters Lease 6.5
Licenses 3.15
Master Agreement 10.2(g)
Multiemployer Plan 9.1
PBGC 9.1
Pension Plan 9.1
Post-Closing Tax Period 8.1
Pre-Closing Tax Period 8.1
Purchaser Plan 9.5
Purchaser Indemnified Parties 11.2
Related Transaction Agreements 7.4
Retention Arrangements 6.6
Returns 8.2
Seller Indemnified Parties 11.2
Shares Introduction
Subsidiary Securities 3.6
Tax 8.1
Tax Indemnification Period 8.1
Tax Sharing Agreement 8.1
Title IV Plan 9.1
Transferred Employees 9.3
Transition Services Agreement 10.2(i)
1.2. Defined Terms. (a) All references in this Agreement to "Articles",
"Sections" and other subdivisions are to the designated Articles, Sections and
other subdivisions of this Agreement. The words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement and not to
any particular Article, Section or other subdivision.
(b) In this Agreement in the computation of periods of time from a
specified date to a later specified date, the word "from" means "from and
including" and the words "to" and "until" each mean "to but excluding".
(c) A reference to "including" in this Agreement shall mean including
without limitation.
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(d) A reference to a Person in this Agreement includes its successors and
permitted assigns (if any).
(e) A reference to any agreement or contract in this Agreement includes
permitted amendments and supplements.
(f) A reference to a law in this Agreement includes any amendment or
modification to such law and any rules or regulations issued thereunder.
ARTICLE II
Closing Matters
2.1 Closing Payment. Upon the terms and subject to the conditions of this
Agreement, Seller agrees to sell to Purchaser, and Purchaser agrees to purchase
from Seller, the Shares at the Closing free and clear of any and all Liens. The
consideration payable at Closing for the Shares (the "Closing Payment") is
$122,100,000 in cash, subject to adjustment as provided in Section 2.4.
2.2 Closing. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place five business days following the date
on which all conditions to Closing have been satisfied or waived at 10:00 a.m.,
at the offices of Howard, Darby & Levin, 1330 Avenue of the Americas, New York,
New York, or at such other time or at such other place as Purchaser and Seller
may agree. At the Closing,
(a) Purchaser shall deliver to Seller:
(i) the Closing Payment, by wire transfer of immediately available funds to
such account as Seller may direct by written notice delivered to Purchaser by
Seller at least two business days prior to the Closing Date; and
(ii) such other documents and certificates duly executed as may be required
to be delivered by Purchaser pursuant to the terms of this Agreement (including
Section 10.3).
(b) Seller shall deliver to Purchaser:
(i) certificates for the Shares duly endorsed or accompanied by stock
powers duly endorsed in blank, with any required transfer stamps affixed
thereto; and
(ii) such other documents and certificates duly executed as may be required
to be delivered by Seller pursuant to the terms of this Agreement (including
Section 10.2).
2.3 Closing Balance Sheet. (a) (i) As promptly as practicable after the
Closing Date, Seller will cause the Closing Balance Sheet to be prepared and
will prepare a certificate based on such
4
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Closing Balance Sheet setting forth its calculation of Closing Stockholder's
Equity. As promptly as practicable, but no later than 90 days, after the Closing
Date, Seller will cause the Closing Balance Sheet together with its certificate
to be delivered to Purchaser. Except as otherwise provided in subsection (ii)
below, the Closing Balance Sheet shall (x) fairly present in all material
respects the consolidated financial position of the Company and its consolidated
Subsidiaries as at the close of business on the day immediately preceding the
Closing Date in accordance with generally accepted accounting principles applied
on a basis consistent with those used in the preparation of the Balance Sheet
(including those matters discussed in Section 3.7(b) of the Disclosure
Schedule), subject to normal, historically consistent year-end adjustments, none
of which will be material in nature, (y) include line items substantially
consistent with those in the Balance Sheet and (z) be prepared in accordance
with accounting policies and practices applied on a basis consistent with those
used in the preparation of the Balance Sheet.
(ii) Prior to the date of the Closing Balance Sheet, Seller shall (i)
determine the amount of all federal and state income taxes (or a reasonable
estimate thereof) which (but for the last sentence of this paragraph) would be
accrued as a current or deferred liability under generally accepted accounting
principles ("Closing Accrued Tax Liabilities") on the Closing Balance Sheet and
(ii) determine the amount (or reasonable estimate thereof) of all federal and
state current or deferred income tax assets ("Closing Accrued Tax Assets") which
would be recorded as an asset under generally accepted accounting principles on
the Closing Balance Sheet. Prior to the date of the Closing Balance Sheet,
Seller shall assume all the Closing Accrued Tax Liabilities and cause to be
transferred to Seller (by dividend or otherwise) the amount of all the Closing
Accrued Tax Assets; it being understood and agreed that the Closing Balance
Sheet shall not contain any balances relating to any state or federal income tax
current or deferred assets or liabilities.
If the Closing Accrued Tax Liabilities exceed the Closing Accrued Tax
Assets, the difference shall be referred to as the "Net Accrued Tax Liability";
if the Closing Accrued Tax Assets exceed the Closing Accrued Tax Liabilities,
the difference shall be referred to as the "Net Accrued Tax Assets." In the
event the above determination results in Net Accrued Tax Liability, the Seller
shall be entitled to cause the Company, prior to the date of the Closing Balance
Sheet, to dividend cash to the Seller (or transfer to the Seller by adjustment
of intercompany accounts) in the amount of Net Accrued Tax Liability. In the
event the above determination results in Net Accrued Tax Assets, the Seller
shall contribute to the Company, prior to the date of the Closing Balance Sheet,
cash (or transfer to the Company by adjusting intercompany accounts) in the
amount of Net Accrued Tax Assets.
(b) If Purchaser disagrees with Seller's calculation of Closing
Stockholder's Equity delivered pursuant to Section 2.3(a), Purchaser may, within
30 days after delivery of the documents referred to in Section 2.3(a), deliver a
notice to Seller disagreeing with such calculation and setting forth Purchaser's
calculation of such amount. Any such notice of disagreement shall specify those
items or amounts as to which Purchaser disagrees, and Purchaser shall be deemed
to have agreed with all other items and amounts contained in the Closing Balance
Sheet and the calculation of Closing Stockholder's Equity delivered pursuant to
Section 2.3(a).
(c) If a notice of disagreement shall be duly delivered pursuant to Section
2.3(b), the parties shall, during the 15 days following such delivery, use their
best efforts to reach agreement on the disputed items or amounts in order to
determine, as may be required, the amount of Closing Stockholder's Equity, which
amount shall not be more than the amount thereof shown in Seller's
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calculation delivered pursuant to Section 2.3(a) nor less than the amount
thereof shown in Purchaser's calculation delivered pursuant to Section 2.3(b).
If, during such period, the parties are unable to reach such agreement, they
shall promptly thereafter cause an independent accounting firm of nationally
recognized standing reasonably satisfactory to Seller and Purchaser (who shall
not have any material relationship with Seller or Purchaser), promptly to review
this Agreement and the disputed items or amounts for the purpose of calculating
Closing Stockholder's Equity. In making such calculation, such independent
accountants shall consider only those items or amounts in the Closing Balance
Sheet or Seller's calculation of Closing Stockholder's Equity as to which
Purchaser has disagreed. Such independent accountants shall deliver to Seller
and Purchaser, as promptly as practicable, a report setting forth such
calculation. Such report shall be final and binding upon the parties hereto. The
cost of such review and report shall be borne (i) by Seller if the difference
between Final Stockholder's Equity and Closing Stockholder's Equity as set forth
in Seller's calculation of Closing Stockholder's Equity delivered pursuant to
Section 2.3(a) is greater than the difference between Final Stockholder's Equity
and Closing Stockholder's Equity as set forth in Purchaser's calculation of
Closing Stockholder's Equity delivered pursuant to Section 2.3(b), (ii) by
Purchaser if the first such difference is less than the second such difference
and (iii) otherwise equally by Seller and Purchaser.
(d)The parties hereto agree that they will, and agree to cause their
respective independent accountants and the Company to, cooperate and assist in
the preparation of the Closing Balance Sheet and the calculation of Closing
Stockholder's Equity and in the conduct of the review referred to in Section
2.3(c), including without limitation the making available to the extent
necessary of books, records, work papers and personnel.
2.4 Adjustment of Closing Payment. (a) If Base Stockholder's Equity exceeds
Final Stockholder's Equity by at least $500,000, Seller shall pay to Purchaser,
as an adjustment to the Closing Payment, in the manner and with interest as
provided in Section 2.4(b), the amount by which Base Stockholder's Equity
exceeds Final Stockholder's Equity. If Final Stockholder's Equity exceeds Base
Stockholder's Equity by at least $500,000, Purchaser shall pay to Seller, in the
manner and with interest as provided in Section 2.4(b), the amount by which
Final Stockholder's Equity exceeds Base Stockholder's Equity. Any such payment
pursuant to this Section 2.4(a) shall be made at a mutually convenient time and
place (i) within 40 days after Seller's delivery of the documents referred to in
Section 2.3(a) if no notice of disagreement with respect to Closing
Stockholder's Equity is duly delivered pursuant to Section 2.3(b) or (ii) if a
notice of disagreement with respect to Closing Stockholder's Equity is duly
delivered pursuant to Section 2.3(b) then within 10 days after the earlier of
(A) agreement between the parties pursuant to Section 2.3(c) with respect to
Closing Stockholder's Equity and (B) delivery of the calculation of Closing
Stockholder's Equity referred to in Section 2.3(c).
(b) Method of Payment. Any payments pursuant to this Section 2.4 shall be
made by wire transfer of immediately available funds to such account as the
payee may direct by written notice delivered to the payor by the payee at least
two business days prior to the date of such payment. The amount of any payment
to be made pursuant to this Section 2.4 shall bear interest from and including
the Closing Date to but excluding the date of payment at a rate per annum equal
to the rate publicly announced from time to time by The Chase Manhattan Bank in
New York City as its prime rate in effect from time to time during the period
from the Closing Date to the date of payment. Such interest shall be payable at
the same time as the payment to which it relates and shall be calculated daily
on the
6
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basis of a year of 365 days and the actual number of days for which due.
ARTICLE III
Representations and Warranties of Seller
Seller hereby represents and warrants to Purchaser that:
3.1 Corporate Existence and Power. Each of Seller and the Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation, and has all requisite corporate power
and authority to carry on its business as now being conducted. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where the character of the property owned or leased by it
or the nature of its activities make such qualification necessary. Seller has
heretofore delivered to Purchaser true and complete copies of the certificate of
incorporation and bylaws of Seller and the Company as currently in effect.
3.2 Corporate Authorization. The execution, delivery and performance by
Seller of this Agreement and the consummation by Seller of the transactions
contemplated hereby are within Seller's corporate powers and have been duly
authorized by all necessary corporate action on the part of Seller and the
shareholder of Seller. This Agreement constitutes a valid and binding obligation
of Seller, enforceable against Seller in accordance with its terms, subject to
(i) bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization and
other similar laws affecting creditors' rights generally and the rights of
creditors of insurance companies generally and (ii) general principles of equity
(regardless of whether considered in a proceeding at law or in equity).
3.3 Governmental Authorization; Consents. (a) Except as set forth in
Section 3.3(a) of the Disclosure Schedule and except for applicable requirements
of the HSR Act, neither the execution and delivery of this Agreement by Seller,
nor the consummation by Seller of the transactions contemplated hereby will
require any action by or in respect of, or filing with, any governmental body,
agency, official or authority (other than actions or filings that are immaterial
to Purchaser, the Company and the Subsidiaries, and the consummation of the
transactions contemplated hereby).
(b) Except as set forth in Section 3.3(b) of the Disclosure Schedule, no
consent, approval, waiver or other action by any Person (other than any
governmental body, agency, official or authority referred to in (a) above) under
any contract, agreement, indenture, lease, instrument or other document listed
in Section 3.11(a) of the Disclosure Schedule is required or necessary for the
execution, delivery and performance of this Agreement by Seller or the
consummation of the transactions contemplated hereby.
3.4 Non-Contravention. Except as set forth in Section 3.4 of the Disclosure
Schedule, the execution, delivery and performance by Seller of this Agreement do
not and will not (i) contravene or conflict with the certificate of
incorporation or bylaws of Seller, the Company or any Subsidiary, (ii) assuming
compliance with the matters referred to in Section 3.3(a), contravene or
conflict in any material respect with or constitute a violation in any material
respect of any provision of any law, regulation, judgment, injunction, order or
decree binding upon or applicable to Seller, the Company or
7
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any Subsidiary; (iii) constitute a default under, or give rise to any right of
termination, cancellation or acceleration of any right or obligation of Seller,
the Company or any Subsidiary under, or to a loss of any benefit to which
Seller, the Company or any Subsidiary is entitled under, any provision of any
material agreement, contract or other material instrument binding upon Seller,
the Company or any Subsidiary or any material license, franchise, permit or
other similar material authorization held by Seller, the Company or any
Subsidiary or (iv) result in the creation or imposition of any Lien on any
material asset of Seller, the Company or any Subsidiary.
3.5 Capitalization. The authorized capital stock of the Company consists of
50,000 shares of Common Stock. As of the date hereof, there are outstanding
10,000 shares of Common Stock. All outstanding shares of capital stock of the
Company are duly authorized, validly issued, fully paid and non-assessable.
Except as set forth in this Section, there are no outstanding (i) shares of
capital stock or other voting securities of the Company, (ii) securities of the
Company convertible into or exchangeable for shares of capital stock or voting
securities of the Company or (iii) options or other rights to acquire from the
Company, and there is no obligation of the Company to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of the Company (the items in clauses (i), (ii) and
(iii) being referred to collectively as the "Company Securities"). There are no
outstanding obligations of the Company or any Subsidiary to issue or deliver or
to repurchase, redeem or otherwise acquire any Company Securities. Seller is and
will be at the Closing the record and beneficial owner of the Shares, free and
clear of any Lien whatsoever, and will transfer and deliver to Purchaser at the
Closing valid title to the Shares free and clear of any Lien. There are no
stockholder agreements, voting agreements, voting trusts, proxies or other
agreements in effect with respect to the voting or transfer of the Common Stock.
3.6 Subsidiaries. (a) Each Subsidiary is a corporation duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, has all requisite corporate power and authority to carry on its
business as now conducted and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities make such
qualification necessary. All Subsidiaries and their respective jurisdictions of
incorporation are identified in Section 3.6(a) of the Disclosure Schedule.
Seller has heretofore delivered to Purchaser true and complete copies of the
certificate of incorporation and bylaws of each Subsidiary as currently in
effect.
(b) Except as set forth in Section 3.6(b) of the Disclosure Schedule, all
of the outstanding capital stock of, or other ownership interests in, each
Subsidiary, is owned, of record and beneficially, by the Company or another
Subsidiary, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other ownership interests). There are no
outstanding (i) securities of the Company or any Subsidiary convertible into or
exchangeable for shares of capital stock or other voting securities or ownership
interests in any Subsidiary or (ii) options or other rights to acquire from the
Company or any Subsidiary, and there is no obligation of the Company or any
Subsidiary, to issue, any capital stock, voting securities or other ownership
interests in, or any securities convertible into or exchangeable for any capital
stock, voting securities or ownership interests in, any Subsidiary (the items in
clauses (i) and (ii) being referred to collectively as the "Subsidiary
Securities"). There are no outstanding obligations of the Company or any
Subsidiary to repurchase, redeem or otherwise acquire any outstanding
8
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Subsidiary Securities.
(c) Other than the Subsidiaries identified in Section 3.6(a) of the
Disclosure Schedule, there are no other corporations, partnerships, limited
liability companies, joint ventures or other entities in which the Company or
any Subsidiary owns, of record or beneficially, any direct or indirect equity
interest or any right (contingent or otherwise) to acquire the same. There are
no stockholder agreements, voting agreements, voting trusts, proxies or other
agreements in effect with respect to the voting or transfer of the capital stock
of any Subsidiary.
3.7 Financial Statements. The audited consolidated balance sheets of the
Company as of December 31, 1995 and 1996 and the related consolidated statements
of income, stockholder's equity and cash flows for each of the years then ended,
and the unaudited consolidated balance sheet of the Company as of June 30, 1997
and the related consolidated statements of income and stockholder's equity for
the six month period then ended, respectively, attached hereto as Section 3.7(a)
of the Disclosure Schedule, fairly present in all material respects, in
conformity with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto or as set forth on
Section 3.7(b) of the Disclosure Schedule), the consolidated financial position
of the Company and its consolidated Subsidiaries as of the dates thereof and
their consolidated results of operations and, in the case of the audited
financial statements, cash flows for the periods then ended (subject to normal,
historically consistent year-end adjustments in the case of the unaudited
interim financial statements).
3.8 Properties. (a) Neither the Company nor any Subsidiary owns any real
property. The Company and the Subsidiaries have good and marketable title to, or
in the case of leased property have valid leasehold interests in, all assets
reflected on the Balance Sheet or acquired after the Balance Sheet Date, except
for assets sold, or leaseholds terminated, since the Balance Sheet Date in the
ordinary course of business consistent with past practices. None of such assets
is subject to any Liens, except: (i) Liens disclosed on the Balance Sheet; (ii)
Liens for taxes not yet due or being contested in good faith (and for which
adequate accruals or reserves have been established on the Balance Sheet); (iii)
Liens which do not materially detract from the value of such property or assets
as now used, or materially interfere with any present or intended use of such
property or assets; (iv) Liens attaching by operation of law, incurred in the
ordinary course of business consistent with past practices and securing payments
not past due; or (v) Liens with respect to which deposits or pledges have been
made to obtain the release of any such Liens described in clause (iv) above.
(b) The accounts receivable reflected on the Balance Sheet and all accounts
receivable arising between the Balance Sheet Date and the date of this Agreement
arose from bona fide transactions in the ordinary course of business and are not
subject to offset or deduction, and the goods and/or services involved have been
sold, delivered and/or fully-performed. Management of the Company believes that
adequate provision has been made for contractual discounts and adjustments to
all such accounts receivable from third-party payors.
3.9 No Undisclosed Material Liabilities. To the knowledge of the Company
(after reasonable inquiry), there are no liabilities of the Company or any
Subsidiary of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, other than (i) liabilities disclosed or
provided for in the Balance Sheet or in the notes to the balance sheet as of
December 31,
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1996 referred to in Section 3.7, (ii) liabilities arising out of items disclosed
in Section 3.10 of the Disclosure Schedule, (iii) liabilities that the Company
is retaining, or the Purchaser is assuming, pursuant to Article IX, and (iv)
current liabilities accruing in the ordinary course of business that are
immaterial to the Company and the Subsidiaries taken as a whole.
3.10 Litigation. Except as set forth in Section 3.10 of the Disclosure
Schedule, there is no material action, suit, investigation, proceeding or claim
made in writing (other than claims made under benefit plans pursuant to which
the Company provides behavioral health services) (whether insured or uninsured)
pending, or to the knowledge of Seller threatened, against the Company or any
Subsidiary or any of their respective properties before any court or arbitrator
or any governmental body, agency, official or authority. There is no action,
suit, investigation or proceeding pending, or to the knowledge of Seller
threatened, against Seller, the Company or any Subsidiary seeking to prohibit,
prevent or materially alter or delay the consummation of the transactions
contemplated hereby.
3.11 Material Contracts. (a) Section 3.11(a) of the Disclosure Schedule
sets forth the following agreements, contracts, plans, leases, arrangements or
commitments (each, a "Contract" and, collectively, the "Contracts"):
(i) any agreement providing for the delivery by the Company or any
Subsidiary of behavioral healthcare services for non-Aetna employee
assistance program and managed behavioral health business providing for
projected annualized premiums (based upon June 30, 1997 business in force)
to the Company or any Subsidiary of $200,000 or more ("Customer
Contracts");
(ii) any provider contract between the Company or any Subsidiary and a
third party behavioral healthcare service provider (x) pursuant to which
subcapitation or other alternative payment arrangements are utilized, and
(y) in each of the nine regions served by the Company and the Subsidiaries,
the largest (measured by volume of services provided) provider contract
with respect to (1) in-patient services, (2) partial in-patient services,
(3) intensive out-patient services and (4) out-patient services (the
"Provider Contracts");
(iii) any agreement, other than Customer Contracts, Provider Contracts
and License Contracts (as defined below), for the purchase or sale of
goods, services, equipment or other assets providing for annual payments by
or to the Company or any Subsidiary of $150,000 or more, other than any
such agreements that are terminable by the Company or such Subsidiary at
will on thirty or fewer days' notice without any premium, penalty or other
similar payment in excess of $10,000 becoming payable by the Company or
such Subsidiary by virtue of such termination;
(iv) any lease for real or personal property in which the amount of
payments which the Company is required to make on an annual basis exceeds
$50,000;
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(v) any partnership, joint venture or other similar contract,
arrangement or agreement;
(vi) any contract relating to indebtedness for borrowed money or
guarantee or the deferred purchase price of property (whether incurred,
assumed, guaranteed or secured by any asset) in an amount exceeding
$100,000;
(vii) any contract or cost allocation arrangement relating to
outstanding indebtedness, liabilities or obligations for amounts owing to,
or notes or accounts receivable from, or leases, contracts or other
commitments or arrangements with or for the benefit of, Seller or any of
its Affiliates, other than any such unwritten contracts, leases,
commitments or arrangements which will be terminated on or prior to the
Closing Date without giving rise to any further obligations on the part of
the Company or such Subsidiary;
(viii) any contract relating to the acquisition or disposition of any
asset or business (whether by merger, sale of stock, sale of assets or
otherwise) material to the Company and the Subsidiaries taken as a whole,
where the transactions contemplated thereby have not been consummated as of
the date hereof;
(ix) any contract or other agreement that by its terms limits the
right of the Company or any Subsidiary to compete (x) in any line of
business, (y) with any Person or (z) in any geographic area or which would
so limit the right of the Company or any Subsidiary after the Closing Date;
(x) any contract or other agreement relating to any Intellectual
Property Rights used by the Company or any Subsidiary, which contract or
other agreement provides for annual license payments in excess of $100,000
("License Contracts"); and
(xi) any other contract or commitment not made in the ordinary course
of business that is material to the Company and the Subsidiaries taken as a
whole.
(b)Except as set forth in Section 3.11(b) of the Disclosure Schedule, each
Contract is a valid and binding agreement of the Company or a Subsidiary
enforceable in accordance with its terms, subject to (i) bankruptcy, insolvency,
fraudulent transfer, moratorium, reorganization and other similar laws affecting
creditors' rights generally and the rights of creditors of insurance companies
generally and (ii) general principles of equity (regardless of whether
considered in a proceeding at law or in equity), and as of the date of this
Agreement is in full force and effect, and neither the Company, any Subsidiary
nor, to the knowledge of Seller, any other party thereto is in default in any
material respect under the terms of any such Contract. Seller has made available
to Purchaser a true and correct copy of each Contract.
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(c)Except as set forth in Section 3.11(c) of the Disclosure Schedule, to
the knowledge of Seller as of the date of this Agreement, no third party to any
of the Contracts intends to (i) terminate or amend the terms thereof or (ii)
refuse to renew same upon expiration of its current term.
3.12 Compliance with Laws. Neither the Company nor any Subsidiary has
violated or is in violation in any material respect of any applicable provisions
of any laws, statutes, ordinances, licenses, permits, authorizations, rules or
other regulations. Neither the Company nor any Subsidiary is in default in any
material respect under, and no condition exists that with notice or lapse of
time or both would constitute a default in any material respect under, any
order, injunction or material judgment of any court, arbitrator or governmental
body, agency, official or authority.
3.13 Brokers' Fees. Except for Merrill Lynch & Co., whose fees will be paid
by Seller, there is no investment banker, broker, finder or other intermediary
which has been retained by or is authorized to act on behalf of Seller, the
Company or any Subsidiary who might be entitled to any fee or commission from
Purchaser, the Company or any of their respective Affiliates upon consummation
of the transactions contemplated by this Agreement.
3.14 Intellectual Property. (a) Except as set forth in Section 3.14 of the
Disclosure Schedule, each of the Company and its Subsidiaries owns or otherwise
has rights to use all Intellectual Property Rights used in the conduct of the
Company's and such Subsidiaries' businesses as presently conducted.
(b)(i) Neither the Company nor any Subsidiary is being sued or charged in
writing with or is a defendant in any claim, suit, action or proceeding relating
to its assets or business that involves a claim of infringement of any material
Intellectual Property Rights and (ii) to the knowledge of Seller, there is no
other claim of such infringement by the Company or any Subsidiary. To the
knowledge of Seller, there is no continuing infringement by any other Person of
any of the material Intellectual Property Rights of the Company or any
Subsidiary.
3.15 Permits and Licenses. Except as set forth in Section 3.15 of the
Disclosure Schedule, each of the Company and its Subsidiaries possesses all
permits, licenses and other authorizations (the "Licenses") of, and has made all
registrations with, all governmental or accreditation entities necessary to
conduct the Company's and such Subsidiaries' businesses as presently conducted
(other than, in the case of Licenses and registrations for the Company, Human
Affairs Alaska, Inc. or Human Affairs International of California, respectively,
such Licenses and registrations that are immaterial to such Person, and, in the
case of Licenses and registrations for the other Subsidiaries, such Licenses and
registrations that are immaterial to the Company and the Subsidiaries taken as a
whole). Except as set forth in Section 3.15 of the Disclosure Schedule, no
notice from any governmental or accreditation entities with respect to
(including an investigation) the revocation, termination, suspension,
restriction, modification or limitation of any material License or the failure
to have any material License has been issued, or given, to Seller, the Company
or any Subsidiary, nor, to the knowledge of Seller, is the issuance of any such
notice or the commencement of any such investigation proposed, pending or
threatened. A list of the material Licenses is set forth in Section 3.15 of the
Disclosure Schedule.
3.16 Labor Matters. There is no collective bargaining agreement in effect
or, to the knowledge of Seller, other union organizational effort occurring with
respect to the employees of the
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Company. There is no labor strike, dispute, stoppage or lockout pending,
affecting, or to the knowledge of Seller, threatened against the Company and
during the past two years there has not been any such action. Except as set
forth in Section 3.16 of the Disclosure Schedule, there are no charges,
administrative proceedings or formal complaints or, to the knowledge of the
Seller, investigations of discrimination (including discrimination based upon
sex, age, marital status, race, national origin, sexual preference, disability
or veteran status) pending before the Equal Employment Opportunity Commission or
any other governmental entities against the Company or any Subsidiary.
3.17 Insurance Policies. Section 3.17 of the Disclosure Schedule sets forth
(i) a true and complete list of all insurance policies and other surety
arrangements of any kind whatsoever which relate to the assets or businesses of
the Company or any Subsidiary (the "Policies") and (ii) a summary description of
each pending claim asserting liability to the Company or any Subsidiary equal to
or greater than $500,000 under each of the Policies. All of the Policies are in
full force and effect. During the three-year period ending on the date hereof,
no such insurance policies or other surety arrangements have been canceled by an
insurer and no application for any such insurance policies or other surety
arrangements has been rejected by an insurer.
3.18 Absence of Certain Commercial Practices. To the knowledge of Seller,
none of Seller, the Company, any Subsidiary, or any of their respective
directors, officers or employees has:
(a) given, proposed to give, or agreed to give any material gift or similar
material benefit to any customer, supplier or any other person (other than as
described in subsection (b) of this Section 3.18), for the purpose of furthering
the business of the Company or any Subsidiary;
(b) in connection with the business of the Company or any Subsidiary, used
any corporate or other funds for contributions, payments, gifts, or
entertainment, or made any expenditures relating to political activities to
government employees, officials or others in violation of any applicable law or
established or maintained any unlawful or unrecorded funds; or
(c) offered, paid, solicited or received any remuneration (as such term has
been interpreted under 42 U.S.C. ss. 1320a-7b(b)) to induce or in return for any
referral of healthcare business or ordering of healthcare items or services in
violation of any federal or state civil or criminal law.
To the knowledge of Seller, none of Seller, the Company, any Subsidiary, or any
of their respective directors, officers, or employees has accepted or received
any unlawful contributions, payments or gifts in connection with the businesses
of the Company and the Subsidiaries.
3.19 Assets. Except as disclosed on Section 3.19(a) of the Disclosure
Schedule, the assets and properties owned or leased by the Company are all of
the assets and properties necessary to conduct the business and operations of
the Company as currently conducted by the Company. Except as set forth on
Section 3.19(b) of the Disclosure Schedule, Seller covenants and agrees to
contribute or cause to be contributed or transferred to the Company for no
additional consideration, good and marketable title, free and clear of all
Liens, to those assets and properties (exclusive of Intellectual Property and
real property) ("Contributed Assets") set forth on Section 3.19(b) of the
Disclosure Schedule that are owned or leased by Seller or an Affiliate of Seller
and used exclusively or principally in the business and operations of the
Company or its Subsidiaries. The contribution or transfer of the
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Contributed Assets shall not be taken into consideration for purposes of
calculating the Closing Stockholder's Equity. The only assets and properties
(exclusive of Intellectual Property and real property) within the categories of
assets and properties set forth on Section 3.19(a) of the Disclosure Schedule
which will not be Contributed Assets are those assets and properties which the
Company will have the right to utilize pursuant to the Transition Services
Agreement. Section 3.19(c) of the Disclosure Schedule also sets forth a list of
the general categories of services that have been historically provided to the
Company and the Subsidiaries by Seller or its Affiliates.
3.20 No Adverse Changes. Except as set forth in Section 3.20 of the
Disclosure Schedule, since the Balance Sheet Date, the Company and the
Subsidiaries have conducted their respective businesses only in the ordinary
course of business, and none of them has: (i) through the date of this
Agreement, suffered any material adverse change in its business, properties or
financial condition, including any material damage, destruction or loss
affecting its assets, (ii) made any material increase in compensation payable or
to become payable to any of its employees or made or promised to make any
material bonus payment to any of its employees, or made any material change in
personnel policies, insurance benefits or other compensation arrangements
affecting any of its employees (other than increases, promises or changes in the
ordinary course consistent with past practices or pursuant to Benefit Plans,
Benefit Arrangements and practices in effect as of the Balance Sheet Date);
(iii) sold, transferred, leased to others or otherwise disposed of any of its
material assets (except for (x) inventory sold or used in the ordinary course of
business consistent with past practices or (y) assets sold or disposed of and
replaced by other similar assets), canceled or compromised any debts owed to, or
claims relating to, its assets, business or operations which are of material
value or waived, compromised or released any rights which are of material value
or (iv) through the date of this Agreement, suffered any termination of any
Contract to which it is or was a party representing $500,000 or more of revenues
to the Company and the Subsidiaries for the 12-month period ending on the date
of this Agreement.
3.21 Disclosure. To the knowledge of Seller, as of the date of this
Agreement, no representation or warranty of the Seller (as modified by the
Disclosure Schedule) contained in this Agreement, and no statement contained in
any certificate, document or other instrument furnished to the Purchaser by or
on behalf of Seller pursuant to this Agreement, contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
ARTICLE IV
Representations And Warranties Of Purchaser
Purchaser hereby represents and warrants to Seller that:
4.1 Organization and Existence. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite corporate power and
authority to carry on its business as now conducted.
4.2 Corporate Authorization. The execution, delivery and performance by
Purchaser of this Agreement and the consummation by Purchaser of the
transactions contemplated hereby are within Purchaser's corporate powers and
have been duly authorized by all necessary corporate action
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on the part of Purchaser. This Agreement constitutes a valid and binding
obligation of Purchaser, enforceable against Purchaser in accordance with its
terms, subject to (i) bankruptcy, insolvency, fraudulent transfer, moratorium,
reorganization and other similar laws affecting creditors' rights generally and
(ii) general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
4.3 Governmental Authorization; Consents. (a) Except as set forth in
Section 4.3(a) of the Purchaser Disclosure Schedule and except for applicable
requirements of the HSR Act, neither the execution and delivery of this
Agreement by Purchaser, nor the consummation by Purchaser of the transactions
contemplated hereby will require any action by or in respect of, or filing with,
any governmental body, agency, official or authority (other than actions or
filings that are immaterial to Seller, the Company, the Subsidiaries and the
consummation of the transactions contemplated hereby).
(b) Except as set forth in Section 4.3(b) of the Purchaser Disclosure
Schedule, no consent, approval, waiver or other action by any Person (other than
any governmental body, agency, official or authority referred to in (a) above)
under any material contract, agreement, indenture, lease, instrument or other
document to which Purchaser is a party or by which it is bound is required or
necessary for the execution, delivery and performance of this Agreement by
Purchaser or the consummation of the transactions contemplated hereby.
4.4 Non-Contravention. The execution, delivery and performance by Purchaser
of this Agreement do not and will not (i) contravene or conflict with the
certificate of incorporation or bylaws of Purchaser, (ii) assuming compliance
with the matters referred to in Section 4.3(a), contravene or conflict in any
material respect with or constitute a violation in any material respect of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon Purchaser, (iii) constitute a default under, or give rise to any right of
termination, cancellation or acceleration of any right or obligation of
Purchaser under, or to a loss of any benefit to which Purchaser is entitled
under, any provision of any material agreement, contract or other material
instrument binding upon Purchaser or any material license, franchise, permit or
other similar material authorization held by Purchaser or (iv) result in the
creation or imposition of any Lien on any material asset of Purchaser.
4.5 Brokers' Fees. There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
Purchaser who might be entitled to any fee or commission from Seller or any of
its Affiliates upon consummation of the transactions contemplated by this
Agreement.
4.6 Financing. Purchaser has, and at all times until the Closing will have,
funds sufficient to consummate the transactions contemplated hereby, which funds
are not, and shall not, be subject to any contingencies or consents by any
Person in order to consummate such transactions.
4.7 Purchase for Investment. Purchaser is purchasing the Shares for
investment for its own account and not with a view to, or for sale in connection
with, any distribution thereof.
4.8 Litigation. There is no action, suit, investigation or proceeding
(whether insured or uninsured) pending against, or to the knowledge of Purchaser
threatened against or affecting, Purchaser before any court or arbitrator or any
governmental body, agency or official which in any
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manner challenges or seeks to prevent, enjoin, alter or materially delay the
transactions contemplated hereby.
4.9 Inspections. Purchaser is an informed and sophisticated purchaser, is
familiar with the business of the Company, and has engaged expert advisors,
experienced in the evaluation and purchase of companies such as the Company.
Purchaser has undertaken such investigation and has been provided with and has
evaluated such documents and information as it has deemed necessary to enable it
to make an informed and intelligent decision with respect to the execution,
delivery and performance of this Agreement. Purchaser acknowledges that Seller
has made no representation or warranty as to the Shares or the prospects,
financial or otherwise, of the Company or the Subsidiaries, except as expressly
set forth herein.
ARTICLE V
Covenants Of Seller
Seller agrees that:
5.1 Conduct of the Company. From the date hereof until the Closing Date,
Seller shall cause the Company and the Subsidiaries to conduct their businesses
in the ordinary course consistent with past practices.
(a) Except as otherwise provided in this Agreement or Section 5.1(a) of the
Disclosure Schedule, from the date of this Agreement until the Closing Date,
without the prior written consent of the Purchaser, Seller will not permit the
Company or any Subsidiary to:
(i) adopt or propose any change in its certificate of incorporation or
bylaws;
(ii) merge or consolidate with any other Person or acquire or lease a
material amount of assets of any other Person, except for those assets which are
owned by Seller or Affiliates of Seller and identified in Section 3.19(b) of the
Disclosure Schedule which will be contributed or transferred to the Company for
no consideration;
(iii) declare, set aside or pay any dividend or other distribution with
respect to any shares of capital stock of the Company, or repurchase, redeem or
otherwise acquire any outstanding shares of capital stock, or other ownership
interests in, the Company or any Subsidiary;
(iv) incur, assume or guarantee any indebtedness for borrowed money other
than, in each case, (x) in a principal amount not exceeding $100,000 or (y) in
the ordinary course of business and in amounts and on terms consistent with past
practices;
(v) create or assume any Lien on any material asset other than
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in the ordinary course of business consistent with past practices;
(vi) make any loan, advance or capital contributions to or investment in
any Person, other than loans, advances or capital contributions to or
investments made (x) that are immaterial to the Company and the Subsidiaries
taken as a whole, (y) pursuant to existing contracts or commitments or (z) in
the ordinary course of business consistent with past practices;
(vii) sell, lease, license or otherwise dispose of any material assets or
property except (x) pursuant to existing contracts or commitments (which
contracts or commitments are described in Section 5.1(a)(vii) of the Disclosure
Schedule) or (y) in the ordinary course consistent with past practices;
(viii) change any method of accounting or investment, tax or accounting
practice, except for any such change required by reason of a concurrent change
in generally accepted accounting principles or law;
(ix) enter into or consummate any joint venture, partnership or other
similar arrangement or, except as otherwise permitted or required pursuant to
this Agreement, form any other new arrangement for the conduct of its business;
(x) terminate, renew, amend or otherwise alter any of the material Customer
Contracts or other Contracts, except in the ordinary course of business
consistent with past practices;
(xi) except as otherwise permitted or required pursuant to this Agreement,
enter into any written contract or other agreement with Seller, any Affiliate of
Seller or any Affiliate of the Company (other than written contracts or other
agreements between or among the Company and the Subsidiaries);
(xii) increase or otherwise change the rate or nature of the compensation
(including wages, salaries and bonuses) which is paid or payable to any employee
or independent contractor of the Company or any Subsidiary, except in the
ordinary course of business consistent with past practices or pursuant to
existing Employee Plans, Benefit Arrangements, and practices with have been
disclosed to Purchaser;
(xiii) adopt or commit to adopt any employee plan or benefit arrangement
other than an Employee Plan or Benefit Arrangement or make material amendments
to any such Employee Plan or Benefit Arrangement except to the extent required
by law or necessary to preserve the nature of the benefits provided under such
plan or arrangement;
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(xiv) issue or commit to issue any additional shares of capital stock or
option or warrant of the Company or any Subsidiary;
(xv) enter into any transaction, contract or agreement material to the
Company and the Subsidiaries taken as a whole, other than transactions and
commitments in the ordinary course of business consistent with past practices
and other than those contemplated by this Agreement;
(xvi) alter in any material respect the consideration paid or received by
the Company for those services set forth on Section 3.19(c) of the Disclosure
Schedule; or
(xvii)agree or commit to do any of the foregoing.
Seller will not, and will not permit the Company or any Subsidiary to (i) take
or agree or commit to take any action that would make any representation and
warranty of Seller hereunder inaccurate in any material respect at, or as of any
time prior to, the Closing Date or (ii) omit or agree or commit to omit to take
any action necessary to prevent any such representation or warranty from being
inaccurate in any material respect at any such time.
(b)Except as otherwise provided in this Agreement or Section 5.1(b) of the
Disclosure Schedule, from the date of this Agreement until the Closing Date,
Seller will cause the Company and the Subsidiaries to:
(i) maintain their books and records in the usual, regular and ordinary
manner consistent with past practices;
(ii) preserve their businesses and maintain all of their material Licenses;
(iii) preserve generally the goodwill of the businesses of the Company and
the Subsidiaries; and
(iv) continue to perform in the ordinary course their respective
obligations under the Contracts.
5.2 Access to Information. (a) From the date hereof until the Closing Date,
Seller will give, and will cause the Company and each Subsidiary to give,
Purchaser, its counsel, financial advisors, auditors and other authorized
representatives reasonable access to the offices, properties, books and records
of the Company and the Subsidiaries; provided that all such access shall be
arranged solely by prior request made by Purchaser to the persons designated by
Seller as the contact people for such purposes. Purchaser agrees not to, and
shall cause its counsel, financial advisors, auditors and other authorized
representatives not to, directly contact the Company, any Subsidiary, or any of
their respective officers, directors or employees unless such designated contact
persons have approved such contact.
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(b) From the date hereof until the Closing Date, Seller will furnish, and
will cause the Company and each Subsidiary to furnish, to Purchaser, its
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data and other information relating to the Company and
the Subsidiaries as such Persons may reasonably request.
(c) From the date hereof until the Closing Date, notwithstanding the
foregoing, Purchaser shall not have access to personnel records of the Company
or any Subsidiary relating to medical histories or other sensitive personnel
information the disclosure of which could subject Seller to risk of liability.
5.3 Notices of Certain Events. Seller shall promptly notify Purchaser of:
(i) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened, against Seller, the Company or
any Subsidiary that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.10.
5.4 Resignations. Seller will deliver to Purchaser at or prior to the
Closing Date the resignations of all officers and directors of the Company and
each Subsidiary who will be officers, directors or employees of Seller or any of
its Affiliates after the Closing Date from their positions with the Company and
each Subsidiary.
5.5 No Shop. Purchaser contemplates the expenditure of substantial sums of
time and money in connection with legal, accounting, financial, and due
diligence work to be performed in conjunction with the purchase of the shares as
contemplated herein (the "Transaction") and may forego other business
opportunities prior to the Closing. Accordingly, Seller acknowledges and agrees
that, from the date hereof through the Closing Date (or the termination of this
Agreement) (the "Restricted Period"), neither Seller nor the Company, directly
or indirectly, without Purchaser's prior written consent, shall initiate or hold
discussions with any Person (other than Purchaser and its representatives)
concerning any transaction substantially similar to the Transaction or
inconsistent with the Transaction, directly or indirectly, whether by sale of
outstanding stock, issuance of additional securities, merger, consolidation,
sale or lease of assets, affiliation, joint venture, or other transaction.
During the Restricted Period, Seller will promptly notify Purchaser by telephone
and thereafter confirm in writing via telecopy if any such discussions or
negotiations are sought in writing to be initiated with, or any such proposal or
possible proposal is received in writing, directly or indirectly, by Seller or
the Company and any such notice will include any terms and conditions of any
such proposal.
5.6 Contributed Assets. Seller has previously delivered to the Purchaser
lists of the
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Contributed Assets. Seller has informed the Purchaser that the lists it has
delivered may need to be updated or revised. Seller agrees that, as soon as
reasonably practicable after the date hereof, it will retain a business firm
reasonably satisfactory to Purchaser for the purposes of taking an inventory and
valuation of the Contributed Assets and compiling a comprehensive list of all of
the Contributed Assets (the "Inventory List"). Purchaser shall have the right to
consult with the business firm and observe the inventory count and valuation.
The fees and expenses of the business firm and the other costs of taking the
inventory shall be borne equally by Seller and Purchaser and the fees and
expenses of the business firm with respect to, and the other costs of, the
valuation shall be borne by Purchaser. At the Closing, Seller shall deliver an
officer's certificate to the Purchaser stating that the Inventory List is
complete and accurate in all material respects.
ARTICLE VI
Covenants Of Purchaser
Purchaser agrees that:
6.1 Confidentiality. All information and documents furnished to Purchaser
or any of the Persons referred to in Section 5.2 for any purpose under this
Agreement will be treated as "Evaluation Material" under the Confidentiality
Agreement dated March 10, 1997 between AHP Holdings, Inc. and Purchaser. Seller
and Purchaser hereby agree that such Confidentiality Agreement shall terminate
and be of no further force and effect as of the Closing Date.
6.2 Access. Purchaser will cause the Company and the Subsidiaries, on and
after the Closing Date for a period of seven years thereafter (or such longer
period as may be necessary for income tax audit purposes or compliance with laws
purposes), to afford promptly to Seller and its agents, upon reasonable notice
to the persons designated by Purchaser as the contact people for such purposes,
reasonable access during normal business hours to their properties, books,
records, employees and auditors to the extent necessary to permit Seller to
determine any matter relating to its rights and obligations hereunder or to any
period ending on or before the Closing Date. Seller will hold, and will cause
its officers, directors, employees, accountants, counsel, consultants, advisors
and agents to hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all confidential
documents and information concerning the Company and the Subsidiaries provided
to it pursuant to this Section 6.2. All access afforded Seller pursuant to this
Section 6.2 shall be without interference with the conduct of the businesses of
the Company and the Subsidiaries and shall be arranged solely by prior request
made by Seller to the persons designated by Purchaser as the contact people for
such purposes.
6.3 Insurance. On or prior to the Closing, Seller shall purchase, or cause
to be purchased, "tail" insurance coverage (including professional liability
insurance coverage), with limitations on liability of no less than $1,000,000
per claim and $7,000,000 in the aggregate and no more than $5,000,000 per claim
and $20,000,000 in the aggregate, covering any and all claims that may be made
during the period beginning on the Closing Date and ending on the seventh
anniversary of the Closing Date in respect of any acts or omissions occurring
before the Closing Date by the Company, any Subsidiary or any of their
respective employees, contracted providers of behavioral healthcare services,
subcontractors or agents. The parties shall negotiate in good faith and agree,
prior to Closing, within
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the range specified above, on the appropriate per claim and aggregate
limitations on liability for such tail insurance.
6.4 Use of Names. After the Closing, Purchaser shall not use the names
"Aetna U.S. Healthcare", "Aetna", "U.S. Healthcare", or any combination or
derivation of the same in connection with the Company, any Subsidiary or any of
their respective operations, or any other entity or operations associated with
Purchaser. After the Closing, except as set forth in the Master Agreement,
Seller and its Affiliates shall not use the name "Human Affairs International"
or any combination or derivation of the same in connection with Seller or its
Affiliates or any of their respective operations, or any other entity or
operations associated with Seller.
6.5 Headquarters Lease. With respect to the lease (the "Headquarters
Lease") of real property constituting the Company's headquarters facilities in
Sandy, Utah (the "Headquarters Property"), at the Closing, Seller shall cause
Aetna Life Insurance Company ("Aetna Life"), as lessee under the Headquarters
Lease, to sublet to the Company the Headquarters Property on substantially the
same terms and conditions as Aetna Life leases the Headquarters Property, which
sublet shall be pursuant to a customary sublease agreement to be negotiated by
the parties prior to the Closing in good faith (provided that the Company shall
not have any option to renew or extend the original term of the sublease).
6.6 Retention Arrangements. From and after the Closing Date, Purchaser
agrees that it shall, and shall cause the Company to, assume responsibility for
and comply with the terms and conditions of the retention agreements and other
arrangements set forth in Section 6.6 of the Disclosure Schedule (the "Retention
Arrangements"); provided that Seller shall be responsible for any amounts in
excess of target bonus amounts in the aggregate payable pursuant to the
Retention Arrangements.
ARTICLE VII
Covenants Of Both Parties
The parties hereto agree that:
7.1 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each party will use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary or
desirable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement, including, without limitation, the preparation
and filing as promptly as practicable after the date of this Agreement of (i)
all applicable forms under the HSR Act and (ii) all applicable forms necessary
in order to obtain any other required government approvals. Seller and Purchaser
each agree, and Seller, prior to the Closing, and Purchaser, after the Closing,
agree to cause the Company, to execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to consummate or implement expeditiously
the transactions contemplated by this Agreement. Seller will use all reasonable
efforts, in cooperation with Purchaser, to obtain those consents from third
parties with respect to the agreements described in Items 1, 2 and 5 of Section
3.4 of the Disclosure Schedule.
7.2 Certain Filings. Seller and Purchaser shall cooperate with one another
(a) in
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determining whether any action by or in respect of, or filing with, any
governmental body, agency, official or authority is required, or any actions,
consents, approvals or waivers are required to be obtained from parties to any
material contracts, in connection with the consummation of the transactions
contemplated by this Agreement and (b) in taking such actions or making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such actions, consents, approvals or waivers.
7.3 Public Announcements. Each party agrees to obtain the approval of the
other party before issuing any press release or making any public statement with
respect to this Agreement or the transactions contemplated hereby, except for
such press releases or public statements as may be required by applicable law or
any listing agreement with any national securities exchange.
7.4 Related Agreements. Each party acknowledges that the Master Agreement,
the Transition Services Agreement and the HMO and non-HMO Health Care Agreements
(collectively, the "Related Transaction Agreements") are an integral part of the
transactions contemplated by this Agreement. Both parties agree to comply (or
cause their Affiliates to comply) with the Related Transaction Agreements.
7.5 Home Office Lease. Certain of the Company's employees currently occupy
space in Seller's home office (the "Home Office"). Prior to Closing, the parties
will discuss the necessity of maintaining this arrangement. At the request of
the Company, Seller or one of its Affiliates will enter into a lease with the
Company with respect to the Company-occupied space in the Home Office on terms
that are reasonably satisfactory to the parties, provided that the term of such
lease shall be no longer than two years following the Closing Date and the rent
due thereunder shall be at the same rate charged to other Aetna business units.
7.6 Co-Located Space. The Company currently shares office space with Seller
or its Affiliates in a number of locations identified on Section 3.11(a)(iv) of
the Disclosure Schedule. Unless prohibited under any applicable primary lease,
prior to the Closing, Seller and the Company will enter into sublease agreements
with respect to these shared locations on terms that are reasonably satisfactory
to Seller and the Company. The rent charged to the Company pursuant to such
sublease agreements shall be determined in accordance with historical
methodologies. Seller may increase the rent at any time to reflect increases in
its actual costs under the applicable primary leases. The term of the subleases
shall be mutually agreed upon prior to the Closing, but shall not exceed the
shorter of (i) two years from the Closing Date and (ii) the remaining term of
the primary lease; provided that, in connection with Seller terminating the
primary lease or subletting the entire leased premises, the sublease may be
terminated by Seller upon at least 180 days' prior written notice.
7.7 Transition Services Standards. Each party agrees to use good faith
efforts to prepare a joint description of the standards of quality and
timeliness that the services to be performed under the Transition Services
Agreement will be performed, which description will be attached thereto as
Schedule C.
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ARTICLE VIII
Tax Matters
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8.1 Tax Definitions. The following terms, as used herein, have the
following meanings:
"Code" means the Internal Revenue Code of 1986.
"Federal Taxes" means United States Federal income, environmental and
alternative or add-on minimum taxes.
"Final Determination" shall mean, with respect to Federal Taxes, a
"determination" as defined in Section 1313(a) of the Code or execution of an
Internal Revenue Service Form 870AD and, with respect to Taxes other than
Federal Taxes, any final determination of liability in respect of a Tax that,
under applicable law, is not subject to further appeal, review or modification
through proceedings or otherwise, including but not limited to the expiration of
a statute of limitations or a period for the filing of claims for refunds,
amended returns or appeals from adverse determinations.
"Post-Closing Tax Period" means any Tax period ending after the Closing
Date.
"Pre-Closing Tax Period" means any Tax period ending on or before the close
of business on the Closing Date.
"Tax" means (i) any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, value added, franchise, profits,
license, withholding on amounts paid to or by the Company or any Subsidiary,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
governmental authority (a "Taxing Authority") responsible for the imposition of
any such tax (domestic or foreign), (ii) liability of the Company or any
Subsidiary for the payment of any amounts of the type described in (i) as a
result of being a member of an affiliated, consolidated, combined or unitary
group for any period during the Tax Indemnification Period and (iii) liability
of the Company or any Subsidiary for the payment of any amounts of the type
described in (i) as a result of any express or implied obligation to indemnify
any other Person.
"Tax Indemnification Period" means (i) any Pre-Closing Tax Period of the
Company or any Subsidiary, (ii) with respect to any Tax described in clause (ii)
of the definition of "Tax", any Pre-Closing Tax Period of the Company or any
Subsidiary and the taxable year of any member of a group described in such
clause (ii) which includes (but does not end on) the Closing Date, and (iii)
with respect to any Tax described in clause (iii) of the definition of "Tax",
the survival period of the indemnification obligation under the applicable
contract.
"Tax Sharing Agreement" means the Amended and Restated Tax Sharing
Agreement executed by the Company on September 14, 1995.
8.2 Tax Representations. Except as set forth in Section 8.2 of the
Disclosure
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Schedule, (i) all Tax returns, statements, reports and forms (including
estimated tax returns and reports) required to be filed with any Taxing
Authority with respect to any Pre-Closing Tax Period by or on behalf of the
Company or any Subsidiary (collectively, the "Returns"), have been filed when
due in accordance with all applicable laws; (ii) the Returns are correct and
complete in all material respects; (iii) the Company and the Subsidiaries have
timely paid, withheld or made provision for all Taxes shown as due and payable
on the Returns that have been filed; (iv) the Company and the Subsidiaries have
made or will on or before the Closing Date make provision for all Taxes payable
by the Company and the Subsidiaries for any Pre-Closing Tax Periods for which no
Return has yet been filed, excluding Taxes to the extent that Seller is required
under this Article VIII to pay, reimburse or indemnify Purchaser therefor; (v)
the charges, accruals and reserves for Taxes with respect to the Company and its
Subsidiaries for any Pre-Closing Tax Period (excluding any provision for
deferred income taxes and excluding Taxes to the extent that Seller is required
under this Article VIII to pay, reimburse or indemnify Purchaser therefor)
reflected on the books of the Company and the Subsidiaries are adequate to cover
such Taxes; (vi) all Returns filed with respect to taxable years of the Company
and the Subsidiaries through the taxable year ended December 31, 1987 have been
examined and closed or are Returns with-respect to which the applicable period
for assessment under applicable law, after giving effect to extensions or
waivers, has expired; (vii) neither the Company nor any Subsidiary is delinquent
in the payment of any Tax or has requested any extension of time within which to
file or send any Return, which Return has not since been filed or sent; (viii)
there are no requests for rulings in respect of any Tax pending between the
Company or any Subsidiary and any Taxing Authority; (ix) there are no liens for
Taxes upon the assets of the Company or any Subsidiary except liens for current
Taxes not yet due; (x) Seller is not subject to withholding under Section 1445
of the Code with respect to any transaction contemplated hereby; (xi) since June
9, 1988, neither the Company nor any Subsidiary has been a member of an
affiliated group other than one of which either Aetna Inc. or Aetna Services,
Inc. (formerly Aetna Life and Casualty Company) was the common parent, or filed
or been included in a combined, consolidated or unitary Return other than one
filed by Aetna, Inc. or Aetna Services, Inc. (formerly Aetna Life and Casualty
Company); (xii) neither the Company nor any Subsidiary is currently under any
contractual obligation to indemnify any other Person with respect to Taxes or is
a party to any agreement, other than the Tax Sharing Agreement, providing for
payments with respect to taxable income or Taxes; (xiii) no issues have been
raised in writing (and are currently pending) by any taxing authority in
connection with any of the Tax Returns referred to in clause (i), and all
deficiencies asserted or assessments made as a result of any examination by a
taxing authority of such Tax Returns have been paid in full; and (xiv) the
information provided by Seller to Purchaser regarding (x) Seller's tax basis in
the stock of the Company and the Subsidiaries, (y) the tax basis of the assets
of the Company and the Subsidiaries, and (z) the state tax position of Seller,
the Company and the Subsidiaries, is true and accurate as of the date hereof or
as of the relevant date specified therein in all material respects.
8.3 Elections. (i) Each of Seller and Purchaser shall make timely and
irrevocable elections under Section 338(h)(10) of the Code and, if permissible,
similar elections under any applicable state or local income tax laws with
respect to the Company and each Subsidiary. Seller will not, and will not permit
the Company or any Subsidiary to take, cause or permit to be taken any
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action that would disqualify this transaction as a deemed asset sale under
Section 338(h)(10) of the Code. Each of Seller and Purchaser shall report the
transaction consistent with such elections under Section 338(h)(10) or any
similar state or local tax provision (the "Elections") and shall take no
position contrary thereto unless and to the extent required to do so pursuant to
a Final Determination. Seller and Purchaser agree that as a result of the
Elections, the deemed asset sales resulting from the Elections must be included
in the final Return of the Company for the Pre-Closing Tax period to be filed
with any Taxing Authority of a jurisdiction for which the Elections are
applicable.
(ii) Each of Seller and Purchaser shall execute at the Closing any and all
forms necessary to effectuate the Elections (including, without limitation,
Internal Revenue Service Form 8023-A and any similar forms under applicable
state and local income tax laws (the "Section 338 Forms")). Each of the Seller
and the Purchaser shall cause the Section 338 Forms to be duly executed by an
authorized person and shall duly and timely file the Section 338 Forms in
accordance with applicable Tax laws and the terms of this Agreement.
(iii) Each of Seller and Purchaser agree that in making the Elections it
shall report the Aggregate Deemed Sale Price (as defined under applicable
Treasury Regulations) of the assets of the Company (the "ADSP") as calculated
(x) by using only the Closing Payment, as adjusted pursuant to Section 2.4
hereof, as the purchase price of the Shares and (y) by not taking into account
as an assumed liability any liability for Taxes to the extent that Seller is
required under this Article VIII to pay, reimburse or indemnify Purchaser
therefor. Each of Seller and Purchaser agrees to allocate such ADSP as set forth
in Section 8.3 of the Disclosure Schedule, which shall be prepared by the
parties prior to the Closing Date and which shall reflect an allocation agreed
to by the parties. Each of Seller and Purchaser will reflect such allocation in
all applicable tax returns filed by any of them, including but not limited to
the Section 338 Forms. Each of Seller and Purchaser shall not take a position
before any Taxing Authority or otherwise (including in any Return) inconsistent
with such allocation unless and to the extent required to do so pursuant to a
Final Determination.
8.4 Termination of Existing Tax Sharing Agreements. Any and all existing
tax sharing agreements or arrangements binding the Company or any of its
Subsidiaries (including, without limitation, the Tax Sharing Agreement) and any
other agreement, express or implied, relating to taxable income shall be
terminated as of the Closing Date.
8.5 Tax Returns. (a) Seller shall timely prepare all Tax Returns of the
Company and the Subsidiaries for all Pre-Closing Tax Periods. Such Tax Returns
shall be prepared in an manner consistent with past practice and, on such Tax
Returns, no positions shall be taken, elections made, or method adopted that is
inconsistent with positions taken, elections made, or methods used in preparing
similar Tax Returns in prior periods without the consent of Purchaser which
consent shall not be unreasonably withheld.
(b) Seller shall file or cause to be filed when due all Tax Returns of the
Company and the Subsidiaries for all Pre-Closing Tax Periods that are filed on a
consolidated, combined, or unitary basis by the Seller or the parent of Seller
(including all federal income Tax Returns), and
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Seller shall be responsible for the contents of such Tax Returns and for the
payment of all Taxes shown to be due thereon; provided, however, that Seller
shall furnish Purchaser and the Company with copies of such Tax Returns of the
Company and the Subsidiaries, on a separate company basis, within 30 days
following the filing date. Seller shall prepare and send to the Company as
promptly as practicable but at least five business days prior to the due date
all other Tax Returns that are required to be filed by the Company and the
Subsidiaries for all Pre-Closing Tax Periods, and Seller or, after the Closing
Date, Purchaser shall file or cause to be filed when due such other Tax Returns.
At least five business days prior to the date on which the Taxes shown on such
other Tax Returns are required to be paid, Seller shall provide Purchaser with
the funds for the payment of all Taxes unpaid as of the Closing Date shown to be
due on such other Tax Returns and Purchaser shall be responsible for the payment
of all Taxes unpaid as of the Closing Date shown to be due on such other Tax
Returns, provided that Purchaser's obligation to pay such Taxes shall not limit
Purchaser's indemnification rights against Seller pursuant to Section 8.9. If
any such Tax Return shows an overpayment of Taxes due, Seller may credit (upon
written notice to Purchaser to that effect) the amount of such overpayment
against any payment otherwise due from Seller to Purchaser under this Agreement
and any amount of the overpayment not so credited shall be reimbursed by
Purchaser to Seller no later than five business days after the later of receipt
by Purchaser of Seller's written request for reimbursement and the earlier of
Purchaser's receipt of a refund on account of such overpayment and the
application of such overpayment to offset a Tax liability of Purchaser or an
Affiliate of Purchaser otherwise due.
(c) Purchaser shall prepare and file all Tax Returns of the Company and the
Subsidiaries for all Post-Closing Tax Periods. As promptly as practicable but at
least five business days before the due date, Purchaser shall furnish Seller
with copies of all Tax Returns of the Company and the Subsidiaries for any
Post-Closing Tax Period that includes the Closing Date. At least five business
days prior to the date on which the Taxes shown on such Tax Return are required
to be paid, Seller shall provide Purchaser with funds for the payment of all
Taxes shown to be due on such Tax Returns that are attributable to the
Pre-Closing Tax Period and Purchaser shall be responsible for the payment of all
Taxes shown to be due on such Tax Returns, provided that Purchaser's obligation
to pay such Taxes shall not limit Purchaser's indemnification rights against
Seller pursuant to Section 8.9.
8.6 Other Tax Matters. (a) All transfer, documentary, sales, use, stamp,
and registration Taxes and fees (including any penalties and interest) incurred
in connection with this Agreement, shall be paid one-half by Seller and one-half
by Buyer when due, and each party will, at its own expense, file all necessary
Returns and other documentation with respect to all such transfer, documentary,
sales, use, stamp, registration and other taxes and fees.
(b)Certification to the effect that Seller is not a "foreign person" as
defined in Section 1445 of the Code shall be signed by Seller and delivered to
Purchaser prior to the Closing.
8.7 Cooperation on Tax Matters. (a) Purchaser and Seller shall cooperate
fully, as and to the extent reasonably requested by the other party, in
connection with any audit, litigation
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or other proceeding with respect to Taxes and with the preparation of any
Returns. Such cooperation shall include the retention and (upon the other
party's request) the provision of records and information which are reasonably
relevant to any such audit, litigation or other proceeding and making employees
available on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. The Company and Seller agree (i)
to retain all books and records with respect to Tax matters pertinent to the
Company and its Subsidiaries relating to any Pre-Closing Tax Period, and to
abide by all record retention agreements entered into with any Taxing Authority,
and (ii) to give the other party reasonable written notice prior to
transferring, destroying or discarding any such books and records and, if the
other party so requests, the Company or Seller, as the case may be, shall not
destroy or discard such books and records and shall allow the other party to
take possession of such books and records.
(b)Purchaser and Seller further agree, upon request, to use their best
efforts to obtain any certificate or other document from any governmental
authority or customer of the Company or any Subsidiary or any other Person as
may be necessary to mitigate, reduce or eliminate any Tax that could be imposed
(including, but not limited to, with respect to the transactions contemplated
hereby).
(c)Purchaser and Seller further agree, upon request, to provide the other
party with all information that either party may be required to report pursuant
to section 6043 of the Code and all Treasury Regulations promulgated thereunder.
8.8 Certain Disputes. Disputes arising under this Article VIII and not
resolved by mutual agreement as stated herein shall be resolved by a nationally
recognized accounting firm with no affiliation or relationship whatsoever with
Purchaser, Seller or their Affiliates (the "Accounting Referee") chosen and
mutually acceptable to both Purchaser and Seller within five business days of
the date on which the need to choose the Accounting Referee arises. The
Accounting Referee shall resolve any disputed items within 30 days of having the
item referred to it pursuant to such procedures as it may require. The costs,
fees and expenses of the Accounting Referee shall be borne equally by Purchaser
and Seller.
8.9 Tax Indemnification. (a) The covenants, agreements, representations and
warranties of the parties hereto contained in this Article VIII or in any
certificate or other writing delivered pursuant to this Article VIII or in
connection herewith shall survive the Closing until February 28, 1999 or until
expiration of the applicable statutory period of limitation, if later.
(b) Seller hereby indemnifies the Purchaser Indemnified Parties against and
agrees to hold them harmless from (i) any (x) Tax of the Company or any
Subsidiary and (y) liabilities, costs, expenses (including, without limitation
reasonable expenses of investigation and attorneys' fees and expenses), losses,
damages, assessments, settlements or judgments arising out of or incident to the
imposition, assessment or assertion of any Tax, and any liability as transferee,
in each case related to the Tax Indemnification Period and in each case incurred
or suffered by Purchaser, any of its Affiliates or, effective upon the Closing,
the Company or any Subsidiary; and
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(ii) any and all Damages incurred or suffered by the Purchaser Indemnified
Parties arising out of any misrepresentation or breach of warranty, covenant or
agreement made or to be performed by Seller pursuant to this Article VIII. The
indemnification set forth in the preceding sentence shall not apply to or in
respect of Taxes of the Company or any Subsidiary to the extent that such Taxes
were funded by a payment by Seller to Purchaser pursuant to Sections 8.5(b) or
8.5(c). Purchaser hereby indemnifies the Seller Indemnified Parties against and
agrees to hold them harmless from any and all Damages incurred or suffered by
the Seller Indemnified Parties arising out of any misrepresentation or breach of
warranty, covenant or agreement made or to be performed by Purchaser pursuant to
this Article VIII.
(c)For purposes of Section 8.5 and this Section 8.9, in the case of any
Taxes that are imposed on a periodic basis and are payable for a taxable period
that includes (but does not end on) the Closing Date, the portion of such Tax
related to the portion of such taxable period ending on the Closing Date shall
(x) in the case of any Taxes other than Taxes based upon or related to income,
be deemed to be the amount of such Tax for the entire taxable period multiplied
by a fraction the numerator of which is the number of days in the taxable period
ending on the Closing Date and the denominator of which is the number of days in
the entire taxable period, and (y) in the case of any Tax based upon or related
to income be deemed equal to the amount which would be payable if the relevant
taxable period ended on the Closing Date. Any credits relating to a taxable
period that begins before and ends after the Closing Date shall be taken into
account as though the relevant taxable period ended on the Closing Date. All
determinations necessary to give effect to the foregoing allocations shall be
made in a manner consistent with prior practice of the Company and its
Subsidiaries.
(d)Purchaser agrees to give prompt notice to Seller of the assertion of any
claim, or the commencement of any suit, action or proceeding in respect of which
indemnity may be sought hereunder, which Purchaser deems to be within the ambit
of this Section 8.9 (specifying with particularity the basis therefor) and will
give Seller such information with respect thereto as Seller may request. Seller
may, at its own expense, (i) participate in and, (ii) upon notice to Purchaser,
assume the defense of any such suit, action or proceeding; provided that, (y)
Seller shall thereafter consult with Purchaser upon Purchaser's reasonable
request for such consultation from time to time with respect to such suit,
action or proceeding and (z) Seller shall not, without Purchaser's consent,
which consent shall not be unreasonably withheld, agree to any settlement with
respect to any Tax if such settlement could materially adversely affect the
past, present or future Tax liability of Purchaser, any of its Affiliates or,
upon the Closing, the Company or any Subsidiary. If Seller assumes such defense,
Purchaser shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by Seller. Whether or not Seller chooses to defend or prosecute any
claim, all of the parties hereto shall cooperate in the defense or prosecution
thereof.
(e)Seller agrees to give prompt notice to Purchaser of the assertion of any
claim, or the commencement of any suit, action or proceeding in respect of which
indemnity may be sought hereunder which Seller deems to be within the ambit of
this Section 8.9 (specifying with
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particularity the basis therefor) and will give Purchaser such information with
respect thereto as Purchaser may request. Purchaser may, at its own expense, (i)
participate in and, (ii) upon notice to Seller, assume the defense of any such
suit, action or proceeding; provided that, (y) Purchaser shall thereafter
consult with Seller upon Seller's reasonable request for such consultation from
time to time with respect to such suit, action or proceeding and (z) Purchaser
shall not, without Seller's consent, which consent shall not be unreasonably
withheld, agree to any settlement with respect to any Tax if such settlement
could materially adversely affect the past, present or future Tax liability of
Seller or any of its Affiliates. If Purchaser assumes such defense, Seller shall
have the right (but not the duty) to participate in the defense thereof and to
employ counsel, at its own expense, separate from the counsel employed by
Purchaser. Whether or not Purchaser chooses to defend or prosecute any claim,
all of the parties hereto shall cooperate in the defense or prosecution thereof.
(f)Seller shall not be liable under this Section 8.9 with respect to any
Tax resulting from a claim or demand the defense of which it was not offered the
opportunity to assume as provided under Section 8.9(d) hereof to the extent
Seller's liability under Section 8.9(a) is adversely affected as a result
thereof. No investigation by Purchaser or any of its Affiliates at or prior to
the Closing Date shall relieve Seller of any liability hereunder.
(g) Purchaser shall not be liable under this Section 8.9 with respect to
any Tax resulting from a claim or demand the defense of which it was not offered
the opportunity to assume as provided under Section 8.9(e) hereof to the extent
Purchaser's liability under Section 8.9(a) is adversely affected as a result
thereof. No investigation by Seller or any of its Affiliates at or prior to the
Closing Date shall relieve Purchaser of any liability hereunder.
(h) Any amounts owed by any party to any other party under this Section 8.9
shall be paid within 10 business days of notice from such other party. Any
amounts which are not paid within such 10-day period shall accrue interest at
the monthly "Federal Short-Term Rate" under Section 1274(d)(1)(C) of the Code
applicable to any period for which such intent is payable.
(i) The indemnification provided for hereunder shall not be subject to the
provisions of Article XI and shall constitute a separate and distinct
indemnification obligation of the parties hereto.
ARTICLE IX
Employee Benefits
9.1 Employee Benefits Definitions. The following terms, as used herein,
have the following meanings:
"Benefit Arrangement" means any employment, severance or similar contract,
arrangement or policy, or any plan or arrangement providing for severance
benefits, insurance coverage (including any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits, deferred compensation, profit-sharing,
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bonuses, stock options, stock appreciation rights or other forms of incentive
compensation or post-retirement insurance, compensation or benefits that (i) is
not an Employee Plan and (ii) is entered into or maintained, as the case may be,
by the Seller or any of its ERISA Affiliates and (iii) covers any employee or
former employee of the Company or any Subsidiary of the Company.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA Affiliate" of any entity means any other entity which, together with
such entity, would be treated as a single employer under Section 414 of the
Code.
"Individual Account Plan" means the Aetna Incentive Savings Plan and the
U.S. Healthcare Savings Plan.
"Multiemployer Plan" means each Employee Plan that is a multiemployer plan,
as defined in Section 3(37) of ERISA.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Pension Plan" means the Pension Plan for Employees of Aetna Services, Inc.
and the Pension Plan for Employees of U.S. Healthcare.
"Title IV Plan" means an Employee Plan, other than any Multiemployer Plan,
subject to Title IV of ERISA.
9.2. ERISA Representations. (a) Section 9.2(a) of the Disclosure Schedule
is an accurate and complete list of each "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by the Seller or any of its ERISA
Affiliates and (iii) covers any employee or former employee of the Company or
any Subsidiary. Such plans are hereinafter referred to as the "Employee Plans".
Seller has furnished or made available to Purchaser copies of such plans (and,
if applicable, related trust agreements) and all amendments thereto and written
interpretations thereof together with (i) the most recent annual report prepared
in connection with any such plan (Form 5500 including accompanying schedules)
and (ii) if applicable, the most recent actuarial valuation report prepared in
connection with any such plan. Section 9.2(a) of the Disclosure Schedule
identifies each Employee Plan that is a Title IV Plan.
(b) Neither the Seller nor any ERISA Affiliate of Seller has incurred any
liability under Title IV of ERISA arising in connection with the termination of,
or complete or partial withdrawal from, any plan covered or previously covered
by Title IV of ERISA that could become a liability of the Purchaser or any of
its ERISA Affiliates after the Closing Date.
(c) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code and each amendment thereto, has been determined by the
Internal Revenue Service to be so qualified and no such determination has been
revoked and no plan amendment that is not the subject of a favorable
determination letter would affect the qualification of the plan or the validity
of the plan's favorable determination letter. Seller has provided Purchaser with
the most recent determination letters of the Internal Revenue Service relating
to each such Employee Plan. Each Employee Plan has been
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maintained in substantial compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Code.
No Employee Plan is a Multiemployer Plan.
(d) Section 9.2(d) of the Disclosure Schedule is an accurate and complete
list of each Benefit Arrangement. Seller has furnished or made available to
Purchaser copies of each Benefit Arrangement. Each Benefit Arrangement has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations.
(e) Except as set forth in Section 9.2(e) of the Disclosure Schedule, there
is no contract, agreement, plan or arrangement with respect to which the Company
or any Subsidiary has any liability that provides for the payment to any
employee or former employee of the Company or any Subsidiary of more than
$75,000 in any calendar year.
(f) Except as set forth in Section 9.2(f) of the Disclosure Schedule, no
employee or former employee of the Company or any of its Subsidiaries will
become entitled to any bonus, retirement, severance, job security or similar
benefit solely as a result of the transactions contemplated hereby.
(g) Except as set forth in Section 9.2(g) of the Disclosure Schedule, to
the knowledge of Seller, there are no governmental inspections, investigations,
audits or examinations currently pending or threatened with respect to any
Employee Plan or Benefit Arrangement. There exists no material action, suit or
claim (other than routine claims for benefits) with respect to any Employee Plan
or Benefit Arrangement pending or to the knowledge of Seller threatened against
any of such plans or arrangements.
(h) Except as to matters described in Section 3.10 of the Disclosure
Schedule, to the knowledge of Seller, there are no facts or events, including
the consummation of the transaction contemplated by this Agreement, that could
lead to the imposition of any material liability on the Purchaser or any of its
ERISA Affiliates, of whatever nature including the provision of employee
benefits with respect to the employment of any employees of Seller or its
Subsidiaries who are not Transferred Employees.
(i) Except as provided in Section 9.6(a), all material benefits due and
payable to any of the Transferred Employees under the Employee Plans and Benefit
Arrangements as of the Closing Date will be paid thereto by or on behalf of the
Seller.
9.3. Employees. On or prior to the Closing Date, Seller will cause all
employees of the Seller or any of its Subsidiaries identified by Seller on
Section 9.3 of the Disclosure Schedule (by name and job title) as performing
substantially all of their services to the Company's business units to become
employees of the Company or one of its Subsidiaries. With respect to each
individual who, as of the Closing Date, is employed (including persons absent
from active service for any reason, including, but not limited to, illness,
disability, family and medical leave or other leave of absence, whether paid or
unpaid) by the Company or any of its Subsidiaries or is otherwise described in
Section 9.3 of the Disclosure Schedule ("Transferred Employees"), Purchaser or
one of its Affiliates shall continue the employment of each such Transferred
Employee, and provide each such Transferred Employee with at
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least the level of base salary per annum as in effect on the Closing Date for
such Transferred Employee, in each case for the longer of (i) three months after
the Closing Date and (ii) the remainder of the calendar year ending December 31,
1997. Nothing in this Section 9.3 is intended to, or shall, require such
employer to employ a Transferred Employee on a basis other than as an employee
at will.
9.4. Pension Plan. Seller and its Affiliates shall retain all liabilities
and obligations in respect of benefits accrued by both Transferred Employees and
former employees of the Company and its Subsidiaries under the Pension Plan. No
Pension Plan assets shall be transferred to Purchaser or any of its Affiliates
or to any plan of Purchaser or its Affiliates. It is understood that the
Transferred Employees will be fully vested in their accrued benefits under the
Pension Plan as of the Closing Date.
9.5. Individual Account Plan. Seller shall retain all liabilities and
obligations in respect of benefits accrued by Transferred Employees under the
Individual Account Plan. It is understood that the Transferred Employees are
fully vested (or will become fully vested) in their account balances under the
Individual Account Plan. On the Closing Date, Seller shall take such action as
may be necessary, if any, to permit each Transferred Employee to exercise his
rights under the Individual Account Plan to effect a distribution of such
Transferred Employee's vested account balances under the Individual Account Plan
or to effect a tax-free rollover of the taxable portion of the account balances
into an eligible retirement plan, if any, (within the meaning of Section
401(a)(31) of the Code, a "Direct Rollover") maintained by Purchaser or a
subsidiary of Purchaser (the "Purchaser Plan") or to an individual retirement
account. Seller and Purchaser shall work together in order to facilitate any
such distribution or rollover and to effect a Direct Rollover for those
participants who elect to roll over their account balances directly into the
Purchaser Plan in accordance with the terms and conditions of the Purchaser
Plan; provided that nothing contained herein shall obligate the Purchaser Plan
to accept a Direct Rollover in a form other than cash or obligate Purchaser to
establish or maintain a Purchaser Plan.
9.6. Other Employee Plans and Benefit Arrangements. (a) Purchaser shall
assume and be liable for, and, where appropriate, shall cause the Company and
its Subsidiaries to perform all obligations in respect of the Transferred
Employees under the employee agreements and arrangements described in Section
9.6(a) of the Disclosure Schedule (which by execution of this Agreement,
Purchaser or the Company, as applicable, expressly assumes as of the Closing
Date). Except to the extent specifically set forth herein and in Section 9.9, it
is understood that Purchaser shall not assume and shall not be liable for any
obligations, responsibilities or liabilities under the Employee Plans or Benefit
Arrangements of Seller.
(b) Subject to the provisions of Section 9.6(a), and except as provided in
Sections 9.4 and 9.5, Purchaser shall assume and be liable for all liabilities
(including legal costs and fees) involving any Transferred Employee relating to
any claim arising under any federal, state or local statute (including, without
limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991, the Age Discrimination in Employment Act of 1967, the Equal Pay Act, the
Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the
Family and Medical Leave Act, and all other statutes regulating the terms and
conditions of employment), regulation, executive order or ordinance, under the
common law or in equity (including any claims for wrongful discharge or
otherwise), or under any policy, agreement, understanding or promise, written or
oral, formal or informal, between the Company or any Subsidiary and such
Transferred Employee, including all such liabilities that relate to events
occurring on or prior to the Closing Date or which arise by reason of the
transactions contemplated by
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this Agreement. Nothing in the immediately preceding sentence shall affect the
indemnification rights that the parties would otherwise be entitled pursuant to
Article XI of this Agreement.
(c) For the calendar year in which the Closing Date falls, Transferred
Employees shall be eligible to accrue the number of vacation days calculated
under the Company's vacation policy in effect immediately prior to the Closing
Date, a copy of which is attached to this Agreement as Section 9.6(c) of the
Disclosure Schedule. Subject to Purchaser's policies and procedures respecting
vacation time, so long as a Transferred Employee is employed by the Company, a
Subsidiary or any Affiliate of Purchaser, such Transferred Employee shall accrue
at least as many vacation days as such person was scheduled to accrue under the
Company's vacation policy as of the beginning of such calendar year. Purchaser
will assume the vacation liability accrued by Transferred Employees as of the
Closing Date in a manner consistent with the Company's existing policy as of the
date hereof.
9.7. Plans Following the Closing. (a) For the period from the Closing Date
through the date 12 months after the Closing Date, Purchaser will cause the
Company to maintain employee benefit plans and arrangements for the benefit of
the Transferred Employees that are substantially comparable in the aggregate to
the Employee Plans. Notwithstanding the foregoing, Purchaser shall not be
obligated or required to establish or maintain a defined benefit plan (as
defined in ERISA Section 3(35) or Code Section 414(j)) for the benefit of any
Transferred Employee. Purchaser will cause the Company to give Transferred
Employees full credit for all purposes, including eligibility, vesting and
benefit accrual, under any such plans or arrangements maintained by the Company
pursuant to this Section 9.7 for such Transferred Employees' service recognized
for such purposes under the Employee Plans and Benefit Arrangements.
(b) Without limiting the generality of the foregoing, for the period from
the Closing Date through the date 12 months after the Closing Date, Purchaser
will maintain and make available to Transferred Employees (i) medical, dental,
and short-term disability plans that are substantially comparable to the Seller
plans identified in Section 9.7(b)(i) of the Disclosure Schedule without any
increase in required contributions by Transferred Employees for comparable
benefits in accordance with Section 9.8 and (ii) a severance package that is
identical to the Seller severance plan described in Section 9.7(b)(ii) of the
Disclosure Schedule.
(c) For the period beginning on the date 12 months after the Closing Date,
Purchaser shall provide benefit plans and programs that are at least as
favorable as such plans and programs that are available to other employees of
the Purchaser and its Affiliates generally and give Transferred Employees credit
for service with Seller and any of its affiliates as well as service with
Purchaser and any of its Affiliates for all purposes including eligibility,
vesting, and benefit accrual.
(d) Purchaser shall cause any Transferred Employee who is on short-term
disability on the Closing Date to receive without interruption on and after the
Closing Date short-term disability benefits provided by Purchaser substantially
identical to the short-term disability benefits provided by Seller for the
Transferred Employee. Seller shall have no liability to Purchaser with respect
to such benefits provided by Purchaser. If a Transferred Employee who was on
short-term disability on the Closing Date subsequently becomes eligible for
coverage and receives benefits under Seller's long-term disability plan,
Purchaser shall have no liability to Seller with respect to such long-term
disability coverage.
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9.8. Medical and Dental Insurance Coverage. (a) Purchaser shall cause all
employee health and dental plans in which Transferred Employees become
participants on or after the Closing Date to waive any and all pre-existing
condition exclusions and waiting period requirements and to recognize, to the
extent such participation commences other than at the beginning of a plan year,
expenses previously incurred for the period from the beginning of the calendar
year in which the Closing Date falls to the Closing Date for purposes of
applicable deductible rules to the extent such expenses are recognized under
Purchaser's plans in effect immediately prior to the Closing Date. In addition,
Purchaser will continue short-term disability benefits under the Company's sick
pay plan for any Transferred Employee receiving such benefits as of the Closing
Date for so long as such Transferred Employee remains eligible for such benefits
(not to exceed 26 weeks). Through the date 12 months after the Closing Date,
Transferred Employees shall not be required to make contributions toward the
cost of the applicable coverage under Purchaser's health and dental plans in
excess of the monthly amounts, if any, they would have been required to pay
under Seller's medical and dental insurance plans prior to the Closing Date.
(b) For the period from the Closing Date through the date 12 months after
the Closing Date, Purchaser agrees that in respect of any Transferred Employee
who as of the Closing Date is involved in a course of treatment covered under
Seller's medical plans, Purchaser shall take no action in connection with the
continuation of, or establishment of, coverage of such Transferred Employee
under Purchaser medical plans which will cause such Transferred Employee to have
to alter such course of treatment, including but not limited to, a change in
physician or location of covered treatment, in order for such course of
treatment to be covered under the applicable Purchaser medical plan.
9.9. Assumption of Liabilities. Except as otherwise provided in Section 9.4
or 9.5 or elsewhere herein, Purchaser agrees that, effective on and after the
Closing Date, the Company and its Subsidiaries shall have all liability and
responsibility with respect to the Transferred Employees and Seller shall not
retain any, and shall not be deemed to have retained any, of such liabilities
and responsibilities. With respect to Transferred Employees, and except to the
extent provided in Section 9.6(a), Seller shall retain those obligations and
liabilities relating to or arising under any Employee Plan or Benefit
Arrangement that are attributable to benefits accrued or otherwise payable on or
prior to the Closing Date and are not accrued as a liability on the Closing
Balance Sheet and that either (i) are with respect to an Employee Plan or
Benefit Arrangement set forth in Section 9.9 of the Disclosure Schedule or (ii)
arise from claims, including claims challenging the administration,
interpretation, or statutory or regulatory compliance of an Employee Plan or
Benefit Arrangement, that are not routine claims for benefits in the ordinary
course of operation of the Employee Plan or Benefit Arrangement. Except to the
extent provided in the preceding sentence or in Section 9.4 or 9.5, Purchaser
shall, as of the Closing Date, assume all obligations and liabilities of Seller
and any of its Affiliates in respect of Transferred Employees under each
Employee Plan and Benefit Arrangement; provided that, except as provided in
Section 9.6 or 9.7, nothing contained herein shall constitute a commitment or
obligation on the part of Purchaser to continue any such Employee Plan or
Benefit Arrangement after the Closing Date.
9.10 Third Party Beneficiaries. No provision of this Article IX shall create
any third party beneficiary rights in any employee or former employee of the
Company (including any beneficiary or dependent thereof) in respect of continued
employment or resumed employment, and no provision of this Article IX shall
create any rights in any such persons in respect of any benefits that may be
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provided, directly or indirectly, under any Employee Plan or Benefit
Arrangement.
ARTICLE X
Conditions To Closing
10.1 Conditions to Obligations of Each Party. The obligations of Purchaser
and Seller to consummate the Closing are subject to the satisfaction of the
following conditions:
(a) Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired or been terminated.
(b) No provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Closing,
and no proceeding challenging this Agreement or seeking to prohibit,
prevent or materially alter or delay, or materially impair the value of,
the transactions contemplated hereby shall have been instituted by any
governmental body, agency or authority having proper jurisdiction and shall
be pending.
(c) All actions by, authorizations, consents or approvals of, or
filings with any governmental body, agency, official or authority required
in order to permit the consummation of the Closing shall have occurred,
been filed or been obtained.
10.2 Conditions to Obligation of Purchaser. The obligation of Purchaser to
consummate the Closing is subject to the satisfaction of the following further
conditions:
(a)(i)Seller shall have performed in all material respects all of its
obligations hereunder required to be performed by it on or prior to the
Closing Date, (ii) the representations and warranties of Seller contained
in this Agreement shall be true and correct as of the Closing Date with the
same effect as though such representations and warranties had been made on
and as of such time, other than representations and warranties that speak
as of a specific date or time (which need only be true and correct as of
such date or time); provided that the condition set forth in this clause
(ii) shall be deemed satisfied if the facts, events or circumstances
underlying any inaccuracies in any such representations and warranties as
of the Closing Date (without giving effect to any materiality
qualifications or materiality exceptions contained therein), individually
or in the aggregate, could not reasonably be expected to have a material
adverse effect on the business, properties or financial condition of the
Company and the Subsidiaries taken as a whole and (iii) Purchaser shall
have received a certificate duly executed by an authorized officer of
Seller to the foregoing effect.
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(b) Purchaser shall have received the stock books, stock ledgers,
minute books and corporate seal of the Company and the Subsidiaries.
(c) Purchaser shall have received with respect to the Company and each
Subsidiary (i) a copy of its certificate or articles of incorporation,
including all amendments, certified by the Secretary of State or other
appropriate official of the jurisdiction of its incorporation and (ii)
certificates from the Secretary of State or other appropriate official of
the jurisdiction of its incorporation to the effect that such person is in
good standing or subsisting in such jurisdiction, listing all charter
documents of such person on file.
(d) Purchaser shall have received a certificate, dated the Closing
Date and executed by the Secretary or an Assistant Secretary of the
Company, in form and substance customary for transactions of this type.
(e) Purchaser shall have received (i) a copy of the certificate or
articles of incorporation, including all amendments, of Seller certified by
the Secretary of State or other appropriate official of the State of
Connecticut and (ii) certificates from the Secretary of State or other
appropriate official of the State of Connecticut to the effect that Seller
is in good standing or subsisting in such jurisdiction, listing all charter
documents of Seller on file.
(f) Purchaser shall have received a certificate, dated the Closing
Date and executed by the Secretary or an Assistant Secretary of Seller, in
form and substance customary for transactions of this type.
(g) Aetna U.S. Healthcare Inc., a Pennsylvania corporation
("Guarantor"), shall have executed and delivered to Purchaser the Guaranty,
substantially in the form attached as Exhibit A.
(h) Guarantor shall have executed and delivered to Purchaser the
Master Service Agreement, substantially in the form attached as Exhibit B
(the "Master Agreement").
(i) Guarantor shall have executed and delivered to Purchaser the
Transition Services Agreement, substantially in the form of Exhibit C (the
"Transition Services Agreement").
(j) Guarantor or one of its Affiliates shall have executed and
delivered to Purchaser the HMO and non-HMO health care agreements,
substantially in the form of the applicable Exhibit to the Master
Agreement.
(k) Guarantor shall have executed and delivered to Purchaser the
Non-Competition Covenant, substantially in the form of Exhibit D.
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(l) Since the date of this Agreement, there has been no material
adverse change in the business, assets, condition (financial or otherwise)
or results of operations of the Company and the Subsidiaries taken as a
whole (other than as a result of changes (i) in general conditions,
including laws and regulations, applicable to the behavioral healthcare
industry or (ii) in general economic conditions).
(m) The essential software without which the business of the Company
and the Subsidiaries could not operate in the ordinary course listed on
Section 10.2(m) of the Disclosure Schedule (or its functional equivalent)
being available for license by Purchaser or the Company on commercially
reasonable terms.
10.3 Conditions to Obligation of Seller. The obligation of Seller to
consummate the Closing is subject to the satisfaction of the following further
conditions:
(a)(i)Purchaser shall have performed in all material respects all of
its obligations hereunder required to be performed by it on or prior to the
Closing Date, (ii) the representations and warranties of Purchaser
contained in this Agreement shall be true and correct as of the Closing
Date with the same effect as though such representations and warranties had
been made on and as of such time, other than representations and warranties
that speak as of a specific date or time (which need only be true and
correct as of such date or time); provided that the condition set forth in
this clause (ii) shall be deemed satisfied if the facts, events or
circumstances underlying any inaccuracies in any such representations and
warranties as of the Closing Date (without giving effect to any materiality
qualifications or materiality exceptions contained therein), individually
or in the aggregate, could not reasonably be expected to have a material
adverse effect on the business, properties or financial condition of the
Purchaser and it subsidiaries taken as a whole and (iii) Seller shall have
received a certificate duly executed by an authorized officer of Purchaser
to the foregoing effect.
(b) Seller shall have received (i) a copy of the certificate or
articles of incorporation, including all amendments, of Purchaser certified
by the Secretary of State or other appropriate official of the jurisdiction
of Purchaser's incorporation and (ii) certificates from the Secretary of
State or other appropriate official of the jurisdiction of Purchaser's
incorporation to the effect that Purchaser is in good standing or
subsisting in such jurisdiction, listing all charter documents of Purchaser
on file.
(c) Seller shall have received a certificate, dated the Closing Date
and executed by the Secretary or an Assistant Secretary of Purchaser, in
form and substance customary for transactions of this type.
(d) The Company shall have executed and delivered to
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Guarantor the Transition Services Agreement.
(e) Purchaser and the Company shall have executed and delivered to
Guarantor the Master Agreement.
(f) The Company or one of its Affiliates shall have executed and
delivered to Guarantor the HMO and non-HMO health care agreements,
substantially in the form of the applicable Exhibit to the Master
Agreement.
(g) Purchaser shall have executed and delivered to Seller the
Guaranty, substantially in the form of the applicable Exhibit to the Master
Agreement.
ARTICLE XI
Survival; Indemnification
11.1 Survival. The covenants, agreements, representations and warranties of
the parties hereto contained in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive the
Closing until the later of (x) the 12 month anniversary of the Closing Date and
(y) January 31, 1999 (the "Expiration Date") or (i) in the case of Sections 3.2,
3.5, 3.6(b) and (c), 3.13, 4.2, 4.5, 6.1, 6.3, 6.4, 6.5 and 6.6 indefinitely,
(ii) in case of Section 6.2, for the period set forth therein, (iii) in the case
of the covenants, agreements, representations and warranties contained in
Article VIII, as set forth in Section 8.9(a), (iv) in the case of covenants and
agreements contained in Article IX, for the periods specified therein, or if no
period is specified, then indefinitely. Notwithstanding the foregoing, the
covenants and agreements contained in this Article XI shall survive until the
Expiration Date, except (i) as to any claims for, or any claims that may result
in, Damages for which indemnity may be sought hereunder of which the
Indemnifying Party has received written notice (describing the claim in
reasonable detail) from the Indemnified Party on or before the Expiration Date
in which case the indemnity obligation for such claim shall survive the
Expiration Date or (ii) as to any representation, warranty or agreement
expressly surviving the Expiration Date as set forth in this Section 11.1.
11.2 Indemnification. (a) Seller hereby indemnifies Purchaser and,
effective at the Closing, without duplication, the Company and the Subsidiaries,
and their respective directors, officers, shareholders, employees and agents
(collectively, the "Purchaser Indemnified Parties") against and agrees to hold
them harmless from any and all damage, loss, liability and expense (including
without limitation reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any action, suit or proceeding)
("Damages") incurred or suffered by the Purchaser Indemnified Parties arising
out of (x) any misrepresentation or breach of warranty, covenant or agreement
made or to be performed by Seller pursuant to this Agreement (other than
pursuant to Article VIII), (y) the litigation identified in Item 3 of Section
3.10 of the Disclosure Schedule or (z) the litigation identified in Item 21 of
Section 3.10 of the Disclosure Schedule; provided that (i) except as set forth
in Section 11.1, the Purchaser Indemnified Parties shall not have any right to
be indemnified under, nor shall they make any claim pursuant to, this Section
11.2(a) after the Expiration Date, (ii) the Purchaser Indemnified Parties shall
not have any right to be indemnified under, nor shall they make any
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claim pursuant to, this Section 11.2(a) for any single claim for Damages of less
than $20,000 ("De Minimis Claims"), (iii) the Purchaser Indemnified Parties
shall not have any right to be indemnified under, nor shall they make any claim
pursuant to, this Section 11.2(a) unless the aggregate amount of all Damages to
the Purchaser Indemnified Parties (other than De Minimis Claims) exceeds
$5,000,000, in which case the Purchaser Indemnified Parties will be entitled to
indemnification only to the extent to which such Damages (other than De Minimis
Claims) exceed $5,000,000 and (iv) Seller's maximum liability under this Section
11.2(a) shall not exceed the Closing Payment, as adjusted pursuant to Section
2.4, together with all amounts paid to Seller pursuant to the Master Agreement.
Notwithstanding anything to the contrary set forth in the immediately preceding
sentence, (1) Seller's indemnification obligations pursuant to clause (y) of
such sentence shall not be subject to, and shall not count towards, the
$5,000,000 deductible described in clause (iii) of such sentence, and (2)
although Seller's indemnification obligations pursuant to clause (z) of such
sentence shall be subject to, and shall count towards, such $5,000,000
deductible, Seller shall be obligated to undertake the defense of such
litigation, through counsel of its own choosing (reasonably acceptable to
Purchaser) at its own expense, in accordance with the provisions of Section
11.3.
(b)Purchaser hereby indemnifies Seller and its directors, officers,
shareholders, employees and agents (collectively, the "Seller Indemnified
Parties") against and agrees to hold them harmless from any and all Damages
incurred or suffered by the Seller Indemnified Parties arising out of any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Purchaser pursuant to this Agreement (other than pursuant to
Article VIII); provided that (i) except as set forth in Section 11.1, the Seller
Indemnified Parties shall not have any right to be indemnified under, nor shall
they make any claim pursuant to, this Section 11.2(b) after the Expiration Date,
(ii) the Seller Indemnified Parties shall not have any right to be indemnified
under, nor shall they make any claim pursuant to, this Section 11.2(b) for any
De Minimis Claims, (iii) the Seller Indemnified Parties shall not have any right
to be indemnified under, nor shall they make any claim pursuant to, this Section
11.2(b) unless the aggregate amount of all Damages to the Seller Indemnified
Parties (other than De Minimis Claims) exceeds $5,000,000, in which case the
Seller Indemnified Parties will be entitled to indemnification only to the
extent to which such Damages (other than De Minimis Claims) exceed $5,000,000
and (iv) Purchaser's maximum liability under this Section 11.2(b) shall not
exceed the Closing Payment, as adjusted pursuant to Section 2.4, together with
all amounts paid to Seller pursuant to the Master Agreement.
(c)The amount of any and all Damages for which indemnification is provided
pursuant to this Article XI shall be net of any amounts received by the
Indemnified Party under insurance policies with respect to such Damages (it
being understood that any proceeds obtainable from a captive insurance company
of the Indemnified Party or any amounts which the Indemnified Party self-
insures shall not be so taken into account). In the event that any claim for
indemnification asserted under this Article XI is, or may be, the subject of the
Company's or any party's hereto insurance coverages, the Indemnified Party
agrees to promptly notify the applicable insurance carrier of such claim and
tender defense thereof to such carrier. Each Indemnified Party shall pursue such
claims diligently and shall reasonably cooperate with each such insurance
carrier, and there shall be no payment obligation with respect to such claim for
indemnification under this Article XI for a period of one year after making a
claim for such insurance. If insurance coverage is denied (in whole or in part),
or if no resolution of an insurance claim shall have occurred within such one
year period, upon payment of the
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relevant indemnification obligation, the Indemnifying Party shall be subrogated
to the rights of the Indemnified Party against such insurance carrier.
11.3 Procedures; Exclusivity. (a) The party seeking indemnification under
Section 11.2 (the "Indemnified Party") agrees to give prompt written notice to
the party against whom indemnity is sought (the "Indemnifying Party") setting
forth in reasonable detail the assertion of any claim, or the commencement of
any suit, action or proceeding, in respect of which indemnity may be sought
under such Section. The Indemnifying Party shall have 45 days after receipt of
such notice (or five days prior to such lesser time period as is permitted by
applicable law or administrative rule to contest such claim) to undertake,
through counsel of its own choosing and at its own expense, the settlement or
defense thereof, and the Indemnified Party shall cooperate with it in connection
therewith; provided, however, that the Indemnified Party may participate in such
settlement or defense through counsel chosen by such Indemnified Party, provided
that the fees and expenses of such counsel shall be borne by such Indemnified
Party. The Indemnified Party shall not pay or settle any claim which the
Indemnifying Party is contesting in good faith. Notwithstanding the foregoing,
the Indemnified Party shall have the right to pay or settle any such claim;
provided that the terms of such settlement are not materially prejudicial to the
Indemnifying Party, and that in such event the Indemnified Party shall be deemed
to have waived any right of indemnity therefor by the Indemnifying Party. If the
Indemnifying Party does not notify the Indemnified Party within 45 days after
the receipt of the Indemnified Party's notice of a claim of indemnity hereunder
(or five days prior to such lesser time period as is permitted by applicable law
or administrative rule to contest such claim) that it elects to undertake the
defense thereof, the Indemnified Party shall have the right to contest, settle
or compromise the claim but shall not thereby waive any right to indemnity
therefor by the Indemnifying Party.
(b) After the Closing, Sections 8.9 and 11.2 will provide the exclusive
remedy by either party for any misrepresentation, breach of warranty, covenant
or other agreement or other claim arising out of this Agreement or the
transactions contemplated hereby.
11.4 Investigation. Any investigation made at any time by or on behalf of
any party hereto shall not diminish in any respect whatsoever such party's right
to rely on the representations and warranties made by any other party pursuant
to this Agreement.
ARTICLE XII
Termination
12.1 Grounds for Termination. This Agreement may be terminated at any time
prior to the Closing:
(i) by mutual written agreement of Seller and Purchaser; or
(ii) at any time after March 31, 1998, by Seller or Purchaser upon written
notification of the non-terminating party by the terminating party if the
Closing shall not have occurred on or before such date and such failure to
consummate is not caused by a breach of this Agreement by the terminating party.
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12.2 Effect of Termination. If this Agreement is validly terminated
pursuant to Section 12.1, such termination shall be without liability or
obligation of either party (or any shareholder, director, officer, employee,
agent, consultant or representative of such party) to the other party to this
Agreement; provided that if such termination shall result from the willful
failure of either party to fulfill a condition to the performance of the
obligations of the other party or to perform a covenant of this Agreement or
from a willful breach by either party to this Agreement, such party shall be
fully liable for any and all Damages incurred or suffered by the other party as
a result of such failure or breach. The provisions of Sections 3.13, 4.5, 6.1,
13.3, 13.5, 13.6 and 13.7 shall survive any termination hereof pursuant to
Section 12.1.
ARTICLE XIII
Miscellaneous
13.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt if delivered personally,
telecopied (which telecopy is confirmed) or mailed by registered or certified
mail (return receipt requested) or the next day if by overnight delivery service
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
if to Purchaser, to:
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30319
Attention: General Counsel
Telecopy: 404-814-5717
with a copy to:
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30319
Attention: Chief Financial Officer
Telecopy: 404-814-5793
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if to Seller, to:
Aetna Insurance Company of Connecticut
c/o Aetna U.S. Healthcare Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: Chief Legal Officer
Telecopy: 860-273-8340
with a copy to:
Howard, Darby & Levin
1330 Avenue of the Americas
New York, New York 10019
Attention: John P. Gourary
Telecopy: 212-841-1010
13.2 Amendments; No Waivers. (a) Any provision of this Agreement may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by Purchaser and Seller, or in the case of
a waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by either party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law, except as otherwise provided in Section 11.3(b).
13.3 Expenses. All costs and expenses incurred in connection with this
Agreement shall be paid by the party incurring such cost or expense.
13.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided that neither party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of the other party hereto. Any
purported assignment not permitted by this Section 13.4 shall be void.
13.5 Governing Law. This Agreement shall be construed in accordance with
and governed by the law of the State of New York, without regard to any
applicable principles of conflicts of law.
13.6 Submission to Jurisdiction. Each of the parties hereto hereby submits
to the exclusive jurisdiction of the United States District Court for the
Southern District of New York and of any New York State court sitting in New
York City for purposes of all legal proceedings arising out of or relating to
this Agreement or the
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transactions contemplated hereby. Each of the parties hereto irrevocably waives,
to the fullest extent permitted by law, any objection which it may now or
hereafter have to the laying of the venue of any proceeding brought in such a
court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum.
13.7 Waiver of Jury Trial. Each of the parties hereto hereby irrevocably
waives any and all right to trial by jury in any legal proceeding arising out of
or relating to this Agreement or the transactions contemplated hereby.
13.8 Specific Performance. The parties acknowledge that money damages alone
would not a sufficient remedy for any breach of Section 6.1 of this Agreement,
and that the non- breaching party shall be entitled to equitable relief,
including injunction and specific performance, as a remedy for any such breach.
Such remedies shall be in addition to all other legal or equitable remedies
available to such party.
13.9 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received a
counterpart hereof signed by the other party hereto.
13.10 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings and negotiations, both written and oral,
between the parties with respect to the subject matter of this Agreement. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein has been made or relied upon by either party hereto.
13.11 Severability. This Agreement shall be deemed severable, and the
invalidity or unenforceability of any term or provision of this Agreement shall
not affect the validity or enforceability of this Agreement or of any other term
hereof, which shall remain in full force and effect.
13.12 Captions; Construction. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof. The parties acknowledge that this Agreement was initially
prepared by Seller, and that all parties have read and negotiated the language
used in this Agreement. The parties agree that, because all the parties
participated in negotiating and drafting this Agreement, no rule of construction
shall apply to this Agreement which construes ambiguous language in favor of or
against any party by reason of that party's role in drafting this Agreement.
13.13 Third Party Beneficiaries. None of the provisions of this Agreement
shall be for the benefit of, or enforceable by, any employee or creditor of any
party hereto.
13.14 No Set-off. The parties hereto expressly waive any rights to set-off
against any amount or payment due hereunder that any party may have under law or
equity.
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In witness whereof, the parties hereto here caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
Magellan Health Services, Inc.
By /s/ Mac Crawford
-------------------------------
Name: Mac Crawford
Title: Chairman, President and
Chief Executive Officer
Aetna Insurance Company of Connecticut
By /s/ James H. Dickerson, Jr.
--------------------------------
Name: James H. Dickerson, Jr.
Title: Vice President
45
MASTER SERVICE AGREEMENT
EXECUTION SHEET
This Master Agreement ("Agreement") is made and entered into by and among Aetna
U.S. Healthcare Inc., on behalf of itself and all of its applicable affiliates
(collectively, "Aetna USHC") (other than Human Affairs International,
Incorporated ("HAI") and its subsidiaries), Magellan Health Services, Inc.
("Magellan") and HAI. As used in this Agreement, "Contractor" refers to HAI and
its subsidiaries. As used in this Agreement, "Aetna USHC" may refer from time to
time to Aetna U.S. Healthcare Inc. and its affiliated companies, collectively,
including HAI and its subsidiaries prior to the Effective Date and excluding HAI
and its affiliates after the Effective Date. Aetna USHC and Contractor are
hereinafter sometimes referred to collectively as "Parties" and individually as
a "Party".
The "Effective Date" of this Agreement shall be the date the transactions
contemplated by the Stock Purchase Agreement dated as of August 5, 1997 between
Aetna Insurance Company of Connecticut and Magellan Health Services, Inc. (the
"Stock Purchase Agreement") are consummated, subject to any applicable
regulatory approvals.
Aetna USHC and Contractor mutually desire to enter into an agreement whereby
Aetna USHC and Contractor will provide access to and coordinate the provision of
behavioral health care services to Members with the objective of delivering
cost-effective, quality behavioral health care services.
This Agreement constitutes the complete and exclusive contract between the
parties with respect to the subject matter hereof and supersedes any and all
prior or contemporaneous oral or written communications or proposals not
expressly included herein.
In consideration of the mutual covenants and promises stated herein and other
good and valuable consideration, the parties hereby enter into this Agreement.
By executing this Agreement, the parties acknowledge and agree that they have
reviewed all of the terms and conditions of this Agreement and intend to be
legally bound by same.
Aetna U.S. Healthcare Inc. Magellan Health Services, Inc.
By: /s/ James H. Dickerson, Jr. By: /s/ Mac Crawford
------------------------------ ---------------------------------
Name: James H. Dickerson, Jr. Name: Mac Crawford
Title: Vice President Title: Chairman, President & CEO
Date: August 5, 1997 Date: August 5, 1997
Human Affairs International,
Incorporated
By: /s/ Jack D. Williams
---------------------------------
Name: Jack D. Williams
Title: President & CEO
Date: August 5, 1997
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This Agreement is entered into by and between Aetna USHC, Magellan and HAI,
which parties have signed the Execution Sheet attached hereto.
1. Behavioral Healthcare Services
A. Contractor provides, and manages the administration and utilization
of, behavioral healthcare benefits in multiple jurisdictions
throughout the United States. It is the intention of the Parties that
all Members for which Aetna USHC compensates Contractor pursuant to
Section 6 hereof will be serviced by or through Contractor. In the
event that any services are provided to Members by Magellan or a
subsidiary of Magellan (other than Contractor), such services will be
deemed to be provided by Contractor for purposes of Section 7 of this
Agreement. In addition, in the event that Contractor transfers to
Magellan or a subsidiary of Magellan (other than Contractor) any
Member who receives Managed Behavioral Health services, such Member
shall be deemed to be a Member for purposes of Section 7 of this
Agreement so long as such Member continues to receive Managed
Behavioral Health services from Magellan or one of its subsidiaries.
In the event that the product category known as "Managed Behavioral
Health" is amended, changed, subdivided or combined with other
categories of products or services without the intent of preventing
the counting of increase in Managed Behavioral Health Members, and as
a result of such action it becomes impossible or impracticable for the
Parties to determine the number of Members receiving Managed
Behavioral Health services, Contractor shall be deemed to have
provided such services to not less than the number of such Members
immediately prior to such event for purposes of Section 7 of this
Agreement.
Commencing on the Effective Date, Contractor shall provide the
services described in Exhibits A [GENERIC HMO AGREEMENT] and B
[NON-HMO AGREEMENT] hereto (collectively, the "Vendor Contracts") in
the markets described in Schedules A [HMO MARKETS] and B [NON-HMO
MARKETS], respectively, subject to the qualifications set forth in
paragraphs B and C below.
B. Aetna USHC and Contractor shall implement the Behavioral Health Care
Service Agreements substantially in the form attached hereto as
Exhibit A (the "HMO Agreement") for each of the markets identified in
Schedule A on the Effective Date, subject to any applicable regulatory
approvals and licensing requirements. It is understood and agreed that
the form of HMO Agreement attached hereto may need to be modified in
each market in a manner that is reasonably acceptable to Aetna USHC
and Contractor to meet applicable regulatory requirements. The parties
to the HMO Agreements shall be the applicable HMO subsidiary or
affiliate of Aetna USHC on the one hand and Contractor or one of its
affiliates on the other.
C. Aetna USHC and Contractor (or Magellan) may, from time to time,
mutually agree to enter into HMO Agreements in other geographic
markets not identified on Schedule A.
D. Aetna USHC and Contractor shall enter into the Behavioral Health Care
Service Agreement substantially in the form attached hereto as Exhibit
B (the "Non-HMO Agreement") on the Effective Date, subject to any
applicable regulatory approvals. The Non-HMO Agreement shall govern
the provision of services identified therein for Aetna USHC throughout
the United States.
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E. In order to provide services pursuant to this Agreement, Network
Providers must have executed individual Participating Provider
Addendum attached to the applicable HMO Agreement. Contractor and all
Network Providers will act as independent contractors of Aetna USHC in
providing Covered Services to Members. Except as otherwise set forth
in this Agreement, Aetna USHC shall not be liable for any provider's
failure to properly perform health care services to any Member or
fulfill his/her/its obligations under applicable provider contract.
F. Network Providers who are HMO Network Providers shall participate in
all Plans covering Members serviced by Contractor throughout the term
of this Agreement, provided they continue to meet Aetna USHC's
participation criteria.
G. On an ongoing basis Contractor shall identify potential Network
Providers who have agreed to participate in the Aetna USHC provider
network and shall encourage such providers not currently participating
with Aetna USHC to apply for participation with Aetna USHC. Aetna USHC
agrees to accept for participation any such provider that meets Aetna
USHC's applicable participation criteria and agrees to the terms and
conditions required by this Agreement. It is understood by the
parties, however, that an HMO Network Provider cannot provide services
pursuant to this Agreement unless such provider participates in all
Plans.
2. Products/Publicity
Aetna USHC shall have the primary responsibility for the advertising and
marketing of all Plans. Neither Party may advertise, issue a press release
or make any public written statement about the other Party or this
Agreement without such other Party's prior written approval, which shall
not be unreasonably withheld, provided that neither Party shall need the
approval of the other Party for disclosure relating to this Agreement
within the text of any periodic report (other than a press release) filed
with the Securities and Exchange Commission ("SEC"), that both Parties
recognize this Agreement may be filed with the SEC as an exhibit to an SEC
report and that this Section shall not prohibit either Party from making
any disclosure permitted by Section 17.A, B or C.
3. Duties of Contractor and Magellan
A. Magellan shall, and shall cause its subsidiaries (including HAI), to
comply with their respective obligations of this Agreement and all
Vendor Contracts (including the HMO Agreements and the Non-HMO
Agreement) entered into pursuant to this Agreement.
B. Contractor shall satisfy all regulatory and licensure requirements for
the implementation and continued effectiveness of the HMO Agreements
in all of the markets in which Contractor is providing services and
for the implementation and continued effectiveness of the Non-HMO
Agreement.
C. Contractor shall comply with all federal and state laws in all
material respects applicable to it related to this Agreement, the
Vendor Contracts and the services to be provided thereunder,
including, but not limited to statutes and regulations
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related to fraud, abuse, discrimination, disabilities,
confidentiality, self-referral, false claims and prohibition of kick
backs.
D. Contractor shall use commercially reasonable best efforts to require
that Network Providers properly provide the Covered Services of the
applicable Plan.
E. Contractor shall use commercially reasonable best efforts, in
cooperation with Aetna USHC, to review, inform and educate Network
Providers of all applicable Aetna USHC policies and procedures
delivered to HAI.
4. Duties of Aetna USHC
A. Aetna USHC shall cause its affiliates located in the markets
identified on Schedule A hereto to enter into and comply with the
terms of the HMO Agreements and the Non-HMO Agreement for their
particular markets, consistent with the provisions of Section 1
hereof.
B. Prior to the Effective Date, Aetna USHC shall satisfy all regulatory
and licensure requirements applicable to it for the implementation of
the HMO Agreements in all of the markets identified on Schedule A
hereto and for the implementation of the Non- HMO Agreement.
C. Aetna USHC shall comply with all federal and state laws in all
material respects applicable to it related to this Agreement and the
Vendor Contracts.
5. Provider Contracts/Network Rental Arrangement
A. Aetna USHC understands and agrees that Contractor is in the midst of a
recontracting effort to establish provider contracts directly with all
of its participating providers, and that Contractor may not have
completed this effort prior to the Effective Date. Aetna USHC agrees
to use reasonable efforts to assist Contractor in such efforts.
Contractor may therefore need to avail itself of a portion of Aetna
USHC's behavioral health provider network for a period of time
following the Effective Date. Aetna USHC hereby agrees to enter into a
network rental arrangement (the "Network Rental Arrangement") with
Contractor on terms and conditions that are reasonably satisfactory to
both Parties (at no fee to Contractor) for a period of one year
following the Effective Date. Unless prohibited by the applicable
contract, the Network Rental Arrangement shall encompass all Aetna
USHC behavioral health participating providers who or which do not
have a direct contractual relationship with Contractor. Except for
cause, Aetna USHC shall not terminate any contracts with any such
participating providers until termination of the Network Rental
Arrangement. Aetna USHC shall not, however, be obligated to renew any
such contracts that expire. To the extent necessary to maintain the
quality of Contractor's provider networks, the Parties may mutually
agree to extend the six-month Network Rental Arrangement for such
longer period of time as may be appropriate under the circumstances.
Upon request, Contractor shall provide Aetna USHC with a mailing list
of all behavioral health providers who have entered into any direct
contracts of the type described above with Contractor, which will
enable Aetna USHC to terminate existing provider contracts with Aetna
USHC (where it deems appropriate).
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B. Subject to terms of the immediately preceding paragraph, Contractor
shall cooperate with Aetna USHC's efforts in the event Aetna USHC
concludes it is desirable to terminate (or terminate its participation
in) any behavioral health provider contracts to which Aetna USHC is a
party, including but not limited to the three-party provider contracts
entered into prior to the Effective Date and any contracts to which
Aetna USHC and the provider are the sole contracting parties. Aetna
USHC will use commercially reasonable best efforts to cooperate with
and assist Contractor in enforcing contracts with Participating
Providers utilized by Contractor pursuant to the Network Rental
Agreement.
C. Contractor shall indemnify and hold Aetna USHC harmless from all
claims, obligations, liabilities or other causes of action (including
costs and counsel fees) (collectively, "Claims") relating to the
Network Rental Arrangement, behavioral health care services provided
by Contractor or any Participating Provider or Participating
Provider's commercial relationship with Contractor, except that Aetna
USHC will not be indemnified for, and shall indemnify and hold
Contractor harmless from, all Claims which arise from Aetna USHC's
negligence or willful misconduct in performing its obligations under
the Rental Network Agreement.
6. Rates; Payment Arrangements
A. The rates for services provided under the HMO Agreements shall be as
set forth in Schedule A.
B. The rates for services provided under the Non-HMO Agreement shall be
as set forth in Schedule B hereto.
C. If (a) Aetna USHC changes the Covered Services or the level of care
criteria applicable to a Plan, or implements a new Plan, which will
(in Aetna USHC's or Contractor's reasonable actuarial estimate) result
in $.05 or more change (either increase or decrease) in the total cost
of Covered Services per Member per month under such Plan (or if no
applicable Plan exists, under the most similar Plan) from the then
total cost of the Covered Services then in effect (whether such
addition results from a change in Plan structure or benefits or from a
change in law or regulation), (b) Aetna USHC changes the co-payment or
co-insurance requirements of a Plan which will, in Aetna USHC's
reasonable actuarial estimate which is reasonably acceptable to
Contractor, result in a material change in the utilization of Covered
Services, (c) Aetna USHC implements any material changes in the
policies and procedures applicable to Contractor (including any
amendments to credentialing criteria, reporting obligations, etc)
which will result in Contractor becoming obligated to perform a task
it was otherwise not obligated to perform and the incurrence of a
material increase in expense by Contractor's expense (which expense
increase shall be demonstrable to Aetna USHC's reasonable
satisfaction), or (d) an advance in technology materially lowers
treatment costs, the Parties shall negotiate in good faith for a
period of sixty (60) days to make appropriate increases or decreases
(as appropriate) to the rates described in this Section 6. If the
Parties are unable to agree upon such increases, the Parties shall
resolve any dispute arising from such negotiation pursuant to Section
13 of this Agreement. If the Parties agree upon such increase or
decrease in rates (whether through negotiations or through dispute
resolution),
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the changed rates shall be effective as of the first date on which the
applicable event described above have occurred or occur. If the
changed rates described above are not utilized during any period when
such changed rates should have been utilized, the then-existing rates
prior to such change in rates shall be utilized to pay Contractor and
any adjustment thereto necessary to reflect the changed rates shall be
applied retroactively. During any period in which any change in rates
is being determined pursuant to this Section (whether through
negotiations or through dispute resolution), Aetna USHC shall continue
to pay to Contractor in accordance with the then-existing rates prior
to such change, and upon determination of such changed rates and if
the effective date of such change is prior to the date of such
determination, any adjustment to the then-existing rates prior to such
change shall be retroactively applied to such effective date.
D. In the event that Aetna USHC's reversals of Contractor's clinical
denials that are consistent with Company's standards, policies,
procedures and criteria become in the aggregate materially burdensome
to Contractor, Contractor may bring the resulting incremental cost
increase issue to the Operating Committee pursuant to Sections 13.B.
and 13.C of this Agreement.
7. Contingent Payments
A. Tranche 1 and Tranche 2 Payments. In respect of each Contract Year,
Contractor shall promptly pay to Aetna USHC the "Tranche 1 Payments"
and "Tranche 2 Payments" described below, if any, calculated in
accordance with, and payable pursuant to the terms and conditions of,
this Section 7.
B. Certain Defined Terms. For purposes of this Section, the following
terms shall have the following meanings:
(i) "Aggregate Member Months" shall mean for any Contract Year (a)
with respect to Tranche 1 Members, the total Member Months for
all Tranche 1 Members during such Contract Year, and (b) with
respect to Tranche 2 Members, the total Member Months for all
Tranche 2 Members during such Contract Year.
(ii)"Base Members" shall mean (a) with respect to Tranche 1 Members,
the Tranche 1 Members as of the last day of the month immediately
prior to the Effective Date (but in no event later than December
31, 1997), and (b) with respect to Tranche 2 Members, the Tranche
2 Members as of the last day of the month immediately prior to
the Effective Date (but in no event later than December 31,
1997).
(iii)"Contract Year" shall mean each of the twelve-month periods ending
on the last day of the month in which the Effective Date takes
place in 1998, 1999, 2000, 2001, and 2002. If the Effective Date
shall be in 1998, the reference to Contract Years in this Section
shall be one year later than as stated herein.
(iv)"Equivalent Members" for any Contract Year shall be determined as
follows, with respect to a designated category or categories of
Members serviced by Contractor: (a) determine the Aggregate
Member Months for
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which Contractor provides services to designated category or
categories of Members during the applicable Contract Year, and
(b) divide by 12.
(v) "FPR" shall mean the provision to Members of one or more products
or services described in Schedule C hereto, regardless of the
name of such product or service and regardless of the identity of
the affiliate of Contractor offering or providing such product or
service.
(iii)"HMO" shall mean the provision to Members of one or more products
or services described in Schedule D hereto, regardless of the
name of such product or service and regardless of the identity of
the affiliate of Contractor offering or providing such product or
service.
(iv)"Initial Contract Year" shall mean the Contract Year ending in
1998.
(v) "Managed Behavioral Health" shall mean the provision to Members
of one or more products or services described in Schedule E
hereto, regardless of the name of such product or service and
regardless of the identity of the affiliate of Contractor
offering or providing such product or service.
(vi)"Managed Choice" shall mean the provision to Members of one or
more products or services described in Schedule F hereto,
regardless of the name of such product or service and regardless
of the identity of the affiliate of Contractor offering or
providing such product or service.
(vii)"Member" shall mean, for purposes of this Section 7 only, (a) any
Member (as defined in Section 19.B of this Agreement) or (b) any
member who receives Managed Behavioral Health services from
Contractor (regardless of whether such member is a member of a
Plan or a plan offered by an employer that is not a customer of
Aetna USHC).
(viii)"Member Months" shall mean, for each Member, the number of months
for which Contractor provides services and is compensated under
this Agreement or any Vendor Contract.
(ix)"Tranche 1 Cumulative Incremental Members" shall mean, with
respect to any Contract Year, (i) the number of Equivalent
Members serviced by Contractor during such Contract Year for
Tranche 1 Members, minus (ii) (A) for each Contract Year other
than the Initial Contract Year, the number of Equivalent Members
serviced by Contractor for Tranche 1 Members during the
immediately preceding Contract Year or (B) for the Initial
Contract Year, the Base Members.
(x) "Tranche 2 Cumulative Members" shall mean, with respect to any
Contract Year, (i) the Equivalent Members serviced by Contractor
during such Contract Year for Tranche 2 Members, minus (ii) the
Base Members.
(xi)"Tranche 1 Members" shall mean Members for whom Contractor
provides services in any of the following categories of products
or services: Managed Choice, Managed Behavioral Health, and HMO
(including conversions of individuals who are serviced only in
the category referred to by Contractor as "Network" members into
Managed Choice, Managed
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Behavioral Health, and HMO Members, but not conversions of FPR
Members into such categories. In the event the names of any of
the above service or product categories are changed or any of the
above services or products are amended, changed or subdivided,
the Member for whom Contractor provides such changed, amended or
subdivided service or product shall be deemed Tranche 1 Members.
(xii)"Tranche 2 Members" shall mean Members for whom Contractor
provides products or services in the category of HMO (including
conversions of service with respect to individuals who are
serviced only by Contractor in the category referred to by
Contractor as "Network" members, but not conversions of FPR
Members into HMO Members). In the event the names of any of the
above service or product categories are changed or any of the
above services or products are amended, changed or subdivided,
the Member for whom Contractor provides such changed, amended or
subdivided service or product shall be deemed Tranche 2 Members.
"Tranche 1 Multiplier" shall have the meaning set forth in Schedule H.
(xi) "Tranche 2 Multiplier" shall have the meaning set forth in
Schedule H.
(xii)"Tranche 1 Payment" shall mean the aggregate amount payable to
Aetna USHC pursuant to Section 7.C. with respect to Tranche 1
Members.
(xiii)"Tranche 2 Payment" shall mean the aggregate amount payable to
AUSHC pursuant to Section 7.C. with respect to Tranche 2 Members.
C. Tranche 1 Payment.
(i) Upon the expiration of each Contract Year, the Tranche 1 Payment
shall vest with respect to such Contract Year in an amount equal to the
product of (i) the Tranche 1 Cumulative Incremental Members for such
Contract Year and (ii) the Tranche 1 Multiplier for such Contract Year. For
purposes of this Section 7.C., the vested amount of Tranche 1 Payment shall
be zero with respect to any Contract Year in which the Tranche 1 Cumulative
Incremental Members is a negative number.
(ii)Within 30 days following the end of each Contract Year, a
statement regarding the calculation of the Tranche 1 Payment for such
Contract Year (the "Tranche 1 Statement"), including the supporting
information regarding (A) the Aggregate Member Months for such Contract
Year, (B) the Base Members and (C) the vested and unpaid amounts as of the
applicable time and by each previous Contract Year and for such Contract
Year (before and after any adjustment for such Contract Year pursuant to
clause (iv) of this Section 7.C), shall be delivered in accordance with
Section 7.E. below.
(iii) Within 15 days after receipt by Aetna USHC of the Tranche 1
Statement in accordance with paragraph (ii) of this section 7.C. for each
Contract Year, Contractor shall pay to Aetna USHC the lesser of (i) the
vested portion of the Tranche 1 Payment for such Contract Year and the
vested and unpaid amount relating to prior Contract Years as of the end of
the immediately preceding
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Contract Year (after any adjustment for such Contract Year pursuant to
clause (iv) of this Section 7.C) and (ii) $25,000,000. To the extent that
the vested and unpaid portion of the Tranche 1 Payment exceeds $25,000,000,
the Tranche 1 Payment remitted to Aetna USHC shall be deemed to have been
paid first from any vested but unpaid amounts from previous Contract Years
in order from the earliest Contract Year for which vested amounts remain
unpaid to the most recent Contract Year at the time of such calculation.
Except with respect to the Contract Year ending 2002, any vested but unpaid
portion of the Tranche 1 Payment shall be available for payment to Aetna
USHC in future Contract Years, subject to the provisions of paragraph (iv)
of this Section 7.C. All vested but unpaid amount of Tranche 1 Payments
shall expire following the payment of the Tranche 1 Payment in respect to
the Contract Year ending in 2002, except as otherwise provided in clause
(v) below. Notwithstanding anything herein to the contrary, in no event
shall the aggregate Tranche 1 Payments to Aetna USHC hereunder exceed
$125,000,000.
(iv) In the event that the number of Tranche 1 Cumulative Incremental
Members in respect to any Contract Year is a negative number due to a
decrease in the number of Tranche 1 Cumulative Incremental Members for such
Contract Year (as compared to the immediately preceding Contract Year),
Aetna USHC will forfeit the right to receive a certain portion (which may
be none or all) of the vested and unpaid amounts of the Tranche 1 Payment
relating to preceding Contract Years in accordance with the following
sentences. For purposes of this calculation, the vested and unpaid amount
of the Tranche 1 Payment for all applicable Contract Years (the "vested and
unpaid balance") will be converted to a number of Tranche 1 Members by
dividing the vested and unpaid balance for each applicable Contract Year by
the Tranche 1 Multiplier for such Contract Year and rounding to the nearest
whole number and aggregating all such Tranche 1 Members (the resulting
number being referred to as the "vested and unpaid Tranche 1 Members").
Once the vested and unpaid balance has been converted to the vested and
unpaid Tranche 1 Members, Aetna USHC will forfeit the vested and unpaid
Tranche 1 Members equal to the negative number of Tranche 1 Cumulative
Incremental Members during the Contract Year for which the calculation is
being made. The vested and unpaid Tranche 1 Members will be forfeited in
the order of Contract Year from the earliest Contract Year for which the
vested and unpaid Tranche 1 Members were converted. To the extent that one
or more vested and unpaid Tranche 1 Members are remaining after the
forfeiture resulting from the negative Tranche 1 Cumulative Incremental
Members has been completed as described above, such vested and unpaid
Tranche 1 Members will be converted back to vested and unpaid balance by
multiplying the number of each portion of such remaining vested and unpaid
Tranche 1 Members for each Contract Year by the Tranche 1 Multiplier for
the Contract Year in which such vested and unpaid Tranche 1 Members
originally vested. The resulting amount of vested and unpaid balance will
be available for payment of the Tranche 1 Payment in accordance with clause
(iii) above.
(v) In the event that the aggregate Tranche 1 Payments paid to Aetna
USHC in respect of all Contract Years is less than $125,000,000, Aetna USHC
shall be eligible to earn such deficit amount from any vested but unpaid
balance remaining after payment of Tranche 1 Payment in respect of the
Contract Year ending 2002. In order to become eligible to receive such
deficit amount, Aetna USHC must elect (by written notice to Contractor
delivered no later than 45 days following the
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expiration of the Contract Year ending in 2002) to extend the term of this
Agreement and all HMO Agreements and the Non-HMO Agreement for a term
expiring the contract year ending in 2005 and on the terms and conditions
which are in effect during the Contract Year expiring 2002. In the event
that Aetna USHC makes such an election, Aetna USHC shall be eligible to
receive vested and unpaid amount of Tranche 1 Payments (subject to the
annual maximum payment of $25,000,000 and the aggregate maximum of
$125,000,000) in respect of the extended contract years expiring in 2003,
2004 and 2005 on the same terms and conditions applicable (including
eligibility, calculation and receipt mechanics) to Tranche 1 Payments in
respect of Contract Years; provided that (a) in no event shall Aetna USHC
be entitled to receive an amount in excess of the vested and unpaid balance
at the end of Contract Year 2002 (after any adjustment for such Contract
Year pursuant to clause (iv) of this Section 7.C) and (b) all vested and
unpaid amount of Tranche 1 Payments shall expire upon the earlier of (i)
the payment of aggregate Tranche 1 Payments of $125,000,000 or (ii)
expiration of the Contract Year ending 2005.
(vi) Contractor shall use "best efforts" (as defined below) to
maintain and grow the Managed Behavioral Health business. For purposes of
this clause, Contractor's "best efforts" shall include retaining at least
the substantially same level of resources currently devoted to such
business by Contractor and not increasing rates charged for such business
by Contractor above the reasonable market rate, as reviewed and determined
annually by the Operating Committee in accordance with Section 13.
D. Tranche 2 Payment.
(i) Upon the expiration of each Contract Year, the Tranche 2 Payment
shall be an amount equal to the lesser of: (a) (I) the product of (A) the
Tranche 2 Cumulative Members for such Contract Year and (B) the Tranche 2
Multiplier applicable to such number of Tranche 2 Cumulative Members, minus
(II) the aggregate of the Tranche 2 Payments paid to Aetna USHC for all
previous Contract Years and (b) $35,000,000. For purposes of this Section
7.D., this amount shall be zero with respect to any Contract Year in which
the Tranche 2 Cumulative Members is a negative number.
(ii)Within 30 days following the end of each Contract Year, a
statement regarding the calculation of the Tranche 2 Payment for such
Contract Year (the "Tranche 2 Statement"), including the supporting
information regarding the Aggregate Member Months for such Contract Year
and the Base Members, shall be delivered in accordance with Section 7.E.
below.
(iii) Within 15 days after receipt by Aetna USHC of the Tranche 2
Statement in accordance with paragraph (ii) of this section 7.D. for each
Contract Year, Contractor shall pay to Aetna USHC in accordance with this
Section 7 the amount of Tranche 2 Payment payable for such Contract Year
calculated in accordance with clause (i) above. All rights to receive
Tranche 2 Payment shall expire following the payment of the Tranche 2
Payment in respect to the Contract Year ending in 2002, except as otherwise
provided in clause (iv) below. Notwithstanding anything herein to the
contrary, in no event shall the aggregate Tranche 2 Payment to AUSHC
hereunder exceed $175,000,000.
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(iv) In the event that the aggregate Tranche 2 Payments paid to Aetna
USHC in respect of all Contract Years is less than $175,000,000, Aetna USHC
shall be eligible to earn such deficit amount. In order to become eligible
to receive such deficit amount, Aetna USHC must elect (by written notice to
Contractor delivered no later than 45 days following the expiration of the
Contract Year ending in 2002) to extend the term of this Agreement and all
HMO Agreements and the Non-MHO Agreement for a term expiring in the
contract year ending in 2005 and on the terms and conditions which are in
effect during the Contract Year expiring 2002. In the event that Aetna USHC
makes such an election, Aetna USHC shall be eligible to receive the
remaining Tranche 2 Payments (subject to the annual maximum of $35,000,000
and the aggregate maximum of $175,000,000) in respect of the extended
contract years expiring in 2003, 2004 and 2005 on the same terms and
conditions applicable (including eligibility, calculation and receipt
mechanics) to Tranche 2 Payments in respect of Contract Years; provided
that all rights to receive Tranche 2 Payments shall expire upon the earlier
of (i) payment of the aggregate Tranche 2 Payments of $175,000,000 or (ii)
expiration of the contract year ending 2005.
E. Annual Statements. Prior to the Effective Date, the Operating
Committee shall determine the process by which the Tranche 1 and 2
Statements (including the methodology by which Members will be counted
for purposes of Section 6 and 7, with the purpose of making minimal
changes from the existing methodology for counting Members) will be
prepared and delivered to each Party in accordance with Sections
7.C(ii) and 7.D(ii). During the 30-day period following expiration of
each Contract Year, the Operating Committee shall endeavor to agree
upon and submit to Aetna USHC and Contractor a proposed Tranche 1
Statement and Tranche 2 Statement. If the Operating Committee is
unable to agree upon any such Statement, the Parties agree to resolve
their differences in accordance with Section 13. If the differences
among the members of the Operating Committee are resolved pursuant to
Section 13, the Tranche 1 and Tranche 2 Statements shall be delivered
to Aetna USHC and Contractor pursuant to such resolution, which shall
be binding upon both Parties. Notwithstanding any objection raised by
either Party pursuant to this Section E., Contractor shall deliver the
undisputed amount due hereunder to Aetna USHC in accordance with
Section 7.C(iii) or 7.D(iii), as the case may be.
F. If any Tranche 1 or 2 Payment is due hereunder on a non-business day,
such Payment shall be due and payable on the immediately following
business day.
G. From the Effective Date until the end of Contract Year ending 2002,
Aetna USHC agrees not to utilize any vendor (i) for servicing of any
FPR Members serviced by Contractor (other than any FPR Members covered
by Plans acquired by Aetna USHC or one of its affiliates through
purchase of stock or assets, or merger, consolidation or joint venture
with another entity, or any other similar transaction) or (ii) for
servicing of HMO and Managed Choice Members which would have the
result of Aetna USHC not achieving any portion of Tranche 1 Payment or
Tranche 2 Payment for any Contract Year, provided further that the
Parties agree that this Section G shall not prohibit Aetna USHC from
having any Member (as defined in Section 19.B of this Agreement)
serviced by any vendor pursuant to any provider arrangements with
integrated delivery systems or any existing contractual commitments of
Aetna USHC as of the Effective Date. This Section G shall not apply to
any market in which Contractor is unable to serve Members (whether due
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to contractual, licensure, legal or regulatory restrictions or any
other reason). During each Contract Year, when and if Aetna USHC knows
that it has achieved sufficient number of Tranche 1 Members and
Tranche 2 Members to be entitled to full payment of Tranche 1 Payment
and Tranche 2 Payment for such Contract Year, Aetna USHC will so
inform Contractor. During the same period, Aetna USHC agrees to use
commercially reasonable best efforts to encourage its customers to be
serviced by Contractor for Managed Behavioral Health services.
H. Prior to the Effective Date, the Parties shall use best efforts to
negotiate an agreement regarding Members covered by Plans (including
the valuation method for such covered Members) acquired by Aetna USHC
or one of its affiliates through purchase of stock or assets, or
merger, consolidation or joint venture with another entity, or any
other transaction (except any such transaction that are immaterial to
Aetna USHC) during the term of this Agreement, which the Parties will
refer to as "Tranche 3 Members" and "Tranche 3 Payments". Unless
adverse to either Party, the Parties shall amend and restate this
Agreement to reflect the agreement described above.
8. Corporate Governance
A. Magellan shall take such action as shall be necessary so that, on the
date hereof or such later date as Aetna USHC shall designate, the
Aetna USHC Representative(s) (as defined below) shall be appointed to
the Board of Directors of Magellan (the "Magellan Board") at the next
annual meeting of Magellan's stockholders for a term in office
expiring three years thereafter. If no vacancy exists at the Magellan
Board at the time of such appointment, the Aetna USHC
Representative(s) shall have a right to participate (with no voting
power) at the Magellan Board meetings following the Effective Date
until the Aetna USHC Representative(s) is duly elected by the
stockholders. During the term of this Agreement (including any
extensions or renewals thereof), Magellan shall (i) include the Aetna
USHC Representative(s) in the slate of nominees recommended by the
Magellan Board for election as directors at each applicable meeting of
stockholders of Magellan, commencing with the next meeting of
stockholders, to the Magellan Board (unless Aetna USHC no longer
wishes to have the Aetna USHC Representative(s) serve on such board),
and (ii) unless otherwise instructed by the shareholder in the proxy
card, cause the shares for which Magellan's management or Board of
Directors holds proxies or is otherwise entitled to vote (other than
shares individually owned by Magellan's management or members of the
Magellan Board in their individual capacity) to be voted in favor of
the election of the Aetna USHC Representative(s). For purposes of this
Agreement, the "Aetna USHC Representative(s)" means such person(s) as
may from time to time be specified by Aetna USHC, and reasonably
acceptable to Magellan (who will initially be Daniel S. Messina) to
serve as Aetna USHC's representative(s) on the Magellan Board, the
number of such person(s) to be equal to the aggregate number of
person(s) that are appointed by or represent any Blue Cross or Blue
Shield plan or its affiliates on the Magellan Board. If, at any time,
an Aetna USHC Representative no longer continues to serve as a
director on the Magellan Board for any reason (including, without
limitation, resignation, death or disability), at the request of Aetna
USHC, Magellan shall use its best efforts to ensure that such vacancy
shall be filled by another Aetna USHC Representative.
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B. Magellan agrees to pay the Aetna USHC Representative(s) the standard
Magellan Board compensation and benefits(including, without
limitation, all travel, lodging and other related expenses).
C. Notwithstanding the foregoing, Magellan agrees that if, at any time,
Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service
Corporation, Pierce County Medical Bureau, Inc., Independence Blue
Cross or any other Blue Cross or Blue Shield plan or any of their
respective successors, assigns, transferees, affiliates or
subsidiaries shall possess any rights with respect to representation
or participation on the Magellan Board, any committee thereof to which
the full powers of the Board (such as the executive committee or the
administrative committee, if any) are delegated or on the Board of
Directors of Contractor, Aetna USHC shall be promptly notified of such
rights and (upon Aetna USHC's request) shall be granted rights that
are no less favorable with respect to such representation or
participation. In addition, Magellan shall not take any action that
will significantly reduce the rights of Aetna USHC Representative(s)
as member(s) of the Magellan Board, any committee thereof or the Board
of Directors of Contractor (in comparison to the other members
thereof).
D. Upon date of termination of this Agreement in accordance with the
provisions hereof, unless superseded or succeeded by a similar
agreement, the Aetna USHC Representative(s) shall resign from the
Magellan Board.
9. Term and Termination
A. This Agreement shall be effective for a term of six (6) years from the
Effective Date and for an additional two (2) years thereafter if Aetna
USHC delivers the notice of extension contemplated by Section 7.C(v)
or 7.D(iv) hereof. This Agreement may not be terminated by either
Party hereto except as expressly stated in this Section 9.
B. An "Event of Default" shall be deemed to have occurred under this
Agreement with respect to any Party in the event that:
(i) (A) such Party fails to perform any material obligation of such
Party under this Agreement or breaches any obligation of such
Party under this Agreement having a material adverse effect on the
business of the other Party, including the health and safety of
Members, taken as a whole, or (B) such Party causes an event of
default under or a breach of the Non-HMO Agreement and the other
Party terminates the Non-HMO Agreement in accordance with the
termination provisions thereof;
(ii) the direct or indirect acquisition by an entity that is a direct
competitor of Aetna USHC (with respect to the businesses or
practices prohibited by Section 11 of this Agreement) of a
controlling interest in Magellan or Contractor;
(iii)the suspension or disbarment of Contractor from participation in
the Medicare or Medicaid programs unless Magellan or a subsidiary
of Magellan that is reasonably acceptable to Aetna USHC and has
the necessary license continues to provide the same services that
Contractor can no longer provide due to such suspension or
disbarment;
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(iv) the filing by such Party of a petition under Chapter 7 under
the federal Bankruptcy Code;
(v) the filing by such Party of a plan of reorganization under
Chapter 11 of the federal Bankruptcy code in which the required
parties have formally approved a plan of reorganization prior to
the filing of the bankruptcy petition and without participation
by the other Party;
(vi) the termination by either Party of this Agreement without cause;
(vii)the closing, termination or substantial elimination by Contractor
of any line of its behavioral healthcare business required to
service the Tranche 1 Members; or
(viii) the termination without cause by Contractor of (A) the HMO
Agreements covering more than 50% of the Members as of the
Effective Date or (B) the Non-HMO Agreement;
provided, that if any event described above is curable, no such event
shall be deemed to constitute an "Event of Default" unless the Party
causing the event shall fail to remedy such event within a period of
ninety (90) days after the other Party shall have given the Party
causing the event a written notice of default and further provided
further that if the nature of the event requires more than ninety days
to cure and the Party causing the event has substantially completed
such cure within the ninety day period and continues diligently to
pursue such cure, such cure period shall be extended for up to an
additional 90 day period to permit the breaching Party to complete
such cure. In the Event of Default by Magellan or Contractor, Aetna
USHC shall receive credit for purposes of Section 7 of this Agreement
any Members or Member Months decreased or lost as a result of such
Event of Default during the cure period. In the event of any
suspension, withdrawal, expiration, non-renewal or revocation of any
state or local license, certificate, approval or authorization of
Contractor or the indictment, arrest, charge or conviction of
Contractor or any of its senior officers (in connection with providing
services on behalf of Contractor) for any felony related to moral
turpitude or professional practice related to this Agreement, Aetna
shall not have a right to terminate this Agreement, provided that
Aetna USHC shall receive credit for purposes of Section 7 of this
Agreement any Members or Member Months decreased or lost as a result
of such event.
C. Upon the occurrence of an Event of Default with respect to a Party
(Aetna USHC on the one hand and Magellan or Contractor on the other
hand), the other Party shall be entitled to terminate this Agreement
upon with notice to the Party causing the Event of Default. If under
either an HMO Agreement or the Non-HMO Agreement a breach or an event
of default occurs and such breach or event of default applies both
Agreements, the non-breaching Party shall treat the breach or event of
default in the same manner under both Agreements. Notwithstanding
anything to the contrary herein, in the event of a termination of the
Agreement by Aetna USHC pursuant to clauses (iv) through (viii) above
(but not clauses (i) through (iii) above), Aetna USHC shall be
entitled to receive as liquidated damages (and in lieu of any other
remedy available at law or in equity, except that Aetna USHC shall be
entitled to any indemnification rights arising under Section 16 not as
a result of an Event of Default described in clause (iv) through
(viii) above) the remaining amount which would have been payable to
Aetna USHC under Section 7 of this Agreement (as if all of Aetna
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USHC's obligations for Tranche 1 and Tranche 2 Payments described in
Section 7 from the date of termination through the Contract Year
ending 2002 had been satisfied (which shall be $300,000,000 minus the
amount of Tranche 1 Payment and Tranche 2 Payment paid to Aetna USHC
prior to such time minus the amount of Tranche 1 Payment and Tranche 2
Payment forfeited by Aetna USHC prior to such time)), which shall be
payable in accordance with the scheduled time of payment under Section
7 (except that all such amounts shall be payable at the time of such
termination if the Agreement is terminated pursuant to clause (iv) or
(v) above). In the event of any such termination pursuant to clause
(i) through (iii) above, the non- breaching Party shall be entitled to
pursue any remedy available at law or in equity.
D. In the event any amount due under Section 7 of this Agreement is in
dispute, the amount in dispute shall be paid to an escrow agent in an
interest bearing account pursuant to the terms and conditions of an
escrow agreement to be entered into prior to the first anniversary of
the Effective Date. The escrowed amount plus accrued interest shall be
payable to the appropriate party by the escrow agent upon final
adjudication of the dispute in accordance with the escrow agreement.
E. Magellan shall provide a guaranty of all obligations of Contractor
under this Agreement substantially in the form of the Guaranty
attached hereto as Exhibit C.
F. The Parties hereto expressly waive any rights to set-off any amount or
payment due hereunder or any Vendor Contract that any Party may have
under law or equity.
10. Relationship of Parties
None of the provisions of this Agreement is intended to create, nor shall
be deemed or construed to create, any relationship between the Parties
hereto other than that of independent entities contracting with each other
hereunder solely for the purpose of effecting the provisions of this
Agreement. Neither of the Parties herein, nor any of their respective
employees, shall be construed or represent themselves to be the agent,
employee, servant, employer or representative of the other. This Agreement
is not a joint venture between the Parties.
11. Restrictive Covenants
Contractor, Magellan and its wholly-owned subsidiaries agree that during
the term of this Agreement, Contractor, Magellan and its wholly-owned
subsidiaries shall not directly or indirectly enter into or engage in the
ownership, management, operation or control of any entity which is a
managed care entity offering full health care benefits. Notwithstanding
anything to the contrary set forth in the preceding sentence, Contractor,
Magellan and its wholly-owned subsidiaries may engage in and own, manage,
operate or control any entity engaged in current activities, which are
integrated delivery system services, specialty/limited health service
managed care, third party administration of specialty/limited health care
services, disease management, utilization management, network management,
care management or specialty/limited health care provision/administration
for government agencies, HMO's or insurers.
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12. Cooperation of the Parties
A. Contractor and Aetna USHC will maintain an effective liaison and close
cooperation with each other to (a) maximize the mutual benefits of
their relationship, (b) enhance the quality of behavioral health
services provided to Members and (c) foster working relationships with
network behavioral health providers.
B. Each Party will exchange such financial information, Member
demographics, encounter and clinical data necessary for the other
Party to perform its obligations under this Agreement. Such
information will be exchanged electronically to the extent feasible to
both Parties. In addition, each Party agrees to provide the other
Party reasonable access to the data (which, in the case of Contractor,
is derived from those systems described in Schedule G), at no
additional cost charged to the other Party, which are necessary for
the other Party to perform its obligations hereunder, subject to the
confidentiality obligations set forth in this Agreement. The Parties
acknowledge and agree that (i) Aetna USHC intends to modify, at its
cost, the means by which Aetna USHC provides data to Contractor under
this Agreement (including those that are derived from the systems
described in Schedule G), and (ii) Contractor shall make all necessary
modifications to its system(s), at its cost, to administer its
business on a stand-alone basis within the time period specified
below. Prior to the Effective Date, the Parties will develop a plan to
implement such changes. Each Party shall use commercially reasonable
best efforts to implement such plan and to complete its respective
obligations under such plan within nine months after the Effective
Date and shall in no event complete its obligations under such plan
later than fifteen months after the Effective Date. As soon as
practicable after the date hereof, Aetna USHC will provide to
Contractor a list indicating the priority in which it requests
Contractor to implement the changes described in clause (i) above.
Aetna USHC will consult with Contractor in the process of preparing
this list. Contractor agrees to make good faith efforts to follow
Aetna USHC's priority list.
13. Agreement Administration/Dispute Resolution
A. The Parties shall designate an Operating Committee to oversee the
operation of this Agreement and the related Vendor Contracts. The
Operating Committee shall consist of equal numbers of representatives
from each Party. The Operating Committee shall meet no less frequently
than annually. The Operating Committee shall act or make
recommendations by unanimous consent.
B. If any dispute or controversy shall arise under this Agreement or any
of the Vendor Contracts, the parties shall make good faith efforts to
resolve the dispute or controversy through negotiations within the
Operating Committee.
C. If the Operating Committee is unable to resolve such dispute or
controversy within 60 days, the Operating Committee shall request in
writing the President of each Party to resolve the dispute. If the
President of each Party are unable to resolve such disputes or
controversy within 30 days after the matter is referred to the
Presidents, either party, after such period (but in no event prior to
the expiration of such period), shall be entitled to bring an action
at law or equity in a court of competent jurisdiction, except that
this Section shall not prohibit either Party from bringing any
equitable action at any time if a delay in bringing such action could
result in irreparable harm to such Party.
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14. Use of Name
Contractor consents to the use of its name and other identifying and descriptive
material in provider directories and in other materials and marketing literature
of Aetna USHC in all formats, including, but not limited to, electronic media.
Contractor shall not use Aetna USHC's names, logos, trademarks or service marks
in marketing materials or otherwise, except as provided in this Agreement or any
Vendor Agreement, without Aetna USHC's prior written consent.
15. Interference with Contractual Relations
Contractor shall not: (a) counsel or advise, directly or indirectly, payors,
sponsors or other entities who are currently under contract with Aetna USHC or
any Affiliate to cancel, modify, or not renew said contracts; (b) impede or
otherwise interfere with negotiations which Aetna USHC or an Affiliate is
conducting for the provision of Plans; or (c) use or disclose to any third party
membership lists acquired during the term of this Agreement for the purpose of
directly or indirectly soliciting individuals who were or are Members or
otherwise to compete with Aetna USHC or any Affiliate. Nothing in this Section
is intended or shall be deemed to restrict any communication between a
Participating Provider and a Member determined by the Participating Provider to
be necessary or appropriate for the diagnosis and care of the Member. This
Section shall survive the termination of this Agreement. In the event of a
breach or a threatened breach of this Section by Contractor, Aetna USHC shall
have the right of specific performance and injunctive relief in addition to any
and all other remedies and rights at law or in equity, and such rights and
remedies shall be cumulative. Nothing in this Section is intended to prohibit
Contractor from conducting activities permitted under Section 11.
16. Indemnification
Each Party agrees to indemnify and hold the other Party harmless against any and
all claims, losses, liabilities, expense and costs (including reasonable
attorneys' fees) (collectively, "Damages") arising from any of the services
(which, in the case of Contractor, shall include all of the services delegated
from Aetna USHC to Contractor under this Agreement, any of the Vendor Contracts
or any other agreement mutually entered into, except Damages resulting in whole
or in part from negligence or willful misconduct on the part of Aetna USHC)
performed by the indemnifying party under this Agreement or the breach of any of
the indemnifying party's obligations under this Agreement or any of the Vendor
Contracts.
17. Non-Disclosure
The terms and conditions herein shall be treated by the Parties as strictly
confidential. Accordingly, the Parties agree not to directly or indirectly
disclose this Agreement or the terms and conditions herein, including but not
limited to all schedules and financial terms, to any third party. The parties
agree that the breach or prospective breach of this provision will cause
irreparable harm for which money damages may not be adequate. The parties
therefore agree that in addition to any other remedies, the non-breaching party
shall be entitled to injunctive or other equitable relief to restrain the breach
hereof. This provision shall not apply to:
A. disclosures required by law (including any disclosure permitted in
Section 2 without prior approval), provided such disclosure is limited
to the extent required by law; or
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B. disclosures to the accountants and attorneys retained by each Party;
or
C. information that is within the public domain and which each party
learns of through the public domain at the time of disclosure, or was
previously known to the disclosing party, or is or becomes publicly
available without breach of this Agreement, or is received from a
third party holding such information legally and having the legal
right to disseminate it without breach of this Agreement by such
disclosing party, or is disclosed by the disclosing party with the
written approval of the other party.
This paragraph 17 shall survive termination of this Agreement.
18. Miscellaneous
A. Waiver. The waiver by either Party of a breach or violation of any
provision of this Agreement shall not operate as or be construed to be
a waiver of any subsequent breach thereof. To be effective, all
waivers must be in writing and signed by the party to be charged.
B. Governing Law. This Agreement shall be governed in all respects by the
laws of the State of Delaware.
D. Severability. Any determination that any provision of this Agreement
or any application thereof is invalid, illegal or unenforceable in any
respect in any instance shall not affect the validity, legality and
enforceability of such provision in any other instance, or the
validity, legality, or enforceability of any other provision of this
Agreement.
E. Inconsistencies. If any term or provision of this Agreement relating
to Covered Services is inconsistent with a term or provision of a
non-insured Plan, then as to individuals entitled to receive Covered
Services through said Plan, the term or provision of the Plan shall
prevail.
F. Assignment. This Agreement may be assigned, subcontracted, delegated
or transferred by either Party to one of its wholly owned subsidiaries
or an affiliate of such Party which is wholly owned by the parent
company that wholly owns such Party, unless it results in a material
adverse effect on the other Party's interest under this Agreement.
G. Affirmative Action. Aetna USHC is an Equal Opportunity Employer which
maintains an Affirmative Action Program. To the extent applicable to
Contractor, Contractor shall comply with the following, as amended
from time to time: Executive Order 11246, the Vietnam Era Veterans
Readjustment Act of 1974, the Drug Free Workplace Act of 1988, Section
503 of the Rehabilitation Act of 1973, any similar legislation
regarding transactions relating to any government contract of Company
or an Affiliate, and any rules and regulations promulgated under such
laws.
H. Headings. The headings contained in this Agreement are included for
purposes of convenience only, and shall not affect in any way the
meaning or interpretation of any of the terms or provisions of this
Agreement.
I. Notices. Any notice required to be given pursuant to the terms and
provisions hereof shall be effective only if given in writing and sent
by overnight delivery service with
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<PAGE>
proof of receipt, or by certified mail return receipt requested.
Notices shall be sent to the following addresses (which may be changed
by giving notice in conformity with this section):
To Contractor or Magellan at:
Magellan Health Services
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, GA 30319
Attention: General Counsel and
Chief Financial Officer
and to Aetna USHC at:
980 Jolly Road
Blue Bell, PA 19422
Attention: Chief Financial Officer and
Chief Legal Officer
J. Non-Exclusivity. Except as otherwise set forth in Section 7 of this
Agreement, this Agreement is not exclusive, and nothing herein shall
preclude either party from contracting with any other person or entity
for any purpose not inconsistent with this Agreement.
K. Entire Agreement. This Agreement (including any attached schedules)
constitutes the complete and sole contract between the parties and
supersedes any and all prior or contemporaneous oral or written
communications or proposals not expressly included herein.
19. Definitions
When used in this Agreement, all capitalized terms shall have the following
meanings:
A. Covered Services. Those Medically Necessary Services (as defined in
HMO Agreement) which a Member is entitled to receive under the terms
and conditions of a Plan.
B. Member. An individual covered by or enrolled in a Plan.
C. Network Provider. A physician, hospital, or other individual, entity
or facility involved in the delivery of health care or ancillary
services (whether or not affiliated with Contractor) that meets Aetna
USHC's participation criteria and agrees to accept the rates
contemplated by this Agreement for Covered Services. A list of these
providers as of the Effective Date shall be provided by Contractor to
Aetna USHC.
D. Participating Provider. Any physician, hospital, residential treatment
facility, skilled nursing facility, or other individual or entity
involved in the delivery of health care or ancillary services who or
which has entered into and continues to have a current valid contract
with Aetna USHC to provide Covered Services to Members, and has been
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<PAGE>
credentialed by Contractor consistent with Aetna USHC's applicable
credentialing policies.
E. Plan. Any health benefit product or plan issued, administered, or
serviced by Aetna USHC or one of its Affiliates, including, but not
limited to, HMO, preferred provider organization, indemnity, Medicaid,
Medicare and Worker's Compensation.
F. Proprietary Information. The information developed by or belonging to
Aetna USHC or any third party payor including, but not limited to, this
Agreement, mailing lists, patient lists, employer lists, Aetna USHC
rates and procedures, product related information and structure,
utilization review procedures, formats and structure and related
information and documents concerning Aetna USHC's systems and
operations of its Plans.
-20-
AMENDMENT TO STOCK PURCHASE AGREEMENT
This amendment (the "Amendment") to the Stock Purchase Agreement, dated as
of August 5, 1997 (the "Agreement") between AETNA INSURANCE COMPANY OF
CONNECTICUT ("Seller") and MAGELLAN HEALTH SERVICES, INC. ("Purchaser") is made
and entered into as of the 4th day of December, 1997.
WHEREAS, Seller and Purchaser desire to amend the Agreement in the manner
set forth in this Amendment;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereby agree as follows:
1. Amendment to Section 1.1.
The definition of "Closing Stockholder's Equity" in Section 1.1 of the
Agreement is amended to read, in its entirety, as follows:
"Closing Stockholder's Equity" means the consolidated stockholder's
equity of the Company and its consolidated Subsidiaries as of the close of
business on the day immediately preceding the Closing Date as set forth on
the Closing Balance Sheet less $4,000,000.
2. Miscellaneous.
a. All references in the Agreement to the "Agreement" and any other
references of similar import shall henceforth mean the Agreement as amended by
this Amendment. All capitalized terms used but not otherwise defined herein
shall have the meaning ascribed to them in the Agreement as amended by this
Amendment.
b. Except to the extent specifically amended by this Amendment, all of the
terms and conditions contained in the Agreement shall be and remain in full
force and effect.
c. This Amendment shall be binding upon and inure to the benefit of Seller
and Purchaser and their respective successors and assigns.
d. In the event of any inconsistency or conflict between this Amendment and
the Agreement, the terms, provisions and conditions of this Amendment shall
govern and control.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first written above.
MAGELLAN HEALTH SERVICES, INC.
By: /s/ Craig L. McKnight
-----------------------
Name: Craig L. McKnight
Title: Executive Vice President & CFO
AETNA INSURANCE COMPANY OF
CONNECTICUT
By: /s/ Stephen R. Fisher
-----------------------
Name: Stephen R. Fisher
Title: Assistant Secretary
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FIRST AMENDMENT TO MASTER SERVICES AGREEMENT
This First Amendment (this "Amendment") to the Master Service Agreement is made
and entered into as of the 4th day of December, 1997, by and among Aetna U.S.
Healthcare Inc., on behalf of itself and all of its applicable affiliates
("Aetna USHC")(other than Human Affairs International, Incorporated ("HAI") and
its subsidiaries), Magellan Health Services, Inc. ("Magellan") and HAI.
WITNESSETH:
WHEREAS, Aetna USHC, Magellan and HAI have entered into a Master Service
Agreement dated as of August 5, 1997 (the "Agreement"); and
WHEREAS, Aetna USHC, Magellan and HAI desire to amend the Agreement in the
manner set forth in this Amendment;
NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereby agree as follows:
1. Amendment to Subsection 7.B(ii) of the Agreement.
Subsection 7.B(ii) of the Agreement is hereby amended to read, in its entirety,
as follows:
(ii) "Base Members" shall mean (a) with respect to Tranche 1 Members, the
Tranche 1 Members as of September 30, 1997 and (b) with respect to Tranche
2 Members, the Tranche 2 Members as of September 30, 1997; provided,
however, that with respect to Members whose Plan requires the selection of
primary care physicians but who have not done so ("1111 Members"), all 1111
Members in a Plan being serviced by Contractor as of September 30, 1997,
except for 1111 Members in a Plan written on the U.S. Healthcare platform
in Georgia, will be included as Base Members with respect to Tranche 1
Members or Tranche 2 Members, as applicable, and all other 1111 Members
will not be included as Base Members with respect to either Tranche 1
Members or Tranche 2 Members.
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<PAGE>
2. Amendment to Subsections 7.B(xi) and (xii) of the Agreement.
Subsections 7.B(xi) and (xii) of the Agreement are hereby amended to read, in
their entirety, as follows:
(xi) Tranche 1 Members" shall mean Members for whom Contractor provides services
in any of the following categories of products or services: Managed Choice,
Managed Behavioral Health, and HMO (including conversions of individuals who are
serviced only in the category referred to by Contractor as "Network" Members
into Managed Choice, Managed Behavioral Health, and HMO Members, and including
conversions of FPR, CHA or CHI Members (who were not FPR, CHA or CHI Members as
of the Effective Date) into Managed Choice, Managed Behavioral Health or HMO
Members, but not conversions of individuals who were FPR, CHA or CHI Members as
of the Effective Date into such categories). Notwithstanding the foregoing, the
first two hundred fifty thousand (250,000) individuals who were FPR, CHA or CHI
Members as of the Effective Date who convert to Managed Choice, Managed
Behavioral Health or HMO Members shall be counted as Tranche 1 Members but
discounted at the rate of 75% for the first Contract Year of this Agreement and
50% thereafter (so that each such Member is deemed as only one-quarter or
one-half Tranche 1 Member, respectively). After the first two hundred fifty
thousand (250,000) such conversions from FPR, CHA or CHI Members to Managed
Choice, Managed Behavioral Health or HMO Members, no further conversions from
individuals who were FPR, CHA or CHI Members as of the Effective Date to Managed
Choice, Managed Behavioral Health or HMO Members shall be included or deemed as
Tranche 1 Members. In the event the names of any of the above service or product
categories included in Tranche 1 Members are changed or any of the above
services or products included in Tranche 1 Members are amended, changed or
subdivided, the Member for whom Contractor provides such changed, amended or
subdivided service or product shall continue to be a Tranche 1 Member if such
Member would have otherwise continued to be a Tranche 1 Member notwithstanding
the change, amendment or subdivision of such product or service.
(xii) "Tranche 2 Members" shall mean Members for whom Contractor provides
products or services in the category of HMO (including conversions of
individuals who are serviced only in the category referred to by Contractor as
"Network" Members and including conversions of FPR, CHA, CHI, Managed Choice or
Managed Behavioral Health Members (who were not FPR, CHA, CHI, Managed Choice or
Managed Behavioral Health Members as of the Effective Date) into HMO Members,
but not conversions of individuals who were FPR , Managed Choice, Managed
Behavioral Health, CHA or CHI Members as of the Effective Date into HMO
Members). Notwithstanding the foregoing, the first one million five hundred
thousand (1,500,000) individuals who were FPR, CHA or CHI Members as of the
Effective Date and who
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<PAGE>
convert to HMO Members shall be counted as Tranche 2 Members but discounted at
the rate of 50% (so that each such Member is deemed as only one-half Tranche 2
Member). Upon the first one million five hundred thousand (1,500,000) such
conversions from FPR, CHA or CHI Members to HMO Members, no further conversions
from individuals who were FPR, CHA or CHI Members as of the Effective Date to
HMO Members shall be included or deemed as Tranche 2 Members. In the event the
names of any of the above service or product categories included in Tranche 2
Members are changed or any of the above services or products included in Tranche
2 Members are amended, changed or subdivided, the Members for whom Contractor
provides such changed, amended or subdivided services or products shall continue
to be a Tranche 2 Member if such Member would have otherwise continued to be a
Tranche 2 Member notwithstanding the change, amendment or subdivision of such
product or service
3. Amendment to Subsection 7.B of the Agreement.
Subsection 7.B is hereby amended by adding new Subsections 7.B(xiii) and (xiv)
as follows:
(xiii) "CHA" shall mean the provision to Members of one or more of the products
or services described in Schedule F-1 hereto, regardless of the name of
such product or service and regardless of the identity of the affiliate of
Contractor offering or providing such product or service.
(xiv)"CHI" shall mean the provision to Members of one or more of the products
or services described in Schedule F-1 hereto, regardless of the name of
such product or service and regardless of the identity of the affiliate of
Contractor offering or providing such product or service.
4. Amendment to Subsection 7.E of the Agreement.
The second sentence of Subsection 7.E of the Agreement is hereby amended to
read, in its entirety, as follows:
During the 60-day period following expiration of each Contract Year, the
Operating Committee shall endeavor to agree upon and submit to Aetna USHC and
Contractor a proposed Tranche 1 Statement and Tranche 2 Statement.
5. Amendment to Subsection 7.G of the Agreement.
Subsection 7.G of the Agreement is hereby amended to read, in its entirety, as
follows:
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<PAGE>
G. Except pursuant to Section 7.H of this Agreement, from the Effective
Date until the end of Contract Year ending 2002, Aetna USHC agrees not
to utilize any vendor for servicing of any FPR Members serviced by
Contractor (other than any FPR Members covered by Plans acquired by
Aetna USHC or one of its affiliates through purchase of stocks or
assets, or merger, consolidation or joint venture with another entity,
or any other similar transaction). Except pursuant to Section 7.H of
this Agreement, from the Effective Date until the end of the Contract
Year ending 2002, Aetna USHC agrees not to utilize any vendorfor
servicing HMO Members or Managed Choice Members until such time as
Contractor (including any of its Affiliates) has been paid the first
two and one-half million New Members (as defined below) under the
applicable Vendor Contracts. Notwithstanding the foregoing, the
Parties agree that this Section G shall not prohibit Aetna USHC from
having any Member (as defined in Section 19.B of this Agreement)
serviced by any vendor pursuant to any provider arrangements with
integrated delivery systems or any existing contractual commitment of
Aetna USHC as of the Effective Date. "New Member" shall mean as of any
relevant date of determination, the sum of (i) the number of HMO
Members as of such date of determination minus the number of HMO
Members as of September 30, 1997 (as determined under Subsection
7B(ii), as amended), whether positive or negative and (ii) the number
of Managed Choice Members as of such date of determination minus the
number of Managed Choice Members as of September 30, 1997 (as
determined under Subsection 7.B(ii), as amended), whether positive or
negative. Notwithstanding the foregoing, (a) each FPR, CHA or CHI
Member as of September 30, 1997 who converts to a HMO or Managed
Choice Member shall be discounted at the rate of 55% (so that each
such Member is deemed as only 45% of one New Member), (b) Managed
Behavioral Health Members as of September 30, 1997 who convert into
HMO or Managed Choice Members shall not be counted as "New Members"
and (c) each FPR, Managed Behavioral Health, CHA or CHI Member (who
was not a FPR, Managed Behavioral Health, CHA or CHI Member as of
September 30, 1997) who converts to a HMO or Managed Choice Member
shall be counted as a New Member. This Section G shall not apply to
any market in which Contractor is unable to serve Members (whether due
to contractual, licensure, legal or regulatory restrictions or any
other reason). Promptly following the expiration of each Contract
Year, Aetna USHC will provide Contractor with a statement detailing
the number of New Members as of the end of such Contract Year. In
addition, when and if Aetna USHC knows that it has achieved 2,500,000
New Members (as described herein), Aetna USHC will so inform
Contractor. During the exclusivity period described above, Aetna USHC
agrees to use commercially reasonable best efforts to encourage its
customers to be served by Contractor for Managed Behavioral Health
services.
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<PAGE>
6. Amendment to Subsection 7.H of the Agreement.
Subsection 7.H of the Agreement is hereby amended to read, in its entirety, as
follows:
H. Acquisitions/Right of First Offer
(i) For purposes of this Subsection H, the following terms shall have the
following meanings:
a. Acquired Healthcare Entity means the acquisition by Aetna USHC of
all or any portion of an HMO, health insurer or other managed
care entity offering health care benefits.
b. Behavioral Healthcare Business means an entity which is engaged,
in whole or in part, in the provision or management of Behavioral
Healthcare Services, including the ownership, leasing, operation,
administration or management of an entity or facility which is
engaged, in whole or in part, in the provision or management of
Behavioral Healthcare Services.
c. Behavioral Healthcare Services means the provision of mental
health and substance abuse utilization management, network
management, care management or EAP services for and on behalf of
an entity or healthcare plan (including self-insured plans) for a
fee (or other direct or indirect financial benefit).
(ii) Within twenty (20) days following the closing of an acquisition by
Aetna USHC or any of its Affiliates of an Acquired Healthcare Entity
(whether through an acquisition of assets or stock, merger or
consolidation, joint venture or other similar transaction) (or such
later date as such information may be reasonably obtained or
developed), Aetna USHC shall provide Contractor with written notice of
such acquisition, which notice shall state whether the provision of
Behavioral Healthcare Services for the Plans of the Acquired
Healthcare Entity are performed, as of the acquisition date, by a
vendor that is not an affiliate of the Acquired Healthcare Entity
(including by a provider) (a "Third Party Vendor") or by a component
of the Acquired Healthcare Entity itself or a combination thereof (in
the latter case, the notice shall set forth in reasonable detail which
categories of members covered by Plans of the Acquired Healthcare
Entity are serviced by a Third Party Vendor and which members are
serviced internally and the number of such members). If the number of
members covered by the
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<PAGE>
Plans of the Acquired Healthcare Entity are less than 750,000 as of
the acquisition date or if more than (50%) of the members (as of the
acquisition date) covered by the Plans of the Acquired Healthcare
Entity which receive provision of Behavioral Healthcare Services do so
through a Third Party Vendor, the provisions of Subsection X below
shall apply; in all other cases, the provisions of Subsection Y below
shall apply.
(iii)The provisions of this Subsection H shall supersede the provisions of
Subsection 7.G of this Agreement with respect to members of Plans of
an Acquired Healthcare Entity.
X. (i) Within twenty (20) days of the closing of an applicable
acquisition by Aetna USHC or any of its Affiliates of an Acquired
Healthcare Entity (or such later date as such information
required in connection with Subsection (ii) above may be
reasonably obtained or developed), Aetna USHC shall provide
Contractor with written notice of its election either (a) to
cause the Behavioral Healthcare Services that are currently
performed by or for the Acquired Healthcare Entity to be
performed by Contractor pursuant to the terms of this Agreement
at rates determined in accordance with the methodology provided
for in Section 6 hereof (as if such services constituted a "new
Plan" under subparagraph (a) of Subsection 6.C of this Agreement)
as further described in Subsection (ii) below (the "Status Quo
Election"); or (b) to conduct an auction for such services in the
manner set forth in Subsections (iii) and (iv) below (the
"Auction Election"). Aetna USHC shall have the option of either
(x) making a single Status Quo Election or Auction Election for
the entire Acquired Healthcare Entity or (y) subject to the
proviso below, making separate Status Quo Elections or Auction
Elections for individual divisions, units or legal entities
within the Acquired Healthcare Entity or (z) subject to the
proviso below, making separate Status Quo Elections or Auction
Elections for the individual Plans of the Acquired Healthcare
Entity; provided, however, in the event that Aetna USHC intends
to make separate elections under either subsection (y) or (z)
above, and as a result of such election not all members of any
product category (e.g., HMO or Managed Choice) of the Acquired
Healthcare Entity would be wholly within either the Status Quo
Election or the Auction Election (any such product category shall
be referred to as a "Divided Product Category"), then the
following sentence shall apply. With respect to each Divided
Product Category (i) Aetna
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<PAGE>
USHC shall have the right to designate the number of members to
be included in the Status Quo Election and (ii) the parties shall
in good faith mutually agree on the apportionment (based upon the
number determined in (i)) of the Divided Product Category so that
the members included within the Status Quo Election represent a
reasonable cross-section (considering factors such as historic
utilization rates, historic care costs, historic revenue per
member, contract terms, term and termination provisions, among
other relevant factors) of the Divided Product Category. In the
event the parties do not reach agreement of the matter referred
to within subsection (ii) in the preceding sentence within 15
days following delivery of notice of the applicable Election, the
matter shall be resolved in accordance with Section 13 of this
Agreement, provided that the 60 day period referred to in the
first sentence of Subsection 13.C shall be 10 business days for
purposes of this provision. Notwithstanding the foregoing, Aetna
USHC shall not be obligated to exercise either a Status Quo
Election or an Auction Election with respect to any of the
activities described in the Excluded Activities Schedule attached
hereto (the "Excluded Activities"). Consistent with the
Non-Competition Covenant dated as of December 4,1997, Aetna USHC
and the Acquired Healthcare Entity shall be free to conduct the
Excluded Activities in any manner they deem appropriate following
the closing of the acquisition of the Acquired Healthcare Entity.
(ii) In the event Aetna USHC makes a Status Quo Election, the parties
shall cooperate to ensure that the Behavioral Healthcare Services
are provided by Contractor to the Acquired Healthcare Entity as
soon as reasonably practicable, consistent with existing
contractual obligations of the Acquired Healthcare Entity or
Aetna USHC and subject to any necessary regulatory approvals.
Contractor may defer implementation of the provision of such
services up to ninety (90) days from the date of such election
notice if it has operational constraints on its ability to
perform the Behavioral Healthcare Services for the new Acquired
Healthcare Entity. All members of Plans for which Behavioral
Healthcare Services are performed as a result of a Status Quo
Election shall be treated as new "Members" for purposes of
Section 7 of this Agreement; provided, however, it is understood
that this provision is not intended to modify the provisions of
Section 7, including the annual and aggregate
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maximum payment amounts set forth therein for Tranche 1 and
Tranche 2 Payments.
(iii)Within thirty (30) days of the date Aetna USHC makes an Auction
Election, it shall provide Contractor with an offer (the "Offer")
of proposed rates for providing the Behavioral Healthcare
Services to all Members of Plans of the Acquired Healthcare
Entity with respect to which the Auction Election is being made,
consistent with existing contractual obligations of the Acquired
Healthcare Entity and subject to any necessary regulatory
approvals. The offer shall remain open for a period of not less
than thirty (30) days (the "Offer Period"). During the Offer
Period, Contractor and its representatives and agents shall be
given reasonable access (subject to a confidentiality agreement
between Aetna USHC and Contractor and subject to compliance with
any confidentiality obligations of Aetna USHC or any of its
Affiliates with entities other than the Acquired Healthcare
Entity or the seller of the Acquired Healthcare Entity, provided
that Aetna USHC shall exercise commercially reasonable best
efforts to obtain a waiver of any such confidentiality
obligations for this purpose) to the relevant books and records
and personnel of the Acquired Healthcare Entity to review the
relevant information on the Behavioral Healthcare Services. If,
prior to the expiration of the Offer Period, Contractor notifies
Aetna USHC in writing that it desires to accept the Offer, the
parties shall, as promptly as practicable, negotiate in good
faith a definitive agreement for the provision of such services.
With the exception of the contingent payment provisions under
this Section 7 (which shall not pertain) and the rate provisions
(which shall reflect the Offer), the terms and conditions of the
definitive agreement shall be substantially similar to the
existing applicable Vendor Contract between Contractor and Aetna
USHC.
(iv) In the event the Offer Period expires for any Offer without
Contractor notifying Aetna USHC that it desire to accept such
Offer, Aetna USHC shall be free to solicit bids from third
parties for the provision of Behavioral Healthcare Services for
Plans of the Acquired Healthcare Entity. Contractor shall be
entitled to participate in the bidding process. Aetna USHC shall
otherwise be entitled to operate the bidding process in any
manner it deems appropriate (including, without limitation, the
ability to conduct
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separate auctions for individual divisions, units or legal
entities with the Acquired Healthcare Entity or by Plan type or
by geographical area) and for such period of time as it deems
appropriate. Except as provided below in the penultimate sentence
of this paragraph, in the event the terms of Contractor's final
bid (if any) are in aggregate, better for Aetna USHC than all
other bona fide bids, then Aetna USHC shall be obligated to
choose Contractor as the winning bidder, and the parties shall,
as promptly as practicable, negotiate in good faith a definitive
agreement for the provision of such services. With the exception
of the contingent payment provisions of this Section 7 (which
shall not pertain) and the term and rate provisions (which shall
reflect the Contractor's bid), the terms and conditions to the
definitive agreement shall be substantially similar to the
existing Vendor Contract between Contractor and Aetna USHC. In
the event the terms of Contractor's final bid (if any) are not in
aggregate better for Aetna USHC than all other bona fide bids,
then Aetna USHC shall be free to enter into a contract for the
provision of such services with any bidder on terms that are in
the aggregate, better for Aetna USHC than Contractor's final bid.
In the event Aetna USHC completes a bona fide auction and
concludes, in good faith, that no bidder (including Contractor)
has made a commercially reasonable offer for the services,
consistent with then current market conditions, then Aetna USHC
may provide such services internally until such time as it is
able to obtain a commercially reasonable offer; provided, if
Contractor believes in good faith that it has made a commercially
reasonable offer for the services (notwithstanding Aetna USHC's
conclusion otherwise), the matter shall, at Contractor's written
request, be resolved in accordance with Section 13 of this
Agreement. Other than as required by law, Contractor shall be
prohibited from disclosing to any third parties the terms of this
subsection H and the fact that it is participating in the bidding
process.
(v) It is understood and agreed that Aetna USHC may not be able to
cause all customers of an Acquired Healthcare Entity who have
elected Managed Behavioral Health carve-out services (or who
elect to convert to such services) to enter into a business
relationship with Contractor. In the event Aetna USHC makes a
Status Quo Election or Contractor accepts an Offer or is the
winning bidder in an Auction Election, Aetna USHC agrees to
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make commercially reasonable best efforts to persuade such
customers to engage with Contractor.
(vi) All members of Plans for which Behavioral Healthcare Services are
performed as a result of an Auction election shall not be treated
as "Members" for purposes of Section 7 of the Agreement.
Y. (i) Within seventy-five (75) days following the closing of any
applicable acquisition of an Acquired Healthcare Entity, Aetna USHC
shall take or cause to be taken, all reasonably necessary action
(consistent with existing contractual obligations of the Acquired
Healthcare Entity and subject to any necessary regulatory approvals)
to segregate (unless already segregated) the Behavioral Healthcare
Business operations of the Acquired Healthcare Entity into a separate
and distinct division or subsidiary (as segregated, the "BHB
Component"). In segregating the BHB Component, Aetna USHC shall have
the option (the "Put Option") of notifying Contractor that it intends
to (a) discontinue certain services which were previously provided by
the Acquired Healthcare Entity or by Third Party Vendors prior to the
closing of the acquisition of the Acquired Healthcare Entity and (b)
causing those services to be performed by Contractor pursuant to the
terms of this Agreement at the rates determined in accordance with the
methodology provided for in Section 6 hereof (as if such services
constituted a "new plan" under subparagraph (a) of Subsection 6.C of
this Agreement) as further described in Subsection (ii) below;
provided, however, if as a result of such Put Option, not all Members
of any product category (e.g., HMO or Managed Choice) of the Acquired
Healthcare Entity would be wholly subject to the Put Option (any such
product category shall be referred to as a "Divided Product
Category"), then the following sentence shall apply. With respect to
each Divided Product Category (i) Aetna USHC shall have the right to
designate the number of Members to be included in the Put Option and
(ii) the parties shall in good faith mutually agree on the
apportionment (based upon the number determined in (i)) of the Divided
Product Category so that the Members included within the Put Option
represent a reasonable cross-section (considering factors such as
historic utilization rates, historic care costs, historic revenue per
member, contract terms, term and termination provisions, among other
relevant factors) of the Divided Product Category. In the event the
parties do not reach agreement of the
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matter referred to within subsection (ii) in the preceding sentence
within 15 days following delivery of notice of the Put Option, the
matter shall be resolved in accordance with Section 13 of this
Agreement, provided that the 60 days period referred to in the first
sentence of Subsection 13.C shall be 10 business days for purposes of
this provision. Notwithstanding the foregoing, Aetna USHC shall not be
obligated to segregate (or exercise its Put Option) with respect to
any of the Excluded Activities. Consistent with the Non-Competition
Covenant, Aetna USHC and the Acquired Healthcare Entity shall be free
to conduct the Excluded Activities in any manner they deem appropriate
following the closing of the acquisition of the Acquired Healthcare
Entity.
(ii) In the event Aetna USHC desires to exercise its Put Option, it shall
provide Contractor with written notice of such intent within twenty
(20) days following the closing of the acquisition of the Acquired
Healthcare Entity, which notice shall specify in reasonable detail the
services to be performed by Contractor, the Plans affected and the
number of members involved. The parties shall then cooperate to ensure
that the relevant services are provided by Contractor to the Acquired
Healthcare Entity as soon as reasonably practicable, consistent with
existing contractual obligations of the Acquired Healthcare Entity and
subject to any necessary regulatory approvals. Contractor may defer
implementation of that provision up to ninety (90) days from the date
of the election notice if it has operational constraints on its
ability to perform the Behavioral Healthcare Services for the Acquired
Healthcare Entity. All members of Plans for which Behavioral
Healthcare Services are performed as a result of a Put Option shall be
treated as new "Members" for purposes of Section 7 of this Agreement;
provided, however, it is understood that this provision is not
intended to affect the payment methodology, including the annual and
aggregate maximum payment amounts set forth in Section 7 for Tranche 1
and Tranche 2 Payments.
(iii)Within seventy-five (75) days following the closing of an acquisition
of an Acquired Healthcare Entity, Aetna USHC shall prepare (or cause
to be prepared) a pro forma income statement (the "Pro Forma Income
Statement") for the BHB Component for the twelve month period ending
on the later of (a) the closing date of the acquisition and (b) the
month end for which a pro forma
11
<PAGE>
income statement can reasonably be prepared.. The Pro Forma Income
Statement shall be prepared on a basis which assumes that the BHB
Component had operated separately over this twelve month period with
separate contracts on such terms as Aetna USHC would be willing to put
into place, including term and rates for providing or arranging the
provision of Behavioral Healthcare Services to all Members covered by
Plans of such Entity for the assumed term (the "Applicable Contract
Rates"), which term and rates shall be clearly indicated as
assumptions in the Pro Forma Income Statement. The Pro Forma Income
Statement shall include customary income and expense categories
(including allocations of indirect services and overhead costs, which
are intended to present the operations as if they operated on a
stand-alone basis), and including Earnings Before Interest, Taxes,
Depreciation & Amortization ("EBITDA").
(iv) Within seventy-five (75) days following the closing of an acquisition
of an Acquired Healthcare Entity, Aetna USHC shall offer (an "Offer"),
or cause to be offered, to Contractor the right to purchase the BHB
Component of the Acquired Healthcare Entity. The Offer shall include
all material terms of the proposed sale including the purchase price
and Applicable Contract Rates. Each Offer shall remain open for a
period of not less than forty-five (45) days (the "Offer Period").
(v) During the Offer Period, Contractor and its representatives and agents
shall be entitled to conduct a due diligence review of the BHB
Component and the Acquired Healthcare Entity, in order to evaluate the
Offer, and shall be given reasonable access (subject to a
confidentiality agreement between Contractor and Aetna USHC and
subject to compliance with any confidentiality obligations of Aetna
USHC or any of its Affiliates with entities other than the Acquired
Healthcare Entity or the seller of the Acquired Healthcare Entity,
provided that Aetna USHC shall exercise commercially reasonable best
efforts to obtain a waiver of any such confidentiality obligations for
this purpose) to the books and records and personnel of the Qualifying
Entity and BHB Component, including the supporting information
utilized to prepare the Pro Forma Income Statement of the BHB
Component.
12
<PAGE>
(vi) If, prior to the expiration of the Offer Period, Contractor notifies
Aetna USHC in writing that it desires to accept the Offer, the parties
shall, as promptly as practicable, negotiate in good faith a
definitive purchase agreement (which, other than the Applicable
Contract Rates and other economic terms, shall contain substantially
the same terms and conditions contained in the definitive purchase
agreement pursuant to which Magellan acquired Contractor from Aetna
USHC) and a definitive vendor contract, on substantially the same
terms and conditions (other than the rates which shall be the
Applicable Contract Rates) as those contained in the existing
applicable Vendor Contracts between Contractor and Aetna USHC.
(vii)In the event that Contractor notifies (the "Non-acceptance Notice")
Aetna USHC that it does not accept the Offer or the Offer Period
expires for any Offer without Contractor notifying Aetna USHC that it
desires to accept such Offer, Aetna USHC shall take, or cause to be
taken, all commercially reasonable efforts to sell the BHB Component
to a non-affiliate of Aetna USHC, provided, however, that the purchase
price, rates for services and other material terms of any sale to a
non-affiliate shall not be more favorable (viewed on an aggregate
basis) to the third party than the purchase price, Applicable Contract
Rates and other material terms set forth in the Offer to the
Contractor (viewed on an aggregate basis). Magellan shall have the
right to submit a bid in connection with any auction conducted to sell
the BHB Component. If Aetna USHC (or its Affiliate, as applicable)
does not enter into a definitive agreement with a third party with
respect to the sale of the BHB Component by the end of the "Selling
Period" (as defined below), then for a period of 45 days following the
expiration of the Selling Period (the "Option Period"),Contractor
shall have the option (the "Purchaser Option") to purchase the BHB
Component on terms equal to the more favorable to Aetna USHC of (a) a
purchase price equal to the fair market value of the BHB Component
(assuming the Applicable Contract Rates and other material terms of
the Offer apply), as determined by a mutually acceptable independent
investment banking firm or (b) on terms equal to the most favorable
terms to Aetna USHC (viewed on an aggregate basis) received during the
Selling Period by Aetna USHC from a bona fide third party making a
bona fide offer (the "Bona fide Offer") to purchase the BHB Component
(an offer shall
13
<PAGE>
be considered a Bona fide Offer only if, among other things, the third
party was willing to consummate the offer pursuant to its terms and
that the information received from Aetna USHC upon which the offer was
based was true and correct in all material respects). During the
Option Period, Contractor and its representatives and agents shall be
entitled to conduct confirmatory due diligence of the BHB Component
subject to a confidentiality agreement. In the event Contractor
notifies Aetna USHC in writing before the expiration of the Option
Period that it desires to exercise its Purchaser Option, the parties
shall negotiate in good faith a definitive purchase agreement (which
shall contain substantially the same terms and conditions (other than
with respect to rates and other economic terms) as contained in the
definitive purchase agreement pursuant to which Magellan acquired
Contractor from Aetna USHC) and a vendor contract charging the
Applicable Contract Rates and for the term specified in the Offer (or,
in the event there is a Bone Fide Offer that is more favorable to
Aetna USHC than the fair market valuation, at the rates and for the
term applicable to the Bona fide Offer) and including all Members
covered by any Plan of the Acquired Healthcare Entity. For purposes of
this Subsection (vi), the term "Selling Period" shall mean the period
commencing upon the earlier of the receipt of the Non-acceptance
Notice or the expiration of the Offer Period (the "Commencement Date")
and continuing for 120 days following the Commencement Date, provided
that the Selling Period shall continue for 150 days following the
Commencement Date if Aetna USHC (or its Affiliate, as applicable) has
entered into a letter of intent with a third party with respect to the
sale of the BHB Component within 120 days following the Commencement
Date.
(viii) In the event that Aetna USHC (or its Affiliate, as applicable)
enters into a definitive agreement during the Selling Period, for any
BHB Component, and the purchase and sale contemplated by such
definitive agreement is not consummated within six months of the date
such agreement was executed (or for such longer period as any federal
or state regulatory or antitrust approvals may be pending), then
Contractor shall have a Purchase Option with respect to such BHB
Component for 45 days following the expiration of such six month
period (or longer) on the same terms as described above in Subsection
(vii).
14
<PAGE>
(ix) In the event any state or federal regulatory or governmental entity
prevents the sale to Contractor of the BHB Component (or any part
thereof) or the sale of the BHB Component is not consummated because
the conditions to closing set forth in the definitive purchase
agreement are not satisfied or waived (other than the nonsatisfaction
of a condition as a result of a breach by Aetna USHC of the purchase
agreement), after reasonable good faith efforts to obtain such
approvals or satisfy such conditions, then Aetna USHC shall be free to
dispose of the BHB Component (or the relevant part thereof) or
continue its operations in any manner Aetna USHC deems appropriate.
7. Amendment to Section 12 of the Agreement.
Section 12 is hereby amended by adding a new Subsection 12.C as follows:
C. HAI and Aetna USHC shall each have the right to audit and inspect at any time
during normal business hours upon reasonable notice, (a) documents or
information pertaining to verification of membership, in the possession of the
other party, covered under this Agreement and the Vendor Contracts and (b) any
documentation or information relevant to determinations under Subsection 6.C of
this Agreement, in each case subject to a confidentiality agreement to be
entered into between the parties.
8. Miscellaneous.
a. All references in the Agreement to the "Agreement" and any other references
of similar import shall henceforth mean the Agreement as amended by this
Amendment. All capitalized terms used but not otherwise defined herein
shall have the meaning ascribed to them in the Agreement as amended by this
Amendment.
b. Except to the extent specifically amended by this Amendment, all of the
terms and conditions contained in the Agreement shall be and remain in full
force and effect.
c. This Amendment shall be binding upon and inure to the benefit of Aetna
USHC, Magellan and HAI and their respective successors and assigns.
d. In the event of any inconsistency or conflict between this Amendment and
the Agreement, the terms, provisions and conditions of this Amendment shall
govern and control.
15
<PAGE>
e. This Amendment shall be governed by and construed in accordance with the
internal laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date first written above.
AETNA U.S. HEALTHCARE INC. MAGELLAN HEALTH SERVICES, INC.
By: /s/ Daniel S. Messina By: /s/ Craig L. McKnight
----------------------- -------------------------------------
Name: Daniel S. Messina Name: Craig L. McKnight
Title: Deputy CFO Title: Executive Vice President & CFO
Date: December 4, 1997 Date: December 4, 1997
HUMAN AFFAIRS INTERNATIONAL,
INCORPORATED
By: /s/ Thomas M. Bendoratis
-------------------------------------
Name: Thomas M. Bendoraitis
Title: Vice President & CFO
Date: December 4, 1997
16
Independent Auditors' Consent
The Board of Directors
Human Affairs International, Incorporated
We consent to the inclusion of our report dated February 7, 1997,
except as to note 10 which is as of February 27, 1997, with respect to the
consolidated balance sheets of Human Affairs International, Incorporated and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholder's equity, and cash flows for the years then
ended, which report appears in the Form 8-K of Magellan Health Services, Inc.
dated December 17
, 1997.
/s/ KPMG Peat Marwick LLP
-------------------------
Salt Lake City, Utah
December 17, 1997
- 1 -
FOR IMMEDIATE RELEASE
Magellan Investor Contact: Aetna Investor Contact:
Kevin Helmintoller Catherine H. Smith
(404) 814-5742 (860)273-6184
Magellan Media Contact: Aetna Media Contact:
Robert Mead Joyce A. Oberdorf
(212) 445-8208 (860)273-7392
MAGELLAN TO PURCHASE HUMAN AFFAIRS INTERNATIONAL
-HAI and Aetna U.S. Healthcare Also Agree to Strategic Relationship-
- --------------------------------------------------------------------------------
ATLANTA, GA, August 5, 1997 -- Magellan Health Services, Inc. (NYSE:MGL) and
Aetna Inc. (NYSE:AET) announced today that Magellan has signed a definitive
agreement for the purchase of Human Affairs International, Incorporated (HAI), a
unit of Aetna U.S. Healthcare, the health business unit of Aetna.
In addition, Magellan and Aetna U.S. Healthcare have entered into a
long-term strategic relationship that will allow Aetna U.S. Healthcare's members
continuing access to HAI's broad network of behavioral health professionals.
HAI manages the care of over 15 million covered lives through employee
assistance programs (EAPs) and managed behavioral health plans. HAI will become
a wholly owned subsidiary of Magellan Health Services. The addition of HAI will
double, to 32 million, the number of covered lives for whom Magellan's operating
units manage behavioral care and employee assistance programs, making Magellan
the leading behavioral care manager in the country.
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<PAGE>
- 2 -
Terms of the transaction will include a payment of $122.1 million in
cash by Magellan at closing. In addition, under the terms of the strategic
relationship, payments of up to $300 million may be made by Magellan over the
term of the agreement. The transaction, which will be recorded as a purchase
transaction by Magellan, is subject to federal and state approvals and other
customary conditions, and is expected to close in the fourth quarter of calendar
1997.
"We are pleased to welcome HAI, its employees and its broad network of
providers to the growing Magellan family," said Mac Crawford, chairman,
president and CEO of Magellan. "The acquisition of HAI will be another major
step forward in our strategy to focus more on the specialty managed care segment
of the healthcare business. HAI has been a strong performer, especially in the
employee assistance market and in providing service to Aetna U.S. Healthcare
members. Our previous purchase of a majority interest in Green Spring has
performed very well since our acquisition and we expect HAI to continue its
strong performance as well."
Crawford continued, "We are excited that we could pay for this with
cash on hand and going forward, we will continue to aggressively seek
acquisition and investment opportunities. Under the Magellan holding company
structure we are well positioned to participate in the ongoing consolidation of
both the managed care and provider segments of behavioral healthcare."
"We believe that behavioral health is an integral part of an
individual's overall health and wellness," said Michael J. Cardillo, president
of Aetna U.S. Healthcare. "This transaction is consistent with our focus on our
core managed care business and signifies our commitment to offering
comprehensive, high quality behavioral health programs, employee assistance and
substance abuse programs, with the broadest possible choice of provider networks
and in a cost-effective manner. This transaction also establishes a long-term
strategic relationship with competitive, fixed provider rates."
HAI, headquartered in Salt Lake City, provides mental health, employee
assistance and substance abuse treatment programs, serving more than 15 million
covered lives, of which a majority are Aetna U.S. Healthcare members. HAI was
founded in 1973 as a provider of employee assistance programs and was acquired
by Aetna in 1988.
- more -
<PAGE>
- 3 -
Magellan Health Services, Inc. is one of the country's largest integrated
behavioral health care companies. Its business units include: Majority-owned
Green Spring Health Services, a leader in behavioral managed care services;
Magellan Public Solutions, serving public sector agencies with privatized
behavioral health services; Charter Franchise Services, an international
franchisor of behavioral health care systems; and 50% interest in Charter
Behavioral Health Systems, the largest operator of free-standing behavioral
health facilities in the U.S.
Aetna U.S. Healthcare, the health business unit of Aetna Inc., is the
nation's leading health benefits organization with a total health enrollment of
more than 14 million members nationwide.
Certain of the statements in this press release including, without
limitation, statements by Magellan regarding acquisition opportunities, growth
in managed lives, and expectations as to HAI's future performance, and
statements regarding amounts potentially payable under the strategic
relationship constitute forward-looking statements contemplated under the
Private Securities Reform Act of 1995. Risk factors such as the ability to
successfully complete and integrate acquisitions could prevent Magellan from
consummating the future acquisition opportunities or achieving the growth and
performance mentioned. Also, the amounts potentially payable under the strategic
relationship are contingent upon a number of factors and no assurances can be
made that the payments will be made or received by the respective parties. For a
more complete discussion of these and other risk factors, please see Exhibit 99
contained in Magellan's Annual Report on Form 10-K, as amended, for the fiscal
year ended September 30, 1996 filed with the Securities and Exchange Commission
on April 23, 1997 and Magellan's Form 10-Q for the third fiscal quarter ended
June 30, 1997 to be filed with the Securities and Exchange Commission no later
than August 14, 1997.
###
- 1 -
FOR IMMEDIATE RELEASE
Magellan Investor Contact: Aetna Investor Contact:
Kevin Helmintoller Catherine H. Smith
(404) 814-5742 (860)273-6184
Magellan Media Contact: Aetna Media Contact:
Robert Mead Jill B. Griffiths
(212) 445-8208 (215)775-6890
AETNA U.S. HEALTHCARE COMPLETES SALE OF
HUMAN AFFAIRS INTERNATIONAL TO MAGELLAN
Long-Term Strategic Provider Relationship Commences
- --------------------------------------------------------------------------------
ATLANTA, GA and HARTFORD, CT, December 5, 1997 -- Magellan Health Services, Inc.
(NYSE:MGL) and Aetna Inc. (NYSE:AET) announced today the completion of the
transaction in which Magellan acquired Human Affairs International (HAI), the
behavioral health subsidiary of Aetna U.S. Healthcare. Terms of the transaction
included a payment of $122.1 million in cash by Magellan at closing. In
addition, under the terms of the strategic relationship, payments of up to $300
million may be made by Magellan over the term of the long-term strategic
relationship. HAI has become a wholly-owned subsidiary of Magellan Health
Services.
The two companies have commenced a long-term strategic provider
relationship which will provide Aetna U.S. Healthcare members with continued
access to HAI's broad network of behavioral health professionals, as well as to
Magellan's existing network of behavioral health providers across the country.
Mac Crawford, chairman, president and CEO of Magellan said, "We are
pleased to welcome Human Affairs International as one of our growing behavioral
managed care operations. The inclusion of the long-term strategic relationship
with Aetna U.S. Healthcare is
- more -
<PAGE>
- 2 -
exciting and should provide HAI with significant growth opportunities over the
term of the agreement while continuing to benefit Aetna U.S. Healthcare."
"We're pleased to develop a long-term relationship with Magellan, which
not only maintains HAI behavioral health professionals for our members, but
allows even greater access to Magellan's professionals and facilities," said
Daniel S. Messina, vice president and head of business strategies for Aetna U.S.
Healthcare.
HAI, headquartered in Salt Lake City, provides behavioral health
programs to more than 15 million covered lives, of which the majority are Aetna
U.S. Healthcare members.
Magellan Health Services, Inc. is one of the country's largest
specialty care managers. Its business units include: Majority owned Green Spring
Health Services, a leader in behavioral managed care services with nearly 20
million covered lives; Human Affairs International (HAI), one of the largest
providers of workplace assistance programs in the United States; MENTOR/Magellan
Public Solutions, serving public sector agencies with privatized behavioral
health services; Charter Advantage, an international franchisor of behavioral
health care systems; and 50% interest in Charter Behavioral Health Systems, the
largest operator of free-standing behavioral facilities in the U.S; and subject
to consummation of a previously announced purchase transaction, Merit Behavioral
Care Corporation (MBC), one of the largest providers of mental health and
substance abuse services and employee assistance programs to more than 21
million enrollees and 800 clients.
Aetna U.S. Healthcare, the health business unit of Aetna Inc., is the
nation's leading health benefits organization with a total health enrollment of
approximately 14 million members nationwide.
Certain of the statements in this press release including, without
limitation, statements by Magellan concerning HAI's growth opportunities and
amounts potentially payable under the strategic relationship constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Risk factors such as the ability to successfully close and integrate the
MBC transaction and to successfully integrate the HAI acquisition could prevent
Magellan from achieving the growth mentioned. Also, the amounts potentially
payable under the
- more -
<PAGE>
- 3 -
strategic relationship are contingent upon a number of factors and no assurances
can be made that the payments will be made or received by the respective
parties. For a more complete discussion of these and other risk factors, please
see Magellan's Quarterly Report on Form 10-Q for the third fiscal quarter ended
June 30, 1997 filed with the Securities and Exchange Commission on August 14,
1997 and Exhibit 99 contained in Magellan's Annual Report on Form 10-K, as
amended for the fiscal year ended September 30, 1996 filed with the Securities
and Exchange Commission.
