<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
TO
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-6639
MAGELLAN HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1076937
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(State or other jurisdiction of (I.R.S. Employer
Identification
incorporation or organization) No.)
3414 PEACHTREE ROAD, N.E.
SUITE 1400
ATLANTA, GEORGIA 30326
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(Address of principal executive
offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (404) 841-9200
See Table of Additional Registrants below.
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Common Stock ($0.25 par value) New York Stock Exchange
11 1/4% Series A Senior Subordinated Notes due 2004 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at November 25, 1996 was approximately $504 million.
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /
The number of shares of the Registrant's Common Stock outstanding as of
November 25, 1996 was 28,583,406.
DOCUMENTS INCORPORATED BY REFERENCE: None
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<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Behavioral Heath Systems of Indiana, Indiana 35-1990127 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Beltway Community Hospital, Inc. Texas 58-1324281 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Blue Grass Physician Management Kentucky 66-1294402 3050 Rio Dosa Drive
Group, Inc. Lexington, KY 40509
(606) 269-2325
C.A.C.O. Services, Inc. Ohio 58-1751511 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CCM, Inc. Nevada 58-1662418 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CMCI, Inc. Nevada 88-0224620 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMFC, Inc. Nevada 88-0215629 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMSF, Inc. Florida 58-1324269 3550 Colonial Boulevard
Fort Myers, FL 33912
(813) 939-0403
CPS Associates, Inc. Virginia 58-1761039 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Alvarado Behavioral Health California 58-1394959 7050 Parkway Drive
System, Inc. La Mesa, CA 91942-2352
(619) 465-4411
Charter Appalachian Hall Behavioral North Carolina 58-2097827 60 Caledonia Road
Health System, Inc. Asheville, NC 28803
(704) 253-3681
</TABLE>
i
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Arbor Indy Behavioral Health Indiana 35-1916340 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Arbor Indy Behavioral Health Delaware 58-2265776 3414 Peachtree Rd., N.E.
System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Augusta Behavioral Health Georgia 58-1615676 3100 Perimeter Parkway
System, Inc. P.O. Box 14939
Augusta, GA 30909
(404) 868-6625
Charter Bay Harbor Behavioral Health Florida 58-1640244 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Beacon Behavioral Health Indiana 58-1524996 1720 Beacon Street
System, Inc. Fort Wayne, IN 46805
(219) 423-3651
Charter Beacon Behavioral Health Delaware 35-1994155 1720 Beacon Street
System, LLC Fort Wayne, IN 46805
(219) 423-3651
Charter Behavioral Health System at New Jersey 58-2097832 19 Prospect Street
Fair Oaks, Inc. Summit, NJ 07901
(908) 277-9102
Charter Behavioral Health System at Maryland 52-1866212 522 Thomas Run Road
Hidden Brook, Inc. Bel Air, MD 21014
(410) 879-1919
Charter Behavioral Health System at California 33-0606642 3414 Peachtree Rd., N.E.
Los Altos, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System at Florida 65-0519663 1324 37th Avenue, East
Manatee Adolescent Treatment Bradenton, FL 34208
Services, Inc. (813) 746-1388
Charter Behavioral Health System at Maryland 52-1866221 14901 Broschart Road
Potomac Ridge, Inc. Rockville, MD 20850
(301) 251-4500
</TABLE>
ii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Behavioral Health Systems, Delaware 58-2213642 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Georgia 58-1513304 240 Mitchell Bridge Road
Athens, Inc. Athens, GA 30606
(404) 546-7277
Charter Behavioral Health System of Texas 58-1440665 8402 Cross Park Drive
Austin, Inc. Austin, TX 78754
(512) 837-1800
Charter Behavioral Health System of Texas 76-0430571 3414 Peachtree Rd., N.E.
Baywood, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Florida 58-1527678 4480 51st Street, West
Bradenton, Inc. Bradenton, FL 34210
(813) 746-1388
Charter Behavioral Health System of Georgia 58-1408670 3500 Riverside Drive
Central Georgia, Inc. Macon, GA 31210
(912) 474-6200
Charter Behavorial Health System of Virginia 54-1765921 1500 Westbrook Avenue
Central Virginia, Inc. Richmond, VA 23227
(804) 266-9671
Charter Behavioral Health System of South Carolina 58-1761157 2777 Speissegger Drive
Charleston, Inc. Charleston, SC 29405-8299
(803) 747-5830
Charter Behavioral Health System of Virginia 58-1616917 2101 Arlington Boulevard
Charlottesville, Inc. Charlottesville, VA 22903-1593
(804) 977-1120
Charter Behavioral Health System of Illinois 58-1315760 3414 Peachtree Rd., N.E.
Chicago, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of California 58-1473063 3414 Peachtree Rd., N.E.
Chula Vista, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Missouri 61-1009977 200 Portland Street
Columbia, Inc. Columbia, MO 65201
(314) 876-8000
</TABLE>
iii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Behavioral Health System of Texas 58-1513305 3126 Rodd Field Road
Corpus Christi, Inc. Corpus Christi, TX 78414
(512) 993-8893
Charter Behavioral Health System of Texas 58-1513306 6800 Preston Road
Dallas, Inc. Plano, TX 75024
(214) 964-3939
Charter Behavioral Health System of Maryland 52-1866214 3680 Warwick Road, Route 1
Delmarva, Inc. East New Market, MD 21631
(410) 943-8108
Charter Behavioral Health System of Indiana 35-1916338 7200 East Indiana
Evansville, Inc. Evansville, IN 47715
(812) 475-7200
Charter Behavioral Health System of Delaware 35-1994080 7200 East Indiana
Evansville, LLC Evansville, IN 47715
(812) 475-7200
Charter Behavioral Health System of Texas 58-1643151 3414 Peachtree Rd., N.E.
Fort Worth, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Mississippi 58-1616919 3531 Lakeland Drive
Jackson, Inc. Jackson, MS 39208
(601) 939-9030
Charter Behavioral Health System of Florida 58-1483015 3947 Salisbury Road
Jacksonville, Inc. Jacksonville, FL 32216
(904) 296-2447
Charter Behavioral Health System of Indiana 35-1916342 2700 River City Park Drive
Jefferson, Inc. Jeffersonville, IN 47130
(812) 284-3400
Charter Behavioral Health System of Delaware 35-1994087 2700 River City Park Drive
Jefferson, LLC Jeffersonville, IN 47130
(812) 284-3400
Charter Behavioral Health System of Kansas 58-1603154 8000 West 127th Street
Kansas City, Inc. Overland Park, KS 66213
(913) 897-4999
Charter Behavioral Health System of Louisiana 72-0686492 302 Dulles Drive
Lafayette, Inc. Lafayette, LA 70506
(318) 233-9024
</TABLE>
iv
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
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<S> <C> <C> <C>
Charter Behavioral Health System of Louisiana 62-1152811 4250 Fifth Avenue, South
Lake Charles, Inc. Lake Charles, LA 70605
(318) 474-6133
Charter Behavioral Health System of Indiana 35-1916343 3414 Peachtree Rd., N.E.
Michigan City, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Delaware 35-1994736 3414 Peachtree Rd., N.E.
Michigan City, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Alabama 58-1569921 3414 Peachtree Rd., N.E.
Mobile, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of New Hampshire 02-0470752 29 Northwest Boulevard
Nashua, Inc. Nashua, NH 03063
(603) 886-5000
Charter Behavioral Health System of Nevada 58-1321317 7000 West Spring Mountain Rd.
Nevada, Inc. Las Vegas, NV 89117
(702) 876-4357
Charter Behavioral Health System of New Mexico 58-1479480 5901 Zuni Road, SE
New Mexico, Inc. Albuquerque, NM 87108
(505) 265-8800
Charter Behavioral Health System of California 58-1857277 101 Cirby Hills Drive
Northern California, Inc. Roseville, CA 95678
(916) 969-4666
Charter Behavioral Health System of Arkansas 58-1449455 4253 Crossover Road
Northwest Arkansas, Inc. Fayetteville, AR 72703
(501) 521-5731
Charter Behavioral Health System of Indiana 58-1603160 101 West 61st Avenue
Northwest Indiana, Inc. State Road 51
Hobart, IN 46342
(219) 947-4464
Charter Behavioral Health System of Delaware 35-1994154 101 West 61st Avenue
Northwest Indiana, LLC State Road 51
Hobart, IN 46342
(219) 947-4464
</TABLE>
v
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Behavioral Health System of Kentucky 61-1006115 435 Berger Road
Paducah, Inc. Paducah, KY 42002-7609
(502) 444-0444
Charter Behavioral Health of Puerto Georgia 66-0523678 Caso Bldg., Suite 1504
Rico, Inc. 1225 Ponce de Leon Avenue
Santurce, PR 00907
Charter Behavioral Health System of California 58-1747020 455 Silicon Valley Boulevard
San Jose, Inc. San Jose, CA 95138
(408) 224-2020
Charter Behavioral Health System of Georgia 58-1750583 1150 Cornell Avenue
Savannah, Inc. Savannah, GA 31406
(912) 354-3911
Charter Behavioral Health System of Arkansas 71-0752815 3414 Peachtree Rd., N.E.
Texarkana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of California 95-2685883 2055 Kellogg Drive
the Inland Empire, Inc. Corona, CA 91719
(714) 735-2910
Charter Behavioral Health System of Ohio 58-1731068 1725 Timberline Road
Toledo, Inc. Maumee, Ohio 43537
(419) 891-9333
Charter Behavioral Health System of Arizona 86-0757462 3414 Peachtree Rd., N.E.
Tucson, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of California 33-0606644 3414 Peachtree Rd., N.E.
Visalia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Minnesota 41-1775626 109 North Shore Drive
Waverly, Inc. Waverly, MN 55390
(612) 658-4811
Charter Behavioral Health System of North Carolina 56-1050502 3637 Old Vineyard Road
Winston-Salem, Inc. Winston-Salem, NC 27104
(919) 768-7710
Charter Behavioral Health System of California 33-0606646 3414 Peachtree Rd., N.E.
Yorba Linda, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
vi
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Behavioral Health Systems of Georgia 58-1900736 811 Juniper St., N.E.
Atlanta, Inc. Atlanta, GA 30308
(404) 881-5800
Charter Brawner Behavioral Health Georgia 58-0979827 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter By-The-Sea Behavioral Health Georgia 58-1351301 2927 Demere Road
System, Inc. St. Simons Island, GA 31522
(912) 638-1999
Charter Canyon Behavioral Health Utah 58-1557925 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Canyon Springs Behavioral California 33-0606640 69696 Ramon Road
Health System, Inc. Cathedral City, CA 92234
(619) 321-2000
Charter Centennial Peaks Behavioral Colorado 58-1761037 2255 South 88th Street
Health System, Inc. Louisville, CO 80027
(303) 673-9990
Charter Community Hospital, Inc. California 58-1398708 21530 South Pioneer Boulevard
Hawaiian Gardens, CA 90716
(310) 860-0401
Charter Contract Services, Inc. Georgia 58-2100699 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Cove Forge Behavioral Health Pennsylvania 25-1730464 New Beginnings Road
System, Inc. Williamsburg, PA 16693
(814) 832-2121
Charter Fairmount Behavioral Health Pennsylvania 58-1616921 561 Fairthorne Avenue
System, Inc. Philadelphia, PA 19128
(215) 487-4000
Charter Fenwick Hall Behavioral South Carolina 57-0995766 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
vii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Financial Offices, Inc. Georgia 58-1527680 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Forest Behavioral Health Louisiana 58-1508454 9320 Linwood Avenue
System, Inc. Shreveport, LA 71106
(318) 688-3930
Charter Grapevine Behavioral Health Texas 58-1818492 2300 William D. Tate Ave.
System, Inc. Grapevine, TX 76051
(817) 481-1900
Charter Greensboro Behavioral Health North Carolina 58-1335184 700 Walter Reed Drive
System, Inc. Greensboro, NC 27403
(919) 852-4821
Charter Health Management of Texas, Texas 58-2025056 6800 Park Ten Blvd.
Inc. Suite 275-W
San Antonio, TX 78213
(210) 699-8585
Charter Hospital of Columbus, Inc. Ohio 58-1598899 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Denver, Inc. Colorado 58-1662413 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Ft. Collins, Colorado 58-1768534 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Miami, Inc. Florida 61-1061599 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Mobile, Inc. Alabama 58-1318870 5800 Southland Drive
Mobile, AL 36693
(334) 661-3001
</TABLE>
viii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Hospital of Santa Teresa, New Mexico 58-1584861 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of St. Louis, Inc. Missouri 58-1583760 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Torrance, Inc. California 58-1402481 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Indiana BHS Holding, Inc. Indiana 58-2247985 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Indianapolis Behavioral Indiana 58-1674291 5602 Caito Drive
Health System, Inc. Indianapolis, IN 46226
(317) 545-2111
Charter Indianapolis Behavioral Delaware 35-1994923 5602 Caito Drive
Health System, LLC Indianapolis, IN 46226
(317) 545-2111
Charter Lafayette Behavioral Health Indiana 58-1603158 3700 Rome Drive
System, Inc. Lafayette, IN 47905
(317) 448-6999
Charter Lafayette Behavioral Health Delaware 35-1994151 3700 Rome Drive
System, LLC Lafayette, IN 47905
(317) 448-6999
Charter Lakehurst Behavioral Health New Jersey 22-3286879 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Behavioral Health Tennessee 62-0892645 2911 Brunswick Road
System, Inc. Memphis, TN 38134
(901) 377-4700
Charter Laurel Heights Behavioral Georgia 58-1558212 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
ix
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Linden Oaks Behavioral Illinois 36-3943776 852 West Street
Health System, Inc. Naperville, IL 60540
(708) 305-5500
Charter Little Rock Behavioral Arkansas 58-1747019 1601 Murphy Drive
Health System, Inc. Maumelle, AR 72113
(501) 851-8700
Charter Louisiana Behavioral Health Louisiana 72-1319231 1514 Doctor's Drive
System, Inc. Suite 102
Bossier City, LA 71111
(318) 747-4362
Charter Louisville Behavioral Health Kentucky 58-1517503 1405 Browns Lane
System, Inc. Louisville, KY 40207
(502) 896-0495
Charter Meadows Behavioral Health Maryland 52-1866216 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical-- California, Inc. Georgia 58-1357345 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Clayton County, Georgia 58-1579404 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical-- Cleveland, Inc. Texas 58-1448733 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Dallas, Inc. Texas 58-1379846 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Long Beach, Inc. California 58-1366604 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
x
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Medical--New York, Inc. New York 58-1761153 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical (Cayman Islands) Cayman Islands, BWI 58-1841857 Caledonian Bank & Trust
Ltd. Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical Executive Georgia 58-1538092 3414 Peachtree Rd., N.E.
Corporation Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical Information Georgia 58-1530236 3414 Peachtree Rd., N.E.
Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical International, Inc. Cayman Islands, BWI N/A Caledonian Bank & Trust
Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical International, S.A., Nevada 58-1605110 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical Management Company Georgia 58-1195352 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of East Valley, Inc. Arizona 58-1643158 2190 N. Grace Boulevard
Chandler, AZ 85224
(602) 899-8989
Charter Medical of England Limited United Kingdom N/A 111 Kings Road
Box 323
London SW3 4PB
London, England
44-71-351-1272
</TABLE>
xi
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Medical of Florida, Inc. Florida 58-2100703 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of North Phoenix, Arizona 58-1643154 6015 W. Peoria Avenue
Inc. Glendale, AZ 85302
(602) 878-7878
Charter Medical of Puerto Rico, Inc. Commonwealth of Puerto 58-1208667 Caso Building, Suite 1504
Rico 1225 Ponce De Leon Avenue
Santurce, P.R. 00907
(809) 723-8666
Charter Milwaukee Behavioral Health Wisconsin 58-1790135 11101 West incoln Avenue
System, Inc. West Allis, WI 53227
(414) 327-3000
Charter Mission Viejo Behavioral California 58-1761156 23228 Madero
Health System, Inc. Mission Viejo, CA 92691
(714) 830-4800
Charter MOB of Charlottesville, Inc. Virginia 58-1761158 1023 Millmont Avenue
Charlottesville, VA 22901
(804) 977-1120
Charter North Behavioral Health Alaska 58-1474550 2530 DeBarr Road
System, Inc. Anchorage, AK 99508-2996
(907) 258-7575
Charter Northbrooke Behavioral Wisconsin 39-1784461 46000 W. Schroeder Drive
Health System, Inc. Brown Deer, WI 53223
(414) 355-2273
Charter North Counseling Center, Alaska 58-2067832 2530 DeBarr Road
Inc. Anchorage, AK 99508-2996
(907) 258-7575
Charter Northridge Behavioral Health North Carolina 58-1463919 400 Newton Road
System, Inc. Raleigh, NC 27615
(919) 847-0008
Charter Oak Behavioral Health California 58-1334120 1161 East Covina Boulevard
System, Inc. Covina, CA 91724
(818) 966-1632
Charter of Alabama, Inc. Alabama 63-0649546 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
</TABLE>
xii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Palms Behavioral Health Texas 58-1416537 1421 E. Jackson Avenue
System, Inc. McAllen, TX 78502
(512) 631-5421
Charter Peachford Behavioral Health Georgia 58-1086165 2151 Peachford Road
System, Inc. Atlanta, GA 30338
(404) 455-3200
Charter Petersburg Behavioral Health Virginia 58-1761160 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Pines Behavioral Health North Carolina 58-1462214 3621 Randolph Road
System, Inc. Charlotte, NC 28211
(704) 365-5368
Charter Plains Behavioral Health Texas 58-1462211 801 N. Quaker Avenue
System, Inc. Lubbock, TX 79408
(806) 744-5505
Charter-Provo School, Inc. Utah 58-1647690 4501 North University Ave.
Provo, UT 84604
(801) 227-2000
Charter Real Behavioral Health Texas 58-1485897 8550 Huebner Road
System, Inc. San Antonio, TX 78240
(512) 699-8585
Charter Regional Medical Center, Texas 74-1299623 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Ridge Behavioral Health Kentucky 58-1393063 3050 Rio Dosa Drive
System, Inc. Lexington, KY 40509
(606) 269-2325
Charter Rivers Behavioral Health South Carolina 58-1408623 2900 Sunset Boulevard
System, Inc. West Columbia, SC 29169
(803) 796-9911
Charter Rockford Behavioral Health Delaware 51-0374617 100 Rockford Drive
System, Inc. Newark, DE 19713
(302) 996-5480
Charter San Diego Behavioral Health California 58-1669160 11878 Avenue of Industry
System, Inc. San Diego, CA 92128
(619) 487-3200
</TABLE>
xiii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Sioux Falls Behavioral South Dakota 58-1674278 2812 South Louise Avenue
Health System, Inc. Sioux Falls, SD 57106
(605) 361-8111
Charter South Bend Behavioral Health Indiana 58-1674287 6704 N. Gumwood Drive
System, Inc. Granger, IN 46530
(219) 272-9799
Charter South Bend Behavioral Health Delaware 35-1994307 6704 N. Gumwood Drive
System, LLC Granger, IN 46530
(219) 272-9799
Charter Springs Behavioral Health Florida 58-1517461 3130 S.W. 27th Avenue
System, Inc. Ocala, FL 32674
(904) 237-7293
Charter Springwood Behavioral Health Virginia 58-2097829 Route 4, Box 50
System, Inc. Leesburg, VA 22075
(703) 777-0800
Charter Suburban Hospital of Texas 75-1161721 3414 Peachtree Rd., N.E.
Mesquite, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Terre Haute Behavioral Indiana 58-1674293 1400 Crossing Boulevard
Health System, Inc. Terre Haute, IN 47802
(812) 299-4196
Charter Terre Haute Behavioral Delaware 35-1994308 1400 Crossing Boulevard
Health System, LLC Terre Haute, IN 47802
(812) 299-4196
Charter Thousand Oaks Behavioral California 58-1731069 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Treatment Center of Michigan 58-2025057 3414 Peachtree Rd., N.E.
Michigan, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Westbrook Behavioral Health Virginia 54-0858777 1500 Westbrook Avenue
System, Inc. Richmond, VA 23227
(804) 266-9671
Charter White Oak Behavioral Health Maryland 52-1866223 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
xiv
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Charter Wichita Behavioral Health Kansas 58-1634296 8901 East Orme
System, Inc. Wichita, KS 67207
(316) 686-5000
Charter Woods Behavioral Health Alabama 58-1330526 700 Cottonwood Road
System, Inc. Dothan, AL 36301
(205) 794-4357
Correctional Behavioral Solutions, Delaware 58-2180940 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral Solutions of Indiana 35-1978792 3414 Peachtree Rd., N.E.
Indiana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral Solutions of New Jersey 22-3436964 3000 Atrium Way
New Jersey, Inc. Suite 410
Mount Laurel, NJ
(609) 235-2339
Correctional Behavioral Solutions of Ohio 34-1826431 Allen Correctional Institute
Ohio, Inc. 2338 North West Street
Lima, OH 45801
(419) 224-8000
Desert Springs Hospital, Inc. Nevada 88-0117696 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Employee Assistance Services, Inc. Georgia 58-1501282 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Florida Health Facilities, Inc. Florida 58-1860493 21808 State Road 54
Lutz, FL 33549
(813) 948-2441
Gulf Coast EAP Services, Inc. Alabama 58-2101394 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
xv
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Hospital Investors, Inc. Georgia 58-1182191 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Illinois Mentor, Inc. Illinois 36-3643670 313 Congress St.
Boston, MA 02210
(617) 790-4800
Magellan Public Solutions, Inc. Delaware 58-2227841 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Mandarin Meadows, Inc. Florida 58-1761155 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Magellan Public Network, Inc. Delaware 51-0374654 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Massachusetts Mentor, Inc. Massachusetts 04-2799071 313 Congress St.
Boston, MA 02210
(617) 790-4800
Metroplex Behavioral Healthcare Texas 58-2138596 1000 South Main Street
Services, Inc. Suite 100
Grapevine, TX 76051
(817) 540-6948
National Mentor, Inc. Delaware 04-3250732 313 Congress St.
Boston, MA 02210
(617) 790-4800
National Mentor Healthcare, Inc. Massachusetts 04-2893910 313 Congress St.
Boston, MA 02210
(617) 790-4800
NEPA--Massachusetts, Inc. Massachusetts 58-2116751 #6 Courthouse Lane
Chelmsford, MA 01863
(508) 441-2332
NEPA--New Hampshire, Inc. New Hampshire 58-2116398 29 Northwest Boulevard
Nashua, NH 03063
(603) 886-5000
</TABLE>
xvi
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------------------ -------------- ------------------------------------
<S> <C> <C> <C>
Ohio Mentor, Inc. Ohio 31-1098345 313 Congress St.
Boston, MA 02210
(617) 790-4800
Pacific-Charter Medical, Inc. California 58-1336537 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
South Carolina Mentor, Inc. South Carolina 57-0782160 313 Congress St.
Boston, MA 02210
(617) 790-4800
Southeast Behavioral Systems, Inc. Georgia 58-2100700 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Schizophrenia Treatment and Georgia 58-1672912 209 Church Street
Rehabilitation, Inc. Decatur, GA 30030
(404) 377-1986
Sistemas De Terapia Respiratoria, Georgia 58-1181077 3414 Peachtree Rd., N.E.
S.A., Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Western Behavioral Systems, Inc. California 58-1662416 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
- ------------------------
(1) The Additional Registrants listed are wholly-owned subsidiaries of the
Registrant and are guarantors of the Registrant's 11 1/4% Series A Senior
Subordinated Notes due 2004. The Additional Registrants have been
conditionally exempted, pursuant to Section 12(h) of the Securities Exchange
Act of 1934, from filing reports under Section 13 of the Securities Exchange
Act of 1934.
xvii
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
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ITEM 1. Business.................................................................... 2
ITEM 2. Properties.................................................................. 17
ITEM 3. Legal Proceedings........................................................... 18
ITEM 4. Submission of Matters to a Vote of Security Holders......................... 18
PART II
ITEM 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters..................................................................... 19
ITEM 6. Selected Financial Data..................................................... 19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 21
ITEM 8. Financial Statements and Supplementary Data................................. 30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 30
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......................... 31
ITEM 11. Executive Compensation...................................................... 32
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............. 35
ITEM 13. Certain Relationships and Related Transactions.............................. 37
PART IV
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.............. 39
</TABLE>
<PAGE>
The undersigned Registrant hereby amends Items 10 through 13 of its Annual
Report on Form 10-K for the fiscal year ended September 30, 1996.
PART I
ITEM 1. BUSINESS
GENERAL
Magellan Health Services, Inc. ("Magellan" or the "Company"), which was
incorporated in 1969, is an integrated, national behavioral healthcare company.
The Company operates through three principal subsidiaries engaging in (i) the
provider business, (ii) the managed care business and (iii) the public sector
business.
Charter Behavioral Health Systems, Inc. ("Charter" or the "provider
business"), the Company's wholly-owned subsidiary that engages in the provider
business, operated 90 acute care psychiatric hospitals and 4 residential
psychiatric treatment centers with an aggregate capacity of 8,429 licensed beds
as of September 30, 1996. Charter also manages one acute care psychiatric
hospital with 34 licensed beds. Eighty-eight of Charter's hospitals operate
partial hospitalization programs and the Company operates approximately 150
outpatient centers, staffed by mental health professionals.
Green Spring Health Services, Inc. ("Green Spring" or the "managed care
business"), the Company's 61% owned subsidiary that engages in the managed care
business, provides managed behavioral healthcare services, which include (i)
Enhanced Utilization Management, a utilization review process that employs
clinical criteria designed to provide each patient with accessible, appropriate
and affordable treatment across the entire continuum of care and services; (ii)
Care Management, a fully integrated healthcare model that offers utilization
review services and provides care to patients through the management of a
national network of contract providers and Green Spring-owned staff model
clinics; and (iii) Comprehensive Administrative Services, including member
assistance, management reporting, claims processing, clinical management
information and provider referral systems that are adaptable to customer
circumstances and requirements through a network of more than 30,000 providers
nationwide covering approximately 13.6 million people as of September 30, 1996.
Magellan Public Solutions, Inc. ("Public Solutions" or the "public sector
business"), the Company's wholly-owned subsidiary that engages in the public
sector business, provides specialty home-based behavioral healthcare services,
behavioral services in correctional facilities and troubled and delinquent
adolescent facilities services pursuant to contractual arrangements with
governmental agencies.
The Company's business strategy is to provide access to a full continuum of
behavioral healthcare and managed care services and to perform such services in
a cost effective manner with monitored results. The Company's integrated
national behavioral healthcare company has the capability to deliver and to
manage the delivery of behavioral healthcare services for large public and
private payers who need assistance in managing the risk of behavioral healthcare
costs.
RECENT DEVELOPMENTS
GREEN SPRING ACQUISITION
On December 13, 1995, the Company acquired a 51% ownership interest in Green
Spring for approximately $68.9 million in cash, the issuance of 215,438 shares
of Magellan Common Stock valued at approximately $4.3 million and the
contribution of Group Practice Affiliates, Inc. ("GPA"), a wholly-owned
subsidiary of the Company, which became a wholly-owned subsidiary of Green
Spring. GPA was organized by the Company for the purpose of acquiring and
managing professional group practices and has acquired seven group practices
through September 30, 1996. On December 20, 1995, the Company acquired an
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additional 10% ownership interest in Green Spring for approximately $16.7
million in cash as a result of an exercise by a minority stockholder of its
Exchange Option (as hereinafter defined) for a portion of the stockholder's
interest in Green Spring. The Company has a 61% ownership interest in Green
Spring. Green Spring is a leading provider of managed behavioral healthcare
services, which includes utilization management, care management and employee
assistance programs through a 50-state provider network covering approximately
13.6 million people nationwide.
The Green Spring acquisition and the creation of Public Solutions combined
with the existing provider business created the first integrated national
behavioral healthcare system and gives the Company the capability to provide
case management and delivery services to large private organizations and a
public sector marketplace seeking increased privatization of services. The
Company changed its name to Magellan Health Services, Inc. on December 21, 1995
to reflect the broader range of services it provides as a result of the Green
Spring acquisition.
The minority shareholders of Green Spring consist of four Blue Cross/Blue
Shield organizations (the "Blues") that are key customers of Green Spring. In
addition, two other Blues organizations that formerly owned a portion of Green
Spring continue to be customers of Green Spring. The minority stockholders of
Green Spring have the option, under certain circumstances, to exchange their
ownership interests ("Exchange Option") in Green Spring for 2,831,739 shares of
Magellan Common Stock or $65.1 million in subordinated notes. The Company may
elect to pay cash in lieu of issuing the subordinated notes. The Exchange Option
expires December 13, 1998.
NEW REVOLVING CREDIT AGREEMENT
On October 28, 1996, the Company entered into a new Credit Agreement with
certain financial institutions for a five-year Senior Secured reducing revolving
credit facility in an aggregate committed amount of $400 million (the "New
Revolving Credit Agreement"). The Company borrowed approximately $121.0 million
under the New Revolving Credit Agreement in October 1996 to (i) pay-off the
existing borrowings under the Revolving Credit Agreement (as hereinafter
defined) and (ii) pay for fees and expenses related to the New Revolving Credit
Agreement.
The loans outstanding under the New Revolving Credit Agreement bear interest
(subject to certain potential adjustments) at a rate per annum equal to one,
two, three or six-month LIBOR plus 1.25% or the Prime Lending Rate. Interest on
Prime Lending Rate loans is payable at the end of each fiscal quarter and upon
conversion to a LIBOR-based loan. Interest on LIBOR-based loans is payable at
the end of their respective one, two, three or six-month terms.
PRIOR DEVELOPMENTS
NME ACQUISITION
During fiscal 1994, the Company agreed to acquire 40 psychiatric hospitals
(the "Acquired Hospitals") from Tenet Healthcare Corporation (formerly known as
National Medical Enterprises, Inc. ("NME")). The purchase price for the Acquired
Hospitals was approximately $120.4 million in cash plus an additional cash
amount of approximately $51 million, subject to adjustment, for the net working
capital of the Acquired Hospitals (the "Hospital Acquisition"). The Acquired
Hospitals had an aggregate capacity of 2,873 licensed beds when acquired and
were located in 19 states.
On June 30, 1994, the Company completed the purchase of 27 of the Acquired
Hospitals for a cash purchase price of approximately $129.6 million, which
included approximately $39.3 million, subject to adjustment, for the net working
capital of the facilities. On October 31, 1994, the Company completed the
purchase of three additional Acquired Hospitals for a cash purchase price of
approximately $5 million, which included approximately $2.2 million related to
the net working capital of the facilities. On November 30, 1994, the Company
completed the purchase of the remaining ten Acquired Hospitals for a
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cash purchase price of approximately $36.8 million, including approximately $9.5
million related to the net working capital of the ten Acquired Hospitals. During
the year ended September 30, 1995, the Company received approximately $3.5
million from NME as a partial payment related to the settlement of the working
capital portion of the purchase price. The Company accounted for the Hospital
Acquisition using the purchase method of accounting.
DEBT REFINANCING
In order to finance the Hospital Acquisition and to refinance substantially
all of the Company's outstanding long-term debt, on May 2, 1994, the Company
entered into a Second Amended and Restated Credit Agreement with certain
financial institutions for a five-year reducing, revolving credit facility in an
aggregate committed amount of $300 million (the "Revolving Credit Agreement")
and issued $375 million of 11 1/4% Series A Senior Subordinated Notes which
mature on April 15, 2004 (the "Notes") and are general unsecured obligations of
the Company. (See Note 6 of the Company's Consolidated Financial Statements.)
SALE OF GENERAL HOSPITALS
On September 30, 1993, the Company sold its general hospitals and related
assets to Quorum, Inc. for approximately $338 million. The Company retained the
assets and liabilities relating to these hospitals for professional liability
claims incurred and cost report settlements for periods prior to September 30,
1993.
For fiscal 1993, the general hospitals had net revenue of approximately $347
million, a net loss of approximately $15 million, and admissions and patient
days of 39,669 and 205,843, respectively. In 1993, the Company restated its
consolidated financial statements to reflect the sales of the general hospitals
and its interest in a non-hospital subsidiary as discontinued operations.
FINANCIAL RESTRUCTURING
In its 1992 fiscal year, the Company completed a restructuring of its debt
and equity capitalization (the "Restructuring") pursuant to a prepackaged plan
of reorganization filed under Chapter 11 of the United States Bankruptcy Code
(the "Plan"), which became effective on July 21, 1992. As a result of the
Restructuring, the Company's long-term debt was reduced by approximately $700
million and its redeemable preferred stock of $233 million was eliminated. The
holders of the debt and preferred stock that were reduced or eliminated received
approximately 97% of the Company's Common Stock outstanding on July 21, 1992.
PROVIDER BUSINESS
OVERVIEW
The Company's psychiatric hospitals in operation on September 30, 1996 are
located in well-populated urban and suburban locations in 33 states and two
foreign countries. Seven of the Company's hospitals are affiliated with medical
schools for residency and other post-graduate teaching programs.
Most of the Company's hospitals offer a full continuum of behavioral care in
their service area. The continuum includes inpatient hospitalization, partial
hospitalization, intensive outpatient services and, in some markets, residential
treatment services.
The Company's hospitals provide structured and intensive treatment programs
for mental health and alcohol and drug dependency disorders in children,
adolescents and adults. The specialization of programs enables the clinical
staff to provide care that is specific to the patient's needs and facilitates
monitoring of the patient's progress. A typical treatment program of the Company
integrates physicians and other patient-care professionals with structured
activities, providing patients with testing, adjunctive therapies (occupational,
recreational and other), group therapy, individual therapy and educational
programs. A
4
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treatment program includes one or more of the types of treatment settings
provided by the Company's continuum of care. For those patients who do not have
a personal psychiatrist or other specialist, the hospital refers the patient to
a member of its medical staff.
A significant portion of hospital admissions are provided by referrals from
former patients, local marketplace advertising, managed care organizations and
physicians. Professional relationships are an important aspect of the Company's
ongoing business. Management believes the quality of the Company's treatment
programs, staff employees and physical facilities are important factors in
maintaining good professional relationships.
The Company's hospitals work closely with mental health professionals,
non-psychiatric physicians, emergency rooms and community agencies that come in
contact with individuals who may need treatment for mental illness or substance
abuse. A portion of the Company's marketing efforts is directed at increasing
general awareness of mental health and addictive disease and the services
offered by the Company's hospitals.
SEASONALITY
The Company's provider business is seasonal in nature, with a reduced demand
for certain services generally occurring in the first fiscal quarter around
major holidays, such as Thanksgiving and Christmas, and during the summer months
comprising the fourth fiscal quarter.
COMPETITION
Each of the Company's hospitals competes with other hospitals, some of which
are larger and have greater financial resources. Some competing hospitals are
owned and operated by governmental agencies, others by nonprofit organizations
supported by endowments and charitable contributions and others by proprietary
hospital corporations. The hospitals frequently draw patients from areas outside
their immediate locale and, therefore, the Company's hospitals may, in certain
markets, compete with both local and distant hospitals. In addition, the
Company's hospitals compete not only with other psychiatric hospitals, but also
with psychiatric units in general hospitals, and outpatient services provided by
the Company may compete with private practicing mental health professionals. The
competitive position of a hospital is, to a significant degree, dependent upon
the number and quality of physicians who practice at the hospital and who are
members of its medical staff. The Company has entered into joint venture
arrangements with other healthcare providers in certain markets to achieve more
efficiency in the local delivery system.
In recent years, the competitive position of hospitals has been affected by
the ability of such hospitals to obtain contracts with Preferred Provider
Organizations ("PPO's"), Health Maintenance Organizations ("HMO's") and other
managed care programs to provide inpatient and other services. Such contracts
normally involve a discount from the hospital's established charges, but provide
a base of patient referrals. These contracts also frequently provide for
pre-admission certification and for concurrent length of stay reviews. The
importance of obtaining contracts with HMO's, PPO's and other managed care
companies varies from market to market, depending on the individual market
strength of the managed care companies. The Company's acquisition of Green
Spring creates opportunities to increase its revenues through managed care
contracts utilizing the continuum of care described above and through
information systems that support care management and at-risk pricing mechanisms.
State certificate of need laws regulate the Company and its competitors'
ability to build new hospitals and to expand existing hospital facilities and
services. These laws do provide some protection from competition, as their
intent is to prevent duplication of services. In most cases, these state laws do
not restrict the ability of the Company or its competitors to offer new
outpatient services. The Company operates 39 hospitals in 12 states (Arizona,
Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada, New Mexico,
South Dakota, Texas and Utah) which do not have certificate of need laws
applicable to hospitals.
5
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INDUSTRY TRENDS
The Company's hospitals have been adversely affected by factors influencing
the entire psychiatric hospital industry. Factors which affect the Company
include (i) the imposition of more stringent length of stay and admission
criteria by payors; (ii) the failure of reimbursement rates received from
certain payers that reimburse on a per diem or other discounted basis to offset
increases in the cost of providing services; (iii) an increase in the percentage
of its business that the Company derives from payers that reimburse on a per
diem or other discounted basis; (iv) a trend toward higher deductibles and
co-insurance for individual patients; (v) a trend toward limiting employee
mental health benefits, such as reductions in annual and lifetime limits on
mental health coverage and (vi) pricing pressure related to an increasing rate
of claims denials by third party payers. In response to these conditions, the
Company has (i) strengthened controls to minimize costs and capital
expenditures; (ii) reviewed its portfolio of hospitals and sold, closed or
leased hospitals or consolidated operations in certain locations; (iii)
developed strategies to increase outpatient services and partial hospitalization
programs to meet the demands of the marketplace; (iv) implemented programs to
contest third party denials relating to valid pre-certified medical procedures;
(v) renegotiated contracts with managed care organizations at increased rates;
and (vi) created an integrated national behavioral healthcare system thereby
improving Charter's ability to obtain contracts with large private and public
payers.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation has been on budgetary and related funding mechanism
issues. Both the Congress and the Clinton Administration have made proposals to
reduce the rate of increase in projected Medicare and Medicaid expenditures and
to change funding mechanisms and other aspects of both programs. If enacted,
these proposals would generally reduce Medicare and Medicaid expenditures. The
Company cannot predict the effect of any such legislation, if adopted, on its
operations; but the Company anticipates that, although overall Medicare and
Medicaid funding may be reduced from projected levels, the changes in such
programs may provide opportunities to the Company to obtain increased Medicare
and Medicaid business through risk-sharing or partial risk-sharing contracts
with managed care plans and state Medicaid programs.
A number of states in which the Company has operations have either adopted
or are considering the adoption of healthcare reform proposals of general
applicability or Medicaid reform proposals, partly in response to possible
changes in Medicaid law. Where adopted, these state reform laws have often not
yet been fully implemented. The Company cannot predict the effect of these state
healthcare reform and Medicaid reform laws on its operations.
The Health Insurance Portability Act (H.R. 3103, also known as the
Kassebaum-Kennedy Bill) was signed into law by President Clinton in August,
1996. Under this law, nongovernment health plans covering two or more employees
are subject to new rules intended to make health insurance more accessible and
avoid individual losses of coverage. Among other things, the law requires
insurers to offer individual coverage to persons who lose their
employer-sponsored insurance, and limits the ability of insurers to deny
coverage because of pre-existing medical conditions, mental or physical. The law
also prohibits group health plans (and insurers that offer them) from
discriminating in enrollment or premiums based upon medical conditions,
including both physical and mental illnesses, but does not require plans to
offer particular benefits or restrictions. The law also establishes a four-year
trial program to encourage the use of medical savings accounts by giving tax
incentives to individuals and employers who contribute to such accounts. Anyone
participating in a medical savings account must also maintain a high-deductible
catastrophic health insurance policy, and the program is generally limited to
750,000 catastrophic policies. The law may have a minimal, though positive,
impact on the Company's operations. The law effectively allows people with
insurance coverage to retain that coverage, and while it does not mandate
coverage for the uninsured, the law creates tax incentives for purchasing
catastrophic health insurance coverage in
6
<PAGE>
connection with a medical spending account. Accordingly, enactment of the law
may result in an increase in the insurance coverage available for the types of
services offered by the Company.
SOURCES OF REVENUE
Payments are made to the Company's hospitals by patients, by insurance
companies and self-insured employers, by the federal and state governments under
Medicare, Medicaid, CHAMPUS (as hereinafter defined) and other programs and by
HMO's, PPO's and other managed care programs. Amounts received under government
programs, HMO, PPO and other managed health care arrangements, certain self-
insured employers and certain Blue Cross plans are generally less than the
hospital's established charges. The approximate percentages of gross patient
revenue (which is revenue before deducting contractual allowances and discounts
from established billing rates) derived by the Company's hospitals from various
payment sources for the last three fiscal years were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF HOSPITAL GROSS PATIENT
REVENUE FOR THE YEAR ENDED SEPTEMBER
30,
-------------------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Medicare............................................... 27% 26% 28%
Medicaid............................................... 16 17 17
--- --- ---
45 43 45
HMO's and PPO's........................................ 14 17 21
CHAMPUS................................................ 5 4 3
Other Government Programs.............................. 3 6 6
Other (primarily Blue Cross and other commercial
insurance)........................................... 35 30 25
--- --- ---
Total.................................................. 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
Most private insurance carriers reimburse their policyholders or make direct
payments to the hospitals for charges at rates specified in their policies. The
patient remains responsible to the hospital for any difference between the
insurance proceeds and the total charges. Certain Blue Cross programs have
negotiated reimbursement rates with certain of the Company's hospitals which are
less than the hospital's established charges.
Most of the Company's hospitals have entered into contracts with HMO's,
PPO's, certain self-insured employers and other managed care plans which provide
for reimbursement at rates less than the hospital's normal charges. In addition
to contracts entered into by individual hospitals with such managed care plans,
the Company has entered into regional and national contracts with HMO's, PPO's,
self-insured employers and other managed care plans that apply to all of the
Company's hospitals in the geographic areas covered by a contract. The Company
is seeking to obtain additional regional and national contracts. The Company
expects its percentage of revenue from these payor sources to increase in the
future.
Under the Medicare provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), costs per Medicare case are determined for each of the
Company's hospitals. A target cost per case is established for each year (the
"Target Rate"). If a hospital's costs per case are less than the Target Rate,
the hospital receives a bonus of 50% of the difference between its actual costs
per case and the Target Rate (limited to 5% of the Target Rate). Hospitals with
costs which exceed the Target Rate are paid an additional amount equal to 50% of
the excess, up to 10% of the Target Rate. These limits apply only to operating
costs and do not apply to capital costs, including lease expense, depreciation
and interest associated with capital expenditures. The Target Rate for each
hospital is increased annually by the application of an "update factor."
7
<PAGE>
Most of the Company's hospitals participate in state-operated Medicaid
programs. Current federal law prohibits Medicaid funding for inpatient services
in freestanding psychiatric hospitals for patients between the ages of 21 and
64. Each state is responsible for establishing the Medicaid eligibility and
coverage criteria, payment methodology and funding mechanisms which apply in
that state, subject to federal guidelines. Accordingly, the level of Medicaid
payments received by the Company's hospitals varies from state to state. In
addition to the basic payment level for patient care, several state programs
include a financial benefit for hospitals which treat a disproportionately large
volume of Medicaid patients as a percentage of the total patient population.
These "disproportionate share" benefits are subject to annual review and
revision by the related state governments and could be substantially reduced or
eliminated at any point in the future. The Omnibus Budget Reconciliation Act of
1993 ("OBRA 93") prohibits disproportionate share payments to hospitals which
have a Medicaid utilization rate of less than 1%. The amount of disproportionate
share payments each hospital can receive is limited through the use of formulas
based generally on the cost of providing services to Medicaid and uninsured
patients. The Company received approximately $11 million, $9 million and $5
million in Medicaid disproportionate share payments in fiscal 1994, 1995 and
1996, respectively.
Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings and interpretations
which may affect payments made under either or both of such programs. In
addition, federal or state governments could reduce the future funds available
under such programs or adopt additional restrictions on admissions and more
stringent requirements for utilization of services. These types of measures
could adversely affect the Company's operations. Final determination of amounts
payable under Medicare and certain Medicaid programs are subject to review and
audit. The Company's management believes that adequate provisions have been made
for any adjustments that might result from such reviews or audits.
Most of the Company's hospitals receive revenues from the CHAMPUS program.
Under various CHAMPUS programs, payments can either be based on contractually
agreed upon rates or rates determined by regulatory formulas.
CHAMPUS patients are subject to annual limits on the number of psychiatric
days covered by CHAMPUS. Covered inpatient services are generally limited to 30
days for adult acute patients, 45 days for child and adolescent acute patients,
and 150 days for residential treatment center patients.
REGULATION AND OTHER FACTORS
Operations of psychiatric hospitals are subject to substantial federal,
state and local government regulation. Such regulations provide for periodic
inspections or other reviews by state agencies, the United States Department of
Health and Human Services (the "Department") and CHAMPUS to determine compliance
with their respective standards of medical care, staffing, equipment and
cleanliness necessary for continued licensing or participation in the Medicare,
Medicaid or CHAMPUS programs. The admission and treatment of patients at the
Company's hospitals are also subject to substantial state regulation relating to
involuntary admissions, confidentiality and patients' rights and to federal
regulation relating to confidentiality of medical records of substance abuse
patients.
Obtaining approvals for construction of new hospitals and for renovation of
and additions to existing hospitals is subject to various governmental
requirements, such as approval of sites and findings of community need for
additional hospital facilities and services. In addition, in certain states, as
a practical matter, it is necessary to pledge to provide various amounts of
uncompensated care to indigent persons in order to obtain a certificate of need.
Federal law contains numerous provisions designed to insure that services
rendered by hospitals to Medicare and Medicaid patients are medically necessary
and are of a quality which meets professionally recognized standards and to
insure that claims for reimbursement under the Medicare and Medicaid programs
are properly filed. Among other things, services provided at the Company's
hospitals are subject
8
<PAGE>
to periodic review by Peer Review Organizations ("PRO's"). All hospitals which
participate in the Medicare program are subject to review by PRO's. PRO
activities include reviews of certain admissions and services to determine
medical necessity and to determine whether quality of care meets professionally
recognized standards. PRO's have the authority to recommend to the Department
that a provider who is in substantial noncompliance with the medical necessity
and quality of care standards of a PRO or who has grossly and flagrantly
violated an obligation to render quality care be excluded from participation in
the Medicare program or be required to reimburse the federal government for
certain payments previously made to the provider under the Medicare program.
The Company's hospitals have been subject to and have complied with various
forms of utilization review since 1970. The Company has implemented a quality
assurance program in each of its hospitals, which includes procedures for
utilization review and retrospective patient care evaluation. Approximately 20%
of the Company's hospitals have received accreditation with commendation from
the Joint Commission on Accreditation of Healthcare Organizations (the "Joint
Commission").
The Medicare and Medicaid Patient and Program Protection Act of 1987
expanded the authority of the Department to exclude from participation in the
Medicare and Medicaid programs those hospitals which engage in defined
prohibited activities. The Department is required under this Act to exclude from
participation in the Medicare and Medicaid programs any individual or entity
that has been convicted of a criminal offense relating to the delivery of
services under Medicare and Medicaid or to the neglect or abuse of patients. In
addition, the Department has authority to exclude from participation in the
Medicare program individuals or hospitals under certain other circumstances.
These include engaging in illegal remuneration arrangements with physicians and
other healthcare providers, license revocation, exclusion from some other
government programs (such as CHAMPUS), filing claims for excess charges or for
unnecessary services, failure to comply with conditions of participation and
failure to disclose certain required information or to grant proper access to
hospital books and records.
The Department has authority to impose civil monetary penalties against any
participant in the Medicare program which makes claims for payment for services
which were not rendered or were rendered by a person or entity not properly
licensed under state law. The Department also has authority to impose a penalty
of not more than $2,000 for each improperly claimed service and an assessment
equal to not more than twice the amount claimed for each service not rendered.
In 1989, Congress passed the so-called Stark I legislation ("Stark I") which
prohibits physicians who have a financial relationship with entities that
furnish clinical laboratory services from referring to such entities for
Medicare-reimbursed clinical laboratory services and prohibits the entities for
billing for services provided pursuant to such prohibited referrals. Stark I,
which contains a number of exceptions from its general referral prohibition,
became effective January 1, 1992. Proposed regulations implementing Stark I were
first issued in March 1992, however, the final Stark I regulations were issued
on August 14, 1995.
In 1993, Congress passed Stark II legislation ("Stark II") which expanded
the prohibitions of Stark I to include referrals from physicians for a wide
variety of medical services, including inpatient/outpatient hospital services,
and extended the referral prohibition to include services reimbursed under
Medicaid in addition to Medicare. The limitations on referrals outlined in Stark
II became effective January 1, 1995. Although the regulations implementing Stark
II have not been issued it is anticipated that they will be similar to the Stark
I regulations. A number of states in which the Company has operations have
adopted legislation similar to the Stark legislation. The Company believes that
its financial relationships with physicians do not violate the applicable
statutes and regulations. There can be no assurance however that (i) government
enforcement agencies will not contend that certain of these financial
relationships are in violation of the Stark legislation, (ii) that the Stark
legislation will not ultimately be interpreted by the courts in a manner
inconsistent with the Company's practices or (iii) regulations will be issued in
the future that will result in an interpretation by the courts in the manner
inconsistent with the Company's practices.
9
<PAGE>
Federal law makes it a felony, subject to certain exceptions, for a hospital
to make false statements relating to claims for payments under the Medicare
program, to engage in illegal remuneration arrangements with physicians and
other healthcare providers, to make false statements relating to compliance with
the Medicare conditions of participation, or to make false claims for Medicare
or Medicaid payments. A number of states have adopted laws that also make
illegal under state law certain remuneration and referral arrangements with
physicians and other healthcare providers.
In order to provide guidance to healthcare providers with respect to the
statute that makes certain remuneration arrangements between hospitals and
physicians and other healthcare providers illegal, the Department has issued
regulations outlining certain "safe harbor" practices, which, although
potentially capable of inducing prohibited referrals of business, would not be
subject to enforcement action under the illegal remuneration statute. The
practices covered by the regulations include, among others, certain investment
transactions, leases of space and equipment, personal services and management
contracts, sales of physician practices, payments to employees and waivers of
beneficiary deductibles and co-payments. Additional proposed safe harbors were
published in 1993 by the Department. Certain transactions and agreements of the
Company do not satisfy all the applicable criteria contained in the final and
proposed safe harbor regulations that relate to such transactions and
agreements. However, the Company believes that such leases and contracts do not
violate the statute that makes certain remuneration arrangements illegal. There
can be no assurance that (i) government enforcement agencies will not assert
that certain of these arrangements are in violation of the illegal remuneration
statute or (ii) the statute and the regulations will ultimately be interpreted
by the courts in a manner consistent with the Company's practices.
Recent legislation, which becomes effective January 1, 1997, strengthens
federal health care fraud and abuse law enforcement efforts. Among other things,
the new legislation (i) adds several new offenses, (ii) expands the scope of
certain existing laws by including private health insurance plans as well as the
Medicare and Medicaid programs, (iii) increases penalties for certain existing
offenses and (iv) significantly increases funding for health care fraud and
abuse detection and prosecution efforts, including authorizing informants to
share in recoveries and establishing a national health care fraud and abuse data
bank.
Among other things, the new legislation prohibits submitting a claim for
reimbursement based on a code that the person knows or "should know" will result
in a greater payment than the code "the person knows or should know" is
applicable to the item or service actually provided, and prohibits submitting
claims to Medicare or Medicaid for a pattern of medical or other items or
services that a person knows or should know are not medically necessary. The
legislation also prohibits offering any inducements to beneficiaries in order to
influence them to order or receive Medicare or Medicaid covered items or
services from a particular provider or practitioner.
The new offenses created by this legislation, as well as the greater
spending on health care fraud and abuse enforcement which will result from this
legislation, may significantly increase the likelihood that any particular
health care company will be scrutinized by federal, state and/or local law
envorcement officials. In addition, the increased penalties will strengthen the
ability of enforcement agencies to effect more numerous and larger monetary
settlements with health care providers and businesses than was previously the
case.
CHAMPUS regulations authorize CHAMPUS to exclude from the CHAMPUS program
any provider who has committed fraud or engaged in abusive practices. The
regulations permit CHAMPUS to make its own determination of abusive practices
without reliance on any actions of the Department. The term "abusive practices"
is defined broadly to include, among other things, the provision of medically
unnecessary services, the provision of care of inferior quality and the failure
to maintain adequate medical or financial records.
10
<PAGE>
A number of states have adopted hospital rate review legislation, which
generally provides for state regulation of rates charged for various hospital
services. Such laws are in effect in the state of Florida in which the Company
operates seven hospitals. In Florida, the Health Care Board approves a budget
for each hospital, which establishes a permitted level of revenues per
discharge. If this level of permitted revenues per discharge is exceeded by a
hospital in a particular year by more than a specified amount, certain
penalties, including cash penalties, can be imposed.
GPA, a subsidiary of Green Spring that owns or manages professional group
practices, is subject to the federal and state illegal remuneration statutes
described above. In addition, in some states, practice of medicine and certain
other health professions' laws prohibit the subsidiary from owning, but not from
managing, professional practices.
MEDICAL STAFFS
At September 30, 1996, approximately 1,400 licensed physicians were active
members of the medical staffs of the Company's hospitals. Many of these
physicians also serve on the medical staffs of other hospitals. A number of
these physicians serve in administrative capacities in the Company's hospitals.
Most of these physicians are independent contractors who have private practices
in addition to their duties for the Company, while certain of these physicians
are employees of the Company. The medical and professional affairs of each
hospital are supervised by the medical staff of the hospital, under the control
of its board of trustees. The Company recruits physicians to serve in
administrative capacities at its hospitals and to engage in private practice in
communities where the Company's hospitals are located.
Registered nurses and certain other hospital employees are required to be
licensed under the professional licensing laws of most states. The Company's
hospital subsidiaries require such employees to maintain such professional
licenses as a condition of employment.
GENERAL AND PROFESSIONAL LIABILITY
Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"), a
wholly-owned Bermuda subsidiary of the Company, provides general and hospital
professional liability insurance up to $25 million per occurrence for the
Company's hospitals. All of the risk of losses from $1.5 million to $25 million
per occurrence has been reinsured with unaffiliated insurers. The Company also
insures with an unaffiliated insurer 100% of the risk of losses between $25
million and $100 million per occurrence, subject to an annual aggregate limit of
$75 million. The Company's general and professional liability coverage is
written on a "claims made or circumstances reported" basis. For reinsured claims
between $10 and $25 million per occurrence, the Company has an annual aggregate
limit of coverage of $30 million. For reinsured claims between $1.5 million and
$10 million per occurrence, the Company has no limits on the aggregate dollar
amounts of coverage.
For the six years from June 1, 1989 through May 31, 1995, the Company had a
similar general and hospital professional liability insurance program. For those
years, the per occurrence deductible (with respect to which the Company was
self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2
million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to
the Company's general hospitals sold on September 30, 1993) for the year ended
May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a
per occurrence deductible for the years ended May 31, 1994 and 1995. In December
1994, the per occurrence deductible for the years ended May 31, 1989 and 1990
was eliminated. Plymouth provides coverage with no per occurrence deductible for
hospital system claims which had not been paid prior to December 31, 1994.
Plymouth does not underwrite any insurance policies with any parties other than
the Company or its affiliates and subsidiaries.
The amount of expense relating to Magellan's malpractice insurance based on
estimated ultimate losses incurred during the year may materially increase or
decrease from year to year depending, among other things, on the nature and
number of new reported claims against Magellan and amounts of
11
<PAGE>
settlements of previously reported claims. To date, Magellan has not experienced
a loss in excess of policy limits. Management believes that its coverage limits
are adequate. However, losses in excess of the limits described above or for
which insurance is otherwise unavailable could have a material adverse effect
upon the Company.
MANAGED CARE BUSINESS
OVERVIEW
Green Spring is the nation's third largest managed behavioral healthcare
organization specializing in mental health and substance abuse/dependency
services through a network of more than 30,000 providers nationwide, serving
approximately 13.6 million people at September 30, 1996.
Green Spring was founded in 1989 by a group of clinicians who utilized a
clinical model that emphasizes the treatment needs of individuals. Green Spring
attempts to match each patient with an appropriate provider, focusing on the
quality of care and cost effectiveness from both the clinical and service
aspects.
Green Spring's services include:
ENHANCED UTILIZATION MANAGEMENT, a utilization review process that employs
clinical criteria designed to provide each patient with accessible, appropriate
and affordable treatment across the entire continuum of care and services;
CARE MANAGEMENT, a fully integrated healthcare model that offers utilization
review services and provides care to patients through the management of a
national network of providers and Green Spring-owned staff model clinics;
COMPREHENSIVE ADMINISTRATIVE SERVICES, including member assistance,
management reporting, claims processing, clinical management information and
provider referral systems that are adaptable to customer circumstances and
requirements.
Green Spring has several contractual funding arrangements with its customers
ranging from full risk capitated contracts to non-risk administrative services
only (ASO) arrangements. The primary funding arrangements for risk business
include full capitation and partial capitation. Under full capitation
arrangements, Green Spring assumes full risk for care under the contract and is
paid a monthly fee for each at-risk member regardless of the actual utilization
of services by the member. Partial capitation arrangements are similar to full
capitation arrangements except that the underwriting gain or loss is split
between the customer and Green Spring based on a pre-determined formula.
Non-risk funding arrangement include administrative service fees, and
incentive-based administrative service fees. ASO funding arrangements call for
the payment of a fee to Green Spring for providing varying levels of
administrative support and management. Incentive-based administrative service
fees are similar to incentive-based ASO arrangements except the ASO fee is
subject to adjustment based on the level of performance achieved by Green Spring
compared to a mutually agreed target level of performance.
At September 30, 1996, Green Spring's risk and non-risk membership was
approximately 4.4 million and 9.2 million, respectively. During fiscal 1996,
risk and non-risk business comprised approximately 70% and 30%, respectively, of
Green Spring revenues.
Green Spring's customers include Fortune 1000 companies, Blue Cross/Blue
Shield organizations, major HMO's/PPOs, several state employee programs, labor
unions and several state Medicaid programs. During fiscal 1996, approximately
70% of Green Spring's revenues were generated from Blue Cross/Blue Shield
organizations.
12
<PAGE>
GOVERNMENT REGULATION
Green Spring operations, in some states, are subject to utilization review,
licensure and related state regulatory procedures. Green Spring provides managed
behavioral healthcare services to various Blue Cross/Blue Shield plans that
operate Medicare and Medicaid health maintenance organizations or other at-risk
managed care programs and that participate in the Blue Cross Federal Employees
health program. As a contractor to these Blue Cross/Blue Shield plans, Green
Spring is indirectly subject to federal and, with respect to the Medicaid
program, state monitoring and regulation of performance and financial reporting
requirements. However, Green Spring must comply with all reporting and
monitoring requirements of the Health Care Financial Administration ("HCFA")
communicated to it from the prime contractor, Blue Cross/Blue Shield plans, for
the behavioral healthcare portion for the Medicare risk business. The Office of
Inspector General of the United States monitors and reviews financial healthcare
benefits through several Blue Cross plans. Medicaid business is also subject to
the financial reporting and performance monitoring requirements of the
applicable state governments as well as HCFA as noted above.
The management of Green Spring believes that it is in compliance, in all
material respects, with all current state and federal regulatory requirements
applicable to the business it conducts.
COMPETITION
The managed healthcare industry is being affected by various external
factors including rising healthcare costs, intense price competition, market
consolidation by major managed care companies and proposed healthcare reform
legislation.
Green Spring faces competition from a number of sources, including other
behavioral health managed care companies and traditional full service managed
care companies that contract to provide behavioral healthcare benefits. Also, to
a lesser extent, competition exists from fully capitated multi-specialty medical
groups and individual practice associations that directly contract with managed
care companies and other customers to provide and manage all components of
healthcare for the members including the behavioral healthcare component.
Green Spring believes that the most significant factors in a customer's
selection of a managed behavioral healthcare company include price, the extent
and depth of provider networks and flexibility and quality of services. The
management of Green Spring believes that Green Spring competes effectively with
respect to these factors.
PUBLIC SECTOR BUSINESS
OVERVIEW
The Company's public sector business provides specialty home-based
behavioral healthcare services ("mentor homes") through its National Mentor,
Inc. subsidiary ("Mentor") to over 2,200 clients in 16 states as of September
30, 1996. The public sector business also includes three facilities in Florida
for troubled and delinquent adolescents and two contracts for behavioral
services in correctional facilities in Ohio and New Jersey.
Mentor was founded in 1983 and was acquired by the Company in January 1995.
Public Solutions was established as a separate business unit of the Company
during fiscal 1996 to meet the growing demand among public sector agencies for
privatized behavioral healthcare services.
Public Solutions' services include:
SPECIALTY HOME-BASED BEHAVIORAL HEALTHCARE SERVICES, which features
individualized home and community-based health and human services delivered in
highly structured and professionally monitored family environments or "mentor"
homes. The mentor homes serve clients with chronic behavioral disorders and
13
<PAGE>
disabilities requiring long-term care, including children and adolescents with
behavioral problems, individuals with mental retardation or developmental
disabilities, and individuals with neurological impairment or other medical and
behavioral frailties;
TROUBLED AND DELINQUENT ADOLESCENT FACILITY SERVICES, which features
contracts with governmental entities for correctional facilities for youth with
emotional and substance abuse problems that have led to convictions;
CORRECTIONAL FACILITY BEHAVIORAL HEALTHCARE SERVICES, which features the
management and provision of behavioral healthcare to the prison population of
government-run correctional facilities.
COMPETITION AND GOVERNMENT REGULATION
Public Solutions competes with various for profit and not-for-profit
entities, including, but not limited to, (i) managed behavioral healthcare
companies that have started managing human services for governmental agencies,
(ii) home health care organizations, (iii) proprietary nursing home companies
and (iv) proprietary corrections companies.
Public Solutions believes that the most significant factors in a customer's
selection of services include price and quality of services and outcomes. The
pricing aspect of such services is especially important to attract public sector
agencies looking to outsource public services to the private sector as demand
for quality services escalates while budgeted dollars for healthcare services
are reduced. The management of Public Solutions believes it competes effectively
with respect to these factors.
The public sector market place is extremely complex and therefore includes
some unique issues regarding competition and government regulation. States
normally purchase human services through various agencies utilizing a
procurement process whereby one to seven program solicitations may be going on
at the same time with little procurement coordination between agencies. County
or municipal solicitations may also occur simultaneously. This situation may be
changing as some states now have central procurement or purchasing divisions
with standard proposal kits, and others are developing coordinated purchasing of
blended services/funding.
Public sector purchasing methods have evolved to include a number of
controls designed to maintain an open and competitive bidding process. Bids are
typically solicitated through a variety of Request-for-Proposal formats ranging
from vague to exhaustive in detail. Bids are generally sought on a price-basis
only, although "two-envelope" price quality competitors are becoming more
commonplace.
Several legal and regulatory barriers are found, depending on the state or
governmental entity. For example, some entities have statutes which prevent
contracts with for-profit or out-of-state organizations for delivery of
services. Others require contractors to meet specific residency or business
performance requirements.
Many governmental entities have specific statutes affecting the ability of
public officials to privatize services. These include requirements to meet prior
cost-effectiveness tests, requirements to give first priority to competitive
bids submitted by public sector employee unions, or outright bars on
privatization of specific services.
MENTAL HEALTH PARITY LEGISLATION
In October 1996, President Clinton signed a bill submitted by the U.S.
Congress that prohibits health plans from setting annual or lifetime caps on
mental health coverage ("parity") at levels below those set for general
medical/surgical healthcare services. The bill does not require a health plan to
offer or provide mental health services and does not affect other terms and
conditions of health plans, such as inpatient day or outpatient visit limits or
scope of benefits, nor does this bill prohibit health plans from utilizing other
forms of cost containment. The definition of mental health services in the bill
excludes substance abuse
14
<PAGE>
and chemical dependency. The effective date for the parity legislation is
January 1, 1998. Other key components of the parity legislation are as follows:
1) Employers with 50 or fewer employees are exempt from the parity
legislation.
2) Health plans that incur increased costs of 1% or more as a result of
the parity legislation will be exempt.
3) The parity legislation expires on September 30, 2001 unless extended
by Congress.
The Company views the parity legislation as an acknowledgement by the
Federal government of the importance of effective treatment of mental health
disorders for society in general. However, at this time, the Company cannot
predict or measure the effect the parity legislation will have on each of its
businesses.
INTELLECTUAL PROPERTY
The Company owns certain intellectual property which is important to its
provider business. The Company has registered as trademarks both the "CHARTER"
name and "800-CHARTER". The Company also owns the "Charter System", which is a
system for the operation of businesses specializing in the delivery of
behavioral healthcare under the "CHARTER" names and marks. The Charter System
includes treatment programs and procedures, quality standards, quality
assessment methods, performance improvement and monitoring programs, advertising
and marketing assistance, promotional materials, consultation and other matters
related to the operation of businesses specializing in the delivery of
behavioral healthcare.
EMPLOYEES OF THE REGISTRANT
At September 30, 1996, the Company had approximately 19,000 full-time and
part-time employees. The Company believes it has satisfactory relations with its
employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH THE COMPANY AND PRINCIPAL
OF EXECUTIVE OFFICER OCCUPATIONS DURING THE PAST FIVE YEARS
--------------------- --------------------------------------------------------------------------
<S> <C>
E. Mac Crawford Chairman of the Board of Directors, President and Chief Executive Officer
47 (since 1993); President and Chief Operating Officer (1992-1993) and
Director (since 1990); Executive Vice President--Hospital Operations
(1990-1992)
Craig L. McKnight Executive Vice President and Chief Financial Officer (since October 1995);
45 Executive Vice President--Office of the President and Chairman (March
1995-September 1995); Partner, Coopers & Lybrand L.L.P. (1985-1995)
John C. Bartlett, M.D. Executive President--Clinical Strategies (since January 1996); Senior Vice
49 President--Clinical Strategies (April 1995-January 1996); Vice
President--Corporate Medical Director, MCC Behavioral Care Inc.
(1988--1995)
Steve J. Davis Executive Vice President, Administrative Services (Chief Administrative
48 Officer) and General Counsel (since January 1996); Senior Vice
President--General Counsel (April 1995-December 1995); Vice
President--General Counsel (September 1994-March 1995); Partner, Dow,
Lohnes & Albertson (1992-1994); Of Counsel (since September 1994);
Partner, Phears & Davis (1990-1992)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH THE COMPANY AND PRINCIPAL
OF EXECUTIVE OFFICER OCCUPATIONS DURING THE PAST FIVE YEARS
--------------------- --------------------------------------------------------------------------
<S> <C>
John M. DeStefanis Executive Vice President of the Company and President and Chief Operating
46 Officer of Charter Behavioral Health Systems, Inc. (since January 1996);
President and Chief Operating Officer, Quantum Health Resources, Inc.
(1994-1996); President and Chief Operating Officer, Norrell Healthcare
Corporation (1992-1994); Senior Vice President, Caremark International,
Inc. (1991-1992)
Henry T. Harbin M.D. Executive Vice President of the Company (since December 1995); President
50 and Chief Executive Officer of Green Spring Health Services, Inc. (since
1994); Executive Vice President and Chief Clinical Officer of Green Spring
(1993-1994); Consultant to Green Spring (1989-1992)
Danna Mauch, Ph.D. Executive Vice President of the Company and President and Chief Operating
46 Officer of Magellan Public Solutions, Inc. (since May 1996); President,
Integrated Health Strategies, Inc. (1990-April 1996)
Richard M. Mastaler Executive Vice President--Business Development (since September 1996);
50 President, Unilab Southern California Clinical Laboratory (1994-1996);
President and Chief Executive Officer, Qualmed Health and Life Insurance
Company (1992-1994); President and Chief Executive Officer, Preferred
Health Network (1987-1994)
</TABLE>
Coopers & Lybrand L.L.P is an international accounting firm that provides
accounting and auditing services, tax services and consulting services. As an
audit partner at Coopers & Lybrand L.L.P., Mr. McKnight had responsibility for a
wide range of hospital and managed care engagements, as well as assisting
clients with formulating financing options, financial restructuring and the
purchase/sale of health plans and facilities.
MCC Behavioral Care, Inc. is a managed mental health and substance abuse
provider. As Corporate Medical Director, Dr. Bartlett coordinated and managed
the professional and clinical activities of the organization, including quality
management, risk management and outcomes evaluation.
Dow, Lohnes & Albertson is a law firm with offices in Washington, D.C. and
Atlanta, Georgia. As a partner, Mr. Davis performed legal services for clients
relating to commercial litigation, health care and general corporate matters,
including representation of the Company. Following his employment by the
Company, Mr. Davis has continued to provide consulting services to the firm on
non-Company matters pursuant to an "Of Counsel" arrangement. Phears & Davis was
a law firm in Norcross, Georgia, in which Mr. Davis was a Senior Partner.
Quantum Health Resources, Inc. is a provider of therapy and support services
to individuals with chronic health disorders. Norrell Healthcare Corporation is
a provider of healthcare and supplemental staffing services. Caremark
International, Inc. is a provider of various healthcare-related services
including home healthcare and intervenous therapy.
As a consultant to Green Spring, Dr. Harbin provided management services
related to precertification and concurrent/retrospective review for Green Spring
enrollees considered for or admitted for psychiatric or substance abuse
treatment.
Integrated Health Strategies, Inc. ("IHS") was a consulting firm for health
and human services organizations. As president of IHS, Dr. Mauch assisted health
and human services executives, boards of directors and clinical leaders with
strategic planning, policy analysis and program development.
Unilab Southern California Clinical Laboratory is California's largest
clinical laboratory. Qualmed and Preferred Health Network are both managed
healthcare companies.
16
<PAGE>
INTERNATIONAL OPERATIONS
The Company owns and operates two psychiatric hospitals in London, England
(a 45-bed hospital and a 78-bed hospital) and a 69-bed psychiatric hospital in
Nyon, Switzerland. The Company's international hospital operations are not
material to the Company's overall operations. The Company's international
operations also include the Bermuda insurance company that provides the
coverages described under "Liability Insurance."
ITEM 2. PROPERTIES
PROVIDER BUSINESS
The following table provides information relating to the 91 psychiatric
hospitals and 4 residential psychiatric treatment centers operated or managed by
the Company as of September 30, 1996.
<TABLE>
<CAPTION>
STATE/COUNTRY NUMBER OF HOSPITALS NUMBER OF LICENSED BEDS
- ------------------------------------------------ ----------------------- -------------------------
<S> <C> <C>
Alabama......................................... 2 169
Alaska.......................................... 2 108
Arizona......................................... 2 170
Arkansas........................................ 2 125
California...................................... 8 649
Colorado........................................ 1 72
Delaware........................................ 1 72
England......................................... 2 123
Florida......................................... 7 638
Georgia......................................... 9 902
Illinois........................................ 1 100
Indiana......................................... 8 577
Kansas.......................................... 2 160
Kentucky........................................ 3 256
Louisiana....................................... 3 259
Maryland........................................ 3 250
Massachusetts................................... 2 215
Minnesota....................................... 1 40
Mississippi..................................... 1 111
Missouri........................................ 1 96
Nevada.......................................... 1 84
New Hampshire................................... 1 100
New Jersey...................................... 1 150
New Mexico...................................... 2 170
North Carolina.................................. 6 603
Ohio............................................ 1 38
Pennsylvania.................................... 2 265
South Carolina.................................. 3 248
South Dakota.................................... 1 60
Switzerland..................................... 1 69
Tennessee....................................... 1 204
Texas........................................... 8 662
Utah............................................ 1 196
Virginia........................................ 3 362
Wisconsin....................................... 2 160
--
-----
Total......................................... 95 8,463
--
--
-----
-----
</TABLE>
17
<PAGE>
All of the Company's hospitals located in the United States have been
accredited by the Joint Commission. The Joint Commission is a national
commission which establishes standards relating to the physical plant,
administration, quality of patient care, governing body and medical staffs of
hospitals.
The Company operates 10 leased hospitals, including one 150-bed general
hospital not listed above, which is managed by an unaffiliated third party. The
leases for such hospitals have terms expiring between 1997 and 2069. The leases
for two hospitals contain options to purchase these hospitals for nominal
consideration at the end of their respective lease terms.
Fifty-nine of the Company's hospitals previously listed are subject to
mortgages at September 30, 1996, which were subsequently released in October
1996 pursuant to the terms of the New Revolving Credit Agreement.
The Company owns 15 medical office buildings and leases an additional 9 such
buildings. Five of the Company's medical office buildings are subject to
mortgages.
The Company leases office space for its outpatient centers. The leases
generally have terms of less than five years.
In addition, the Company leases to third parties, with options to purchase
by the lessees, three facilities which it previously operated prior to fiscal
1991. The Company is also attempting to sell or lease 16 other previously
operated hospitals and related medical office buildings and certain unimproved
real estate.
The Company's corporate headquarters in Atlanta, Georgia also serves as
headquarters for the provider business with a lease term expiring in 1999.
MANAGED CARE BUSINESS
Green Spring leases all of its 50 operating facilities with terms expiring
between 1996 and 2009. Green Spring's headquarters facilities are leased and are
located in Columbia, Maryland with lease terms expiring between 1998 and 2001.
PUBLIC SECTOR BUSINESS
Public Solutions owns three juvenile facilities in Florida. The remaining 58
operating facilities are leased with terms expiring between 1997 and 2001.
Public Solutions' headquarters is leased and is located in Boston, Massachusetts
with a lease term expiring in 2002.
ITEM 3. LEGAL PROCEEDINGS
Certain of the company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of management,
based on consultation with counsel, resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company has one class of Common Stock, which was listed for trading on
the American Stock Exchange through December 30, 1996 (ticker symbol "MGL"), and
on the New York Stock Exchange, effective December 31, 1996. As of November 25,
1996, there were 11,186 holders of record of the Company's $0.25 par value
Common Stock. The following table sets forth the high and low sales prices of
the Company's Common Stock from October 1, 1994 through the fiscal year ended
September 30, 1996 as reported by the American Stock Exchange:
<TABLE>
<CAPTION>
COMMON STOCK SALES
PRICES
--------------------
CALENDAR YEAR HIGH LOW
--------------------------- --------- ---------
<S> <C> <C>
1994
Fourth Quarter........................................................... $ 28 1/2 19
1995
First Quarter............................................................ $ 21 1/4 $ 13 7/8
Second Quarter........................................................... 19 5/8 15 5/8
Third Quarter............................................................ 23 1/4 16 1/4
Fourth Quarter........................................................... 24 1/4 17 3/8
1996
First Quarter............................................................ $ 25 $ 21 3/8
Second Quarter........................................................... 24 7/8 21
Third Quarter............................................................ 21 5/8 14 3/4
</TABLE>
The Company has not declared any cash dividends during fiscal 1995 or 1996.
As of November 30, 1996, the Company was prohibited from paying dividends on its
Common Stock under the terms of its New Revolving Credit Agreement.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information of
the Company for each of the five years in the period ended September 30, 1996.
The information prior to August 1992 is not comparable because of the
consummation of the Company's Restructuring and the implementation of fresh
start accounting in fiscal 1992, which included the revaluation of the Company's
assets and liabilities and resulted in, among other things, significant
reductions in long-term debt and interest expense and elimination of preferred
stock and preferred stock dividend requirements. In 1993, the Company restated
its consolidated financial statements to reflect the sale of certain
subsidiaries as discontinued operations. The Summary of Operations and Balance
Sheet Data for the five years ended September 30, 1996, presented below, have
been derived from, and should be read in conjunction with, the Company's audited
consolidated financial statements and the related notes thereto. The following
financial information should be read in conjunction with "Item 1.--Business" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company
indicated in the Index on page F-1 of this Annual Report on Form 10-K.
19
<PAGE>
SUMMARY OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TEN MONTHS TWO MONTHS
ENDED ENDED YEAR ENDED SEPTEMBER 30,
JULY 31, SEPTEMBER 30, ------------------------------------------
1992 1992 1993 1994 1995 1996
---------- ------------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue................................................. $ 777,855 $142,850 $897,907 $904,646 $1,151,736 $1,345,279
Salaries, supplies and other operating expenses............. 563,600 107,608 640,847 661,436 863,598 1,064,445
Bad debt expense............................................ 50,403 14,804 67,300 70,623 92,022 81,470
Depreciation and amortization............................... 35,126 3,631 26,382 28,354 38,087 48,924
Amortization of reorganization value in excess of amounts
allocable to identifiable asset........................... -- 7,167 42,678 31,200 26,000 --
Interest, net............................................... 169,244 12,690 74,156 39,394 55,237 48,017
ESOP expense (credit)....................................... 33,714 4,811 45,874 49,197 73,257 --
Stock option expense (credit)............................... -- (789) 38,416 10,614 (467) 914
Unusual items............................................... -- -- -- 71,287 57,437 37,271
Deferred compensation expense............................... 3,190 -- -- -- -- --
Income (loss) from continuing operations before income
taxes, reorganization items and extraordinary item........ (77,422 ) (7,072) (37,746) (57,459) (53,705) 64,238
Provision for (benefit from) income taxes................... 4,259 1,054 1,874 (10,504) 11,082 25,695
Income (loss) from continuing operations before minority
interest, reorganization items and extraordinary item..... (81,681 ) (8,126) (39,620) (46,955) (42,963) 38,543
Minority interest........................................... -- -- -- 48 340 6,160
Income (loss) before reorganization items and extraordinary
items..................................................... (81,681 ) (8,126) (39,620) (47,003) (42,963) 32,383
Discontinued operations:
Income (loss) from discontinued operations.................. 24,211 930 (14,703) -- -- --
Gain on disposal of discontinued operations................. -- -- 10,657 -- -- --
Income (loss) before reorganization items and extraordinary
items..................................................... (57,470 ) (7,196) (43,666) (47,003) (42,963) 32,383
Reorganization Items:
Professional fees and other expenses........................ (8,156 ) -- -- -- -- --
Adjust accounts to fair value............................... 83,004 -- -- -- -- --
Extraordinary item--gain (loss) on early extinguishment or
discharge of debt......................................... 730,589 -- (8,561) (12,616) -- --
Net income (loss)........................................... $ 747,967 $ (7,196) $(52,227) $(59,619) $ (42,963) $ 32,383
Earnings (loss) per common share:
Loss from continuing operations before extraordinary item... $ (0.33) $ (1.59) $ (1.78) $ (1.54) $ 1.04
Income (loss) from discontinued operations and disposal of
discontinued operations................................... 0.04 (0.16) -- -- --
Income (loss) before extraordinary item..................... (0.29) (1.75) (1.78) (1.54) 1.04
Extraordinary loss on early extinguishment of debt.......... -- (0.35) (0.48) -- --
Net income (loss)........................................... --(A ) $ (0.29) $ (2.10) $ (2.26) $ (1.54) $ 1.04
</TABLE>
- ------------------------
(A) Earnings per share for ten months ended July 31, 1992 is not presented
because it is not meaningful due to the implementation of fresh start
accounting and the increase in the number of shares outstanding as a result
of the Plan.
20
<PAGE>
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Current assets.................................................................. $ 290,742 $231,915 $324,627 $305,575 $ 338,150
Current liabilities............................................................. 296,144 272,598 215,048 214,162 274,316
Working capital................................................................. (5,402) (40,683) 109,579 91,413 63,834
Working capital ratio........................................................... -- -- 1.51:1 1.43:1 1.23:1
Property and equipment, net..................................................... 486,762 444,786 494,345 488,767 495,390
Total assets.................................................................... 1,299,198 838,186 961,480 983,558 1,140,137
Long-term debt and capital lease obligations.................................... 844,839 350,205 533,476 538,770 566,307
Stockholders' equity............................................................ 10,424 57,298 56,221 88,560 121,817
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 including, without
limitation, statements regarding the sufficiency of the Company's liquidity and
sources of capital and the statements under the heading "Outlook". These
forward-looking statements are subject to certain risks, uncertainties and other
factors which could cause actual results to differ materially from those
anticipated, including, without limitation, potential reductions in
reimbursement by third-party payers and changes in hospital payer mix,
governmental budgetary constraints and healthcare reform, the impact of
potential hospital closures, competition in the provider business and the
managed care business, and the regulatory environment for the Company's
businesses, as well as the other factors discussed in Exhibit 99 hereto, which
is hereby incorporated by reference.
GREEN SPRING ACQUISITION
On December 13, 1995, the Company acquired a 51% ownership interest in Green
Spring for approximately $68.9 million in cash, the issuance of 215,458 shares
of Magellan Common Stock valued at approximately $4.3 million and the
contribution of GPA, a wholly-owned subsidiary of the Company, which became a
wholly-owned subsidiary of Green Spring. On December 20, 1995, the Company
acquired an additional 10% ownership interest in Green Spring for approximately
$16.7 million in cash as a result of an exercise by a minority stockholder of
its Exchange Option for a portion of the stockholder's interest in Green Spring.
The Company has a 61% ownership interest in Green Spring. Green Spring provides
managed behavioral healthcare services, which includes utilization management,
care management and employee assistance programs through a 50-state provider
network covering approximately 13.6 million people nationwide. The Company has
accounted for the acquisition of Green Spring using the purchase method of
accounting, which resulted in additional intangible assets of approximately $113
million.
The minority stockholders of Green Spring consist of four Blues
organizations that are key customers of Green Spring. In addition, two other
Blues organizations that formerly owned a portion of Green Spring have continued
as customers of Green Spring. As of September 30, 1996, the minority
stockholders of Green Spring have the Exchange Option, under certain
circumstances, to exchange their ownership interest in Green Spring for
2,831,739 shares of the Company's Common Stock or $65.1 million in subordinated
notes. The Company may elect to pay cash in lieu of issuing the subordinated
notes. The Exchange Option expires December 13, 1998.
OVERVIEW
For the fiscal years ended September 30, 1994, 1995 and 1996, the Company's
provider business derived approximately 14%, 17% and 21%, respectively, of its
gross patient revenue from managed care
21
<PAGE>
payors (primarily HMO's and PPO's); 35%, 30% and 25%, respectively, from other
private payor sources (primarily Blue Cross and commercial insurance); and 51%,
53% and 54%, respectively, from governmental payers (primarily Medicare,
Medicaid and CHAMPUS). The Company believes that its provider revenue from
private payers, as a percentage of total gross patient revenue, has declined
because of a shift by purchasers of health care coverage to managed care plans
that generally authorize shorter lengths of stay than traditional insurance
plans and authorize more outpatient treatment plans. Services to Medicare and
Medicaid patients have increased due to increased recognition and treatment of
behavioral illnesses of the elderly and disabled and, in some states, improved
coverage of behavioral services in psychiatric hospitals for Medicaid
beneficiaries. These shifts in the Company's payer mix and a shift in program
mix to residential treatment settings have resulted in lower net revenue per
equivalent patient day. The psychiatric hospital industry has been adversely
affected by the trends described under "Item 1. Provider Business--Industry
Trends."
The Company's operating margins have declined to 14.8% in fiscal 1996 from
17.0% and 19.1% in fiscal 1995 and 1994, respectively. These declines are
primarily attributable to the adverse business trends described above and the
increasing significance of the Company's managed care business and public sector
business in fiscal 1995 and 1996, which have historically had lower operating
margins than the provider business. See Note 13 to the Consolidated Financial
Statements. Operating income (net revenue less salaries, supplies and other
operating expenses and bad debt expenses) was $199.4 million for fiscal 1996,
compared with $196.1 million and $172.6 million in fiscal 1995 and 1994,
respectively. The Company expects a reduction in operating margins as a
percentage of net revenue in future periods due to continued pricing pressure in
the provider business and the anticipated growth of its managed care and public
sector businesses. The Company has broadened the scope of services it provides
by offering alternatives to traditional inpatient treatment settings, such as
partial hospitalization, intensive outpatient and residential treatment
programs, the utilization of mentor homes and by entering the behavioral managed
care business through the acquisition of Green Spring in December 1995.
The Company's ability to increase the rates it charges in its provider
business to offset cost increases is limited because the Company derives a
significant portion of its revenues from patients covered by governmental and
managed care programs. With respect to governmental programs, the amount the
Company is paid for its provider business services is established by law and
regulation. With respect to managed care programs, the amount is established by
the managed care contracts. Although inflation has not been a significant factor
in the Company's results of operations in recent years, a resurgence of
inflation could adversely affect the Company's results of operations because of
such limitations on the Company's ability to increase its rates. It is unlikely
that federal and state governments will increase reimbursement rates under their
programs in amounts sufficient to offset future price increases that result from
general inflationary pressures.
The Company's provider business is seasonal in nature, with a reduced demand
for certain services generally occurring during the first fiscal quarter around
major holidays such as Thanksgiving and Christmas and during the summer months
comprising the fourth fiscal quarter.
22
<PAGE>
A summary of the Company's psychiatric hospitals operated or managed during
each fiscal year is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Beginning of the year........................................................... 74 101 102
Consolidated/closed/sold........................................................ -- (15) (9)
Acquisitions and joint ventures (1)............................................. 27 16 2
---- ---- ----
End of the year................................................................. 101 102 95
---- ---- ----
---- ---- ----
</TABLE>
- ------------------------
(1) Includes Northstar Hospital in Anchorage, Alaska that is managed pursuant to
an August 1996 joint venture agreement.
The Company leases one general hospital, which is managed by an unrelated
third party. The lease and management agreement expire in January 1997.
During fiscal 1992, the Company filed a voluntary petition for relief
pursuant to Chapter 11 of the U.S. Bankruptcy Code. The prepackaged plan of
reorganization effected a restructuring of the Company's debt and equity
capitalization. The Restructuring, which became effective on July 21, 1992,
resulted in a reduction of approximately $700 million principal amount of
long-term debt and the elimination of redeemable preferred stock having an
aggregate liquidation preference of $233 million. The Company accounted for the
Restructuring by using the principles of fresh start accounting. Accordingly,
the Company's total assets were recorded at their assumed reorganization value,
with the reorganization value allocated to identified tangible assets on the
basis of their estimated fair value at July 31, 1992. The excess of the
reorganization value over the value of identifiable assets is reported as
"reorganization value in excess of amounts allocable to identifiable assets."
The following table summarizes, for the periods indicated, changes in
selected operating indicators.
<TABLE>
<CAPTION>
PERCENTAGE OF NET
REVENUE
----------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net revenue..................................................................... 100.0% 100.0% 100.0%
------ ------ ------
Salaries, supplies and other operating expenses................................. 73.1 75.0 79.1
Bad debt expenses............................................................... 7.8 8.0 6.1
------ ------ ------
Total expenses.................................................................. 80.9 83.0 85.2
------ ------ ------
Operating margin................................................................ 19.1 17.0 14.8
------ ------ ------
------ ------ ------
</TABLE>
- ------------------------
(1) Hospitals operated or managed on September 30th.
23
<PAGE>
PSYCHIATRIC HOSPITAL RESULTS
Following are financial and statistical results from operations of hospitals
which are included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
SELECTED PSYCHIATRIC HOSPITAL OPERATING DATA
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Number of Psychiatric Hospitals (1)............................... 79 74 101 102 95
Bed Capacity:
Licensed Beds................................................. 7,228 6,902 8,908 8,939 8,463
Average Licensed Beds......................................... 7,288 7,145 7,468 9,368 8,805
Net Revenue (in thousands) (2).................................... $ 875,776 $ 853,792 $ 850,575 $1,042,360 $ 988,997
Total Patient Days (3)............................................ 1,430,815 1,373,835 1,383,388 1,758,079 1,753,011
Total Equivalent Patient Days (4)................................. 1,508,716 1,481,221 1,527,855 1,957,509 1,946,525
Net Revenue/Equivalent Patient Day (2)(4)......................... $ 580 $ 576 $ 557 $ 532 $ 508
Admissions........................................................ 81,311 86,794 102,802 132,165 140,546
Average Length of Stay (Days)..................................... 17.8 15.8 13.6 12.9 12.4
Private Pay and Other Sources/ Gross Revenue (5).................. 65% 56% 49% 47% 46%
Government Programs/Gross Revenue (5)(6).......................... 35% 44% 51% 53% 54%
</TABLE>
- ------------------------
(1) Hospitals operated or managed on September 30th.
(2) Includes inpatient and outpatient revenue.
(3) Provision of care to one patient for one day.
(4) Represents inpatient days adjusted to reflect outpatient utilization,
computed by dividing patient charges by inpatient charges per day.
(5) Gross revenue is revenue before deducting contractual allowances and
discounts from established billing rates. Gross Revenue is not separately
identified in the Company's Consolidated Statements of Operations; instead,
Net Revenue in the Consolidated Statements of Operations reflects gross
revenue after deductions for contractual allowances and discounts from
established billing rates.
(6) Government programs include Medicare, Medicaid and the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS"), which provides
payment for medical services to military dependents and retired military
personnel.
Note: Includes Northstar Hospital in Anchorage, Alaska that is managed
pursuant to a joint venture agreement.
FISCAL 1995 COMPARED TO FISCAL 1996. Patient days at the Company's
hospitals decreased 0.3% in fiscal 1996 compared to fiscal 1995. The decrease
resulted primarily from the closure of hospitals during fiscal 1995 and 1996
offset by increases in patient days resulting from (i) admission growth at same
store hospitals and (ii) hospital acquisitions and joint ventures during fiscal
1995 and 1996. Admissions at the Company's hospitals increased 6.3% in fiscal
1996 compared to fiscal 1995. The increase resulted from continued admissions
growth at the Company's same store hospitals and admissions attributable to
hospital acquisitions and joint ventures in fiscal 1995 and 1996 offset by
reductions resulting from hospitals closed in fiscal 1995 and 1996.
24
<PAGE>
The Company's net revenue for fiscal 1996 increased 16.8% compared to fiscal
1995. The increase resulted primarily from acquisitions less (i) the effect of
hospitals closed during fiscal 1995 and 1996 and (ii) the decrease in revenue
per equivalent patient day in fiscal 1996. Mentor, which was acquired in January
1995, had revenue of $69.8 million during fiscal 1996 compared to $44.8 million
for fiscal 1995. Green Spring (excluding GPA), which was acquired on December
13, 1995, had revenues of approximately $215.0 million . Net revenue for fiscal
1995 and 1996 included $35.6 million and $28.3 million , respectively, for the
normal settlement and adjustments of reimbursement issues related to earlier
fiscal periods ("reimbursement issues"). Net revenue per equivalent patient day
at the Company's psychiatric hospitals decreased in 1996 by 4.5% compared to
fiscal 1995. The decreases were primarily due to (i) continued shift in payer
mix from private payer sources to managed care payers and governmental payers,
(ii) pricing pressure from certain payers, primarily related to the denial of
claims payable to the hospitals, (iii) lower settlements of reimbursement
issues, (iv) shifts in program mix to residential treatment settings from acute
care settings and (v) the elimination of ESOP expense in fiscal 1996, which
resulted in lower Medicare reimbursement levels.
The Company's salaries, supplies and other operating expenses increased
23.3% in fiscal 1996 compared to fiscal 1995. The increase resulted primarily
from acquisitions less (i) the effect of hospitals closed in fiscal 1995 and
1996 and (ii) adjustments, as a result of updated actuarial estimates to
malpractice claim reserves, which resulted in a reduction of expenses of
approximately $15.3 million during 1996. Expenses incurred by Mentor increased
to $59.7 million during fiscal 1996 compared to $38.1 million for fiscal 1995.
Green Spring expenses (excluding GPA) were approximately $188.2 million during
fiscal 1996.
The Company's bad debt expense decreased 11.5% during fiscal 1996 compared
to fiscal 1995. The decrease was primarily due to (i) the shift in the provider
business to managed care payers, which reduces the Company's credit risk
associated with individual patients and (ii) the number of reduced days of net
revenue in its hospital receivables at September 30, 1996. Bad debt expense for
Mentor and Green Spring was less than 1% of net revenue for their respective
businesses in fiscal 1996.
Depreciation and amortization increased 28.5% during fiscal 1996 compared to
fiscal 1995. The increase resulted primarily from depreciation and amortization
related to the Green Spring Acquisition.
Reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Value") and ESOP expense were not recorded in fiscal 1996 as a
result of the completion of the amortization of Reorganization Value in fiscal
1995 and the Company's commitment to allocate all existing shares held by the
ESOP to the participants as of September 30, 1995.
Interest expense, net, decreased 13.1% during fiscal 1996 compared to fiscal
1995. The decrease resulted primarily from approximately $5.0 million of
interest income recorded during fiscal 1996 related to income tax refunds due
from the State of California for the Company's income tax returns for fiscal
1982 through 1989.
Stock option expense for fiscal 1996 increased $1.4 million from the
previous year due to fluctuations in the market price of the Company's Common
Stock.
During fiscal 1996, the Company recorded unusual items of $37.3 million.
Included in the unusual charges was the resolution of a billing dispute in
August 1996 between the Company and a group of insurance carriers that arose in
fiscal 1996 related to matters originating in the 1980's. As part of the
settlement of these claims, certain related payer matters and associated legal
fees, the Company recorded a charge of approximately $30.0 million. The Company
will pay the insurance settlement in twelve installments over a three-year
period. The Company and the insurance carriers have agreed that the dispute and
settlement will not negatively impact any present or pending business
relationships nor will it prevent the parties from negotiating in good faith
concerning additional business opportunities available to, and future
relationships between, the parties.
25
<PAGE>
During fiscal 1996, the Company consolidated, closed or sold nine
psychiatric facilities. The Company recorded charges of approximately $4.1
million during fiscal 1996 related to the closure of psychiatric hospitals.
The Company also recorded a charge of approximately $1.2 million related to
impairment losses and $2.0 million related to severance costs for personnel
reductions.
See Note 4 to the Company's Consolidated Financial Statements for further
information regarding unusual items.
The Company's effective tax rate was 40.0% during fiscal 1996. The change in
the effective tax rate from the prior year periods is primarily attributable to
(i) the elimination of non-deductible amortization of reorganization value in
excess of amounts allocable to identifiable assets in fiscal 1996 and (ii) the
reduction in the Company's effective tax rate as a result of the favorable
resolution of the Company's California income tax returns for fiscal 1982
through 1989 offset by the increase in non-deductible intangible amortization in
the fiscal 1996 periods as a result of the Mentor and Green Spring acquisitions.
As of September 30, 1996, the Company had estimated tax net operating loss
(NOL) carryforwards of approximately $250 million available to reduce future
federal taxable income. These NOL carryforwards expire in 2006 through 2010 and
are subject to examination by the Internal Revenue Service. The Internal Revenue
Service is currently examining the Company's income tax returns for fiscal 1989
through 1992. Adjustments arising from such examination could reduce or
eliminate the NOL carryforwards. In management's opinion, adequate provisions
have been made for any adjustments which may result from such examinations.
Minority interest increased $5.8 million during fiscal 1996 compared to
fiscal 1995. The increase is primarily due to the Company acquiring a
controlling interest in Green Spring in December 1995 and obtaining a
controlling interest in other businesses during fiscal 1995 and 1996.
OUTLOOK
Management continually assesses events and changes in circumstances that
could effect its business strategy and the viability of its provider facilities.
During fiscal 1995, the Company consolidated, closed or sold 15 psychiatric
hospitals. During fiscal 1996, the Company consolidated, closed or sold nine
psychiatric hospitals. See Note 4 of the Company's Consolidated Financial
Statements for further information regarding facility closures. The Company
plans to pursue acquisitions in its provider segment during fiscal 1997 in
markets where it does not currently have a presence and in markets where it has
existing hospital operations. Management expects to consolidate services in
selected markets as a result of acquisitions or overcapacity and to close or
sell additional facilities in future periods depending on market conditions and
evolving business strategies. If the Company closes additional psychiatric
hospitals in future periods, it could result in additional charges to income for
the costs necessary to exit the hospital operations.
During fiscal 1995 and fiscal 1996, the Company recorded impairment losses
on property and equipment and intangible assets of approximately $27.0 million
and $1.2 million, respectively. Such impairment losses resulted from changes in
the manner that certain of the Company's assets will be used in future periods
and from historical operating losses at certain of the Company's operating
facilities combined with projected future operating losses. The affected
businesses that were operating as of September 30, 1996 had operating income of
less than $100,000 (net revenue less salaries, supplies and other operating
expenses and bad debt expense) in aggregate during fiscal 1996, excluding the
normal settlement of reimbursement issues. When events or changes in
circumstances are present that indicate the carrying amount of long-lived assets
may not be recoverable, the Company assesses the recoverability of long-lived
assets by determining whether the carrying value of such assets will be
recovered through future cash flows expected from the use of the asset and its
eventual disposition. The Company may record additional impairment losses in
future periods as circumstances warrant.
26
<PAGE>
The Company's hospitals continue to experience a shift in payer mix to
managed care payers from other payers, which contributed to a reduction in
revenue per equivalent patient day in fiscal 1996 compared to prior periods.
Management anticipates continued shifting in its hospitals' payer mix towards
managed care payers as a result of changes in the healthcare marketplace and the
synergies created by the Green Spring acquisition. Future shifts in the
Company's hospital payer mix to managed care payers could result in lower
revenue per equivalent patient day in future periods for the Company's hospital
operations. In addition, the Company's hospitals have experienced pricing
pressure related to an increasing rate of claim denials by third party payers,
which contributed to a reduction in revenue per equivalent day compared to prior
periods. Management expects the pricing pressure to continue into fiscal 1997,
which could result in lower revenue per equivalent patient day in future
periods. Management intends to vigorously contest third party denials that
relate to valid pre-certified medical procedures and review or renegotiate
contractual relationships with certain third party payers.
During fiscal 1994, 1995 and 1996, the Company recorded revenue of $32.1
million, $35.6 million and $28.3 million, respectively, for settlements and
adjustments related to reimbursement issues. The settlements in fiscal 1994,
1995 and 1996 related primarily to certain reimbursable costs associated with
the Company's financial reorganization in fiscal 1992 and costs related to the
early extinguishment of long-term debt in fiscal 1994. Management anticipates
that revenue related to such settlements will decline in fiscal 1997, and that
the decline will be comparable to the reduction experienced in fiscal 1996.
During fiscal 1996, the Company recorded reductions of expenses of
approximately $15.3 million as a result of updated actuarial estimates related
to malpractice claim reserves. While management and its actuaries believe that
the present reserve is reasonable, ultimate settlement of losses may vary from
the amount recorded and result in additional fluctuations in income.
On October 28, 1996, the Company terminated its Revolving Credit Agreement.
The Company will record an extraordinary loss from the early extinguishment of
debt of approximately $3.0 million, net of tax, in the first quarter of fiscal
1997 to write off deferred financing costs related to the Revolving Credit
Agreement.
FISCAL 1994 COMPARED TO FISCAL 1995. Patient days at the Company's
hospitals increased 27.1% in fiscal 1995. The increase resulted primarily from
the Acquired Hospitals. Total admissions increased 28.6% in fiscal 1995 as
compared to fiscal 1994. The increase resulted primarily from the Acquired
Hospitals.
The Company's net revenue increased 27.3% from $904.6 million in fiscal 1994
to $1.15 billion in fiscal 1995. The increase resulted primarily from
acquisitions. Net revenue for fiscal 1995 included $35.6 million related to
reimbursement issues, compared to $32.1 million in fiscal 1994. Net revenue at
the Company's non-psychiatric hospital operations increased $59.1 million,
including $56.5 million provided by companies acquired or developed in the
Company's expansion of services pursuant to its business strategy. The Company
derived net revenue in fiscal 1995 of $249.2 million from the Acquired Hospitals
compared to $52.1 million in fiscal 1994. Net revenue per equivalent patient day
decreased 4.5% to $532 in fiscal 1995 from $557 in fiscal 1994. This decrease
resulted primarily from lower net revenue per equivalent patient day for the
Acquired Hospitals compared to the Company's other hospitals and a continued
shift in payor mix from private payer sources to managed care payors and
governmental payors.
The Company's salaries, supplies and other operating expenses increased
30.6% in fiscal 1995 compared to fiscal 1994, due primarily to expenses incurred
by the Acquired Hospitals of $194.1 million in fiscal 1995 compared to $40.2
million in fiscal 1994. The same store psychiatric hospitals of the Company
decreased their salaries, supplies and other expenses primarily by reducing
advertising expenses, purchased services, salaries and benefits and medical
professional fees.
The Company's bad debt expense increased 30.3% in fiscal 1995 compared to
fiscal 1994. The increase resulted primarily from additional bad debt expense of
$12.9 million during fiscal 1995 at the Acquired Hospitals and increased bad
debt expense at the Company's other hospitals.
27
<PAGE>
Depreciation and amortization increased 34.3% in fiscal 1995 compared to
fiscal 1994. The increase resulted primarily from the depreciation related to
the Acquired Hospitals and other acquisitions and the amortization of the
related covenant not to compete and goodwill.
Reorganization value in excess of amounts allocable to identifiable assets
(the "Excess Reorganization Value") was amortized over the three-year period
ended July 31, 1995. The related amortization expense decreased $5.2 million in
fiscal 1995 as compared to fiscal 1994 due to the completion of the amortization
period in fiscal 1995.
Net interest expense for fiscal 1995 increased 40.2% from the previous
fiscal year due to the issuance of the Notes and to borrowings under the
Revolving Credit Agreement for acquisitions.
ESOP expense for fiscal 1995 increased 49.5% to $73.5 million from $49.2
million for fiscal 1994. The increase resulted primarily from an increase in
shares allocated to the ESOP participants.
Stock option expense for fiscal 1995 decreased $11.1 million from the
previous year due to a charge during the first quarter of fiscal 1994 of $3.9
million related to the manner of exercise of certain options held by a former
employee and director (see Note 7 of the Company's Consolidated Financial
Statements) and changes in the market price of the Company's Common Stock.
During fiscal 1995, the Company recorded unusual items of $57.4 million.
Included in the unusual charges was the resolution in March 1995 of disputes
between the Company and a group of insurance carriers that arose in fiscal 1995
related to claims paid predominantly in the 1980's. As part of the resolution,
the Company agreed to pay the insurance carriers approximately $29.8 million in
five installments over a three-year period. The Company and the insurance
carriers will continue to do business at the same or similar general levels.
Furthermore, the parties will seek additional business opportunities that will
serve to enhance their present relationships.
During fiscal 1995, the Company consolidated, closed or sold 15 psychiatric
facilities. The Company recorded a charge of approximately $3.6 million in the
fourth quarter of fiscal 1995 related to the five psychiatric hospitals closed
in the fourth quarter.
The Company also recorded a charge of approximately $27.0 million in fiscal
1995 related to the adoption and implementation of Statement of Financial
Accounting Standards No. 121. See "Recent Accounting Pronouncements" on page 30
for further detail.
The Company also recorded an unusual item of approximately $3.0 million in
fiscal 1995 for the gain on the sale of three psychiatric hospitals.
During fiscal 1994, the Company recorded unusual items of approximately
$71.3 million. Included in the unusual charges was the resolution in November
1994 between the Company and a group of insurance carriers of disputes that
arose in the fourth quarter related to claims paid predominantly in the 1980's.
As part of the resolution, the Company agreed to pay the insurance carriers
approximately $31 million plus interest, for a total of $37.5 million in four
installments over a three-year period. The Company and the insurance carriers
will continue to do business at the same or similar general levels. Furthermore,
the parties will seek additional business opportunities that will serve to
enhance their present relationships.
As a result of the Hospital Acquisition, the Company reassessed its business
strategy in certain markets. The Company established a plan to consolidate
services in selected markets and close or sell certain facilities owned prior to
the Hospital Acquisition. Accordingly, the Company recorded a charge of $23.0
million in fiscal 1994 primarily to write down the assets of those facilities to
their net realizable value. The Company also recorded as an unusual charge
during fiscal 1994 of approximately $4.5 million of expenses related to the
relocation of the Company's executive offices. See Note 4 to the Company's
Consolidated Financial Statements for further information regarding unusual
items.
28
<PAGE>
During fiscal 1994, the Company recorded an extraordinary loss of
approximately $12.6 million (net of income tax benefit of approximately $8.4
million) related to the defeasance of the Company's 7 1/2% Senior Subordinated
Debentures due 2003 and the pay-off of certain subsidiary mortgages. The
extraordinary loss includes the difference between the redemption price and the
carrying value of the debentures and prepayment penalties related to such
subsidiary mortgages.
See "Item 1--Business" for additional information on trends that may affect
operations.
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONAL ACTIVITIES. The Company's net cash provided by operating
activities was $95.6 million and $101.9 million for fiscal 1995 and fiscal 1996,
respectively. The increase in net cash provided by operating activities is
primarily attributable to (i) Green Spring operating cash flows since
acquisition and (ii) state income tax refunds of $8.6 million from the State of
California offset by (a) the increased payments related to the insurance
settlements ($22.3 million in fiscal 1995 and $24.6 million in fiscal 1996), and
(b) reduced operating cash flows from the provider business. As of September 30,
1995 and 1996, the Company had working capital of $91.4 million and $63.8
million, respectively, including cash and cash equivalents of $105.5 million and
$120.9 million, respectively. The decrease in working capital is due primarily
to the partial funding ($38.5 million) of treasury stock purchases described
below with cash on hand during September 1996. Management believes that the
Company will have adequate cash flow from operations in fiscal 1997 to fund its
operations, capital expenditures and debt service obligations.
INVESTING ACTIVITIES. The Company acquired a 61% ownership interest in
Green Spring during fiscal 1996. The consideration paid for Green Spring and
related acquisition costs resulted in the use of cash of approximately $87.2
million compared to approximately $62.0 million in acquisition expenditures
during fiscal 1995. The Company plans to pursue acquisitions in each of its
business segments during fiscal 1997. Management believes that its cash on hand,
future cash flows from operations, borrowing capacity under the New Revolving
Credit Agreement and its ability to issue debt and equity securities from time
to time will provide adequate capital resources to support the Company's
anticipated investing strategies.
FINANCING ACTIVITIES. The Company borrowed approximately $28.9 million and
$104.8 million, respectively, during fiscal 1995 and 1996, primarily to fund the
acquisition of 13 hospitals in fiscal 1995 and to (i) fund the Green Spring
acquisition and to (ii) partially fund ($35.0 million) treasury stock purchases
during September 1996. The Company believes that its businesses will generate
sufficient cash flows from operations to meet its future debt service
requirements.
On January 25, 1996, the Company issued 4,000,000 shares of Common Stock
(the "Shares") along with a warrant to purchase an additional 2,000,000 shares
of Common Stock (the "Warrant") pursuant to a Stock and Warrant Purchase
Agreement. The Warrant, which expires in January, 2000 entitles the holder to
purchase such additional shares of Common Stock at a per share price of $26.15,
subject to adjustment for certain dilutive events, and provides registration
rights for the shares of Common Stock underlying the Warrant. The aggregate
purchase price for the Shares and the Warrant was $69,732,000. The Warrant
becomes exercisable on January 25, 1997 and expires on January 25, 2000.
The Company received proceeds of approximately $68.6 million, net of
issuance costs, from the issuance of the Shares and the Warrant. Approximately
$68.0 million of the proceeds were used to repay outstanding borrowings under
the Revolving Credit Agreement.
On September 27, 1996, the Company repurchased approximately 4.0 million
shares for approximately $73.5 million, including transaction costs, pursuant to
a "Dutch Auction" self-tender offer to its stockholders. On November 1, 1996,
the Company announced that its board of directors approved the repurchase of an
additional 3.0 million shares of its common stock from time to time subject to
the terms of the New Revolving Credit Agreement. The Company expects to use cash
on hand, future cash flows from
29
<PAGE>
operations and borrowings under its New Revolving Credit Facility to fund any
future treasury stock purchases.
As of November 30, 1996, the Company had approximately $209 million of
availability under the New Revolving Credit Agreement. The Company was in
compliance with all debt covenants at September 30, 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("FAS 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
", which becomes effective for fiscal years beginning after December 15, 1995.
FAS 121 establishes standards for determining when impairment losses on
long-lived assets have occurred and how impairment losses should be measured.
The Company adopted FAS 121 effective October 1, 1994. The financial statement
impact of adopting FAS 121 was not material.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which becomes
effective for fiscal years beginning after December 15, 1995. FAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense for
stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting in
APB Opinion No. 25 will be required to make pro forma disclosures of net income
and earnings per share as if the provisions of FAS 123 had been applied. The
Company plans to adopt FAS 123 in fiscal 1997 on a proforma disclosure basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is contained in the Company's
Consolidated Financial Statements and financial statement schedule indicated in
the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and certain other information about
each director of the Registrant:
<TABLE>
<CAPTION>
NAME, AGE, AND DATE POSITION WITH THE REGISTRANT,
FIRST BECAME A PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
DIRECTOR TERM EXPIRING AND OTHER DIRECTORSHIPS
- ------------------------ --------------- -------------------------------------------------------------------------
<S> <C> <C>
E. Mac Crawford 1997 Chairman of the Board, President and Chief Executive Officer (since
47 1993); President and Chief Operating Officer (1992-1993); Executive Vice
April 1990 President--Hospital Operations (1990-1992). Director of First Union
National Bank of Georgia and Integrated Health Services, Inc.
Raymond H. Kiefer 1997 Retired insurance executive (since 1992); President, Allstate Insurance
69 Company (1989-1992).
July 1992
Gerald L. McManis 1997 President of McManis Associates, Inc. (strategy development and
60 management consulting firm for healthcare and healthcare- related
February 1994 companies) (since 1965). Director of MMI Companies, Inc.
Andre C. Dimitriadis 1998 Chairman and Chief Executive Officer of LTC Properties (a healthcare real
56 estate investment trust) (since 1992); Executive Vice President and Chief
July 1992 Financial Officer, Beverly Enterprises, Inc. (nursing homes) (1989-1992).
Director of Health Management, Inc. and Assisted Living Concepts, Inc.
A.D. Frazier, Jr. 1998 Executive Vice President, Invesco PLC (a registered investment advisor)
52 (since 1996); Senior Executive Vice President and Chief Operating Officer
May 1995 for the Atlanta Committee for the Olympic Games (1991-1996). Director of
the INVESCO Funds/The EBI Funds/INVESCO Treasurer's Series Trust/The
Global Health Sciences Fund.
G. Fred DiBona, Jr. 1998 Director, President and Chief Executive Officer of Independence Blue
45 Cross (a health insurance company) (since 1990). Director of Pennsylvania
January 1996 Savings Bank and Philadelphia Suburban Water Company.
Edwin M. Banks 1999 Securities Analyst, W.R. Huff Asset Management Co., LLC (a registered
34 investment advisor) (1988 - present). Director of American Communications
July 1992 Services, Inc. and Del Monte Corporation.
Darla D. Moore 1999 Private Investor, Rainwater, Inc. (investments) (since 1994); Managing
42 Director, The Chase Manhattan Bank, N.A. (commercial banking)
February 1996 (1982-1994).
</TABLE>
The name and certain other information about each executive officer of the
Registrant is set forth in Item 1, "Executive Officers of the Registrant."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Exchange Act requires the Registrant's directors, certain officers and
persons who own more than 10% percent of the Common
31
<PAGE>
Stock to file reports of ownership and changes in ownership with the SEC and
furnish copies of such reports to the Registrant. Based solely on a review of
the copies of such forms furnished to the Registrant, or written representations
that no other reports were required, the Registrant believes that all persons
who are required to comply with the Section 16(a) filing requirements with
respect to the Common Stock have complied with such filing requirements on a
timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Registrant to
its Chief Executive Officer and the four most highly compensated executive
officers other than the chief executive officer (the "Named Executive Officers")
for the three fiscal years ended September 30, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------------ ----------------------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL COMPENSATION ALL OTHER
POSITIONS YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)(2) COMPENSATION(3)
- ------------------------------- ----------- --------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford 1996 $ 712,500 $ 153,500 $ -- 300,000 $ 181,936
Chairman of the Board, 1995 600,000 -- 177,236 -- 204,095
President and Chief Executive 1994 600,000 369,000 1,009 90,000 332,135
Officer
Craig L. McKnight (4) 1996 361,250 50,000 -- 25,000 73,891
Executive Vice President and 1995 204,167 -- 45,668 100,000 11,218
Chief Financial Officer
Steve J. Davis (5) 1996 256,667 50,000 -- 40,000 50,449
Executive Vice President-- 1995 182,083 -- 21,121 -- 91,972
Administrative Services and 1994 15,000 8,484 1,270 17,500 2,828
General Counsel
Henry T. Harbin (6) 1996 236,705 167,195 -- 100,000 10,750
Executive Vice President and
President and Chief Executive
Officer of Green Spring
Health Services, Inc.
John M. DeStefanis (7) 1996 255,993 50,000 125,399 100,000 45,702
Executive Vice President and
President and Chief Operating
Officer of Charter Behavioral
Health Systems, Inc.
</TABLE>
- ------------------------
(1) Other Annual Compensation for fiscal 1996 includes the reimbursement of
relocation expenses of $111,219 for Mr. DeStefanis. Other Annual
Compensation for fiscal 1995 includes: (a) reimbursement of relocation
expenses of $157,558 and $38,289 for Messrs. Crawford and McKnight,
respectively and (b) a car allowance of $12,000 for Mr. Davis.
(2) Represents the number of stock options granted under the Registrant's 1994
Stock Option Plan and 1996 Stock Option Plan.
(3) All Other Compensation for fiscal 1996 includes: (a) contributions to the
ESOP of $18,050, $22,795 and $22,795 for Messrs. Crawford, McKnight and
Davis, respectively, which represents the Registrant's expense (the fair
value of the ESOP shares on the date earned were $699, $883 and $883 for
Messrs. Crawford, McKnight and Davis, respectively); (b) contributions to
the Registrant's 401(k)
32
<PAGE>
Plan of $5,250 for Mr. Crawford and contributions to the Green Spring 401(k)
Plan of $10,750 for Mr. Harbin, (c) amounts deposited in trust pursuant to
the Executive Benefits Plan of $137,191, $40,150, $23,375 and $38,500 for
Messrs. Crawford, McKnight, Davis and DeStefanis, respectively, (d) premiums
paid for life and disability insurance of $19,840, $10,260, $3,595 and
$6,672 for Messrs. Crawford, McKnight, Davis and DeStefanis, respectively,
and (e) term life insurance premiums of $1,605, $686, $684 and $530 for
Messrs. Crawford, McKnight, Davis and DeStefanis, respectively. All Other
Compensation for fiscal 1995 includes: (a) contributions to the ESOP of
$20,408 and $18,560 for Messrs. Crawford and Davis, respectively, which
represents the Registrant's expense (the fair value of the ESOP shares on
the date earned were $465 and $424 for Messrs. Crawford, and Davis,
respectively); (b) contributions to the Registrant's 401(k) Plan of $5,250
for Mr. Crawford, (c) amounts deposited in trust pursuant to the Executive
Benefits Plan of $104,877 and $25,897 for Messrs. Crawford and Davis,
respectively, (d) premiums paid for life and disability insurance of $72,954
and $4,410 for Messrs. Crawford and Davis, respectively, (e) term life
insurance premiums of $606, $208 and $685 for Messrs. Crawford, McKnight and
Davis, respectively and (f) amount payable to Mr. Davis of $42,420 pursuant
to Mr. Davis achieving performance goals set relating to his employment with
the Registrant.
(4) Mr. McKnight became an employee of the Registrant effective March 1, 1995.
(5) Mr. Davis became an employee of the Registrant effective September 1, 1994.
(6) Dr. Harbin became an executive officer of the Registrant effective December
13, 1995.
(7) Mr. DeStefanis became an employee of the Registrant effective January 8,
1996.
OPTION GRANTS IN FISCAL 1996
The following table sets forth certain information with respect to grants of
options to the Named Executive Officers during fiscal 1996, and the potential
realizable value of such options on September 30, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
NUMBER OF PERCENTAGE OF VALUE AT ASSUMED
SECURITIES TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME (#)(1) FISCAL 1996 PER SHARE DATE 5% 10%
- -------------------------------------------- ----------- --------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford............................. 300,000 19.1% $ 18.25 11/30/05 $ 3,443,198 $ 8,725,740
Craig L. McKnight........................... 25,000 1.6% 18.25 11/30/05 286,933 727,145
Steve J. Davis.............................. 40,000 2.5% 18.25 11/30/05 459,093 1,163,432
Henry T. Harbin............................. 100,000 6.4% 18.875 11/30/05 1,187,039 3,008,189
John M. DeStefanis.......................... 100,000 6.4% 22.50 01/08/06 1,415,013 3,585,91
</TABLE>
- ------------------------
(1) Options were granted to Mr. DeStefanis under the 1994 Stock Option Plan
which become exercisable over three years at the rate of 33 1/3% of the
total number of options per year. Options were granted to Messrs. Crawford,
McKnight, Davis and Harbin under the 1996 Stock Option Plan which become
exercisable over four years at the rate of 25% of the total number of
options per year.
33
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND OPTION VALUES AT SEPTEMBER 30, 1996
The following table sets forth certain information with respect to options
exercised by the Named Executive Officers during fiscal 1996, and the number and
value of options held on September 30, 1996:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES VALUE AT SEPTEMBER 30, 1996 SEPTEMBER 30, 1996($)(2)
ACQUIRED ON REALIZED -------------------------- ---------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ------------ ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford....................... 100,000 $ 1,926,500 425,440 330,000 $ 5,949,406 $ 750,000
Craig L. McKnight..................... -- -- 33,333 91,667 81,266 225,034
Steve J. Davis........................ -- -- 11,667 45,833 -- 100,000
Henry T. Harbin....................... -- -- -- 100,000 -- 187,500
John M. DeStefanis.................... -- -- -- 100,000 -- --
</TABLE>
- ------------------------
(1) Value realized is the difference between the option exercise price and the
closing market price of the Common Stock on the date of exercise, multiplied
by the number of shares to which the option relates.
(2) The closing price for the Common Stock as reported on September 30, 1996 was
$20.75. The value of unexercised in-the-money options is the difference of
the per share option exercise price and $20.75, multiplied by the number of
shares of Common Stock underlying in-the-money options.
34
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets
forth certain information as of December 31, 1996 (except as otherwise noted)
with respect to any person known by the Registrant to be the beneficial owner of
more than 5% of the outstanding Common Stock:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP CLASS
- ------------------------------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Rainwater-Magellan Holdings, L.P. 6,000,000(1) 19.6%
777 Main Street
Suite 2700
Ft. Worth, TX 76102
Nicholas Company, Inc.(2) 2,804,000 9.8%
700 North Water Street
Suite 1010
Milwaukee, WI 53202
Wellington Management Company, LLP(3) 2,426,400 8.5%
75 State Street
Boston, MA 02109
Lazard Freres & Co., LLC(4) 1,761,000 6.2%
30 Rockefeller Plaza
New York, NY 10020
First Pacific Advisors, Inc.(5) 1,592,500 5.6%
11400 West Olympic Blvd.
Suite 1200
Los Angeles, CA 90064
</TABLE>
- ------------------------
(1) Includes 2,000,000 shares of Common Stock that Rainwater-Magellan Holdings,
L.P. ("Rainwater-Magellan") has the right to acquire pursuant to the
Rainwater-Magellan Warrant. Under the rules of the SEC, Rainwater, Inc., the
general partner of Rainwater-Magellan, and Richard E. Rainwater, the sole
owner and sole director of Rainwater, Inc., are also deemed to be beneficial
owners of the shares owned by Rainwater-Magellan. Information concerning
beneficial ownership of securities by Rainwater-Magellan is based on its
Schedule 13D, dated November 26, 1996. Darla D. Moore, a director of the
Registrant, is the spouse of Richard E. Rainwater.
(2) Information concerning beneficial ownership of securities by Nicholas
Company, Inc. is based on its Form 13F, dated September 18, 1996.
(3) Information concerning beneficial ownership of securities by Wellington
Management Company, LLP is based on its Form 13F, dated November 4, 1996.
(4) Information concerning beneficial ownership of securities by Lazard Freres &
Co., LLC is based on its Form 13F, dated November 15, 1996.
(5) Information concerning beneficial ownership of securities by First Pacific
Advisors, Inc. is based on information provided to the Registrant on January
3, 1997.
Nicholas Company, Inc. is a registered investment advisor and possesses sole
dispositive power over the 2,804,000 shares of Common Stock owned by it.
Nicholas Fund, Inc. is a registered investment company managed by Nicholas
Company, Inc. and possesses sole voting power over 2,600,000 shares of the
2,804,000 shares owned by Nicholas Company, Inc. Albert O. Nicholas may be
deemed to be a beneficial
35
<PAGE>
owner of the shares held by Nicholas Company, Inc. under SEC rules because of
his control of Nicholas Company, Inc. Mr. Nicholas is the President, a director
and majority stockholder of Nicholas Company, Inc. and disclaims beneficial
ownership of all securities reported as beneficially owned by Nicholas Company,
Inc.
Wellington Management Company, LLP is an institutional investment manager
and possesses sole dispositive power over 2,393,300 shares of Common Stock and
shares dispositive power over 33,100 shares of Common Stock owned by it.
Wellington Management Company, LLP possesses sole voting authority over
1,199,000 shares of Common Stock, shared voting power over 33,100 shares of
Common Stock and no voting power over 1,194,300 shares of Common Stock.
Lazard Freres & Co., LLC is an institutional money manager and possesses
sole dispositive power over 1,635,000 shares of the 1,761,000 shares of Common
Stock owned by it and possesses sole voting authority over all of the Common
Stock owned by it.
First Pacific Advisors, Inc. is an institutional money manager and possesses
sole dispositive power over all of the shares of Common Stock owned by it and
possesses no voting power over such shares.
SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth certain
information concerning the beneficial ownership of Common Stock by (i)
directors, (ii) the Named Executive Officers and (iii) directors and executive
officers as a group, as of December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OWNERSHIP(1)(2) TOTAL OUTSTANDING
- ----------------------------------------------------- -------------------- -------------------
<S> <C> <C>
E. Mac Crawford...................................... 530,794 1.8%
Craig L. McKnight.................................... 72,954 *
Steve J. Davis....................................... 21,724 *
Henry T. Harbin...................................... 25,000 *
John M. DeStefanis................................... 33,333 *
Edwin M. Banks(3).................................... 33,250 *
G. Fred DiBona, Jr.(4)............................... 895,815 3.0%
Andre C. Dimitriadis................................. 32,750 *
A.D. Frazier, Jr..................................... 22,250 *
Raymond H. Kiefer.................................... 33,750 *
Gerald L. McManis.................................... 27,750 *
Darla D. Moore(5).................................... 6,006,250 19.6%
All directors and executive
officers as a group (12 persons)................... 7,735,620(4)(5)(6) 23.9%
</TABLE>
- ------------------------
* Less than 1% of total outstanding.
(1) Includes 530,440, 72,917, 21,667, 25,000 and 33,333 shares that Messrs.
Crawford, McKnight, Davis, Harbin and DeStefanis, respectively, have the
right to acquire upon the exercise of options and warrants within 60 days of
December 31, 1996.
(2) Includes 32,750 shares that each of Messrs. Dimitriadis, Kiefer and Banks
have the right to acquire, 27,750 shares that Mr. McManis has the right to
acquire, 22,250 shares that Mr. Frazier has the right to acquire and 6,250
shares that Mr. DiBona and Ms. Moore each have the right to acquire within
60 days of December 31, 1996.
(3) Does not include shares owned by W.R. Huff Asset Management Co., LLC
("Huff"), of which Mr. Banks disclaims beneficial ownership. Mr. Banks is a
Securities Analyst with Huff.
36
<PAGE>
(4) Includes 889,565 shares that Independence Blue Cross has the right to
acquire pursuant to the Exchange Option. Mr. DiBona is a director and the
President and Chief Executive Officer of Independence Blue Cross and
disclaims beneficial ownership of all securities attributed to him because
of his official positions with Independence Blue Cross.
(5) Includes 4,000,000 shares owned by Rainwater-Magellan and 2,000,000 shares
that Rainwater-Magellan has the right to acquire pursuant to the
Rainwater-Magellan Warrant. Ms. Moore is the spouse of Richard E. Rainwater,
the sole stockholder and sole director of Rainwater, Inc., which is the sole
general partner of Rainwater-Magellan.
(6) Includes 844,107 shares that the directors and executive officers have the
right to acquire upon the exercise of options and units, 889,565 shares that
Independence Blue Cross has the right to acquire upon exercise of the
Exchange Option and 2,000,000 shares that Rainwater-Magellan has the right
to acquire upon the exercise of the Rainwater-Magellan Warrant, all of which
are exercisable within 60 days of December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gerald L. McManis, a director of the Registrant, is the President of McManis
Associates, Inc. ("MAI"), a healthcare development and management consulting
firm. During fiscal 1996, MAI provided consulting services to the Registrant
with respect to the development of strategic plans and a review of the
Registrant's business processes. The Registrant paid approximately $274,000 in
fees for such services during fiscal 1996 and reimbursed MAI approximately
$13,000 for expenses.
G. Fred DiBona, Jr., a director of the Registrant, is a director and the
President and Chief Executive Officer of Independence Blue Cross. As of December
31, 1996, Independence Blue Cross had a 12.25% equity interest in Green Spring.
The Registrant acquired a 51%-equity interest in Green Spring on December
13, 1995 for approximately $68.9 million in cash, the issuance of Common Stock
valued at approximately $4.3 million and the contribution of GPA, a wholly-owned
subsidiary of the Registrant, to Green Spring. The minority stockholders of
Green Spring, including Independence Blue Cross, have the option under certain
circumstances, to exchange their equity interests in Green Spring for 2,831,739
shares of Common Stock or $65.1 million in subordinated notes. In the event of
an exchange, the Registrant may elect to pay cash in lieu of issuing
subordinated notes. The Exchange Option expires on December 13, 1998. The
consideration paid and terms of the Exchange Option were determined through
arm's length negotiations that considered, among other factors, the historical
and projected income of Green Spring and the value of GPA. The consideration
paid by the Registrant was determined by the Board with the advice of management
and the Registrant's investment bankers. On December 20, 1995, the Registrant
acquired an additional 10% equity interest in Green Spring for $16.7 million in
cash as a result of the exercise of the Exchange Option by a minority
stockholder of Green Spring. The Registrant had a 61%-equity interest in Green
Spring as of December 31, 1996.
On December 13, 1995, as part of the Registrant's initial investment in
Green Spring, Independence Blue Cross sold a 4.42% equity interest in Green
Spring, in which it had a cost basis of $3.2 million, to the Registrant for $5.4
million in cash. The Exchange Option gives Independence Blue Cross the right,
until December 13, 1998, to exchange its remaining equity interest in Green
Spring for a maximum of 889,565 shares of Common Stock or $20.5 million in
subordinated notes.
Independence Blue Cross and its affiliated entities contract with Green
Spring for provider network, case management and medical review services
pursuant to contractual relationships entered into on July 7, 1994, with terms
of up to five years. During fiscal 1996 (since December 13, 1995, the date the
Registrant acquired its initial equity interest in Green Spring), Independence
Blue Cross and its affiliated entities paid Green Spring approximately $29.2
million. As of September 30, 1996, Independence Blue Cross and its
37
<PAGE>
affiliated entities owed Green Spring approximately $9.6 million. Green Spring
recorded revenue of approximately $32.8 million from Independence Blue Cross
during fiscal 1996.
On July 7, 1994, Independence Blue Cross sold a subsidiary to Green Spring
in exchange for a $15.0 million promissory note. As of December 31, 1996, $9.0
million remained outstanding under such promissory note and is due and payable
in equal installments on July 7, 1997, 1998 and 1999.
Darla D. Moore, a director of the Registrant, is the spouse of Richard E.
Rainwater. Mr. Rainwater is the sole stockholder and the sole director of
Rainwater, Inc., the general partner of Rainwater-Magellan. As of December 31,
1996, Rainwater-Magellan beneficially owned 6,000,000 shares of Common Stock
(including the 2,000,000 shares which can be purchased under the
Rainwater-Magellan Warrant), which represented in the aggregate 19.6% of the
Common Stock. Rainwater-Magellan purchased the Common Stock and the
Rainwater-Magellan Warrant on January 25, 1996 in a private transaction (the
"Private Placement").
As part of the Private Placement agreements, Rainwater-Magellan has the
right to designate a nominee acceptable to the Registrant for election as a
director of the Registrant for so long as the Rainwater Group continues to own
beneficially a specified minimum number of shares of Common Stock.
Rainwater-Magellan proposed Ms. Moore as its nominee for director, and Ms. Moore
was elected a director by the Board in February 1996.
As part of the Private Placement agreements, the Registrant agreed (i) to
pay a transaction fee of $150,000; (ii) to reimburse certain expenses of
Rainwater, Inc. in connection with the Private Placement; (iii) to pay Richard
E. Rainwater and his affiliates (the "Rainwater Group") an annual monitoring fee
of $75,000 commencing on March 31, 1996; and (iv) to reimburse the Rainwater
Group for reasonable fees and expenses (up to a maximum of $25,000 annually)
incurred in connection with its ownership of the Common Stock and the
Rainwater-Magellan Warrant. The Registrant also agreed under the Private
Placement agreements to reimburse the Rainwater Group in the future for one
additional filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act") if an HSR Act filing is required in connection with an exercise
of the Rainwater-Magellan Warrant. From the date of the Private Placement
through November 30, 1996, the Registrant paid to the Rainwater Group under the
Private Placement agreements an aggregate of $306,344, consisting of a
transaction fee of $150,000, expense reimbursement in connection with the
Private Placement of $86,156, and monitoring fees and expenses of $70,188.
Excluded from these amounts are directors' fees and expense reimbursement paid
to Ms. Moore in her capacity as a director of the Registrant.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THE REPORT:
1. FINANCIAL STATEMENTS
Information with respect to this item is contained on Pages F-2 to F-36 of
this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
Information with respect to this item is contained on page S-1 of this
Annual Report on Form 10-K.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
2(a) Asset Sale Agreement (First Facilities), dated March 29, 1994, between National Medical Enterprises,
Inc., as Seller, and the Company, as Buyer, which was filed as Exhibit 2(d) to the Company's Amendment
No. 1 to Registration Statement on Form S-4 (No. 33-53701) filed July 1, 1994, and is incorporated
herein by reference.
2(b) Asset Sale Agreement (Subsequent Facilities), dated March 29, 1994, between National Medical
Enterprises, Inc., as Seller, and the Company, as Buyer, which was filed as Exhibit 2(e) to the
Company's Amendment No. 1 to Registration Statement on Form S-4 (No. 33-53701) filed July 1, 1994, and
is incorporated herein by reference.
Exhibit 2(a) and 2(b) do not contain copies of the exhibits and schedules to such agreements. Such
agreements describe such exhibits and schedules. The Company agrees to furnish supplementally to the
Commission, upon request, a copy of any omitted exhibit or schedule to such agreements.
2(c) Amendment No. 1, dated September 12, 1994, to Asset Sale Agreement (First Facilities), dated March 29,
1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was filed
as Exhibit 2(c) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and
is incorporated herein by reference.
2(d) Amendment No. 1, dated September 12, 1994, to Asset Sale Agreement (Subsequent Facilities), dated March
29, 1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was
filed as Exhibit 2(d) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994,
and is incorporated herein by reference.
2(e) Amendment No. 2, dated September 29, 1994, to Asset Sale Agreement (Subsequent Facilities), dated March
29, 1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was
filed as Exhibit 2(e) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994,
and is incorporated herein by reference.
2(f) Amendment No. 3, dated November 15, 1994, to Asset Sale Agreement (Subsequent Facilities), dated March
29, 1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was
filed as Exhibit 2(f) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994,
and is incorporated herein by reference.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
3(a) Restated Certificate of Incorporation of the Company, as filed in Delaware on October 16, 1992, which
was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended September 30,
1992, and is incorporated herein by reference.
3(b) Bylaws of the Company, as amended, effective May 19, 1995, which was filed as Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the Quarterly Period ended June 30, 1995, and is
incorporated herein by reference.
3(c) Certificate of Ownership and Merger merging Magellan Health Services, Inc. (a Delaware corporation) into
Charter Medical Corporation (a Delaware corporation), as filed in Delaware on December 21, 1995, which
was filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended September 30,
1995, and is incorporated herein by reference.
4(a) Indenture, dated as of May 2, 1994, among the Company, the Guarantors listed therein and Marine Midland
Bank, as Trustee, relating to the 11 1/4% Senior Subordinated Notes due April 15, 2004 of the Company,
which was filed as Exhibit 4(a) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed
May 18, 1994, and is incorporated herein by reference.
4(b) Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, the financial
institutions listed therein, Bankers Trust Company, as Agent, and First Union National Bank of North
Carolina, as Co-Agent, which was filed as Exhibit 4(e) to the Company's Registration Statement on Form
S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference.
4(c) Second Amended and Restated Subsidiary Credit Agreement, dated as of May 2, 1994, among certain
subsidiaries of the Company, the financial institutions listed therein, Bankers Trust Company, as Agent,
and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(f) to the
Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated
herein by reference.
4(d) Second Amended and Restated Company Stock and Notes Pledge Agreement, dated as of May 2, 1994, between
the Company and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(g) to the
Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated
herein by reference.
4(e) Second Amended and Restated Subsidiary Stock and Notes Pledge Agreement, dated as of May 2, 1994, among
various subsidiaries of the Company and Bankers Trust Company, as Collateral Agent, which was filed as
Exhibit 4(h) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and
is incorporated herein by reference.
4(f) Second Amended and Restated Subsidiary Pledge and Security Agreement, dated as of May 2, 1994, among
various subsidiaries of the Company and Bankers Trust Company, as Collateral Agent, which was filed as
Exhibit 4(i) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and
is incorporated herein by reference.
4(g) Second Amended and Restated Subsidiary Pledge and Security Agreement (ESOP collateral), dated as of May
2, 1994, between the Company and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit
4(j) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is
incorporated herein by reference.
4(h) Second Amended and Restated FINCO Pledge and Security Agreement I, dated as of May 2, 1994, between
CMFC, Inc. and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(k) to the
Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated
herein by reference.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
4(i) Second Amended and Restated Subsidiary Guaranty, dated as of May 2, 1994, executed by various
subsidiaries of the Company, which was filed as Exhibit 4(l) to the Company's Registration Statement on
Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference.
4(j) Second Amended and Restated Company Collateral Accounts Assignment Agreement, dated as of May 2, 1994,
between the Company and Bankers Trust Company, as agent, which was filed as Exhibit 4(m) to the
Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated
herein by reference.
4(k) Company Pledge and Security Agreement, dated as of May 2, 1994, between the Company and Bankers Trust
Company, as Collateral Agent, which was filed as Exhibit 4(n) to the Company's Registration Statement on
Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference.
4(l) Second Amended and Restated FINCO Pledge and Security Agreement II, dated as of May 2, 1994, between
CMCI, Inc. and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(o) to the
Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated
herein by reference.
4(m) Second Amended and Restated Company Guaranty, dated as of May 2, 1994, executed by the Company, which
was filed as Exhibit 4(p) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May
18, 1994, and is incorporated herein by reference.
4(n) Second Amended and Restated Subsidiary Collateral Accounts Assignment Agreement, dated as of May 2,
1994, among various subsidiaries of the Company and Bankers Trust Company, as Agent, which was filed as
Exhibit 4(q) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and
is incorporated herein by reference.
4(o) Form of Indenture of Mortgage, Deed to Secure Debt, Deed of Trust, Security Agreement and Assignment of
Leases and Rents; Amended Indenture of Mortgage, Deed to Secure Debt, Deed of Trust, Security Agreement
and Assignment of Leases and Rents; and Consolidated Agreement, executed as of May 2, 1994, by 71
subsidiaries of the Company and Bankers Trust Company, as Agent, and various trustees as shown on
individual subsidiary cover pages attached, which was filed as Exhibit 4(t) to the Company's
Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by
reference.
4(p) Purchase Agreement, dated April 22, 1994, between the Company and Bear, Stearns & Co. Inc. and BT
Securities Corporation, which was filed as Exhibit 4(u) to the Company's Registration Statement on Form
S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference.
4(q) Exchange and Registration Rights Agreement, dated April 22, 1994 between the Company and Bear, Stearns &
Co. Inc. and BT Securities Corporation, which was filed as Exhibit 4(v) to the Company's Registration
Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference.
4(r) Amendment No. 1, dated as of June 9, 1994, to Second Amended and Restated Credit Agreement, dated as of
May 2, 1994, among the Company, the financial institutions listed therein, Bankers Trust Company, as
Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(w) to
the Company's Amendment No. 1 to Registration Statement on Form S-4 (No. 33-53701) filed July 1, 1994,
and is incorporated herein by reference.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
4(s) Amendment No. 2, dated September 30, 1994, to Second Amended and Restated Credit Agreement, dated as of
May 2, 1994, among the Company, the financial institutions listed therein, Bankers Trust Company, as
Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(s) to
the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated
herein by reference
4(t) Amendment No. 3, dated as of December 12, 1994, to Second Amended and Restated Credit Agreement, dated
as of May 2, 1994, among the Company, the financial institutions listed herein, Bankers Trust Company,
as Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(a)
to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended December 31, 1994, and is
incorporated herein by reference.
4(u) Amendment No. 4, dated as of January 11, 1995, to Second Amended and Restated Credit Agreement, dated as
of May 2, 1994, among the Company, the financial institutions listed therein, Bankers Trust Company, as
Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(b) to
the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended December 31, 1994, and is
incorporated herein by reference.
4(v) Amendment No. 5, dated as of March 17, 1995, to Second Amended and Restated Credit Agreement, dated as
of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank of North
Carolina, as Co-Agent, and the lenders listed on Annex I, which was filed as Exhibit 4(a) to the
Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995, and is
incorporated herein by reference.
4(w) Amendment No. 6, dated as of October 17, 1995, to Second Amended and Restated Credit Agreement, dated as
of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank of North
Carolina, as Co-Agent, which was filed as exhibit 4 (a) to the Company's quarterly report on Form 10-Q
for the quarterly period ended December 31, 1995 and is incorporated herein by reference.
4(x) Amendment No. 7, dated as of November 30, 1995, to Second Amended and Restated Credit Agreement, dated
as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank of
North Carolina, as Co-Agent, which was filed as exhibit 4 (b) to the Company's quarterly report on Form
10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference.
4(y) Amendment No. 8, dated as of January 24, 1996, to Second Amended and Restated Credit Agreement, dated as
of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank, as
Co-Agent, which was filed as exhibit 4 (c) to the Company's quarterly report on Form 10-Q for the
quarterly period ended December 31, 1995 and is incorporated herein by reference.
4(z) Amendment No. 9, dated as of June 30, 1996, to Second Amended and Restated Credit Agreement, dated as of
May 2, 1994, among the Company, Bankers Trust Company, as agent, First Union National Bank, as Co-Agent,
which was filed as exhibit 4 (a) to the Company's quarterly report on Form 10-Q for the quarterly period
ended June 30, 1996 and is incorporated herein by reference.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
4(aa) Amendment No. 10, dated as of July 31, 1996, to Second Amended and Restated Credit Agreement, dated as
of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union Naitonal Bank as
Co-Agent, which was filed as exhibit 4 (b) to the Company's quarterly report on Form 10-Q for the
quarterly period ended June 30, 1996 and is incorporated herein by reference.
4(ab) Amendment No. 11, dated as of September 3, 1996, to Second Amended and Restated Credit Agreement, dated
as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank as
Co-Agent, which was filed as Exhibit (b) 12 to the Company's Amendment No. 2 to Schedule 13 E-4 dated
September 5, 1996 and is incorporated herein by reference.
4(ac) Indenture Supplement No. 1, dated June 3, 1994, among the Company, the Guarantors listed therein and
Marine Midland Bank, as Trustee, relating to the 11 1/4% Senior Subordinated Notes due April 15, 2004,
together with a schedule identifying substantially similar documents, pursuant to Instruction 2 to Item
601 of Regulation S-K, which was filed as Exhibit 4(t) to the Company's Annual Report on Form 10-K for
the year ended September 30, 1994, and is incorporated herein by reference.
4(ad) Indenture Supplement No. 3, dated August 30, 1994, among the Company, the Guarantors listed therein and
Marine Midland Bank, as Trustee, relating to the 11 1/4% Senior Subordinated Notes due April 15, 2004,
which was filed as Exhibit 4(v) to the Company's Annual Report on Form 10-K for the year ended September
30, 1994, and is incorporated herein by reference.
The Company and the Additional Registrants agree, pursuant to (b)(4)(iii) of Item 601 of Regulation
S-K, to furnish to the Commission, upon request, a copy of each agreement relating to long-term debt
where the total amount of debt under each such agreement does not exceed 10% of the Registrants'
respective total assets on a consolidated basis.
4(ae) Stockholders' Agreement, dated December 13, 1995, among Green Spring Health Services, Inc., Blue Cross
and Blue Shield of New Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce
County Medical Bureau, Inc. and the Company, which was filed as Exhibit 4(d) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by
reference.
4(af) Exchange Agreement, dated December 13, 1995, among Blue Cross and Blue Shield of New Jersey, Inc.,
Health Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the
Company, which was filed as Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1995, and is incorporated herein by reference.
4(ag) Stock and Warrant Purchase Agreement, dated December 22, 1995, between the Company and Richard E.
Rainwater, which was filed as Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1995, and is incorporated herein by reference.
4(ah) Amendment No. 1 to Stock and Warrant Purchase Agreement, dated January 25, 1996, between the Company and
Rainwater-Magellan Holdings, L.P., which was filed as Exhibit 4.7 to the Company's Registration
Statement on Form S-3 dated February 26, 1996, and is incorporated herein by reference.
4(ai) Credit Agreement, dated as of October 16, 1996, among the Company, the lenders named therein, The Chase
Manhattan Bank as Administrative Agent and Collateral Agent and First Union National Bank of North
Carolina as Syndication Agent.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
*10(a) Written description of Corporate Annual Incentive Plan for the year ended September 30, 1995, which was
filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended September 30,
1995, and is incorporated herein by reference.
*10(b) Written description of Corporate Annual Incentive Plan for the year ended September 30, 1996, which was
filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1995, and is incorporated herein by reference.
*10(c) 1989 Non-Qualified Deferred Compensation Plan of the Company, adopted January 1, 1989, as amended, which
was filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K dated as of September 30, 1989
and is incorporated herein by reference.
*10(d) 1992 Stock Option Plan of the Company, as amended, which was filed as Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by
reference.
*10(e) Directors' Stock Option Plan of the Company, as amended, which was filed as Exhibit 10(d) to the
Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein
by reference.
*10(f) 1994 Stock Option Plan of the Company, as amended, which was filed as Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by
reference.
*10(g) Directors' Unit Award Plan of the Company, which was filed as Exhibit 10(i) to the Company's
Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by
reference.
*10(h) Description of Flexible Benefits Plan, which was filed as Exhibit 10(g) to the Company's Annual Report
on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference.
*10(i) 1996 Stock Option Plan of the Company, which was filed as Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996 and is incorporated herein by
reference.
*10(j) 1996 Directors' Stock Option Plan of the Company, which was filed as Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 and is incorporated herein
by reference.
*10(k) Employment Agreement, dated February 28, 1995, between the Company and John Cook Barlett, Executive Vice
President--Quality Improvement, which was filed as Exhibit 10(k) to the Company's Annual Report on Form
10-K for the year ended September 30, 1995, an is incorporated herein by reference.
*10(l) Employment Agreement, dated March 31, 1995, between the Company and Craig L. McKnight, Executive Vice
President and Chief Financial Officer, which was filed as Exhibit 10(l) to the Company's Annual Report
on Form 10-K for the year ended September 30, 1995, an is incorporated herein by reference.
*10(m) Employment Agreement, dated October 1, 1995, between the Company and E. Mac Crawford, Chairman of the
Board of Directors, President and Chief Executive Officer, which was filed as Exhibit 10(m) to the
Company's Annual Report on Form 10-K for the year ended September 30, 1995, an is incorporated herein by
reference.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
*10(n) Employment Agreement, dated March 18, 1993, between Green Spring Health Services, Inc. and Henry T.
Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green
Spring Health Services, Inc., which was filed as Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference.
*10(o) Letter Agreement, dated November 9, 1993, between Green Spring Health Services, Inc. and Henry T.
Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green
Spring Health Services, Inc., which was filed as Exhibit 10(c) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference.
*10(p) Letter Agreement, dated September 19, 1994 between Green Spring Health Services, Inc. and Henry T.
Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green
Spring Health Services, Inc., which was filed as Exhibit 10(d) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference.
*10(q) Employment Agreement dated May 1, 1996, between the Company and Dr. Danna Mauch, President and Chief
Operating Officer of Magellan Public Solutions, Inc. and Executive Vice President of the Company, which
was filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 and is incorporated herein by reference.
*10(r) Employment Agreement dated April 15, 1996, between the Company and John M. DeStefanis, President and
Chief Operating Officer of Charter Behavioral Health Systems, Inc. and Executive Vice President of the
Company, which was filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 and is incorporated herein by reference.
*10(s) Employment Agreement dated May 7, 1996, between the Company and Steve J. Davis, Executive Vice
President, Administrative Services and General Counsel, which was filed as Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 and is incorporated
herein by reference.
*10(t) Employment Agreement dated February 28, 1996, between Green Spring Health Services, Inc. and Henry T.
Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green
Spring Health Services, Inc.
*10(u) Compensation Agreement dated September 30, 1996, between Magellan Health Services, Inc. and Henry T.
Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green
Spring Health Services, Inc.
*10(v) Written description of the Green Spring Health Services, Inc. Annual Incentive Plan for the period ended
September 30, 1996.
10(w) Stock Purchase Agreement, dated November 14, 1995, among Blue Cross and Blue Shield of New Jersey, Inc.
Health Care Service Corporation, Independence Blue Cross, Medical Service Association of Pennsylvania,
Pierce County Medical Bureau, Inc., Veritus, Inc., Green Spring Health Services, Inc. And the Company,
which was filed as Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the Quarterly period
ended December 31, 1995, and is incorporated herein by reference.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
10(x) GPA Stock Exchange Agreement, dated November 14, 1995, between Green Spring Health Services, Inc. and
the Company, which was filed as Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the
Quarterly period ended December 31, 1995, and is incorporated herein by reference.
21 List of subsidiaries of the Company.
23 Consent of independent public accountants.
27 Financial Data Schedule
99 Safe Harbor for Forward-Looking Statements under Private Securities Litigation Reform Act of 1995:
Certain Cautionary Statements.
</TABLE>
- ------------------------
* Constitutes a management contract or compensatory plan arrangement.
(B) REPORTS ON FORM 8-K:
There were no current reports on Form 8-K filed by the Registrant with the
Securities and Exchange Commission during the quarter ended September 30,
1996.
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K:
Exhibits required to be filed by the Company pursuant to Item 601 of
Regulation S-K are contained in a separate volume.
(D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X:
Separate financial statements and schedules of Magellan Health Services,
Inc. ("Parent Company") have been omitted since the restricted net assets as
defined by Rule 4-08(e)(3) of Regulation S-X of the Parent Company's
consolidated subsidiaries do not exceed 25% of the consolidated net assets
of the Company as of September 30, 1996.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
MAGELLAN HEALTH SERVICES, INC.
(Registrant)
Date: January 24, 1997 /S/ CRAIG L. MCKNIGHT
------------------------------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
Date: January 24, 1997 /S/ HOWARD A. MCLURE
------------------------------------------
Howard A. McLure
Vice President and Controller
(Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ E. MAC CRAWFORD Chairman of the Board of
- ------------------------------ Directors, President and January 24, 1997
E. Mac Crawford Chief Executive Officer
/s/ EDWIN M. BANKS Director
- ------------------------------ January 24, 1997
Edwin M. Banks
/s/ G. FRED DIBONA, JR. Director
- ------------------------------ January 24, 1997
G. Fred DiBona, Jr.
/s/ ANDRE C. DIMITRIADIS Director
- ------------------------------ January 24, 1997
Andre C. Dimitriadis
/s/ A.D. FRAZIER, JR. Director
- ------------------------------ January 24, 1997
A.d. Frazier, Jr.
/s/ RAYMOND H. KIEFER Director
- ------------------------------ January 24, 1997
Raymond H. Kiefer
/s/ GERALD L. MCMANIS Director
- ------------------------------ January 24, 1997
Gerald L. McManis
/s/ DARLA D. MOORE Director
- ------------------------------ January 24, 1997
Darla D. Moore
47
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant and its
subsidiaries are submitted herewith in response to Item 8 and Item 14(a)1:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MAGELLAN HEALTH SERVICES, INC.:
Report of independent public accountants............................................. F-2
Consolidated balance sheets as of September 30, 1995 and 1996........................ F-3
Consolidated statements of operations for the years ended September 30, 1994, 1995
and 1996........................................................................... F-5
Consolidated statements of changes in stockholders' equity for the years ended
September 30, 1994, 1995, and 1996................................................. F-6
Consolidated statements of cash flows for the years ended September 30, 1994, 1995
and 1996........................................................................... F-7
Notes to Consolidated Financial Statements........................................... F-8
</TABLE>
The following financial statement schedule of the Registrant and its
subsidiaries is submitted herewith in response to Item 14(a)2:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Schedule II--Valuation and qualifying accounts....................................... S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Magellan Health Services, Inc:
We have audited the accompanying consolidated balance sheets of Magellan
Health Services, Inc. (a Delaware corporation) and subsidiaries as of September
30, 1995 and 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1996. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Magellan Health Services,
Inc. and subsidiaries as of September 30, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 7, 1996
F-2
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1996
-------- ----------
<S> <C> <C>
Current Assets:
Cash, including cash equivalents of $60,234 in 1995 and $54,631 in 1996 at
cost which approximates market value........................................ $105,514 $ 120,945
Accounts receivable, less allowance for doubtful accounts of $48,741 in 1995
and $50,548 in 1996......................................................... 181,163 189,878
Supplies...................................................................... 5,768 4,753
Refundable income taxes....................................................... -- 1,323
Other current assets.......................................................... 13,130 21,251
-------- ----------
Total Current Assets........................................................ 305,575 338,150
Assets restricted for settlement of unpaid claims and other long-term
liabilities................................................................... 94,138 105,303
Property and Equipment:
Land.......................................................................... 88,019 83,431
Buildings and improvements.................................................... 377,169 388,821
Equipment..................................................................... 111,554 146,915
-------- ----------
576,742 619,167
Accumulated depreciation...................................................... (90,877) (126,053)
-------- ----------
485,865 493,114
Construction in progress...................................................... 2,902 2,276
-------- ----------
Total Property and Equipment................................................ 488,767 495,390
-------- ----------
Other Long-Term Assets.......................................................... 33,249 30,755
Goodwill, net of accumulated amortization of $4,663 in 1995 and $9,151 in
1996.......................................................................... 39,994 128,012
Other Intangible Assets, net of accumulated amortization of $4,743 in 1995 and
$10,393 in 1996............................................................... 21,835 42,527
-------- ----------
$983,558 $1,140,137
-------- ----------
-------- ----------
</TABLE>
F-3
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1996
-------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable.............................................................. $ 71,020 $ 78,966
Accrued liabilities........................................................... 139,908 189,599
Current income taxes payable.................................................. 435 --
Current maturities of long-term debt and capital lease obligations.............. 2,799 5,751
-------- ----------
Total Current Liabilities................................................... 214,162 274,316
Long-Term Debt and Capital Lease Obligations.................................... 538,770 566,307
Deferred Income Tax Liabilities................................................. -- 12,368
Reserve for Unpaid Claims....................................................... 100,125 73,040
Deferred Credits and Other Long-Term Liabilities................................ 34,455 39,769
Minority Interest............................................................... 7,486 52,520
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, without par value
Authorized--10,000 shares
Issued and outstanding--none................................................ -- --
Common Stock, par value $.25 per share
Authorized--80,000 shares
Issued and outstanding--28,405 shares in 1995 and 33,007 shares in 1996..... 7,101 8,252
Other Stockholders' Equity
Additional paid-in capital.................................................. 253,295 327,681
Accumulated deficit......................................................... (161,840) (129,457)
Warrants outstanding........................................................ 64 54
Common Stock in treasury, 462 shares in 1995 and 4,424 shares in 1996....... (9,238) (82,731)
Cumulative foreign currency adjustments..................................... (822) (1,982)
-------- ----------
88,560 121,817
-------- ----------
$983,558 $1,140,137
-------- ----------
-------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
F-4
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Net revenue..................................................................... $904,646 $1,151,736 $1,345,279
-------- ---------- ----------
Costs and expenses
Salaries, supplies and other operating expenses............................... 661,436 863,598 1,064,445
Bad debt expense.............................................................. 70,623 92,022 81,470
Depreciation and amortization................................................. 28,354 38,087 48,924
Amortization of reorganization value in excess amounts allocable to
identifiable assets......................................................... 31,200 26,000 --
Interest, net................................................................. 39,394 55,237 48,017
ESOP expense.................................................................. 49,197 73,527 --
Stock option expense (credit)................................................. 10,614 (467) 914
Unusual items................................................................. 71,287 57,437 37,271
-------- ---------- ----------
962,105 1,205,441 1,281,041
-------- ---------- ----------
Income (loss) before income taxes, minority interest and extraordinary item..... (57,459) (53,705) 64,238
Provision for (benefit from) income taxes....................................... (10,504) (11,082) 25,695
-------- ---------- ----------
Income (loss) before minority interest and extraordinary item................... (46,955) (42,623) 38,543
Minority interest............................................................... 48 340 6,160
-------- ---------- ----------
Income (loss) before extraordinary item......................................... (47,003) (42,963) 32,383
Extraordinary item--loss on early extinguishment of debt (net of income tax
benefit of $8,410)............................................................ (12,616) -- --
-------- ---------- ----------
Net income (loss)............................................................... $(59,619) $ (42,963) $ 32,383
-------- ---------- ----------
-------- ---------- ----------
Average number of common shares outstanding..................................... 26,394 27,870 31,014
-------- ---------- ----------
-------- ---------- ----------
Income (loss) per common share:
Income (loss) before extraordinary item....................................... $ (1.78) $ (1.54) $ 1.04
Extraordinary loss on early extinguishment of debt............................ (0.48) -- --
-------- ---------- ----------
Net income (loss)............................................................... $ (2.26) $ (1.54) $ 1.04
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Common Stock:
Balance, beginning of period.................................................. $ 6,250 $ 6,725 $ 7,101
Exercise of options and warrants.............................................. 475 24 97
Green Spring Health Services, Inc. acquisition................................ -- -- 54
Pooling of Mentor............................................................. -- 352 --
Issuance of Common Stock, net of issuance costs............................... -- -- 1,000
-------- -------- --------
Balance, end of period........................................................ 6,725 7,101 8,252
-------- -------- --------
-------- -------- --------
Additional Paid-in Capital:
Balance, beginning of period.................................................. 237,581 244,339 253,295
Stock option expense (credit)................................................. 10,614 (467) 914
Green Spring Health Services, Inc. acquisition................................ -- -- 4,263
Exercise of options and warrants.............................................. (3,856) 624 1,636
Issuance of Common Stock , net of issuance costs.............................. -- -- 67,573
Pooling of Mentor............................................................. -- 8,799 --
-------- -------- --------
Balance, end of period........................................................ 244,339 253,295 327,681
-------- -------- --------
-------- -------- --------
Accumulated Deficit:
Balance, beginning of period.................................................. (59,423) (119,042) (161,840)
Net income (loss)............................................................. (59,619) (42,963) 32,383
Pooling of Mentor............................................................. -- 165 --
-------- -------- --------
Balance, end of period........................................................ (119,042) (161,840) (129,457)
-------- -------- --------
-------- -------- --------
Unearned Compensation under ESOP:
Balance, beginning of period.................................................. (122,724) (73,527) --
ESOP expense.................................................................. 49,197 73,527 --
-------- -------- --------
Balance, end of period........................................................ (73,527) -- --
-------- -------- --------
-------- -------- --------
Warrants Outstanding:
Balance, beginning of period.................................................. 274 180 64
Exercise of warrants.......................................................... (94) (116) (10)
-------- -------- --------
Balance, end of period........................................................ 180 64 54
-------- -------- --------
-------- -------- --------
Common Stock in treasury:
Balance, beginning of period.................................................. -- -- (9,238)
Purchases of treasury stock................................................... -- (5,349) (73,493)
Reacquisition of shares under shareholder note................................ -- (3,889) --
-------- -------- --------
Balance, end of period........................................................ -- (9,238) (82,731)
-------- -------- --------
-------- -------- --------
Cumulative Foreign Currency Adjustments:
Balance, beginning of period.................................................. (4,660) (2,454) (822)
Foreign currency translation gain (loss)...................................... 2,206 1,632 (1,160)
-------- -------- --------
Balance, end of period........................................................ (2,454) (822) (1,982)
-------- -------- --------
-------- -------- --------
Total Stockholders' Equity...................................................... $ 56,221 $ 88,560 $121,817
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss)............................................................. $(59,619) $(42,963) $ 32,383
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Gain on sale of assets...................................................... -- (2,961) (2,062)
Depreciation and amortization............................................... 59,554 64,087 48,924
Non-cash portion of unusual items........................................... 70,207 45,773 31,206
ESOP expense................................................................ 49,197 73,527 --
Stock option expense (credit)............................................... 10,614 (467) 914
Non-cash interest expense................................................... 2,005 2,735 2,424
Extraordinary loss on early extinguishment of debt.......................... 12,616 -- --
Cash flows from changes in assets and liabilities net of effects from sales
and acquisitions of businesses:
Accounts receivable, net.................................................. (7,533) 7,280 15,495
Other current assets...................................................... 4,563 9,533 129
Other long-term assets.................................................... 2,860 (5,813) 6,569
Accounts payable and accrued liabilities.................................. (13,017) (11,645) (7,516)
Income taxes payable and deferred income taxes............................ (26,759) (16,761) 14,925
Reserve for unpaid claims................................................. 1,215 (5,885) (29,985)
Other liabilities......................................................... (8,249) (21,127) (18,968)
Minority interest, net of dividends paid.................................. 80 22 6,406
Other..................................................................... 613 285 1,022
-------- -------- --------
Total adjustments......................................................... 157,966 138,583 69,483
-------- -------- --------
Net cash provided by operating activities............................... 98,347 95,620 101,866
-------- -------- --------
-------- -------- --------
Cash Flows From Investing Activities
Capital expenditures.......................................................... (14,626) (20,224) (38,801)
Acquisitions of businesses, net of cash acquired.............................. (130,550) (61,980) (50,918)
Decrease (increase) in assets restricted for settlement of unpaid claims and
other long-term liabilities................................................. 7,076 (19,606) (17,732)
Proceeds from sale of assets.................................................. 16,584 5,879 5,248
Other......................................................................... -- (1,050) --
-------- -------- --------
Net cash used in investing activities....................................... (121,516) (96,981) (102,203)
-------- -------- --------
-------- -------- --------
Cash Flows From Financing Activities
Payments on debt and capital lease obligations................................ (311,553) (46,779) (85,835)
Proceeds from issuance of debt................................................ 381,798 28,869 104,800
Proceeds from issuance of common stock........................................ -- -- 68,573
Proceeds from exercise of stock options and warrants.......................... 1,315 531 3,401
Purchases of treasury stock................................................... -- (5,349) (73,493)
Tax benefit related to the exercise of stock options.......................... 9,424 -- --
Income tax payments made on behalf of stock optionee.......................... (14,214) -- (1,678)
-------- -------- --------
Net cash provided by (used in) financing activities..................... 66,770 (22,728) 15,768
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............................ 43,601 (24,089) 15,431
Cash and cash equivalents at beginning of period................................ 86,002 129,603 105,514
-------- -------- --------
Cash and cash equivalents at end of period...................................... $129,603 $105,514 $120,945
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-7
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Magellan Health Services, Inc.
("Magellan" or the "Company") include the accounts of the Company and its
subsidiaries except where control is temporary or does not rest with the
Company. All significant intercompany accounts and transactions have been
eliminated in consolidation.
On June 2, 1992, the Company filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code. The prepackaged plan of reorganization (the
"Plan") effected a restructuring of the Company's debt and equity
capitalization. The Company's Plan was confirmed on July 8, 1992, and became
effective on July 21, 1992 (effective on July 31, 1992 for financial reporting
purposes). The consolidated financial statements for the three years in the
period ended September 30, 1996 are presented for the Company after the
consummation of the Plan. These financial statements were prepared under the
principles of fresh start accounting. (See Note 3.)
The Company is an integrated behavioral healthcare company providing
behavioral healthcare services in the United States, the United Kingdom and
Switzerland. The Company operates through three principal subsidiaries engaging
in (i) the provider business, (ii) the managed care business and (iii) the
public sector business.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
PROVIDER NET REVENUE
Provider net revenue is based on established billing rates, less estimated
allowances for patients covered by Medicare and other contractual reimbursement
programs and discounts from established billing rates. Amounts received by the
Company for treatment of patients covered by Medicare and other contractual
reimbursement programs, which may be based on cost of services provided or
predetermined rates, are generally less than the established billing rates of
the Company's hospitals. Final determination of amounts earned under contractual
reimbursement programs is subject to review and audit by the applicable
agencies. Net revenue for fiscal 1994, 1995 and 1996 included $32.1 million,
$35.6 million and $28.3 million, respectively, for the settlement and adjustment
of reimbursement issues related to earlier fiscal periods. Management believes
that adequate provision has been made for any adjustments that may result from
such reviews.
MANAGED CARE REVENUE
Managed care revenue is recognized over the applicable coverage period on a
per member basis for covered members and as earned and estimable for performance
based revenues. Deferred revenue is recorded when premium payments are received
in advance of the applicable coverage period.
F-8
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The production costs of advertising are expensed as incurred. The Company
does not consider any of its advertising costs to be direct-response and,
accordingly, does not capitalize such costs. Advertising costs consist primarily
of radio and television air time, which is amortized as utilized, and printed
media services. Advertising expense was approximately $35.6 million, $33.5
million and $30.5 million for the years ended September 30, 1994, 1995 and 1996,
respectively.
CHARITY CARE
The Company provides healthcare services without charge or at amounts less
than its established rates to patients who meet certain criteria under its
charity care policies. Because the Company does not pursue collection of amounts
determined to be charity care, they are not reported as revenue. For the years
ended September 30, 1994, 1995 and 1996, the Company provided, at its
established billing rates, approximately $29.3 million, $41.2 million and $37.9
million, respectively, of such care.
INTEREST, NET
The Company records interest expense net of capitalized interest and
interest income. Interest income for the years ended September 30, 1994, 1995,
and 1996 was approximately $4.4 million, $3.7 million and $10.5 million,
respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid interest-bearing investments
with a maturity of three months or less when purchased, consisting primarily of
money market instruments.
CONCENTRATION OF CREDIT RISK
Accounts receivable from patient revenue subject the Company to a
concentration of credit risk with third party payors that include insurance
companies, managed healthcare organizations and governmental entities. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is adequate
to provide for normal credit losses.
ASSETS RESTRICTED FOR THE SETTLEMENT OF UNPAID CLAIMS AND OTHER LONG-TERM
LIABILITIES
Assets restricted for the settlement of unpaid claims and other long-term
liabilities include marketable securities which are carried at fair market
value. Transfer of such investments from the insurance subsidiaries to the
Company or any of its other subsidiaries is subject to approval by certain
regulatory authorities.
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities ("FAS 115"). Under FAS 115, investments are classified into three
categories: (i) held to maturity; (ii) available for sale; and (iii) trading.
Unrealized holding gains or losses are recorded for trading and available for
sale securities. The Company's investments are classified as available for sale
and the adoption of FAS 115 did not have a
F-9
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
material effect on the Company's financial statements, financial condition and
liquidity or results of operations. The unrealized gain or loss on investments
available for sale was not material at September 30, 1995 and 1996.
PROPERTY AND EQUIPMENT
As a result of the adoption of fresh start accounting, property and
equipment were adjusted to their estimated fair value as of July 31, 1992 and
historical accumulated depreciation was eliminated. Expenditures for renewals
and improvements are charged to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the respective
assets are expensed as incurred. The Company removes the cost and related
accumulated depreciation from the accounts for property sold or retired, and any
resulting gain or loss is included in operations. Amortization of capital lease
assets is included in depreciation expense. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which is
generally 10 to 40 years for buildings and improvements and three to ten years
for equipment. Depreciation expense was $27.4 million, $35.1 million and $40.0
million for the years ended September 30, 1994, 1995 and 1996, respectively.
INTANGIBLE ASSETS
Intangible assets are composed principally of (i) goodwill, (ii) customer
lists, (iii) non-compete agreements and (iv) deferred financing costs. Goodwill
represents the excess of the cost of businesses acquired over the fair value of
the net identifiable assets at the date of acquisition and is amortized using
the straight-line method over 25 to 40 years. Customer lists are amortized using
the straight line method over their estimated useful lives of 5 to 25 years.
Non-compete agreements and deferred financing costs are amortized over the term
of the related agreements.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through the future cash flows expected
from the use of the asset and its eventual disposition. No impairment losses on
intangible assets were recorded by the Company in fiscal 1994 and 1996.
Impairment losses of approximately $4.0 million were recorded in fiscal 1995.
(See Note 4)
MEDICAL CLAIMS PAYABLE
Medical claims payable represents the liability for healthcare services
authorized, incurred and not yet reported to the Company's managed care
business. Medical claims payable are estimated based upon authorized healthcare
services, past claim payment experience for member groups and other factors.
While Management believes the liability for medical claims payable is adequate,
actual results could differ from such estimates.
F-10
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY
Changes in the cumulative translation of foreign currency assets and
liabilities are presented as a separate component of stockholders' equity. Gains
and losses resulting from foreign currency transactions, which were not
material, are included in operations as incurred.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted average
number of shares of common stock outstanding during the period. Common stock
equivalents were anti-dilutive or not material for the periods presented and
therefore were excluded from the calculations.
The Exchange Option, as hereinafter defined (see Note 2), is classified as a
potentially dilutive security for fiscal 1996 for the purpose of computing fully
diluted earnings per common share. The Exchange Option was anti-dilutive for
fiscal 1996 and therefore was excluded from the 1996 calculation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("FAS 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which became effective for fiscal years beginning after December 15, 1995.
FAS 121 established standards for determining when impairment losses on
long-lived assets have occurred and how impairment losses should be measured.
The Company adopted FAS 121 effective October 1, 1994. The initial financial
statement impact of adopting FAS 121 was not material.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which becomes
effective for fiscal years beginning after December 15, 1995. FAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation cost for
stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting in
APB Opinion No. 25 will be required to make pro forma disclosures of net income
and earnings per share as if the provisions of FAS 123 had been applied. The
Company plans to adopt FAS 123 in the fiscal year ended September 30, 1997 on a
pro forma disclosure basis.
RECLASSIFICATIONS
Certain reclassifications have been made to fiscal 1994 and fiscal 1995
amounts to conform to fiscal 1996 presentation.
2. ACQUISITIONS AND JOINT VENTURES
ACQUISITIONS
On December 13, 1995, the Company acquired a 51% ownership interest in Green
Spring Health Services, Inc. ("Green Spring") for approximately $68.9 million in
cash, the issuance of 215,458 shares of Magellan Common Stock valued at
approximately $4.3 million and the contribution of Group Practice Affiliates,
Inc. ("GPA"), a wholly-owned subsidiary of the Company, which became a
wholly-owned
F-11
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
2. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
subsidiary of Green Spring. On December 20, 1995, the Company acquired an
additional 10% ownership interest in Green Spring for approximately $16.7
million in cash as a result of an exercise by a minority stockholder of its
Exchange Option (as hereinafter defined) for a portion of the stockholder's
interest in Green Spring. The Company has a 61% ownership interest in Green
Spring. As of September 30, 1996, Green Spring provided managed behavioral
healthcare services, which includes utilization management, care management and
employee assistance programs through a 50-state provider network for
approximately 13.6 million people nationwide.
The minority stockholders of Green Spring consist of four Blue Cross/Blue
Shield organizations (the "Blues") that are key customers of Green Spring. In
addition, two other Blues organizations that formerly owned a portion of Green
Spring have continued as customers of Green Spring. As of September 30, 1996,
the minority stockholders of Green Spring have the option, under certain
circumstances, to exchange their ownership interests ("Exchange Option") in
Green Spring for 2,831,739 shares of the Company's Common Stock or $65.1 million
in subordinated notes. The Company may elect to pay cash in lieu of issuing the
subordinated notes. The Exchange Option expires December 13, 1998. The Exchange
Option, if exercised by the minority stockholders of Green Spring, would be
recorded at the fair value of the consideration paid.
The Company recorded the investments in Green Spring using the purchase
method of accounting. Green Spring's results of operations have been included in
the consolidated financial statements since the acquisition date, less minority
interest.
The cost of the investments in Green Spring have been allocated to the
estimated fair value of assets acquired and liabilities assumed to the extent
acquired by the Company. The remaining portion of Green Spring's assets and
liabilities has been recorded at the historical cost basis of the minority
stockholders. The purchase price allocation for the investments in Green Spring
and the historical cost basis of the minority stockholders of Green Spring, in
aggregate, resulted in goodwill of approximately $89 million and identifiable
intangible assets of approximately $24 million.
At each reporting date, the Company must assess the fair value of the
Exchange Option in relation to the redemption price available to the minority
stockholders. In any period that the fair value of the Exchange Option is
determined to be less than the redemption price, the difference must be
recognized as an adjustment to minority interest. Subsequent increases in the
fair value of the Exchange Option can be recognized only to the extent of
previously recognized losses. No losses were recorded in fiscal 1996 as a result
of changes in the fair value of the Exchange Option.
In February 1995, the Company acquired Westwood Pembroke Health System,
which includes two psychiatric hospitals and a professional group practice. The
Company accounted for the acquisition using the purchase method of accounting.
In January 1995, the Company acquired National Mentor, Inc. ("Mentor") by
issuing 1,409,978 shares of Common Stock. Mentor provides specialized health
services in mentor homes. The acquisition was accounted for as a pooling of
interests, effective January 1, 1995. The consolidated financial statements of
the Company were not restated for periods prior to January 1, 1995, as the
effect of restatement would not have been material to such periods.
F-12
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
2. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
During fiscal 1994, the Company agreed to acquire 40 psychiatric hospitals
(the "Acquired Hospitals") from National Medical Enterprises. The purchase price
for the Acquired Hospitals was approximately $120.4 million in cash plus an
additional cash amount of approximately $51 million, subject to adjustment, for
the net working capital of the Acquired Hospitals (the "Hospital Acquisition").
On June 30, 1994, the Company completed the purchase of 27 of the Acquired
Hospitals for a cash purchase price of approximately $129.6 million, which
included approximately $39.3 million, subject to adjustment, for the net working
capital of the facilities. On October 31, 1994, the Company completed the
purchase of three additional Acquired Hospitals for a cash purchase price of
approximately $5 million, which included approximately $2.2 million related to
the net working capital of the facilities. On November 30, 1994, the Company
completed the purchase of the remaining ten Acquired Hospitals for a cash
purchase price of approximately $36.8 million, including approximately $9.5
million related to the net working capital of ten Acquired Hospitals. The
Company accounted for the Hospital Acquisition using the purchase method of
accounting. The operating results of the Acquired Hospitals are included in the
Company's Consolidated Statements of Operations from the respective dates of
acquisition.
JOINT VENTURES
The Company has entered into four hospital-based joint ventures with
Columbia/HCA Healthcare Corporation through September 30, 1996. Generally, each
member of the joint venture leases and/or contributes certain assets in each
respective market to the joint venture with the Company becoming the managing
member.
The joint ventures' results of operations have been included in the
consolidated financial statements since inception, less minority interest. A
summary of the joint ventures is as follows:
<TABLE>
<CAPTION>
MARKET DATE
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Albuquerque, NM.............................................................. May 1995
Raleigh, NC.................................................................. June 1995
Lafayette, LA................................................................ October 1995
Anchorage, AK................................................................ August 1996
</TABLE>
3. THE RESTRUCTURING AND FRESH START REPORTING
The consummation of the Plan discussed in Note 1 resulted in, among other
things, (i) a reduction of approximately $700 million in long-term debt, (ii)
elimination of $233 million of preferred stock and (iii) the issuance of
approximately 24.8 million shares of Common Stock to certain holders of debt
securities, the preferred stockholders and common stockholders.
As a result of the consummation of the Plan, the financing under the $880
Million Credit Agreement between the Company and certain banks dated September
1, 1988 was replaced by new facilities under the Amended and Restated Credit
Agreement, dated July 21, 1992, among the Company and certain banks (the "Credit
Agreement").
Upon consummation of the Plan, the Company recognized an extraordinary gain
on debt discharge of approximately $731 million which represented forgiveness of
debt, principal and interest, reduced by the estimated fair value of Common
Stock issued to certain debtholders of the Company. The Company's
F-13
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
3. THE RESTRUCTURING AND FRESH START REPORTING (CONTINUED)
long-term debt was stated at the present value of amounts to be paid, based on
market interest rates on July 31, 1992. This adjustment to present value
resulted in an aggregate carrying amount for the Company's long-term debt which
was less than the aggregate principal amount thereof, and resulted in the
amortization of the difference into interest expense over the terms of the debt
instruments and, upon extinguishment of the debt prior to scheduled maturity,
resulted in a loss on debt extinguishment.
Under the principles of fresh start accounting, the Company's total assets
were recorded at their assumed reorganization value, with the reorganization
value allocated to identifiable tangible assets on the basis of their estimated
fair value. Accordingly, the Company's property and equipment were reduced and
its intangible assets were written off. In addition, the Company's accumulated
deficit, common stock in treasury and cumulative foreign currency adjustments
were eliminated. The excess of the reorganization value over the value of
identifiable assets was reported as "reorganization value in excess of amounts
allocable to identifiable assets" (the "Excess Reorganization Value").
The total reorganization value assigned to the Company's assets was
estimated by calculating projected cash flows before debt service requirements,
for a five-year period, plus an estimated terminal value of the Company
(calculated using a multiple of approximately six (6) on projected EBDIT (which
is net revenue less operating and bad debt expenses)), each discounted back to
its present value using a discount rate of 12% (representing the estimated
after-tax weighted cost of capital). This amount was approximately $1.2 billion
and was increased by (i) the estimated net realizable value of assets to be sold
and (ii) estimated cash in excess of normal operating requirements. The above
calculations resulted in an estimated reorganization value of approximately $1.3
billion, of which the Excess Reorganization Value was $225 million, of which
$129 million related to continuing operations. The Excess Reorganization Value
was amortized over the three-year period ended July 31, 1995.
4. UNUSUAL ITEMS
INSURANCE SETTLEMENTS
Unusual items included the resolutions of disputes between the Company and
insurance carriers concerning certain billings for services.
In November 1994, the Company and a group of insurance carriers resolved a
billing dispute that arose in the fourth quarter of fiscal 1994 related to
claims paid predominantly in the 1980's. As part of the resolution, the Company
agreed to pay the insurance carriers approximately $31 million plus interest,
for a total of $37.5 million in four installments over a three year period. The
Company and the insurance carriers will continue to do business at the same or
similar general levels. Furthermore, the parties will seek additional business
opportunities that will serve to enhance their present relationships.
In March 1995, the Company and a group of insurance carriers resolved a
billing dispute which arose in fiscal 1995 related to matters arising
predominately in the 1980's. As part of the settlement, the Company agreed to
pay the insurance carriers $29.8 million payable in five installments over a
three year period. The Company and the insurance carriers have agreed to
continue to do business at the same or similar general levels and to seek
additional business opportunities that will serve to enhance their present
relationships.
F-14
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
4. UNUSUAL ITEMS (CONTINUED)
In August 1996, the Company and a group of insurance carriers resolved a
billing dispute which arose in fiscal 1996 related to matters originating in the
1980's. As part of the settlement of these claims, certain related payer matters
and associated legal fees, the Company recorded a charge of approximately $30.0
million during the quarter ended June 30, 1996. The Company will pay the
insurance settlement amount in twelve installments over a three year period,
beginning August 1996. The Company and the insurance carriers have agreed that
the dispute and settlement will not negatively impact any present or pending
business relationships nor will it prevent the parties from negotiating in good
faith concerning additional business opportunities available to, and future
relationships between, the parties.
Amounts payable in future periods under the insurance settlements are as
follows (in thousands):
<TABLE>
<S> <C>
1997............................................... $ 21,510
1998............................................... 14,180
1999............................................... 5,745
</TABLE>
FACILITY CLOSURES
During fiscal 1995 and fiscal 1996, the Company consolidated, closed or sold
fifteen and nine psychiatric facilities (the "Closed Facilities"), respectively.
The Closed Facilities that are still owned by the Company will be sold, leased
or used for alternative purposes depending on the market conditions in each
geographic area.
The Company recorded charges of approximately $3.6 million and $4.1 million
related to facility closures in fiscal 1995 and fiscal 1996, respectively, as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Severance and related benefits............................................. $ 2,132 $ 2,334
Contract terminations and other............................................ 1,492 1,782
--------- ---------
$ 3,624 $ 4,116
--------- ---------
--------- ---------
</TABLE>
Approximately 500 and 620 employees were terminated at the facilities closed
in the fourth quarter of fiscal 1995 and during fiscal 1996, respectively.
Severance and related benefits paid and charged against the resulting liability
were approximately $1.3 million and $2.9 million in fiscal 1995 and fiscal 1996,
respectively. Other exit costs paid and applied against the resulting
liabilities were approximately $212,000 and $1.4 million in fiscal 1995 and
fiscal 1996, respectively.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expenses and loss before income taxes, excluding
unusual items, of the Closed Facilities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1994 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
Net revenue................................................. $ 74,574 $ 104,239 $ 34,984
Salaries, supplies and other operating expen and bad debt
expenses.................................................. 71,900 102,744 39,295
Loss before income taxes.................................... (6,403) (8,638) (9,337)
</TABLE>
F-15
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
The Company also recorded a charge of approximately $2.0 million in fiscal
1996 related to severance and related benefits for approximately 275 employees
who were terminated pursuant to planned overhead reductions.
ASSET IMPAIRMENTS
As a result of the Hospital Acquisition, the Company reassessed its business
strategy in certain markets at the end of fiscal 1994. The Company established a
plan to consolidate services in selected markets and to close or sell certain
facilities owned prior to the Hospital Acquisition. The Company recorded a
charge of $23 million in fiscal 1994 primarily to write down the property and
equipment at these facilities to their net realizable value.
As discussed in Note 1, the Company adopted FAS 121 effective October 1,
1994. During fiscal 1995, the Company recorded impairment losses on property and
equipment and intangible assets of approximately $23.0 million and $4.0 million,
respectively. During fiscal 1996, the Company recorded impairment losses on
property and equipment of approximately $1.2 million. Such losses resulted from
changes in the manner that certain of the Company's assets will be used in
future periods and current period operating losses at certain of the Company's
operating facilities combined with projected future operating losses. Fair
values of the long-lived assets that have been written down were determined
using the best available information in each individual circumstance, which
included quoted market price, comparable sales prices for similar assets or
valuation techniques utilizing present value of estimated expected cash flows.
OTHER
During fiscal 1994, the Company recorded a charge of approximately $4.5
million related to the relocation of the Company's executive offices. During
fiscal 1995, the Company recorded a gain of approximately $3.0 million related
to the sale of three psychiatric hospitals.
5. BENEFIT PLANS
The Company maintains an Employee Stock Ownership Plan (the "ESOP"), a
noncontributory retirement plan that enables eligible employees to participate
in the ownership of the Company.
The Company had recorded unearned compensation to reflect the cost of Common
Stock purchased by the ESOP but not yet allocated to participants' accounts. In
the period that shares are allocated or projected to be allocated to
participants, ESOP expense is recorded and unearned compensation is reduced. All
shares had been allocated to the participants as of September 30, 1995. Interest
expense on the remaining portion of the debt incurred to finance the ESOP
transaction amounted to approximately $6.2 million for fiscal 1994 and is
included in interest expense in the statements of operations.
The Internal Revenue Service has ruled that the ESOP qualifies under Section
401 of the Internal Revenue Code of 1986, as amended. Such determination allows
the Company to deduct its contributions to the ESOP for federal income tax
purposes.
During fiscal 1992, the Company reinstated a defined contribution plan (the
"Magellan 401-K Plan"). Employee participants can elect to voluntarily
contribute up to 6% of their compensation to the Magellan 401-K Plan. Effective
October 1, 1992, the Company began making contributions to the Magellan 401-K
Plan based on employee compensation and contributions. The Company makes a
discretionary contribution of 2% of each employee's compensation and matches 50%
of each employee's contribution up to 3% of their compensation. During the years
ended September 30, 1994, 1995 and 1996, the Company made
F-16
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
5. BENEFIT PLANS (CONTINUED)
contributions of approximately $4.9 million, $5.8 million and $5.3 million,
respectively, to the Magellan 401-K Plan.
Green Spring also maintains a defined contribution plan (the "Green Spring
401-K Plan"). Employee participants can elect to voluntarily contribute up to 6%
or 12% of their compensation, depending upon each employee's compensation level,
to the Green Spring 401-K Plan. Green Spring matches up to 3% of each employee's
compensation. Employees vest in employer contributions over five years. During
the year ended September 30, 1996, Green Spring contributed approximately
$760,000 to the Green Spring 401-K Plan.
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1995 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER
30, 30,
1995 1996
---------- ----------
<S> <C> <C>
Revolving Credit Agreement due through 1999 (9.0% at September 30, 1996)........ $ 80,593 $ 105,593
11.25% Senior Subordinated Notes due 2004....................................... 375,000 375,000
6.59 % to 10.75% Mortgage and other notes payable through 1999.................. 5,268 12,163
Variable rate secured notes due through 2013 (3.65 % to 3.85% at September 30,
1996.......................................................................... 62,025 60,875
7.5% Swiss Bonds................................................................ 6,443 6,443
3.85% to 11.50% Capital lease obligations due through 2014...................... 12,617 12,333
---------- ----------
541,946 572,407
Less amounts due within one year.............................................. 2,799 5,751
Less debt service funds....................................................... 377 349
---------- ----------
$ 538,770 $ 566,307
---------- ----------
---------- ----------
</TABLE>
The aggregate scheduled maturities of long-term debt and capital lease
obligations during the five years subsequent to September 30, 1996 are as
follows (in thousands): 1997--$5,751; 1998--$5,273; 1999-- $5,103; 2000--$1,991
and 2001--$16,802.
The Senior Subordinated Notes, which are carried at cost, had a fair value
of approximately $402 million and $405 million at September 30, 1995 and 1996,
respectively, based on market quotes. The Company's remaining debt is also
carried at cost, which approximates fair market value.
REVOLVING CREDIT AGREEMENT
On May 2, 1994, the Company entered into a Second Amended and Restated
Credit Agreement with certain financial institutions for a five-year reducing,
revolving credit facility in an aggregate committed amount of $300 million (the
"Revolving Credit Agreement"). Proceeds from the Revolving Credit Agreement were
used (i) to refinance certain mortgage indebtedness of certain subsidiaries of
the Company in the principal amount of approximately $14.7 million and the loans
to certain subsidiaries of
F-17
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
the Company outstanding under the Credit Agreement in the principal amount of
approximately $46.8 million, (ii) for continued credit enhancement of certain
currently outstanding variable rate demand notes issued by or for the benefit of
certain subsidiaries of the Company and (iii) for working capital and other
general corporate purposes, including to finance, in part, the Hospital
Acquisition and to finance other permitted acquisitions and investments.
The loans outstanding under the Revolving Credit Agreement bore interest
(subject to certain potential adjustments) at a rate per annum equal to (a) the
sum of the Base Lending Rate plus 3/4 of 1%, or (b) at the option of the
Company, the sum of the maximum reserve-adjusted one, two, three or six-month
LIBOR plus 1 3/4%. The Base Lending Rate was the higher of (x) the rate
announced from time to time as Bankers Trust Company's prime lending rate, (y)
the Federal Reserve's reported weekly average dealer offering rate for
three-month certificates of deposit, adjusted for maximum reserves, plus 1/2 of
1%, and (z) the Federal Funds Rate plus 1/2 of 1%.
NEW REVOLVING CREDIT AGREEMENT
On October 28, 1996, the Company entered into a new Credit Agreement with
certain financial institutions for a five-year Senior Secured reducing revolving
credit facility in an aggregate committed amount of $400 million (the "New
Revolving Credit Agreement"). The Company borrowed approximately $121.0 million
under the New Revolving Credit Agreement in October 1996 to (i) pay-off the
existing borrowings outstanding under the Revolving Credit Agreement and (ii)
pay for fees and expenses related to the New Revolving Credit Agreement.
The loans outstanding under the New Revolving Credit Agreement bear interest
(subject to certain potential adjustments) at a rate per annum equal to one,
two, three or six-month LIBOR plus 1.25% or the Prime Lending Rate. Interest on
Prime Lending Rate Loans is payable at the end of each fiscal quarter and upon
conversion to a LIBOR based loan. Interest on LIBOR based loans is payable at
the end of their respective one, two, three or six-month terms.
SENIOR SUBORDINATED NOTES
Also on May 2, 1994, the Company issued $375 million of 11.25% Senior
Subordinated Notes which mature on April 15, 2004 (the "Notes") and are general
unsecured obligations of the Company. Interest on the Notes is payable
semi-annually on each April 15 and October 15. Proceeds of $181.8 million from
the sale of the Notes were used to defease, and, subsequently on June 9, 1994,
to redeem the Company's outstanding 7.5% Senior Subordinated Debentures due 2003
(the "Debentures"). Certain remaining proceeds were used, along with proceeds
from the Revolving Credit Agreement, to finance the Hospital Acquisition. The
Notes are guaranteed on an unsecured senior subordinated basis by substantially
all of the Company's existing subsidiaries and certain subsidiaries created
after the issuance of the Notes.
The Notes are not redeemable at the option of the Company prior to April 15,
1999. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, at the redemption prices (expressed as a
percentage of the principal amount) set forth below, plus accrued and unpaid
F-18
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning April 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
1999............................................................................. 105.625%
2000............................................................................. 103.750%
2001............................................................................. 101.875%
2002 and thereafter.............................................................. 100.000%
</TABLE>
COVENANTS
The New Revolving Credit Agreement and the indenture for the Notes contain a
number of restrictive covenants, which, among other things, limit the ability of
the Company and certain of its subsidiaries to incur other indebtedness, engage
in transactions with affiliates, repurchase shares of the Company's common stock
above specified levels, incur liens, make certain restricted payments, and enter
into certain business combination and asset sale transactions. The New Revolving
Credit Agreement also requires the Company to maintain certain specified
financial ratios. The Company was in compliance with all debt covenants under
the Revolving Credit Agreement and the Notes at September 30, 1996.
EXTRAORDINARY LOSSES
The consolidated statements of operations for the year ended September 30,
1994 includes an extraordinary after-tax loss of approximately $12.6 million,
resulting from the early extinguishment of debt. The extraordinary loss in
fiscal 1994 was related to the defeasance of the Debentures and the pay-off of
certain subsidiary mortgages and includes the difference between the redemption
price and the carrying value of the Debentures and prepayment penalties related
to the subsidiary mortgages.
On October 28, 1996, the Company paid off all obligations under its
Revolving Credit Agreement. The Company will record an extraordinary loss from
the early extinguishment of debt of approximately $3.0 million, net of tax, in
fiscal 1997 to write off deferred financing costs related to the Revolving
Credit Agreement.
LEASES
The Company leases certain of its operating facilities, some of which may be
purchased during the term or at expiration of the leases. The book value of
capital leased assets was approximately $8.4 million at September 30, 1996. The
leases, which expire at various dates through 2069, generally require the
Company to pay all maintenance, property tax and insurance costs.
At September 30, 1996, aggregate amounts of future minimum payments under
operating leases were as follows: 1997--$9.5 million; 1998--$7.0 million;
1999--$5.1 million; 2000--$3.3 million; 2001--$2.4 million; subsequent to
2001--$48.6 million.
Rent expense for the years ended September 1994, 1995 and 1996 was $11.4
million, $15.4 million and $18.7 million, respectively.
F-19
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
7. STOCKHOLDERS' EQUITY
Pursuant to the Company's Restated Certificate of Incorporation, the Company
is authorized to issue 80 million shares of common stock, $.25 par value per
share, and 10 million shares of preferred stock, without par value. Under the
terms of the Plan, approximately 24.8 million shares of Common Stock were issued
to certain holders of debt securities, the preferred stockholders, and common
stockholders. No shares of preferred stock have been issued as of September 30,
1996.
COMMON STOCK
The Company is prohibited from paying dividends on its Common Stock under
the terms of the New Revolving Credit Agreement except under certain limited
circumstances.
1992 STOCK OPTION PLAN
The 1992 Stock Option Plan provides for the issuance of approximately 3.4
million options to purchase shares of Common Stock. A summary of changes in
options outstanding and other related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Balance, beginning of period... 3,228,076 772,516 715,516
Granted........................ 6,000 0 0
Canceled....................... (24,000) (10,500) 0
Exercised...................... (2,437,560) (46,500) (346,526)
------------- ------------- --------------
Balance, end of period......... 772,516 715,516 368,990
------------- ------------- --------------
------------- ------------- --------------
$4.36 - $4.36 -
Option prices, end of period... $22.75 $22.75 $4.36 - $22.75
Price range of exercised $4.36 - $4.36 -
options...................... $.25 - $4.36 $14.19 $16.875
Average exercise price......... $.62 $6.26 $4.59
</TABLE>
The exercise price of certain options will be reduced upon termination of
employment of a certain optionee without cause.
Options issued pursuant to the 1992 Stock Option Plan are exercisable upon
vesting and expire through October 2000. As of September 30, 1996, 100% of the
options outstanding were vested.
Upon the termination of the employment of the Company's former Chairman of
the Board on March 4, 1993, and under the provisions of the 1992 Stock Option
Plan, all of the former employee's options vested and the option prices were
reduced to $.25 per share. Such options totaled 2,220,336 at September 30, 1993.
As a result, the Company recognized approximately $21.3 million in additional
stock option expense during fiscal 1993. On December 3 and December 29, 1993,
all of the options under the 1992 Stock Option Plan held by the former employee
were exercised. On December 3, 1993, 326,000 options were exercised and the
option exercise price was paid by reducing the number of shares issuable by the
number of shares having a fair market value equal to the option exercise price
(3,326 shares). This exercise triggered a new measurement date for the options
exercised and, since the stock price had increased since March 4, 1993,
additional stock option expense of $3.9 million was recognized in fiscal 1994.
The option exercise price for the 1,894,336 options exercised on December 29,
1993, was paid in
F-20
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
cash; accordingly, no additional stock option expense was triggered. For both of
the exercises, the former employee elected to surrender optioned shares
(approximately 570,000 shares) as consideration for the payment of required
withholding taxes of approximately $14.2 million. These withholdings represent
the minimum required tax withholding amounts required in order to avoid
triggering a new measurement date and additional compensation expense. The
Company was required to make withholding tax payments on behalf of the former
employee of approximately $14.2 million which was charged against additional
paid-in capital. This charge was offset by a tax benefit recorded of
approximately $9.4 million related to additional stock option expense allowable
for income tax purposes.
1994 STOCK OPTION PLAN
The 1994 Stock Option Plan provides for the issuance of approximately 1.3
million options to purchase shares of Common Stock. Options must be granted on
or before December 31, 1996. Officers and key employees of the Company are
eligible to participate. The options have an exercise price which approximates
fair market value of the Common Stock at the date of grant. A summary of changes
in options outstanding and other related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1994 1995 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Balance, beginning of
period...................... -- 876,500 1,162,331
Granted.................... 921,000 495,000 161,000
Canceled................... (44,500) (209,169) (330,162)
Exercised.................. -- -- (44,500)
------------------- ------------------- -------------------
Balance, end of period....... 876,500 1,162,331 948,669
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Option prices, end of
period...................... $22.687 - $28.312 $15.625 - $27.875 $15.687 - $27.875
Price range of exercised
options..................... -- -- $15.625 - $22.875
Average exercise price....... -- -- $20.70
</TABLE>
Options granted under the 1994 Stock Option Plan are exercisable to the
extent vested. An option vests at the rate of 33 1/3% of the shares covered by
the option on each of the first three anniversary dates of the grant of the
option if the optionee is an employee of the Company on such dates. Options must
be exercised no later than ten years after the date of grant. As of September
30, 1996, 48.4% of the options outstanding were vested.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan provides for the issuance of 1.75 million options
to purchase shares of Company Common Stock. Options must be granted on or before
December 31, 1999. Officers and key
F-21
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
employees of the Company are eligible to participate. The options have an
exercise price which approximates fair market value of the Common Stock at the
date of grant. A summary of changes in options outstanding and other related
information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
Balance, beginning of period.............................................. 0
Granted................................................................... 1,413,000
Cancelled................................................................. (114,500)
Exercised................................................................. 0
------------------
Balance, end of period.................................................... 1,298,500
------------------
Options prices, end of period............................................. $ 15.75-$24.00
------------------
</TABLE>
Options granted under the 1996 Stock Option Plan are exercisable to the
extent vested. An option vests at the rate of 25% of the shares covered by the
option on each of the four anniversary dates of the grant of the option if the
optionee is an employee of the Company on such dates. Options must be exercised
no later than November 30, 2005. As of September 30, 1996, none of the options
outstanding were vested.
1994 EMPLOYEE STOCK PURCHASE PLAN
The 1994 Employee Stock Purchase Plan (the "1994 ESPP") covers 600,000
shares of Common Stock that can be purchased by eligible employees of the
Company.
The initial offering period began on April 1, 1994 and expired on March 31,
1995. The second offering period began on April 1, 1995 and ended March 31,
1996. On the first date of these offering periods, each participant was granted
an option to purchase shares of Common Stock at a purchase price equal to 85% of
the fair value of the Company's Common Stock on such date. Total options granted
on April 1, 1994 and April 1, 1995 were 85,115 and 41,565, respectively, with
option prices of $21.144 and $15.831, respectively. A total of 4,872 and 22,065
options were exercised at the end of the first and second offering periods,
respectively.
Effective August 1, 1995, the Company amended the 1994 ESPP to change the
option price in subsequent offering periods to the lesser of (i) 85% of the fair
value of Company Common Stock on the first day of the offering period or (ii)
85% of the fair value of the Company's Common Stock on the last day of the
offering period. Holders of the options from the second offering period as of
July 31, 1995 were given the choice of (i) canceling their options to purchase
shares of Common Stock, (ii) exercising the option to purchase shares of Common
Stock at a purchase price of $15.831 or (iii) keeping their options. A total of
11,870 options were exercised on July 31, 1995. The third offering period began
August 1, 1995 and ended December 31, 1995. A total of 29,217 options were
exercised at a purchase price of $16.681 at the end of the third offering
period.
The fourth offering period began January 1, 1996 and ended on June 30, 1996.
A total of 68,146 options were exercised at a purchase price of $18.275 at the
end of the fourth offering period. The fifth offering period began July 1, 1996
and will end on December 31, 1996. The number of options granted and
F-22
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
the option price for the fifth offering period will be determined on December
31, 1996 when the option price is known.
1997 EMPLOYEE STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan (the "1997 ESPP") covers 600,000
shares of Common Stock that can be purchased by eligible employees of the
Company. The 1997 ESPP offering periods will have a term not less than three
months and not more than 12 months. The first offering period under the 1997
ESPP will not begin prior to January 1, 1997 and the last offering period will
end on or before December 31, 1999. The option price of each offering period
will be the lesser of (i) 85% of the fair value of the Company's Common Stock on
the first day of the offering period or (ii) 85% of the fair value of the
Company's Common Stock on the last day of the offering period.
1992 DIRECTORS' STOCK OPTION PLAN AND DIRECTORS' UNIT AWARD PLAN
The 1992 Directors' Stock Option Plan provides for the grant of options to
non-employee members of the Company's Board of Directors to purchase up to
175,000 shares of the Company's Common Stock, subject to adjustments to reflect
certain changes in capitalization. The options have an exercise price which
approximates the fair market value of the Common Stock on the date of grant.
During fiscal 1994, 25,000 of these options were exercised and an additional
25,000 options were granted at an exercise price of $23.163 per share. During
fiscal 1995, 25,000 options were granted at an exercise price of $18.875 per
share. During fiscal 1996, no options were granted.
Options granted can be exercised from the date of vesting until February 1,
2003. No options can be granted after December 31, 1995. Options vest 20% when
granted and an additional 20% on each successive February 1 for a period of four
years, if the optionee continues to serve as a non-employee director on the
applicable February 1. Unvested options vest in full in certain instances of
termination. As of September 30, 1996, 68.0% of the options outstanding were
vested.
In addition, during 1994, the Company approved the Directors' Unit Award
Plan (the "Unit Plan") which provides for the award of a maximum of 15,000 units
(the "Units") that, upon vesting under the terms of the Unit Plan, would result
in the issuance of an aggregate of 15,000 shares of Common Stock in settlement
of Units.
The Unit Plan provides for the award to each director who is not an employee
of the Company of 2,500 Units. Upon vesting of the Units awarded to a director,
the Company will settle the Units by issuing to the director, with no exercise
price, a number of shares of the Company's Common Stock equal to the number of
vested Units.
1996 DIRECTORS' STOCK OPTION PLAN
The 1996 Directors' Stock Option Plan provides for the grant of options to
non-employee members of the Company's Board of Directors to purchase up to
250,000 shares of the Company's Common Stock, subject to adjustments to reflect
certain changes in capitalization. The options have an exercise price which
approximates the fair market value of the Common Stock on the date of grant.
During fiscal 1996, 175,000 options were granted at exercise prices ranging from
$18.25 to $23.375.
F-23
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
Options granted can be exercised from the date of vesting until November 30,
2005. No options can be granted after December 31, 1999. Options vest at the
rate of 25% of the shares covered on each of the four anniversary dates of the
grant of the option if the optionee continues to serve as a non-employee
director on such dates. Options vest in full in certain instances of
termination. As of September 30, 1996, none of the options outstanding were
vested.
RIGHTS PLAN
Also upon consummation of the Plan, the Company adopted a Share Purchase
Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, each share of
Common Stock also represents one Share Purchase Right (collectively, the
"Rights"). The Rights trade automatically with the underlying shares of Common
Stock. Upon becoming exercisable, but prior to the occurrence of certain events,
each Right initially entitles its holder to buy one share of Common Stock from
the Company at an exercise price of $60.00. The Rights will be distributed and
become exercisable only if a person or group acquires, or announces its
intention to acquire, Common Stock exceeding certain levels, as specified in the
Rights Plan. Upon the occurrence of such events, the exercise price of each
Right reduces to one-half of the then current market price. The Rights also give
the holder certain rights in an acquiring company's Common Stock. The Company is
entitled to redeem the Rights at a price of $.01 per Right at any time prior to
the distribution of the Rights. The Rights have no voting power until exercised.
COMMON STOCK WARRANTS
The Company has two series of warrants outstanding, the 2002 Warrants and
the 2006 Warrants.
In connection with the Plan, the Company issued 114,690 of the 2002 Warrants
to purchase one share each of the Company's Common Stock. These warrants, which
expire on June 30, 2002, have an exercise price of $5.24 per share. During
fiscal 1994, 1995 and 1996, 37,395, 47,392, and 4,320 shares were issued,
respectively, upon the exercise of these warrants.
The 2006 Warrants, which expire on September 1, 2006, were subject to
certain adjustments as a result of the Plan, and accordingly, 146,791 of such
warrants are currently outstanding with an exercise price of $38.70 per share.
PRIVATE PLACEMENT TRANSACTION
On January 25, 1996, the Company issued 4,000,000 shares of Common Stock
(the "Shares") along with a warrant to purchase an additional 2,000,000 shares
of Common Stock (the "Warrant") pursuant to a Stock and Warrant Purchase
Agreement. The Warrant, which expires in January 2000 entitles the holder to
purchase such additional shares of Common Stock at per share price of $26.15
subject to adjustment for certain dilutive events, and provides registration
rights for the shares of Common Stock underlying the Warrant. The aggregate
purchase price for the Shares and the Warrant was $69,732,000. The Warrant
becomes exercisable on January 25, 1997 and expires on January 25, 2000.
Approximately $68.0 million of the proceeds were used to repay outstanding
borrowings under the Revolving Credit Agreement.
F-24
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
TREASURY STOCK TRANSACTIONS
During fiscal 1995, the Company purchased approximately 327,000 shares of
its Common Stock in the open market for approximately $5.6 million.
Approximately 17,000 of such shares were reissued related to 1994 ESPP exercises
for approximately $291,000.
On August 15, 1996, the Company commenced a "Dutch Auction" self-tender
offer to stockholders for the repurchase of 1,891,891 shares of its own Common
Stock. On September 5, 1996, the Company increased the self-tender offer to
3,300,000 shares. Under the terms of the offer, stockholders were invited to
tender their shares by September 18, 1996 at prices ranging from $16.50 to
$18.50 per share as specified by each stockholder.
At the conclusion of the offer, the Company repurchased 3,961,505 shares on
September 27, 1996 at $18.375 per share for a total cost of approximately $73.5
million, including transaction costs. The total shares repurchased represent
approximately 12.0% of the outstanding Common Stock at such date.
The transaction was financed through cash on hand and borrowings under the
Revolving Credit Agreement.
8. INCOME TAXES
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................... $ 0 $ 658 $ 6,900
State........................................ 639 1,851 (1,139)
Foreign...................................... 1,466 1,188 3,779
Deferred income taxes:
Federal...................................... (11,078) (12,931) 15,313
State........................................ (1,583) (1,848) 807
Foreign...................................... 52 0 35
--------- --------- ---------
$ (10,504) $ (11,082) $ 25,695
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
8. INCOME TAXES (CONTINUED)
A reconciliation of the Company's income tax provision (benefit) to that
computed by applying the statutory federal income tax rate is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at federal
statutory income tax rate.................... $ (20,111) $ (18,798) $ 22,483
State income taxes, net of federal income tax
benefit...................................... (616) (16) (216)
Foreign income taxes, net of federal income tax
benefit...................................... 987 772 2,479
Amortization of excess reorganization value.... 10,920 9,100 0
Other--net..................................... (1,684) (2,140) 949
--------- --------- ---------
Income tax provision (benefit)................. $ (10,504) $ (11,082) $ 25,695
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of September 30, 1996, the Company has estimated tax net operating loss
("NOL") carryforwards of approximately $250 million available to reduce future
federal taxable income. These NOL carryforwards expire in 2006 through 2010 and
are subject to examination by the Internal Revenue Service. The Company has
recorded a valuation allowance against the entire amount of the NOL deferred tax
asset and certain other deferred tax assets, that in management's opinion, are
not likely to be recovered.
Components of the net deferred income tax (assets) liabilities at September
30, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property and depreciation............................. $ 12,472 $ 23,970
Long-term debt and interest........................... 57,863 63,516
ESOP.................................................. 10,883 11,616
Other................................................. 7,214 14,133
--------- ---------
Total deferred tax liabilities...................... 88,432 113,235
--------- ---------
--------- ---------
Deferred tax assets:
Operating loss carry forwards......................... (93,171) (102,229)
Insurance settlements................................. (18,752) (3,649)
Self-insurance reserves............................... (46,319) (44,234)
Restructuring costs................................... (21,042) (26,695)
Other................................................. (38,707) (48,033)
--------- ---------
Total deferred tax assets........................... (217,991) (224,840)
--------- ---------
Valuation allowance..................................... 128,676 123,973
--------- ---------
Deferred tax assets after valuation allowance........... (89,315) (100,867)
--------- ---------
Net deferred tax (assets) liabilities................... $ (883) $ 12,368
--------- ---------
--------- ---------
</TABLE>
F-26
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
8. INCOME TAXES (CONTINUED)
The Internal Revenue Service is currently examining the Company's income tax
returns for fiscal 1989 through 1992. In management's opinion, adequate
provisions have been made for any adjustments which may result from these
examinations.
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Salaries, wages and other benefits...................... $ 28,597 $ 39,841
Amounts due health insurance programs................... 10,252 27,223
Medical claims payable.................................. -- 26,552
Interest................................................ 20,561 20,348
Other................................................... 80,498 75,635
--------- ---------
$ 139,908 $ 189,599
--------- ---------
--------- ---------
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended September 30, 1994,
1995 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income taxes paid, net of refunds received.......... $ 7,097 $ 4,682 $ 9,299
Interest paid, net of amounts capitalized........... 25,554 54,302 56,248
Long-term debt assumed in connection with
acquisitions...................................... 4,573 -- 12,100
</TABLE>
The non-cash portion of unusual items for fiscal 1995 and 1996 includes the
unpaid portion of the $29.8 million and $30.0 million insurance settlements that
were recorded during the quarters ended March 31, 1995 and June 30, 1996,
respectively. The payments of the insurance settlements are included in accounts
payable and other accrued liabilities in the statement of cash flows for the
years ended September 30, 1995 and 1996.
11. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks. The reserves for self-insured general and
professional liability losses, including loss adjustment expenses, are based on
actuarial estimates that are discounted at an average rate of 6% to their
present value based on the Company's historical claims experience adjusted for
current industry trends. The undiscounted amount of the reserve for unpaid
claims at September 30, 1995 and 1996 was approximately $113.1 million and $84.3
million, respectively. The reserve for unpaid claims is adjusted periodically as
such claims mature, to reflect changes in actuarial estimates based on actual
experience. During fiscal 1996, the Company recorded a reduction in malpractice
claim reserves of approximately $15.3 million as a result of updated
F-27
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
actuarial estimates. While management and its actuaries believe that the present
reserve is reasonable, ultimate settlement of losses may vary from the amount
recorded.
Certain of the Company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of management,
based on consultation with counsel, resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
In January 1996, the Company settled an ongoing dispute with the Resolution
Trust Corporation ("RTC"), for itself or in its capacity as conservator or
receiver for 12 financial institutions, which formerly held certain debt
securities that were issued by the Company in 1988. In connection with the
settlement, the Company, denying any liability or fault, paid $2.7 million to
the RTC in exchange for a release of all claims.
On August 1, 1996, the United States Department of Justice, Civil Division,
filed an Amended Complaint in a civil QUI TAM action initiated in November of
1994 against the Company and its Orlando South hospital subsidiary by two former
employees. The Amended Complaint alleges that the hospital violated the federal
False Claims Act ("the Act") in billing for inpatient treatment provided to
elderly patients. The Amended Complaint is based on disputed clinical and
factual issues which the Company believes do not constitute a violation of the
Act. The Company and its subsidiary deny any liability in this matter and will
continue to vigorously defend themselves against the suit. As is its policy, the
Company will continue to cooperate with the government in this matter. The
Company does not believe this matter will have a material adverse effect on its
financial position or results of operations.
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company owns 50% of the Charter Medical Building in Macon, Georgia, and
leases space in such building for certain corporate offices. Through September
30, 1994, the Company's corporate headquarters were located in the building and
the lease, which expired September 30, 1994, provided for an average annual rent
of approximately $1.2 million. Currently the Company is paying approximately
$45,000 per month in rent on the building. Mr. William A. Fickling, Jr., a
former Director and former Chairman of the Board of Directors of the Company,
and his father's estate own 25% of the building. In the opinion of management,
such office space was leased on terms as favorable as could be obtained from an
unaffiliated party. The Company received distributions of approximately $280,000
in 1994.
On September 15, 1993, the Company sold its ownership interest in Beech
Street to the children of Mr. Fickling for approximately $5.5 million, plus the
right to receive additional consideration if certain events (e.g. a public
offering of Beech Street stock or if Beech Street sells 50% or more of its
assets) occur within two years. The Company obtained a fairness opinion by an
independent appraisal firm stating that the financial consideration was fair.
The Company acquired its ownership interest in a series of related transactions
beginning in May 1989, for a total purchase price of $2,956,000. During the
period of its ownership, the Company received $1,242,000 in dividend
distributions from Beech Street.
Beech Street was, prior to May 1989, a wholly owned subsidiary of Beech
Street, Inc., in which Mr. Fickling beneficially owns a majority of the
outstanding stock.
F-28
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
The Company also has agreements with Beech Street where certain of the
Company's hospitals provide services to employers (and their related employee
and covered dependent groups) who have entered into agreements with Beech Street
to utilize a Beech Street Preferred Provider Organization ("PPO") for hospital
and other healthcare services. Such agreements provide for covered services to
be rendered under terms (including discounts from the hospital's normal charges)
which management of the Company believes are customary for hospital PPO
agreements. The Beech Street PPO reviews claims and serves as an intermediary
between the Company's hospitals and the contracting employers. The Company
derived approximately $5.2 million in revenue from these agreements during
fiscal 1994. The aggregate discount from customary charges was 19% in 1994.
Gerald L. McManis, who was elected director in February 1994, is the
President of McManis Associates, Inc. ("MAI"), a healthcare development and
management consulting firm and a subsidiary of MMI Companies, Inc. ("MMI"). Mr.
McManis also serves on the Board of Directors of MMI. During fiscal 1994, 1995
and 1996, MAI provided consulting services for the Company related to the
development of strategic plans and a review of the Company's business processes.
The Company incurred approximately $1.3 million, $158,000 and $274,000 in fees
for such services during fiscal 1994, 1995 and 1996, respectively, and
reimbursed MAI for approximately $244,000, $21,000 and $13,000, respectively,
for expenses.
G. Fred DiBona, Jr., who was appointed as a director of the Company in
January 1996, is a Director and the President and Chief Executive Officer of
Independence Blue Cross ("IBC"), a health insurance company. As of September 30,
1996, IBC owned 12.25% of Green Spring, a majority-owned subsidiary of the
Company.
IBC owned 16.67% of Green Spring prior to December 13, 1995. On December 13,
1995, IBC sold 4.42% of its ownership interest in Green Spring to the Company
for $5,376,000 in cash. IBC had a cost basis of $3,288,000 in the 4.42%
ownership interest sold to the Company. The Exchange Option described previously
gives IBC the right to exchange its ownership interest in Green Spring for a
maximum of 889,565 shares of Common Stock or $20,460,000 in subordinated notes
through December 13, 1998.
IBC and its affiliated entities contract with Green Spring for provider
network, case management and medical review services pursuant to contractual
relationships entered into on July 7, 1994 with terms of up to five years.
During the period beginning December 14, 1995 through September 30, 1996, IBC
and its affiliated entities made payments to Green Spring of approximately $29.2
million and owed Green Spring approximately $9.6 million at September 30, 1996.
Green Spring recorded revenue of approximately $32.8 million from IBC during
fiscal 1996.
On July 7, 1994, IBC sold a subsidiary to Green Spring in exchange for a $15
million promissory note. As of September 30, 1996, $9 million remains
outstanding under such promissory note and is due and payable in equal
installments on July 7, 1997, 1998 and 1999.
13. BUSINESS SEGMENT INFORMATION
The Company operates through three principal subsidiaries engaging in (i)
the provider business, (ii) the managed care business and (iii) the public
sector business. Intersegment sales are not material. Operating income
represents net revenue less salaries, supplies and other operating expenses and
bad debt expense, and excludes depreciation, amortization, interest (net),
unusual items, income taxes and minority interest. Identifiable assets are those
used in the Company's operations in each segment. Depreciation and
F-29
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
13. BUSINESS SEGMENT INFORMATION (CONTINUED)
amortization for the managed care business includes the amortization expense
related to the step-up in asset basis for the acquisition of Green Spring in
December 1995. Corporate assets consist primarily of cash and cash equivalents,
investments and assets not employed in operations.
Prior to fiscal 1996, the Company's managed care and public sector
businesses were not material. Accordingly, no comparable segment information is
presented for fiscal 1994 and 1995.
<TABLE>
<CAPTION>
MANAGED PUBLIC
PROVIDER CARE SECTOR CORPORATE
1996 BUSINESS BUSINESS BUSINESS OVERHEAD CONSOLIDATED
- ------------------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue........ $1,037,939 $ 229,859 $ 77,481 $ -- $1,345,279
Operating income... 198,102 25,977 10,071 (34,786) 199,364
Depreciation and
amortization..... 33,780 9,111 3,001 3,032 48,924
Identifiable
assets........... 783,142 116,501 23,881 88,601 1,012,125
Capital
expenditures..... 21,550 6,018 2,151 9,082 38,801
</TABLE>
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended September 30, 1995 and 1996. The first quarter, second quarter and
fourth quarter of fiscal 1995 contained unusual charges (income) of
approximately ($3.0) million, $29.8 million and $30.6 million, respectively. The
third and fourth quarter of fiscal 1996 include unusual charges of approximately
$34.0 million and $3.3 million, respectively. See Note 4 for an explanation of
these charges.
<TABLE>
<CAPTION>
FISCAL QUARTERS
------------------------------------------
1995 FIRST SECOND THIRD FOURTH
- ------------------------------------ --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue......................... $ 263,841 $ 299,817 $ 304,745 $ 283,333
Net income (loss)................... 349 (15,100) 1,682 (29,894)
Net income (loss) per common
share............................. 0.01 (0.53) 0.06 (1.07)
1996
- ------------------------------------
Net revenue......................... $ 295,665 $ 354,953 $ 346,379 $ 348,282
Net income (loss)................... 9,748 20,069 (5,722) 8,288
Net income (loss) per common share:
Primary......................... 0.35 0.63 (0.18) 0.26
Fully diluted................... 0.35 0.59 (0.18) 0.26
</TABLE>
F-30
<PAGE>
15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
MAGELLAN HEALTH SERVICES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
--------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents....................... $ 60,719 $ 10,279 $ 34,516 $ -- $ 105,514
Accounts receivable, net........................ 170,855 10,251 57 -- 181,163
Supplies........................................ 5,081 224 463 -- 5,768
Other current assets............................ 10,004 (1,241) 19,151 (14,784) 13,130
----------- ------------- ------------ ------------ ------------
Total Current Assets.......................... 246,659 19,513 54,187 (14,784) 305,575
Assets restricted for settlement of unpaid claims
and other long-term liabilites.................. -- 78,188 15,950 -- 94,138
Property and Equipment
Land............................................ 79,807 7,199 1,013 -- 88,019
Buildings and improvements...................... 351,081 21,017 5,071 -- 377,169
Equipment....................................... 103,125 4,900 3,529 -- 111,554
----------- ------------- ------------ ------------ ------------
534,013 33,116 9,613 -- 576,742
Accumulated depreciation........................ (87,503) (2,716) (658) -- (90,877)
Construction in progress........................ 2,650 251 1 -- 2,902
----------- ------------- ------------ ------------ ------------
449,160 30,651 8,956 -- 488,767
Other Long-Term Assets(1)......................... 129,898 18,398 1,010,425 (1,125,472) 33,249
Intangible assets, net............................ 29,498 11,811 20,520 -- 61,829
----------- ------------- ------------ ------------ ------------
$ 855,215 $ 158,561 $1,110,038 $(1,140,256) $ 983,558
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................ $ 50,510 $ 8,424 $ 12,086 $ -- $ 71,020
Accrued liabilities and income tax payable...... 67,646 4,156 68,541 -- 140,343
Current maturities of long-term debt and capital
lease obligations............................. 2,673 126 -- -- 2,799
----------- ------------- ------------ ------------ ------------
Total Current Liabilities..................... 120,829 12,706 80,627 -- 214,162
Long-Term Debt and Capital Lease Obligations...... (344,312) 5,271 877,811 -- 538,770
Reserve for Unpaid Claims......................... -- 89,207 25,702 (14,784) 100,125
Deferred Credits and Other Long-Term Liabilities
(1)............................................. 512,425 476 37,338 (515,785) 34,455
Minority interest................................. -- -- -- 7,486 7,486
Stockholders' Equity
Common Stock, par value $0.25 per share;
Authorized 80,000 shares
Issued and outstanding - 28,405 shares........ 2,765 837 7,101 (3,602) 7,101
Commitments and contingencies
Other Stockholders' Equity
Additional paid-in capital...................... 612,131 30,455 253,295 (642,586) 253,295
Retained earnings (Accumulated deficit)......... (47,789) 22,601 (161,840) 25,188 (161,840)
Warrants outstanding............................ -- -- 64 -- 64
Common Stock in treasury 462 shares............. -- (4,736) (9,238) 4,736 (9,238)
Cumulative foreign currency adjustments......... (835) 1,744 (822) (909) (822)
----------- ------------- ------------ ------------ ------------
566,272 50,901 88,560 (617,173) 88,560
----------- ------------- ------------ ------------ ------------
855,215 158,561 1,110,038 (1,140,256) 983,558
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
</TABLE>
- ------------------------
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
The accompanying Notes to Condensed Consolidating Financial Statements
are an integral part of these balance sheets.
F-31
<PAGE>
15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
ASSETS SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents....................... $ 29,751 $ 79,552 $ 11,642 $ -- $ 120,945
Accounts receivable, net........................ 139,523 44,904 5,451 -- 189,878
Supplies........................................ 4,091 394 268 -- 4,753
Other current assets............................ 8,379 121 14,074 -- 22,574
----------- ------------- ------------ ------------ ------------
Total Current Assets.......................... 181,744 124,971 31,435 -- 338,150
Assets restricted for settlement of unpaid claims
a other long-term liabilities................... -- 78,542 26,761 -- 105,303
Property and Equipment
Land............................................ 74,790 6,657 1,984 -- 83,431
Buildings and improvements...................... 350,187 33,493 5,141 -- 388,821
Equipment....................................... 112,748 25,206 8,961 -- 146,915
----------- ------------- ------------ ------------ ------------
537,725 65,356 16,086 -- 619,167
Accumulated depreciation........................ (111,556) (10,313) (4,184) -- (126,053)
Construction in progress........................ 1,586 621 69 -- 2,276
----------- ------------- ------------ ------------ ------------
427,755 55,664 11,971 -- 495,390
Other Long-Term Assets (1)........................ 98,191 (56,176) 1,187,042 (1,155,775) 73,282
Goodwill, net..................................... 20,645 94,682 12,685 -- 128,012
----------- ------------- ------------ ------------ ------------
$ 728,335 $ 297,683 $1,269,894 $(1,155,775) $1,140,137
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................ $ 32,644 $ 34,057 $ 12,265 $ -- $ 78,966
Accrued liabilities and income tax payable...... 57,948 55,208 76,443 -- 189,599
Current maturities of long-term debt and capital
lease obligations............................. 2,620 3,131 -- -- 5,751
----------- ------------- ------------ ------------ ------------
Total Current Liabilities..................... 93,212 92,396 88,708 -- 274,316
Long-Term Debt and Capital Lease Obligations...... (455,333) 8,815 1,012,825 -- 566,307
Deferred Income Tax Liabilities................... -- (4,252) 16,620 -- 12,368
Reserve for Unpaid Claims......................... -- 72,494 546 -- 73,040
Deferred Credits and Other Long-Term
Liabilities(1).................................. 352,044 43,565 29,378 (385,218) 39,769
Minority interest................................. -- -- -- 52,520 52,520
Stockholders' Equity
Common Stock, par value $0.25 per share;
Authorized - 80,000 shares
Issued and outstanding - 33,007 shares........ 2,764 (483) 8,252 (2,281) 8,252
Committments and contingencies
Other Stockholders' Equity
Additional paid-in capital...................... 609,627 30,237 327,681 (639,864) 327,681
Retained earnings (Accumulated deficit)......... 126,826 58,932 (129,457) (185,758) (129,457)
Warrants outstanding............................ -- -- 54 -- 54
Common Stock in treasury, 4,424 shares.......... -- (4,736) (82,731) 4,736 (82,731)
Cumulative foreign currency adjustments......... (805) 715 (1,982) 90 (1,982)
----------- ------------- ------------ ------------ ------------
738,412 84,665 121,817 (823,077) 121,817
----------- ------------- ------------ ------------ ------------
$ 728,335 $ 297,683 $1,269,894 $(1,155,775) $1,140,137
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
</TABLE>
- ------------------------
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
The accompanying Notes to Condensed Consolidating Financial Statements
are an integral part of these balance sheets.
F-32
<PAGE>
15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
----------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenue............................... $ 890,737 $ 24,390 $ 6,931 $ (17,412) $ 904,646
Costs and expenses
Salaries, supplies and other operating
expenses.............................. 622,815 21,148 34,885 (17,412) 661,436
Bad debt expense........................ 70,856 (2) (231) -- 70,623
Depreciation and amortization........... 26,602 1,027 725 -- 28,354
Amortization of reorganization value in
excess of amoounts allocable to
identifiable assets................... -- -- 31,200 -- 31,200
Interest, net........................... (20,830) 21 60,203 -- 39,394
ESOP expense............................ 46,316 -- 2,881 -- 49,197
Stock option expense.................... -- -- 10,614 -- 10,614
Unusual items........................... 787 196 70,304 71,287
----------- ------- ------------ ------------ ------------
746,546 22,390 210,581 (17,412) 962,105
----------- ------- ------------ ------------ ------------
Income (loss) before income taxes, equity
in earnings (loss) of subsidiaries and
extraordinary item........................ 144,191 2,000 (203,650) -- (57,459)
Income tax benefit........................ (8,753) (195) 1,556 -- (10,504)
----------- ------- ------------ ------------ ------------
Income (loss) before equity in earnings
(loss) of subsidiaries and extraordinary
item...................................... 152,944 2,195 (202,094) -- (46,955)
Equity in earnings (loss) of
subsidiaries.............................. 1,889 -- 155,091 (157,028) (48)
----------- ------- ------------ ------------ ------------
Income (loss) before extraordinary item... 154,833 2,195 (47,003) (157,028) (47,003)
Extraordinary item -- loss on early
extinguishment or discharge of debt (net
of income tax benefit of $8,410).......... -- -- (12,616) -- (12,616)
----------- ------- ------------ ------------ ------------
Net income (loss)......................... $ 154,833 $ 2,195 $ (59,619) $ (157,028) $ (59,619)
----------- ------- ------------ ------------ ------------
----------- ------- ------------ ------------ ------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash provided by (used in) operating
activities................................ $ 153,152 $ 7,097 $ (61,902) $ -- $ 98,347
Cash Flows from Investing Activities:
Capital expenditures.................... (14,282) (344) -- -- (14,626)
Proceeds from the sale of assets........ 11,584 -- 5,000 -- 16,584
Acquisitions of businesses.............. (129,816) (734) -- -- (130,550)
(Increase) decrease in assets restricted
for the settlement of unpaid claims... -- (124) 7,200 -- 7,076
----------- ------- ------------ ------------ ------------
Cash provided by (used in) investing
activities................................ (132,514) (1,202) 12,200 -- (121,516)
----------- ------- ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt...... 25,862 -- 355,936 -- 381,798
Payments on debt and capital lease
obligations........................... (19,797) (45) (291,711) -- (311,553)
Cash flows from other financing
activities............................ -- -- (3,475) -- (3,475)
----------- ------- ------------ ------------ ------------
Cash provided by (used in) financing
activities................................ 6,065 (45) 60,750 -- 66,770
----------- ------- ------------ ------------ ------------
Net increase in cash and cash
equivalents............................... 26,703 5,850 11,048 -- 43,601
Cash and cash equivalents at beginning of
period.................................... 45,147 2,756 38,099 -- 86,002
----------- ------- ------------ ------------ ------------
Cash and cash equivalents at end of
period.................................... $ 71,850 $ 8,606 $ 49,147 $ -- $ 129,603
----------- ------- ------------ ------------ ------------
----------- ------- ------------ ------------ ------------
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements
are an integral part of these statements.
F-33
<PAGE>
15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
---------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenue....................................... $1,099,039 $ 79,702 $ (2,792) $ (24,213) $1,151,736
Costs and expenses
Salaries, supplies and other operating
expenses...................................... 789,850 74,449 22,934 (23,635) 863,598
Bad debt expense................................ 91,945 2,088 (2,011) -- 92,022
Depreciation and amortization................... 35,769 2,073 823 (578) 38,087
Amortization of reorganization value in excess
of amounts allocable to identifiable assets... -- -- 26,000 -- 26,000
Interest, net................................... (32,975) 32 88,180 -- 55,237
ESOP expense.................................... 55,497 70 17,960 -- 73,527
Stock option expense............................ -- -- (467) -- (467)
Unusual items................................... 26,640 3,957 26,840 -- 57,437
----------- ------------- ------------- ------------ ------------
966,726 82,669 180,259 (24,213) 1,205,441
----------- ------------- ------------- ------------ ------------
Income (loss) before income taxes and equity in
earnings of subsidiaries.......................... 132,313 (2,967) (183,051) -- (53,705)
Provision for (benefit from) income taxes......... 6,139 (2,418) (14,803) -- (11,082)
----------- ------------- ------------- ------------ ------------
Income (loss) before equity in earnings (loss) of
subsidiaries.................................... 126,174 (549) (168,248) -- (42,623)
Equity in earnings (loss) of continuing
subsidiaries...................................... 3,680 -- 125,285 (129,305) (340)
----------- ------------- ------------- ------------ ------------
Net income (loss)................................. $ 129,854 $ (549) $ (42,963) $ (129,305) $ (42,963)
----------- ------------- ------------- ------------ ------------
----------- ------------- ------------- ------------ ------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash provided by (used in) operating activities... $ 82,863 $ 28,223 $ (15,466) $ -- $ 95,620
----------- ------------- ------------- ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures............................ (17,729) (1,177) (1,318) -- (20,224)
Acquisition of businesses....................... (57,882) (4,098) -- -- (61,980)
Increase in assets restricted for the settlement
of un......................................... -- (16,713) (2,893) -- (19,606)
Proceeds from the sale of assets................ -- -- 5,879 -- 5,879
Other........................................... (1,050) -- -- -- (1,050)
----------- ------------- ------------- ------------ ------------
Cash provided by (used in) investing activities... (76,661) (21,988) 1,668 -- (96,981)
----------- ------------- ------------- ------------ ------------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt.............. 28,869 -- -- -- 28,869
Payments on debt and capital lease
obligations................................... (46,202) (31) (546) -- (46,779)
Purchases of treasury stock..................... -- (4,531) (818) -- (5,349)
Cash flows from other financing activities...... -- -- 531 -- 531
----------- ------------- ------------- ------------ ------------
Cash provided by (used in) financing activities... (17,333) (4,562) (833) -- (22,728)
----------- ------------- ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents....................................... (11,131) 1,673 (14,631) -- (24,089)
Cash and cash equivalents at beginning of
period............................................ 71,850 8,606 49,147 -- 129,603
----------- ------------- ------------- ------------ ------------
Cash and cash equivalents at end of period........ $ 60,719 $ 10,279 $ 34,516 $ -- $ 105,514
----------- ------------- ------------- ------------ ------------
----------- ------------- ------------- ------------ ------------
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements
are an integral part of these statements.
F-34
<PAGE>
15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenue....................................... $1,012,448 $ 349,910 $ 975 $ (18,054) $1,345,279
Costs and expenses
Salaries, supplies and other operating
expenses...................................... 767,317 300,919 14,263 (18,054) 1,064,445
Bad debt expense................................ 76,784 5,379 (693) -- 81,470
Depreciation and amortization................... 35,801 11,969 1,154 -- 48,924
Interest, net................................... (42,935) (1,038) 91,990 -- 48,017
Stock option expense............................ -- -- 914 -- 914
Unusual items................................... 4,897 1,265 31,109 -- 37,271
----------- ------------- ------------- ------------ ------------
841,864 318,494 138,737 (18,054) 1,281,041
----------- ------------- ------------- ------------ ------------
Income (loss) before income taxes and equity in
earnings (loss) of subsidiaries................. 170,584 31,416 (137,762) -- 64,238
Provision for (benefit from) income taxes......... (14,543) 9,317 30,921 -- 25,695
----------- ------------- ------------- ------------ ------------
Income (loss) before equity in earnings (loss) of
subsidiaries.................................... 185,127 22,099 (168,683) -- 38,543
Equity in earnings (loss) of continuing
subsidiaries...................................... (997) (4,772) 201,066 201,457 (6,160)
----------- ------------- ------------- ------------ ------------
Net income (loss)................................. $ 184,130 $ 17,327 $ 32,383 $ (201,457) $ 32,383
----------- ------------- ------------- ------------ ------------
----------- ------------- ------------- ------------ ------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash provided by operating activities............. $ 8,028 $ 67,865 $ 25,973 $ -- $ 101,866
----------- ------------- ------------- ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures............................ (27,543) (5,687) (5,571) -- (38,801)
Acquisition of businessess...................... (820) 35,792 (85,890) -- (50,918)
Increase in assets restricted for the settlement
of unpaid claims.............................. -- (28,543) 10,811 -- (17,732)
Proceeds from the sale of assets................ 2,663 2,585 -- -- 5,248
----------- ------------- ------------- ------------ ------------
Cash provided by (used in) investing activities... (25,700) 4,147 (80,650) -- (102,203)
----------- ------------- ------------- ------------ ------------
Cash Flows from Financing Activities:
Payments on debt and capital lease obligations (13,296) (4,539) (68,000) -- (85,835)
Proceeds from the issuance of debt.............. -- 1,800 103,000 -- 104,800
Proceeds from the issuance of common stock, net
of issuance costs............................. -- -- 68,573 -- 68,573
Purchase of treasury stock...................... -- -- (73,493) -- (73,493)
Income tax payments made on behalf of stock
optionee...................................... -- -- (1,678) -- (1,678)
Proceeds from exercise of stock options &
warrants...................................... -- -- 3,401 -- 3,401
----------- ------------- ------------- ------------ ------------
Cash provided by (used in) financing activities... (13,296) (2,739) 31,803 -- 15,768
----------- ------------- ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents....................................... (30,968) 69,273 (22,874) -- 15,431
Cash and cash equivalents at beginning of
period............................................ 60,719 10,279 34,516 -- 105,514
----------- ------------- ------------- ------------ ------------
Cash and cash equivalents at end of period........ $ 29,751 $ 79,552 $ 11,642 $ -- $ 120,945
----------- ------------- ------------- ------------ ------------
----------- ------------- ------------- ------------ ------------
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements
are an integral part of these statements.
F-35
<PAGE>
15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
General--These condensed consolidating financial statements reflect the
Guarantors under the Notes and the Revolving Credit Agreement consummated in May
1994. The direct and indirect Guarantors are wholly owned by the Company or a
Guarantor Subsidiary of the Company. Separate financial statements of the
Guarantors are not presented because the Guarantors are jointly, severally and
unconditionally liable under the guarantee, and the Company believes the
condensed consolidating financial statements presented are more meaningful in
understanding the financial position of the Guarantor Subsidiaries, and the
separate financial statements are deemed not material to investors.
Distributions--There are no restrictions on the ability of the Guarantor
Subsidiaries to make distributions to the Company.
Transfers from Guarantors to Nonguarantors--The New Revolving Credit
Agreement permits the Company to contribute the assets of hospitals and related
medical facilities to joint ventures that conduct a healthcare business,
provided that certain conditions are satisfied and that the aggregate fair
market value of all such facilities contributed to joint ventures with respect
to which the Company and its wholly-owned subsidiaries have less than 50% of the
equity interests or do not control such joint ventures does not exceed $100
million. Furthermore, the New Revolving Credit Agreement permits the Company and
its Subsidiaries to make investments in controlled joint ventures up to $100
million plus the amount permitted but not used for uncontrolled joint ventures.
The indenture related to the Notes also contains provisions that permit the
Company and its Restricted Subsidiaries (as defined in the indenture for the
Notes) to make investments in non-guarantors.
The Company intends to make investments in Permitted Non-Control Investments
(as defined in the New Revolving Credit Agreement) and Permitted Non Guarantor
Transactions (as defined in the New Revolving Credit Agreement) to the extent it
believes doing so will be consistent with its business strategy. To the extent
the Company or its Restricted Subsidiaries make investments of the type
described above, the assets available for debt payments and guarantee
obligations could be diminished.
F-36
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF
CLASSIFICATION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------------------------- ----------- ----------- ------------ ------------- -----------
Year ended September 30, 1994:
Allowance for doubtful accounts...................... $ 28,843 $ 70,623 $ 19,877(A) $ 109(B) $ 43,555
8,560(D) 84,239(C)
----------- ----------- ------------ ------------- -----------
$ 28,843 $ 70,623 28,437 $ 84,348 $ 43,555
----------- ----------- ------------ ------------- -----------
----------- ----------- ------------ ------------- -----------
Year ended September 30, 1995:
Allowance for doubtful accounts...................... $ 43,555 $ 92,022 $ 21,393(A) $ 111,021(C) $ 48,741
2,792(D)
----------- ----------- ------------ ------------- -----------
43,555 $ 92,022 $ 24,185 $ 111,021 $ 48,741
----------- ----------- ------------ ------------- -----------
----------- ----------- ------------ ------------- -----------
Year ended September 30, 1996:
Allowance for doubtful accounts...................... $ 48,741 $ 81,470 $ 22,761(A) $ 103,236(C) $ 50,548
812(D)
----------- ----------- ------------ ------------- -----------
$ 48,741 $ 81,470 $ 23,573 $ 103,236 $ 50,548
----------- ----------- ------------ ------------- -----------
----------- ----------- ------------ ------------- -----------
</TABLE>
- ------------------------
(A) Recoveries of amounts previously charged to income.
(B) Included in provision for restructuring for operations.
(C) Accounts written off.
(D) Allowance for doubtful accounts assumed in acquisitions.
S-1
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CREDIT AGREEMENT
dated as of October 16, 1996
among
MAGELLAN HEALTH SERVICES, INC.,
THE SUBSIDIARY BORROWERS NAMED HEREIN,
THE LENDERS NAMED HEREIN,
and
THE CHASE MANHATTAN BANK,
as Administrative Agent,
Collateral Agent and an Issuing Bank,
and
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as Syndication Agent and an Issuing Bank
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[CS&M Reference No. 6700-439]
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.02. TERMS GENERALLY . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE II
THE CREDITS
SECTION 2.01. COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.02. LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.03. BORROWING PROCEDURE . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.04. EVIDENCE OF DEBT; REPAYMENT OF LOANS. . . . . . . . . . . . . 26
SECTION 2.05. FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.06. INTEREST ON LOANS . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 2.07. DEFAULT INTEREST. . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 2.08. ALTERNATE RATE OF INTEREST. . . . . . . . . . . . . . . . . . 28
SECTION 2.09. TERMINATION AND REDUCTION OF COMMITMENTS. . . . . . . . . . . 29
SECTION 2.10. CONVERSION AND CONTINUATION OF BORROWINGS. . . . . . . . . . 29
SECTION 2.11. PREPAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 2.12. MANDATORY COMMITMENT REDUCTIONS . . . . . . . . . . . . . . . 31
SECTION 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES . . . . . . . . 32
SECTION 2.14. CHANGE IN LEGALITY. . . . . . . . . . . . . . . . . . . . . . 33
SECTION 2.15. INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 2.16. PRO RATA TREATMENT. . . . . . . . . . . . . . . . . . . . . . 34
SECTION 2.17. SHARING OF SETOFFS. . . . . . . . . . . . . . . . . . . . . . 35
SECTION 2.18. PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 2.19. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 2.20. ASSIGNMENT OF COMMITMENTS UNDER CERTAIN CIRCUMSTANCES;
DUTY TO MITIGATE . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.21. LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 2.22. ADDITIONAL BORROWERS. . . . . . . . . . . . . . . . . . . . . 42
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. ORGANIZATION; POWERS. . . . . . . . . . . . . . . . . . . . . 43
SECTION 3.02. AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 3.03. ENFORCEABILITY. . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 3.04. GOVERNMENTAL APPROVALS. . . . . . . . . . . . . . . . . . . . 43
<PAGE>
Contents, p. 2
PAGE
----
SECTION 3.05. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 44
SECTION 3.06. NO MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . 44
SECTION 3.07. TITLE TO PROPERTIES; POSSESSION UNDER LEASES. . . . . . . . . 44
SECTION 3.08. SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 3.09. LITIGATION; COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . 44
SECTION 3.10. AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 3.11. FEDERAL RESERVE REGULATIONS . . . . . . . . . . . . . . . . . 45
SECTION 3.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. . 45
SECTION 3.13. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 3.14. TAX RETURNS . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 3.15. NO MATERIAL MISSTATEMENTS . . . . . . . . . . . . . . . . . . 45
SECTION 3.16. EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . 46
SECTION 3.17. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . 46
SECTION 3.18. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 3.19. SECURITY DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 47
SECTION 3.20. LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 3.21. SOLVENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE IV
CONDITIONS OF LENDING
SECTION 4.01. ALL CREDIT EVENTS . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 4.02. FIRST CREDIT EVENT. . . . . . . . . . . . . . . . . . . . . . 49
SECTION 4.03. CREDIT EVENTS IN RESPECT OF ADDITIONAL REVOLVING
FACILITY BORROWINGS. . . . . . . . . . . . . . . . . . . 52
SECTION 4.04. NEW SUBSIDIARY BORROWER CREDIT EVENT. . . . . . . . . . . . . 53
ARTICLE V
AFFIRMATIVE COVENANTS
SECTION 5.01. EXISTENCE; BUSINESSES AND PROPERTIES. . . . . . . . . . . . . 53
SECTION 5.02. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 5.03. OBLIGATIONS AND TAXES . . . . . . . . . . . . . . . . . . . . 54
SECTION 5.04. FINANCIAL STATEMENTS, REPORTS, ETC. . . . . . . . . . . . . . 55
SECTION 5.05. LITIGATION AND OTHER NOTICES. . . . . . . . . . . . . . . . . 57
SECTION 5.06. EMPLOYEE BENEFITS . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 5.07. MAINTAINING RECORDS; ACCESS TO PROPERTIES AND INSPECTIONS . . 57
SECTION 5.08. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 5.09. COMPLIANCE WITH ENVIRONMENTAL LAWS. . . . . . . . . . . . . . 58
SECTION 5.10. PREPARATION OF ENVIRONMENTAL REPORTS. . . . . . . . . . . . . 58
SECTION 5.11. FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . 58
<PAGE>
Contents, p. 3
PAGE
----
ARTICLE VI
NEGATIVE COVENANTS
SECTION 6.01. INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 6.02. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 6.03. SALE AND LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . 63
SECTION 6.04. INVESTMENTS, LOANS, ADVANCES AND CERTAIN
OTHER TRANSACTIONS . . . . . . . . . . . . . . . . . . . 63
SECTION 6.05. MERGERS, CONSOLIDATIONS, SALES OF ASSETS AND ACQUISITIONS . . 65
SECTION 6.06. DIVIDENDS AND DISTRIBUTIONS; RESTRICTIONS ON ABILITY
OF SUBSIDIARIES TO PAY DIVIDENDS . . . . . . . . . . . . 66
SECTION 6.07. TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . 67
SECTION 6.08. OTHER INDEBTEDNESS AND AGREEMENTS . . . . . . . . . . . . . . 67
SECTION 6.09. BUSINESS OF THE BORROWERS AND SUBSIDIARIES. . . . . . . . . . 68
SECTION 6.10. INTEREST EXPENSE COVERAGE RATIO . . . . . . . . . . . . . . . 68
SECTION 6.11. LEVERAGE RATIO. . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 6.12. SENIOR DEBT RATIO . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 6.13. FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . 68
ARTICLE VII
EVENTS OF DEFAULT
ARTICLE VIII
THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT AND THE COLLATERAL AGENT
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 9.02. SURVIVAL OF AGREEMENT . . . . . . . . . . . . . . . . . . . . 74
SECTION 9.03. BINDING EFFECT. . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 9.04. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . 75
SECTION 9.05. EXPENSES; INDEMNITY . . . . . . . . . . . . . . . . . . . . . 78
SECTION 9.06. RIGHT OF SETOFF . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 9.07. APPLICABLE LAW. . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 9.08. WAIVERS; AMENDMENT. . . . . . . . . . . . . . . . . . . . . . 79
SECTION 9.09. INTEREST RATE LIMITATION. . . . . . . . . . . . . . . . . . . 80
SECTION 9.10. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 9.11. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . 81
SECTION 9.12. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 9.13. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 9.14. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 9.15. JURISDICTION; CONSENT TO SERVICE OF PROCESS . . . . . . . . . 81
<PAGE>
Contents, p. 4
PAGE
----
SECTION 9.16. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 9.17. OBLIGATIONS JOINT AND SEVERAL . . . . . . . . . . . . . . . . 83
EXHIBITS, ANNEX AND SCHEDULES
Exhibit A Form of Administrative Questionnaire
Exhibit B Form of Assignment and Acceptance
Exhibit C-1 Form of Borrowing Request
Exhibit C-2 Form of New Borrower Agreement
Exhibit C-3 Form of Subsidiary Borrower Termination
Exhibit D Form of Guarantee Agreement
Exhibit E Form of Indemnity, Subrogation and Contribution Agreement
Exhibit F Form of Pledge Agreement
Exhibit G Form of Security Agreement
Exhibit H-1 Opinion of King & Spalding
Exhibit H-2 Opinion of Foreign Counsel
Schedule 1 Subsidiary Borrowers
Schedule 1.01(a) Existing Letters of Credit
Schedule 1.01(b) Guarantors
Schedule 1.01(c) Real Estate for Sale
Schedule 2.01 Commitments
Schedule 3.08 Subsidiaries
Schedule 3.09 Litigation
Schedule 3.17 Environmental Matters
Schedule 3.18 Insurance
Schedule 4.02(a) Foreign Counsel
Schedule 6.01(a) Indebtedness
Schedule 6.02(a) Liens
Schedule 6.04(m) Investments, Loans and Advances
Schedule 6.06(b) Intercompany Dividend Restrictions and Encumbrances
<PAGE>
CREDIT AGREEMENT dated as of October 16, 1996, among
MAGELLAN HEALTH SERVICES, INC., a Delaware corporation (the
"PARENT BORROWER"), each subsidiary of the Parent Borrower listed
on Schedule 1 hereto or as otherwise defined herein (each, a
"SUBSIDIARY BORROWER" and collectively, the "SUBSIDIARY
BORROWERS" (such term is used herein as modified in Article I);
the Parent Borrower and the Subsidiary Borrowers are collectively
referred to herein as the "BORROWERS"); the Lenders (as defined
in Article I), THE CHASE MANHATTAN BANK, a New York banking
corporation, as administrative agent (in such capacity, the
"ADMINISTRATIVE AGENT") for the Lenders, as collateral agent (in
such capacity, the "COLLATERAL AGENT") for the Lenders and as an
issuing bank (in such capacity, an "ISSUING BANK") and FIRST
UNION NATIONAL BANK OF NORTH CAROLINA, a North Carolina banking
corporation, as syndication agent (in such capacity, the
"SYNDICATION AGENT") for the Lenders and as an issuing bank (in
such capacity, an "ISSUING BANK", and together with The Chase
Manhattan Bank in its capacity as an Issuing Bank, the "ISSUING
BANKS").
The Borrowers have requested the Lenders to extend credit to the
Borrowers (a) pursuant to the Refinancing Revolving Credit Facility (such term
and each other capitalized term used but not defined herein having the meaning
given it in Article I), in the form of Refinancing Revolving Loans at any time
and from time to time prior to the Refinancing Revolving Facility Maturity Date,
in an aggregate principal amount at any time outstanding not in excess of
$300,000,000 and (b) pursuant to the Additional Revolving Credit Facility, in
the form of Additional Revolving Loans at any time and from time to time prior
to the Additional Revolving Facility Maturity Date, in an aggregate principal
amount at any time outstanding not in excess of $100,000,000. The Borrowers
have requested the Issuing Banks to issue letters of credit under the
Refinancing Revolving Credit Facility, in an aggregate face amount at any time
outstanding not in excess of $100,000,000, to support payment obligations
incurred in the Borrowers' and the Subsidiaries' business.
The proceeds of the Refinancing Revolving Loans are to be used solely
(a) on the Closing Date, (i) to refinance the principal of, and to pay all
interest, fees and other amounts payable in respect of, the outstanding loans
under the Existing Credit Agreement and (ii) to pay fees and expenses incurred
in connection with the execution of this Agreement and the other Loan Documents
(clauses (i) and (ii) are collectively referred to herein as the
"TRANSACTIONS"), and (b) on or after the Closing Date, (i) for general corporate
purposes and (ii) to finance acquisitions, investments, stock repurchases and
debt repurchases, in each case as permitted hereunder. The proceeds of the
Additional Revolving Loans are to be used solely on or after the date specified
herein for (i) general corporate purposes and (ii) to finance acquisitions,
investments, stock repurchases and debt repurchases, in each case as permitted
hereunder.
The Lenders are willing to extend such credit to the Borrowers and
each Issuing Bank is willing to issue letters of credit for the account of the
Borrowers on the terms and subject to the conditions set forth herein.
Accordingly, the parties hereto agree as follows:
<PAGE>
2
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINED TERMS. As used in this Agreement, the
following terms shall have the meanings specified below:
"ABR BORROWING" shall mean a Borrowing comprised of ABR Loans.
"ABR LOAN" shall mean any Loan bearing interest at the Alternate Base
Rate in accordance with the provisions of Article II.
"ACQUIRED ENTITY" shall mean the assets, in the case of an acquisition
of assets, or the capital stock or other equity interests (or, if the context
requires, the person that is the issuer of such capital stock or other equity
interests), in the case of an acquisition of capital stock or other equity
interests, acquired by any Borrower or any Guarantor pursuant to a Permitted
Acquisition.
"ACQUIRED ENTITY EBITDA" shall mean, for purposes of clause (c) of the
definition of Consolidated EBITDA, the net income of any Acquired Entity PLUS
(ii) to the extent deducted in the determination of such Acquired Entity's net
income, the sum of such Acquired Entity's: (A) aggregate amount of income tax
expense for such period, (B) aggregate amount of interest expense for such
period and (C) aggregate amount of amortization, depreciation and other non-cash
charges (including amortization of goodwill, transaction expenses, employee
stock ownership plan expense, excess reorganization expense, stock option
expense, covenants not to compete and other intangible assets) for such period,
all as determined in accordance with GAAP, PROVIDED that for purposes of
determining Acquired Entity EBITDA, (i) all extraordinary gains or losses of
such Acquired Entity and (ii) the gain (or loss) attributable to the sale of any
assets of such Acquired Entity outside the ordinary course of business shall not
be included in such Acquired Entity's net income.
"ADDITIONAL FACILITY LENDER" shall mean a Lender that has an
Additional Loan Commitment or, if such Commitment has expired or terminated,
that has made Additional Revolving Loans that have not been repaid.
"ADDITIONAL LOAN COMMITMENT" shall mean, with respect to each
Additional Facility Lender, the commitment of such Lender to make Additional
Revolving Loans hereunder as set forth on Schedule 2.01, or in the Assignment
and Acceptance pursuant to which such Lender assumed its Additional Loan
Commitment, as applicable, as the same may be (a) reduced from time to time
pursuant to Sections 2.09, 2.11, 2.12 or 2.20 and (b) reduced or increased from
time to time pursuant to assignments by or to such Lender pursuant to
Section 9.04.
"ADDITIONAL REVOLVING CREDIT FACILITY" shall mean the revolving credit
facility pursuant to which Additional Revolving Loans shall be made.
"ADDITIONAL REVOLVING FACILITY BORROWING" shall mean a Borrowing
comprised of Additional Revolving Loans.
<PAGE>
3
"ADDITIONAL REVOLVING FACILITY MATURITY DATE" shall mean the fourth
anniversary of the Credit Agreement.
"ADDITIONAL REVOLVING LOANS" shall mean the loans made by the
Additional Facility Lenders to the Borrowers pursuant to Section 2.01(b) under
the Additional Revolving Credit Facility. Each Additional Revolving Loan shall
be a Eurodollar Loan or an ABR Loan.
"ADJUSTED LIBO RATE" shall mean, with respect to any Eurodollar
Borrowing for any Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next 1/16 of 1%) equal to the product of (a) the LIBO Rate
in effect for such Interest Period and (b) Statutory Reserves.
"ADMINISTRATIVE AGENT" shall have the meaning assigned to such term in
the preamble to this Agreement or any successor appointed pursuant to Article
VIII.
"ADMINISTRATIVE AGENT FEES" shall have the meaning assigned to such
term in Section 2.05(b).
"ADMINISTRATIVE QUESTIONNAIRE" shall mean an Administrative
Questionnaire in the form of Exhibit A.
"AFFILIATE" shall mean, when used with respect to a specified person,
another person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the person
specified.
"AGGREGATE CREDIT EXPOSURE" shall mean the aggregate amount of the
Refinancing Facility Lenders' Credit Exposures.
"ALTERNATE BASE RATE" shall mean, for any day, a rate per annum
(rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of
(a) the Prime Rate in effect on such day and (b) the Federal Funds Effective
Rate in effect on such day plus 1/2 of 1%. If for any reason the Administrative
Agent shall have determined (which determination shall be conclusive absent
manifest error) that it is unable to ascertain the Federal Funds Effective Rate
for any reason, including the inability of the Administrative Agent to obtain
sufficient quotations in accordance with the terms of the definition thereof,
the Alternate Base Rate shall be determined without regard to clause (b) of the
preceding sentence until the circumstances giving rise to such inability no
longer exist. Any change in the Alternate Base Rate due to a change in the
Prime Rate or the Federal Funds Effective Rate shall be effective on the
effective date of such change in the Prime Rate or the Federal Funds Effective
Rate, respectively. The term "PRIME RATE" shall mean the rate of interest per
annum publicly announced from time to time by the Administrative Agent as its
prime rate in effect at its principal office in New York City; each change in
the Prime Rate shall be effective on the date such change is publicly announced
as being effective. The term "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any
day, the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds brokers, as
published on the next succeeding Business Day by the Federal Reserve Bank of
New York, or, if such rate is not so published for any day that is a Business
Day, the average of
<PAGE>
4
the quotations for the day for such transactions received by the Administrative
Agent from three Federal funds brokers of recognized standing selected by it.
"APPLICABLE PERCENTAGE" shall mean, for any day, with respect to any
Eurodollar Loan, or with respect to the Commitment Fees, as the case may be, the
applicable percentage set forth below under the caption "Eurodollar Spread" or
"Fee Percentage", as the case may be, based upon the Leverage Ratio as of the
relevant determination date:
Leverage Ratio Eurodollar Fee
-------------- Spread Percentage
------ ----------
CATEGORY 1 1.50% .375%
Greater than 3.50 to 1.00
CATEGORY 2 1.25% 0.25%
Less than or equal to 3.50 to 1.00
but greater than 2.00 to 1.00
CATEGORY 3 1.00% 0.25%
Less than or equal to 2.00 to 1.00
but greater than 1.00 to 1.00
CATEGORY 4 0.75% 0.25%
Less than or equal to 1.00 to 1.00
Notwithstanding the foregoing, until the Parent Borrower has delivered
the financial statements for the fiscal quarter ending immediately following the
Closing Date, in accordance with Section 5.04(a) or (b), the Leverage Ratio
shall be deemed to be in Category 2 for purposes of determining the Applicable
Percentage. Each change in the Applicable Percentage resulting from a change in
the Leverage Ratio shall be effective with respect to all Loans, Commitments and
Letters of Credit outstanding on and after the date of delivery to the
Administrative Agent of the financial statements and certificates required by
Section 5.04(a) or (b) indicating such change until the date immediately
preceding the next date of delivery of such financial statements and
certificates indicating another such change. Notwithstanding the foregoing,
(i) at any time during which the Parent Borrower has failed to deliver the
financial statements and certificates required by Section 5.04(a) or (b), or
(ii) at any time after the occurrence and during the continuance of an Event of
Default, the Leverage Ratio shall be deemed to be in Category 1 for purposes of
determining the Applicable Percentage.
"ASSET SALE" shall mean the sale (including any transaction that has
the economic effect of a sale), transfer or other disposition (by way of merger
or otherwise, including sales in connection with a sale and leaseback
transaction permitted pursuant to Section 6.03, or as a result of a Condemnation
Event or a Casualty Event) by the Borrowers or any of the Guarantors to any
person, other than the Borrowers or any Guarantor, of (a) any capital stock of
the Subsidiary Borrowers or any of the Guarantors or (b) any other assets of the
Borrowers or any of the
<PAGE>
5
Guarantors (other than inventory, obsolete or worn out assets, scrap and
Permitted Investments, in each case disposed of in the ordinary course of
business) of the Borrowers or any of the Guarantors, except, (i) sales,
transfers or other dispositions of accounts receivables and related assets of
the Borrowers or any Guarantor in connection with a Permitted Receivables
Financing, (ii) sales, transfers or other dispositions of the Real Estate for
Sale; (iii) sales, transfers or other dispositions that are Permitted Non-
Control Investments or Permitted Non-Guarantor Transactions, (iv) sales,
transfers or other dispositions of Green Spring capital stock pursuant to the
Green Spring Stockholders' Agreement, and (v) sales, transfers or other
dispositions of any assets in one transaction or a series of related
transactions having a value not in excess of $200,000.
"ASSIGNMENT AND ACCEPTANCE" shall mean an assignment and acceptance
entered into by a Lender and an assignee, and accepted by the Administrative
Agent, in the form of Exhibit B or such other form as shall be approved by the
Administrative Agent.
"BACK-UP LETTER OF CREDIT" shall mean any Letter of Credit issued in
order to support any letter of credit that (a) exists on the Closing Date and
(b) is set forth on Schedule 1.01(a).
"BOARD" shall mean the Board of Governors of the Federal Reserve
System of the United States of America.
"BORROWERS" shall mean the Parent Borrower and the Subsidiary
Borrowers.
"BORROWING" shall mean a group of Loans of a single Type made by the
Lenders on a single date and as to which a single Interest Period is in effect.
"BORROWING REQUEST" shall mean a request by the Borrowers in
accordance with the terms of Section 2.03 and substantially in the form of
Exhibit C-1.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or day
on which banks in New York City are authorized or required by law to close;
PROVIDED, HOWEVER, that when used in connection with a Eurodollar Loan, the term
"BUSINESS DAY" shall also exclude any day on which banks are not open for
dealings in dollar deposits in the London interbank market.
"CAPITAL LEASE OBLIGATIONS" of any person shall mean the obligations
of such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person in accordance
with GAAP, and the amount of such obligations shall be the capitalized amount
thereof determined in accordance with GAAP.
"CASUALTY EVENT" shall mean an event pursuant to which the Borrowers
or any of the Guarantors has the right to collect and receive insurance proceeds
(other than business interruption proceeds) under any insurance policies with
respect to any insured casualty to any property of the Borrowers or any of the
Guarantors.
<PAGE>
6
A "CHANGE IN CONTROL" shall be deemed to have occurred if (a) any
person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act
of 1934 as in effect on the date hereof), other than any person or group that
owns at least 5% of the capital stock of the Parent Borrower on the Closing
Date, shall own directly or indirectly, beneficially or of record, shares
representing more than 35% of the aggregate ordinary voting power represented by
the issued and outstanding capital stock of the Parent Borrower; (b) a majority
of the seats (other than vacant seats) on the board of directors of the Parent
Borrower shall at any time be occupied by persons who were neither (i) nominated
by the board of directors of the Parent Borrower, nor (ii) appointed by
directors so nominated; or (c) any change in control (or similar event, however
denominated) with respect to the Parent Borrower shall occur under and as
defined in any indenture or agreement in respect of Indebtedness for borrowed
money in excess of the aggregate principal amount of $12,500,000 to which the
Parent Borrower or any Guarantor is a party.
"CHARTER BEHAVIORAL" shall mean Charter Behavioral Health Systems,
Inc., a Delaware corporation.
"CLOSING DATE" shall mean the date of the first Credit Event.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COLLATERAL" shall mean all the "Collateral" as defined in any
Security Document.
"COLLATERAL AGENT" shall have the meaning assigned to such term in the
preamble to this Agreement or any successor appointed pursuant to Article VIII.
"COMMITMENT" shall mean, with respect to any Lender, such Lender's
Refinancing Loan Commitment and Additional Loan Commitment.
"COMMITMENT FEE" shall have the meaning assigned to such term in
Section 2.05(a).
"CONDEMNATION EVENT" shall mean an event pursuant to which the
Borrowers or any of the Guarantors has the right to collect and receive proceeds
as a result of any action or proceeding for the taking of any property of the
Borrowers or any Guarantor, or any part thereof or interest therein, for public
or quasi-public use under the power of eminent domain, by reason of any public
improvement or condemnation proceeding, or in any other manner.
"CONFIDENTIAL INFORMATION MEMORANDUM" shall mean the Confidential
Information Memorandum of the Parent Borrower dated September, 1996.
"CONSOLIDATED EBITDA" shall mean, for any period, (a) Consolidated Net
Income for such period PLUS (b) to the extent deducted in the determination of
Consolidated Net Income, the sum of: (i) the aggregate amount of income tax
expense for such period, (ii) the aggregate amount of Consolidated Interest
Expense for such period and (iii) the aggregate amount of amortization,
depreciation and other non-cash charges (including amortization of goodwill,
transaction expenses,
<PAGE>
7
employee stock ownership plan expense, excess reorganization expense, stock
option expense, covenants not to compete and other intangible assets) for such
period and PLUS, without duplication, (c) any Acquired Entity EBITDA during such
period, calculated on a PRO FORMA basis as of the first day of such period.
"CONSOLIDATED INTEREST EXPENSE" shall mean, with respect to the Parent
Borrower and the Subsidiaries for any period, the gross interest expense
(including interest expense attributable to Capital Lease Obligations and
Interest Rate Protection Agreements but excluding any non-cash interest expense,
including amortization of deferred loan costs) accrued or paid by the Parent
Borrower and the Subsidiaries for such period, as determined on a consolidated
basis in accordance with GAAP, PLUS (without duplication) (a) interest-
equivalent costs associated with any Permitted Receivables Financing, whether
accounted for as interest expense or loss on the sale of receivables and (b)
interest expense of any Acquired Entity during such period, calculated on a PRO
FORMA basis as of the first day of such period.
"CONSOLIDATED NET INCOME" shall mean, for any period, the net income
(or loss) of the Parent Borrower and the Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, PROVIDED that (a)
there shall be included in the determination of Consolidated Net Income the net
income (or loss) attributable to all Controlled Ventures (it being understood
that such net income (or loss) will be proportionate to the Parent Borrower's
equity interest, direct or indirect, in such Controlled Venture) and (b) there
shall be excluded from the determination of Consolidated Net Income (i) the net
income (or loss) attributable to all Non-Controlled Ventures to the extent that
cash has not been distributed to the Parent Borrower or any of the Subsidiaries,
(ii) all extraordinary gains or losses and (iii) the gain (or loss) attributable
to the sale of any assets of the Parent Borrower or the Subsidiaries permitted
under Section 6.05.
"CONTROL" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and the terms "CONTROLLING" and "CONTROLLED" shall have meanings
correlative thereto. For purposes of this Agreement, "CONTROL" shall be deemed
to exist if, for financial reporting purposes, the Controlled person's financial
statements are consolidated with the financial statement of the Controlling
person.
"CONTROLLED NON-GUARANTOR ENTITIES" shall mean partnerships, joint
ventures or Subsidiary Non-Guarantors in which the Parent Borrower or any of the
Subsidiaries have an ownership interest of 50% or greater of the equity
interests therein and that are Controlled by the Parent Borrower.
"CONTROLLED VENTURES" shall mean the healthcare partnerships and joint
ventures (i) that are Controlled by the Parent Borrower or any of the
Subsidiaries, (ii) of which the Parent Borrower or any of the Subsidiaries has
an ownership interest of 50% or greater of the equity interests therein and
(iii) of which the partnership documents and any other applicable governing
documents contain no restriction or prohibition of any kind on cash
distributions, other than Permitted Restrictions.
"CREDIT EVENT" shall have the meaning assigned to such term in Section
4.01.
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8
"CREDIT EXPOSURE" shall mean, with respect to any Refinancing Facility
Lender at any time, the aggregate principal amount at such time of all
outstanding Refinancing Revolving Loans of such Lender, PLUS the aggregate
amount at such time of such Lender's L/C Exposure.
"DEFAULT" shall mean any event or condition which upon notice, lapse
of time or both would constitute an Event of Default.
"DOLLARS" or "$" shall mean lawful money of the United States of
America.
"DOMESTIC SUBSIDIARIES" shall mean all Subsidiaries incorporated or
organized under the laws of the United States of America, any State thereof or
the District of Columbia.
"ENVIRONMENT" shall mean ambient air, surface water and groundwater
(including potable water, navigable water and wetlands), the land surface or
subsurface strata, the workplace or as otherwise defined in any Environmental
Law.
"ENVIRONMENTAL CLAIM" shall mean any written accusation, allegation,
notice of violation, claim, demand, order, directive, cost recovery action or
other cause of action by, or on behalf of, any Governmental Authority or any
person for damages, injunctive or equitable relief, personal injury (including
sickness, disease or death), Remedial Action costs, tangible or intangible
property damage, natural resource damages, nuisance, pollution, any adverse
effect on the environment caused by any Hazardous Material, or for fines,
penalties or restrictions, resulting from or based upon (a) the existence, or
the continuation of the existence, of a Release (including sudden or non-sudden,
accidental or non-accidental Releases), (b) exposure to any Hazardous Material,
(c) the presence, use, handling, transportation, storage, treatment or disposal
of any Hazardous Material or (d) the violation or alleged violation of any
Environmental Law or Environmental Permit.
"ENVIRONMENTAL LAW" shall mean any and all applicable present and
future treaties, laws, rules, regulations, codes, ordinances, orders, decrees,
judgments, injunctions, notices or binding agreements issued, promulgated or
entered into by any Governmental Authority, relating in any way to the
environment, preservation or reclamation of natural resources, the management,
Release or threatened Release of any Hazardous Material or to health and safety
matters, including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, 42 U.S.C. Sections 9601 ET SEQ. (collectively
"CERCLA"), the Solid Waste Disposal Act, as amended by the Resource Conservation
and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984,
42 U.S.C. Sections 6901 ET SEQ., the Federal Water Pollution Control Act, as
amended by the Clean Water Act of 1977, 33 U.S.C. Sections 1251 ET SEQ., the
Clean Air Act of 1970, as amended 42 U.S.C. Sections 7401 ET SEQ., the Toxic
Substances Control Act of 1976, 15 U.S.C. Sections 2601 ET SEQ., the
Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. Sections 651
ET SEQ., the Emergency Planning and Community Right-to-Know Act of 1986,
42 U.S.C. Sections 11001 ET SEQ., the Safe Drinking Water Act of 1974, as
amended, 42 U.S.C. Sections 300(f) ET SEQ., the Hazardous Materials
Transportation Act, 49 U.S.C. Sections 5101 ET SEQ., and any similar or
implementing state or local law, and all amendments or regulations promulgated
under any of the foregoing.
<PAGE>
9
"ENVIRONMENTAL PERMIT" shall mean any permit, approval, authorization,
certificate, license, variance, filing or permission required by or from any
Governmental Authority pursuant to any Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as the same may be amended from time to time.
"ERISA AFFILIATE" shall mean any trade or business (whether or not
incorporated) that, together with any Loan Party, is treated as a single
employer under Section 414(b) or (c) of the Code, or solely for purposes of
Section 302 of ERISA and Section 412 of the Code, is treated as a single
employer under Section 414 of the Code.
"ERISA EVENT" shall mean (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder, with respect to a
Plan; (b) the adoption of any amendment to a Plan that would require the
provision of security pursuant to Section 401(a)(29) of the Code or Section 307
of ERISA; (c) the existence with respect to any Plan of an "accumulated funding
deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA),
whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or
Section 303(d) of ERISA of an application for a waiver of the minimum funding
standard with respect to any Plan; (e) the incurrence of any liability under
Title IV of ERISA with respect to the termination of any Plan or the withdrawal
or partial withdrawal of any Loan Party or any of its ERISA Affiliates from any
Plan or Multiemployer Plan; (f) the receipt by any Loan Party or any ERISA
Affiliate from the PBGC or a plan administrator of any notice relating to the
intention to terminate any Plan or Plans or to appoint a trustee to administer
any Plan; (g) the receipt by any Loan Party or any ERISA Affiliate of any notice
concerning the imposition of Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA; (h) the occurrence of a "prohibited
transaction" with respect to which any Loan Party or any of its Subsidiaries is
a "disqualified person" (within the meaning of Section 4975 of the Code) or with
respect to which any Loan Party or any such Subsidiary could otherwise be
liable; and (i) any other event or condition with respect to a Plan or
Multiemployer Plan that could reasonably be expected to result in liability of
any Loan Party.
"EURODOLLAR BORROWING" shall mean a Borrowing comprised of Eurodollar
Loans.
"EURODOLLAR LOAN" shall mean any Loan bearing interest at a rate
determined by reference to the Adjusted LIBO Rate in accordance with the
provisions of Article II.
"EVENT OF DEFAULT" shall have the meaning assigned to such term in
Article VII.
"EXISTING CREDIT AGREEMENT" shall mean the Second Amended and Restated
Credit Agreement, dated as of May 2, 1994, and as amended by Amendments 1
through 11 thereto, among the Parent Borrower, Bankers Trust Company, as Agent,
the Syndication Agent, as Co-Agent, and the financial institutions listed on
Annex I thereto.
"FEE LETTER" shall mean the Fee Letter dated August 21, 1996, between
the Parent Borrower, the Administrative Agent and the Syndication Agent.
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10
"FEES" shall mean the Commitment Fees, the Administrative Agent's
Fees, the L/C Participation Fees and the Issuing Bank Fees.
"FINANCIAL OFFICER" of any corporation shall mean any of the chief
financial officer, principal accounting officer, Treasurer and Controller of
such corporation.
"FOREIGN SUBSIDIARY" shall mean any Subsidiary that is not a Domestic
Subsidiary.
"GAAP" shall mean generally accepted accounting principles applied on
a consistent basis.
"GOVERNMENTAL AUTHORITY" shall mean any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or regulatory
body.
"GREEN SPRING" shall mean Green Spring Health Services, Inc., a
Delaware corporation.
"GREEN SPRING EXCHANGE AGREEMENT" shall mean the agreement dated as of
December 13, 1995 among Blue Cross and Blue Shield of New Jersey, Inc., Health
Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau,
Inc. and the Parent Borrower.
"GREEN SPRING STOCKHOLDERS' AGREEMENT" shall mean the stockholders'
agreement dated as of December 13, 1995 among Green Spring, Blue Cross and Blue
Shield of New Jersey, Inc., Health Care Service Corporation, Independence Blue
Cross, Pierce County Medical Bureau, Inc. and the Parent Borrower.
"GUARANTEE" of or by any person shall mean any obligation, contingent
or otherwise, of such person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the "PRIMARY OBLIGOR") in any
manner, whether directly or indirectly, and including any obligation of such
person, direct or indirect, (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness, (b) to purchase or lease property, securities or services for the
purpose of assuring the owner of such Indebtedness of the payment of such
Indebtedness or (c) to maintain working capital, equity capital or any other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness; PROVIDED, HOWEVER, that the
term "Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business.
"GUARANTEE AGREEMENT" shall mean the Guarantee Agreement,
substantially in the form of Exhibit D, made by the Guarantors in favor of the
Collateral Agent for the benefit of the Secured Parties.
"GUARANTORS" shall mean each person listed on Schedule 1.01(b) and
each other person that becomes party to a Guarantee Agreement as a Guarantor,
and the permitted successors and assigns of each such person.
<PAGE>
11
"HAZARDOUS MATERIALS" shall mean all explosive or radioactive
substances or wastes, hazardous or toxic substances or wastes, pollutants,
solid, liquid or gaseous wastes, including petroleum or petroleum distillates,
asbestos or asbestos containing materials, polychlorinated biphenyls ("PCBS") or
PCB-containing materials or equipment, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law.
"INDEBTEDNESS" of any person shall mean, without duplication, (a) all
obligations of such person for borrowed money, (b) all obligations of such
person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such person upon which interest charges are customarily paid,
(d) all obligations of such person under conditional sale or other title
retention agreements relating to property or assets purchased by such person,
(e) all obligations of such person issued or assumed as the deferred purchase
price of property or services (excluding trade accounts payable and accrued
obligations incurred in the ordinary course of business), (f) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such person, whether or not the obligations secured thereby
have been assumed, (g) all Guarantees by such person of Indebtedness of others,
(h) all Capital Lease Obligations of such person, (i) all obligations
(determined on the basis of actual, not notional, obligations) of such person in
respect of interest rate protection agreements, foreign currency exchange
agreements or other interest or exchange rate hedging arrangements and (j) all
obligations of such person as an account party in respect of letters of credit
and bankers' acceptances issued in support of obligations that constitute
Indebtedness under any other clause of this definition (unless such obligations
are fully cash collateralized), PROVIDED that all obligations in respect of
letters of credit shall be deemed Indebtedness to the extent drawings thereunder
are unreimbursed (after any applicable grace period) regardless of the purpose
for which such letter of credit was issued. The Indebtedness of any person
shall include the recourse Indebtedness of any partnership in which such person
is a general partner.
"INDEMNITY, SUBROGATION AND CONTRIBUTION AGREEMENT" shall mean the
Indemnity, Subrogation and Contribution Agreement, substantially in the form of
Exhibit E, among the Borrowers, the Guarantors and the Collateral Agent.
"INSURANCE SUBSIDIARIES" shall mean (a) Golden Isle Assurance Company
and (b) Plymouth Insurance Company, Ltd., each a corporation organized under the
laws of Bermuda, and their respective successors and assigns.
"INTEREST EXPENSE COVERAGE RATIO" shall mean, as of the last day of
any fiscal quarter, the ratio of (a) Consolidated EBITDA for the period of four
consecutive fiscal quarters ended on such day to (b) Consolidated Interest
Expense for such period.
"INTEREST PAYMENT DATE" shall mean, with respect to any Loan, the last
day of the Interest Period applicable to the Borrowing of which such Loan is a
part (and, in the case of a Eurodollar Borrowing with an Interest Period of more
than three months' duration, each day that would have been an Interest Payment
Date had successive Interest Periods of three months' duration
<PAGE>
12
been applicable to such Borrowing), and the date of any prepayment of such
Borrowing or conversion of such Borrowing to a Borrowing of a different Type.
"INTEREST PERIOD" shall mean (a) as to any Eurodollar Borrowing, the
period commencing on the date of such Borrowing and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the
applicable Borrower may elect and (b) as to any ABR Borrowing, the period
commencing on the date of such Borrowing and ending on the earliest of (i) the
last Business Day of March, June, September or December, (ii) the Refinancing
Revolving Facility Maturity Date or the Additional Revolving Facility Maturity
Date, as applicable, and (iii) the date such Borrowing is converted to a
Borrowing of a different Type in accordance with Section 2.10 or repaid or
prepaid in accordance with Section 2.11; PROVIDED, HOWEVER, that, in the case of
a Eurodollar Borrowing, if any Interest Period would end on a day other than a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless such next succeeding Business Day would fall in the next
calendar month, in which case such Interest Period shall end on the next
preceding Business Day. Interest shall accrue from and including the first day
of an Interest Period to but excluding the last day of such Interest Period.
"INTEREST RATE PROTECTION AGREEMENT" shall mean any interest rate
swap, cap or other agreement or arrangement entered into by the Parent Borrower
designed to protect the Parent Borrower against fluctuations in interest rates
and not for speculation, PROVIDED that any such agreement or arrangement
designed to protect against fluctuations in interest rates for borrowed money
entered into after the Closing Date shall be satisfactory to the Administrative
Agent.
"ISSUING BANKS" shall have the meaning assigned to such term in the
preamble to this Agreement, except as amended in Section 2.21(i).
"ISSUING BANK FEES" shall have the meaning assigned to such term in
Section 2.05(c).
"L/C COMMITMENT" shall mean, with respect to each Issuing Bank, the
commitment of such Issuing Bank to issue Letters of Credit pursuant to Section
2.21.
"L/C DISBURSEMENT" shall mean a payment or disbursement made by an
Issuing Bank pursuant to a Letter of Credit.
"L/C EXPOSURE" shall mean at any time the sum of (a) the aggregate
undrawn amount of all outstanding Letters of Credit at such time PLUS (b) the
aggregate principal amount of all L/C Disbursements that have not yet been
reimbursed at such time. The L/C Exposure of any Refinancing Facility Lender at
any time shall mean its Pro Rata Percentage of the aggregate L/C Exposure at
such time.
"L/C PARTICIPATION FEE" shall have the meaning assigned to such term
in Section 2.05(c).
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13
"LENDERS" shall mean (a) the financial institutions listed on
Schedule 2.01 (other than any such financial institution that has ceased to be a
party hereto pursuant to an Assignment and Acceptance) and (b) any financial
institution that has become a party hereto pursuant to an Assignment and
Acceptance.
"LETTER OF CREDIT" shall mean any letter of credit issued pursuant to
Section 2.21.
"LEVERAGE RATIO" shall mean, as of the last day of any fiscal quarter,
the ratio of (a) Total Debt as of such date to (b) Consolidated EBITDA for the
period of four consecutive fiscal quarters ended on such date, all determined on
a consolidated basis in accordance with GAAP.
"LIBO RATE" shall mean, with respect to any Eurodollar Borrowing, the
rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar
deposits approximately equal in principal amount of such Eurodollar Borrowing
and for a maturity comparable to such Interest Period are offered to the
principal London office of the Administrative Agent in immediately available
funds in the London interbank market at approximately 11:00 a.m., London time,
two Business Days prior to the commencement of such Interest Period, as
determined by the Administrative Agent.
"LIEN" shall mean, with respect to any asset, (a) any mortgage, deed
of trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement (or any financing lease
having substantially the same economic effect as any of the foregoing) relating
to such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities.
"LOAN DOCUMENTS" shall mean this Agreement, the Letters of Credit, the
Guarantee Agreement, the Security Documents and the Indemnity, Subrogation and
Contribution Agreement.
"LOAN PARTIES" shall mean the Borrowers and the Guarantors.
"LOANS" shall mean the Refinancing Revolving Loans and the Additional
Revolving Loans.
"MARGIN STOCK" shall have the meaning assigned to such term in
Regulation U.
"MATERIAL ADVERSE EFFECT" shall mean (a) a materially adverse effect
on the business, assets, operations, prospects or condition, financial or
otherwise, of the Parent Borrower and the Subsidiaries taken as a whole,
(b) material impairment of the ability of the Parent Borrower and the other Loan
Parties taken as a whole to perform any of their respective obligations under
any Loan Document to which it is or will be a party or (c) material impairment
of the rights of or benefits available to the Lenders under any Loan Document.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
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14
"NET CASH PROCEEDS" shall mean the cash proceeds of any Asset Sale or
any transaction described in Section 6.05(e) (including cash and cash
equivalents and cash payments received by way of deferred payment or principal
pursuant to a note or installment receivable or otherwise, but only as and when
received), net of (i) costs of sale (including fees, expenses and payment of the
outstanding principal amount of, premium or penalty, if any, interest and other
amounts on any Indebtedness (other than Loans) repaid under the terms thereof as
a result of such Asset Sale), (ii) taxes paid or payable as a result thereof and
(iii) amounts provided as a reserve, in accordance with GAAP, against any
liabilities under any indemnification obligations associated with such Asset
Sale (except that, to the extent and at the time any such amounts are released
from such reserve, such amounts shall constitute Net Cash Proceeds); PROVIDED,
HOWEVER, that if the Asset Sale is a result of a Casualty Event or Condemnation
Event, the cash proceeds thereof for purposes of this definition shall not
include proceeds used to replace or repair the damaged or condemned property, as
applicable, within 180 days of receipt of such proceeds or, if replacement or
repair cannot reasonably be completed within such period, within 360 days of
receipt of such proceeds.
"NEW BORROWER AGREEMENT" shall mean any agreement entered into by a
new Subsidiary Borrower, the Administrative Agent and the Collateral Agent in
accordance with Section 2.22 and substantially in the form of Exhibit C-2.
"NON-CONTROLLED VENTURES" shall mean all partnerships and joint
ventures in which the Parent Borrower or any of the Subsidiaries have an
ownership interest but are not a Controlled Venture.
"OBLIGATIONS" shall mean all obligations defined as "Obligations" in
the Guarantee Agreement and the Security Documents.
"PARENT BORROWER" shall mean Magellan Health Services, Inc., a
Delaware corporation.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to
and defined in ERISA.
"PERFECTION CERTIFICATE" shall mean the Perfection Certificate
substantially in the form of Annex 1 to the Security Agreement.
"PERMITTED ACQUISITION" shall mean any non-hostile acquisition of an
Acquired Entity by the Parent Borrower or any Guarantor in which the Parent
Borrower, any wholly owned Subsidiary or any Guarantor is (x) in the case of an
asset or stock purchase, the purchaser of assets or stock, or (y) in the case of
a merger or consolidation, the surviving entity or the owner of all the capital
stock of the surviving or resulting entity, so long as (a) after giving effect
to such acquisition, (i) the Parent Borrower shall be in compliance, on a PRO
FORMA basis, with all covenants set forth in this Agreement, including the
covenants contained in Section 6.10, 6.11 and 6.12, which shall be recomputed as
at the last day of the most recently ended fiscal quarter (for which financial
information has been delivered pursuant to Section 5.04) of the Parent Borrower
as if such acquisition had occurred on the first day of each relevant period for
testing such compliance, and the Parent Borrower shall have delivered to the
Administrative Agent an officers' certificate to such effect for any
acquisition in excess of $10,000,000, (ii) any Indebtedness of the Acquired
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15
Entity that is acquired or assumed in connection with such acquisition shall be
in compliance with Section 6.01 and (iii) on the date of such acquisition and
immediately after giving effect thereto, no Default or Event of Default shall
have occurred and be continuing, (b) in the case of an asset acquisition, such
assets are to be used, and in the case of an acquisition of capital stock or
other equity interests, the person so acquired is engaged in, a healthcare
business or businesses or reasonably related (ancillary or complementary) line
of business or lines of business and (c) in the case of an acquisition of
capital stock or other equity interests, (i) the Parent Borrower or the
acquiring Guarantor shall acquire at least 50% of the outstanding equity
securities of the Acquired Entity and otherwise Control such Acquired Entity,
(ii) in the case of an Acquired Entity in which no person other than the Parent
Borrower, any Affiliate of the Parent Borrower or any member of management of
the Parent Borrower owns any equity interest, such Acquired Entity shall become
a Guarantor in accordance with Section 5.11 and (iii) all the capital stock of
or other equity interests in such Acquired Entity and any of the subsidiaries of
the Acquired Entity owned by Parent Borrower or any Guarantor shall be pledged
to the Collateral Agent in accordance with Section 5.11.
"PERMITTED DEBT REPURCHASE" shall mean any repurchase of Permitted
Subordinated Indebtedness by the Parent Borrower so long as (a) after giving
effect to such repurchase, (i) the Parent Borrower shall be in compliance, on a
PRO FORMA basis, with all covenants set forth in this Agreement, including the
covenants contained in Section 6.10, 6.11 and 6.12, which shall be recomputed as
at the last day of the most recently ended fiscal quarter (for which financial
information has been delivered pursuant to Section 5.04) of the Parent Borrower
as if such repurchase had occurred on the first day of each relevant period for
testing such compliance, and the Parent Borrower shall have delivered to the
Administrative Agent an officers' certificate to such effect for any repurchase
in excess of $10,000,000 and (ii) on the date of such repurchase and immediately
after giving effect thereto, no Default or Event of Default shall have occurred
and be continuing and (b) after giving effect to such repurchase, the aggregate
amount of cash on the Parent Borrower's consolidated balance sheet PLUS the
remaining available balance of the Total Commitment shall be at least equal to
$50,000,000.
"PERMITTED INVESTMENTS" shall mean:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America or by any agency, instrumentality or sponsored corporation thereof
to the extent such obligations are rated at least A or the equivalent
thereof by Standard & Poor's Ratings Group or at least A-2 or the
equivalent thereof by Moody's Investors Service, Inc., in each case
maturing within one year from the date of acquisition thereof;
(b) investments in commercial paper maturing within 360 days from the
date of acquisition thereof and having, at such date of acquisition, a
rating from Standard & Poor's Ratings Group of A-1 or from Moody's
Investors Service, Inc. of P-1;
(c) investments in certificates of deposit, banker's acceptances and
time deposits maturing within one year from the date of acquisition thereof
issued or guaranteed by or placed with, and money market deposit accounts
issued or offered by, any domestic office of any commercial bank organized
under the laws of the United States of America or any State thereof that
has a combined capital and surplus and undivided profits of not less than
$250,000,000;
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16
(d) repurchase obligations with a term of not more than 90 days for,
and secured by, underlying securities of the types described in clauses (a)
through (c) above entered into with a bank meeting the qualifications
described in clause (c) above;
(e) other investment instruments offered by financial institutions
which have a combined capital and surplus and undivided profits of not less
than $250,000,000; and
(f) deposits made prior to 1992 and interest and income earned thereon
with respect to Parent Borrower's obligations under its Public Issue of
7.5% Dual Currency Swiss Franc Bonds dated 1986 and due 1998/2001.
"PERMITTED NON-CONTROL INVESTMENT" shall mean any investment by the
Parent Borrower or any Guarantor in another corporation or other business entity
so long as (a) after giving effect to such Permitted Non-Control Investment,
(i) the Parent Borrower shall be in compliance, on a PRO FORMA basis, with all
covenants set forth in this Agreement, including the covenants contained in
Sections 6.10, 6.11 and 6.12, which shall be recomputed as at the last day of
the most recently ended fiscal quarter (for which financial information has been
delivered pursuant to Section 5.04) of the Parent Borrower as if such investment
had occurred on the first day of each relevant period for testing such
compliance, and the Parent Borrower shall have delivered to the Administrative
Agent an officers' certificate to such effect for any investment in excess of
$10,000,000 and (ii) on the date of such investment and immediately after giving
effect thereto, no Default or Event of Default shall have occurred and be
continuing, (b) such investment shall constitute either (i) an investment in
less than 50% of the equity interests of such corporation or other business
entity or (ii) an investment in which, notwithstanding the ownership by the
Parent Borrower or any wholly owned Subsidiary of 50% or more of the equity
interests of such corporation or business entity, neither the Parent Borrower
nor any wholly owned Subsidiary Controls such corporation or other business
entity, (c) all the capital stock of such corporation or other business entity
owned by the Parent Borrower or any Guarantor shall be pledged to the Collateral
Agent in accordance with Section 5.11 and (d) the aggregate amount of Permitted
Non-Control Investments made after the Closing Date and outstanding at any time
thereafter shall not exceed $100,000,000 LESS the amount, if any, by which the
outstanding amount of Permitted Non-Guarantor Transactions at such time exceeds
$100,000,000. Subject to satisfaction of the foregoing criteria, the term
"Permitted Non-Control Investment" shall include (a) any investment arising as a
result of sales or other dispositions of common stock of a Guarantor permitted
pursuant to this Agreement, (b) transfers of assets to or other investments in
entities that are neither Controlled Non-Guarantor Entities nor Guarantors and
(c) the granting of any Guarantee of any Indebtedness of any such entity.
"PERMITTED NON-GUARANTOR TRANSACTIONS" shall mean any (a) transfer of
assets by the Parent Borrower or any Guarantor to a Controlled Non-Guarantor
Entity, (b) investments by the Parent Borrower or any Guarantor in Controlled
Non-Guarantor Entities (other than exchanges under the Green Spring Exchange
Agreement and purchases pursuant to the Green Spring Stockholders' Agreement),
(c) Guarantees by the Parent Borrower or any Guarantor of any Indebtedness of
Controlled Non-Guarantor Entities or (d) any transaction that causes any
Guarantor to become a Controlled Non-Guarantor Entity, in each case so long as,
after giving effect to any such transaction, (i) the fair market value of all
assets transferred to Controlled Non-Guarantor Entities (such value to be
determined with respect to each asset as of the time such asset was
transferred), (ii) the amount of then-outstanding investments in Controlled Non-
Guarantor Entities, (iii) the then-outstanding principal amount of Indebtedness
of the Controlled Non-Guarantor Entities
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17
Guaranteed by the Parent Borrower or any Guarantor and (iv) the value of the
equity interests retained by the Parent Borrower or any Guarantor in all
Controlled Non-Guarantor Entities that became Controlled Non-Guarantor Entities
as the result of a Permitted Non-Guarantor Transaction made after the Closing
Date (such value to be determined with respect to each Controlled Non-Guarantor
Entity as of the time the relevant Permitted Non-Guarantor Transaction occurred)
and outstanding at any time thereafter, shall not exceed $100,000,000 in the
aggregate PLUS the amount, if any, by which $100,000,000 exceeds the outstanding
amount of Permitted Non-Control Investments at the time of such transaction.
"PERMITTED RECEIVABLES FINANCING" shall mean any financing secured
substantially by receivables (and related assets) originated by the Parent
Borrower or any Subsidiary, PROVIDED that (i) any such receivables financing
involves the sales of receivables to secure not more than $75,000,000 of
Indebtedness outstanding at any time, (ii) sales of receivables are made at fair
market value for sales of receivables in comparable receivables financings,
(iii) the interest rate applicable to such receivables financing shall be a
market interest rate (as determined in good faith by a Financial Officer of the
Parent Borrower) as of the time such financing is entered into, (iv) such
financing is non-recourse to the Parent Borrower and the Subsidiaries except to
a limited extent customary for such financings and (v) the covenants, events of
default and other provisions thereof, collectively, shall be market terms (as
determined in good faith by a Financial Officer of the Parent Borrower).
"PERMITTED RESTRICTIONS" shall mean, with respect to any Controlled
Venture, provisions contained in the governing documents of such Controlled
Venture that prohibit or otherwise restrict the making of distributions by such
Controlled Venture (a) at any time such Controlled Venture has outstanding
Indebtedness to any owner of equity interests thereof, (b) in the case of
Controlled Ventures that are subject to taxation as a partnership under the Code
to the extent that such distribution would cause any owner of equity interests
thereof to have a negative balance in its capital account, (c) without the
approval of at least a majority of the (i) directors, (ii) managers, managing
members or members, (iii) general partners or (iv) the persons or governing body
performing a similar function as any of the foregoing, (d) to the extent such
distribution would be prohibited by any applicable law, rule or regulation,
(e) out of or through the use of funds of such Controlled Venture that the
directors, managers, managing members, members, general partners (or persons or
governing body performing similar functions) have reasonably determined are
necessary to pay such Controlled Venture's current and anticipated cash
obligations, including operating expenses, debt service, acquisitions, capital
expenditures and reasonable reserves or (f) under other circumstances that are
consented to in writing by the Administrative Agent with respect to such
Controlled Venture.
"PERMITTED STOCK REPURCHASE" shall mean any repurchase by the Parent
Borrower of shares of its common stock so long as (a) after giving effect to
such repurchase, (i) the Parent Borrower shall be in compliance, on a PRO FORMA
basis, with all covenants set forth in this Agreement, including the covenants
contained in Section 6.10, 6.11 and 6.12, which shall be recomputed as at the
last day of the most recently ended fiscal quarter (for which financial
information has been delivered pursuant to Section 5.04) of the Parent Borrower
as if such repurchase had occurred on the first day of each relevant period for
testing such compliance, and the Parent Borrower shall have delivered to the
Administrative Agent an officers' certificate to such effect for any repurchase
that exceeds $10,000,000 and (ii) on the date of such repurchase and immediately
after giving effect thereto, no Default or Event of Default shall exist, (b) the
aggregate amount expended by the Parent Borrower in connection with all
Permitted Stock Repurchases shall
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18
not exceed during the term of this Agreement $27,207,346 and (c) after giving
effect to any such repurchase, the aggregate amount of cash on the Parent
Borrower's consolidated balance sheet PLUS the remaining available balance of
the Total Commitment shall be at least equal to $50,000,000.
"PERMITTED SUBORDINATED INDEBTEDNESS" shall mean (a) the Series A
Notes (including the Guarantees thereof), (b) any Indebtedness of the Parent
Borrower (including any Guarantees thereof) that refinances the Series A Notes,
PROVIDED that (i) such refinancing Indebtedness is in an aggregate principal
amount not greater than the aggregate principal amount of the Series A Notes
plus the amount of any premiums required to be paid thereon and fees and
expenses associated with such refinancing; (ii) such refinancing Indebtedness
has a final maturity later than or equal to and a weighted average life longer
than or equal to the remaining life of the Series A Notes determined as of the
date of the refinancing; (iii) such refinancing Indebtedness bears interest at a
fixed rate, which rate shall be, in the good faith judgment of the Parent
Borrower's board of directors, consistent with the market at the time of
issuance for similar Indebtedness; (iv) such refinancing Indebtedness shall
contain subordination and intercreditor provisions that are no more favorable in
any material respect to the holders thereof than the subordination and
intercreditor provisions contained in the indenture governing the Series A
Notes; (v) the negative and financial covenants (if any) of such refinancing
Indebtedness shall not require the Parent Borrower to maintain any specified
financial condition except as a condition to the taking of certain actions;
(vi) each of the covenants, events of default and other provisions thereof
(including any Guarantees thereof) shall be no less favorable to the Lenders in
any material respect than those contained in the indenture governing the
Series A Notes and (vii) on the date that such refinancing Indebtedness is
incurred and immediately after giving effect thereto, no Default or Event of
Default shall have occurred and be continuing; (c) Indebtedness issued pursuant
to the Green Spring Exchange Agreement; and (d) any other Indebtedness of the
Parent Borrower that is subordinated to all Senior Indebtedness, PROVIDED that
(i) such Indebtedness has a maturity that is after the Refinancing Revolving
Facility Maturity Date, (ii) such Indebtedness bears interest at a rate
consistent with the market at the time of issuance for similar Indebtedness;
(iii) such Indebtedness shall contain subordination and intercreditor provisions
that are no more favorable in any material respect to the holders thereof than
the subordination and intercreditor provisions contained in the indenture
governing the Series A Notes; (iv) the negative financial covenants (if any) of
such Indebtedness shall not require the Parent Borrower to maintain any
specified financial condition except as a condition to the taking of certain
actions; and (v) each of the covenants, events of default and other provisions
thereof (including any Guarantees thereof) shall be no less favorable to the
Lenders in any material respect than those contained in the indenture governing
the Series A Notes.
"PERSON" shall mean any natural person, corporation, limited liability
company, business trust, joint venture, association, company, partnership or
government, or any agency or political subdivision thereof.
"PLAN" shall mean any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or
Section 412 of the Code or Section 307 of ERISA, and in respect of which any
Loan Party or any ERISA Affiliate is (or, if such plan were terminated, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
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19
"PLEDGE AGREEMENT" shall mean the Pledge Agreement, substantially in
the form of Exhibit F, between the Parent Borrower, the Subsidiaries party
thereto and the Collateral Agent for the benefit of the Secured Parties.
"PRO RATA PERCENTAGE" of any Refinancing Facility Lender at any time
shall mean the percentage of the Total Refinancing Loan Commitment represented
by such Lender's Refinancing Loan Commitment.
"PUBLIC SOLUTIONS" shall mean Magellan Public Solutions, Inc., a
Delaware corporation.
"REAL ESTATE FOR SALE" shall mean the real property and improvements
having a book value of $26,195,547 set aside by the Parent Borrower for sale as
set forth in the Parent Borrower's consolidated balance sheet as of June 30,
1996 and described on Schedule 1.01(c).
"REFINANCING INDEBTEDNESS" shall have the meaning assigned to such
term in Section 6.01(o).
"REFINANCING FACILITY LENDER" shall mean a Lender that has a
Refinancing Loan Commitment or, if such Commitment has expired or been
terminated, that has made Refinancing Revolving Loans that have not been repaid.
"REFINANCING LOAN COMMITMENT" shall mean, with respect to each
Refinancing Facility Lender, the commitment of such Lender to make Refinancing
Revolving Loans hereunder as set forth on Schedule 2.01, or in the Assignment
and Acceptance pursuant to which such Lender assumed its Refinancing Loan
Commitment, as applicable, as the same may be (a) reduced from time to time
pursuant to Sections 2.09, 2.11, 2.12 or 2.20 and (b) reduced or increased from
time to time pursuant to assignments by or to such Lender pursuant to Section
9.04.
"REFINANCING REVOLVING CREDIT FACILITY" shall mean the revolving
credit facility pursuant to which Refinancing Revolving Loans shall be made and
Letters of Credit shall be issued.
"REFINANCING REVOLVING FACILITY BORROWING" shall mean a Borrowing
comprised of Refinancing Revolving Loans.
"REFINANCING REVOLVING FACILITY MATURITY DATE" shall mean the fifth
anniversary of the Credit Agreement.
"REFINANCING REVOLVING LOANS" shall mean the loans made by the
Refinancing Facility Lenders to the Borrowers pursuant to Section 2.01(a) under
the Refinancing Revolving Credit Facility. Each Refinancing Revolving Loan
shall be a Eurodollar Loan or an ABR Loan.
"REGISTER" shall have the meaning given such term in Section 9.04(d).
"REGULATION G" shall mean Regulation G of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"REGULATION U" shall mean Regulation U of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
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20
"REGULATION T" shall mean Regulation T of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"REGULATION X" shall mean Regulation X of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"RELEASE" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping,
disposing, depositing, dispersing, emanating or migrating of any Hazardous
Material in, into, onto or through the environment.
"REMEDIAL ACTION" shall mean (a) "remedial action" as such term is
defined in CERCLA, 42 U.S.C. Section 9601(24), and (b) all other actions
required by any Governmental Authority or voluntarily undertaken to:
(i) cleanup, remove, treat, abate or in any other way address any Hazardous
Material in the environment; (ii) prevent the Release or threat of Release, or
minimize the further Release of any Hazardous Material so it does not migrate or
endanger or threaten to endanger public health, welfare or the environment; or
(iii) perform studies and investigations in connection with, or as a
precondition to, (i) or (ii) above.
"REQUIRED LENDERS" shall mean, at any time, Lenders having Loans, L/C
Exposure and unused Commitments representing at least a majority of the sum of
all Loans outstanding, L/C Exposure and unused Commitments at such time.
"RESPONSIBLE OFFICER" of any corporation shall mean any executive
officer or Financial Officer of such corporation and any other officer or
similar official thereof responsible for the administration of the obligations
of such corporation in respect of this Agreement.
"RIGHTS PLAN" shall mean the Rights Agreement dated as of July 21,
1992 between the Parent Borrower and First Union Bank of North Carolina, as
Rights Agent (as defined therein).
"SECURED PARTIES" shall have the meaning assigned to such term in the
Security Agreement.
"SECURITY AGREEMENT" shall mean the Security Agreement, substantially
in the form of Exhibit G, between the Parent Borrower, the Subsidiaries party
thereto and the Collateral Agent for the benefit of the Secured Parties.
"SECURITY DOCUMENTS" shall mean the Security Agreement, the Pledge
Agreement and each of the security agreements and other instruments and
documents executed and delivered pursuant to any of the foregoing or pursuant to
Section 5.11.
"SENIOR DEBT" shall mean Total Debt but excluding all Permitted
Subordinated Indebtedness.
"SENIOR DEBT RATIO" shall mean, as of the last day of any fiscal
quarter, the ratio of (a) Senior Debt as of such date to (b) Consolidated EBITDA
for the period of four consecutive fiscal quarters ended on such date, all
determined on a consolidated basis in accordance with GAAP.
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21
"SENIOR INDEBTEDNESS" shall mean all Indebtedness of the Parent
Borrower and the Subsidiaries, including any Indebtedness incurred pursuant to
this Agreement, unless in the instrument creating or evidencing the same or
pursuant to which the same is outstanding it is provided that such obligations
are not superior in right of payment to any subordinated indebtedness; PROVIDED,
HOWEVER, that Senior Indebtedness shall not include (i) any obligation of the
Parent Borrower to any Subsidiary that is not a Borrower, (ii) any Indebtedness
or obligation of the Parent Borrower and the Subsidiaries which is subordinate
or junior in any respect (other than as a result of such Indebtedness being
unsecured) to any other Indebtedness or obligation of the Parent Borrower and
the Subsidiaries or (iii) any Indebtedness incurred in violation of this
Agreement.
"SERIES A NOTES" shall mean the 11 1/4% Series A Senior Subordinated
Notes due 2004 of the Parent Borrower.
"SERIES A NOTES INDENTURE" shall mean the Indenture governing the
Series A Notes.
"STATUTORY RESERVES" shall mean a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board and any other banking authority, domestic or foreign,
to which the Administrative Agent or any Lender (including any branch,
Affiliate, or other fronting office making or holding a Loan) is subject with
respect to the Adjusted LIBO Rate, for Eurocurrency Liabilities (as defined in
Regulation D of the Board). Such reserve percentages shall include those
imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to
constitute Eurocurrency Liabilities and to be subject to such reserve
requirements without benefit of or credit for proration, exemptions or offsets
that may be available from time to time to any Lender under such Regulation D.
Statutory Reserves shall be adjusted automatically on and as of the effective
date of any change in any reserve percentage.
"SUBSIDIARY" shall mean, with respect to any person (herein referred
to as the "PARENT"), any corporation, partnership, association or other business
entity of which securities or other ownership interests representing more than
50% of the equity or more than 50% of the ordinary voting power or more than 50%
of the general partnership interests are, at the time any determination is being
made, owned, controlled or held.
"SUBSIDIARY" shall mean any subsidiary of the Parent Borrower.
"SUBSIDIARY BORROWER" shall mean each wholly owned Subsidiary listed
on Schedule 1 hereto and each wholly owned Subsidiary that executes a New
Borrower Agreement in accordance with Section 2.22 and that has not ceased to be
a Subsidiary Borrower in accordance with such Section.
"SUBSIDIARY BORROWER TERMINATION" shall mean any termination executed
by the Parent Borrower in accordance with Section 2.22 and substantially in the
form of Exhibit C-3.
"SUBSIDIARY NON-GUARANTORS" shall mean any Subsidiary that is not a
Guarantor.
"SYNDICATION AGENT" shall have the meaning assigned to such term in
the preamble to this Agreement.
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22
"TOTAL ADDITIONAL LOAN COMMITMENT" shall mean, at any time, the
aggregate amount of Additional Loan Commitments as in effect at such time.
"TOTAL COMMITMENT" shall mean, at any time, the aggregate amount of
the Refinancing Loan Commitments and the Additional Loan Commitments, as in
effect at such time.
"TOTAL DEBT" shall mean, with respect to the Parent Borrower and the
Subsidiaries on a consolidated basis at any time, all Indebtedness of the Parent
Borrower and the Subsidiaries which at such time would be required to be
reflected as a liability for borrowed money on a consolidated balance sheet of
the Parent Borrower and its consolidated Subsidiaries prepared in accordance
with GAAP, PLUS (without duplication) (a) any liabilities or obligations
(including any portion of any purchase price received for receivables which
receivables have not been collected) associated with or in respect of any
Permitted Receivables Financing and (b) the amount of any outstanding letters of
credit issued pursuant to this Agreement (it being understood that such letters
of credit shall not be included in "Total Debt" to the extent such letters of
credit are issued to support Indebtedness and the amount of such Indebtedness
has been included in "Total Debt").
"TOTAL REFINANCING LOAN COMMITMENT" shall mean, at any time, the
aggregate amount of Refinancing Loan Commitments, as in effect at such time.
"TRANSACTIONS" shall have the meaning assigned to such term in the
preamble to this Agreement.
"TYPE", when used in respect of any Loan or Borrowing, shall refer to
the Rate by reference to which interest on such Loan or on the Loans comprising
such Borrowing is determined. For purposes hereof, the term "RATE" shall
include the Adjusted LIBO Rate and the Alternate Base Rate.
"WHOLLY OWNED SUBSIDIARY" of any person shall mean a subsidiary of
such person of which securities (except for directors' qualifying shares) or
other ownership interests representing 100% of the equity or 100% of the
ordinary voting power or 100% of the general partnership interests are, at the
time any determination is being made, owned, controlled or held by such person
or one or more wholly owned subsidiaries of such person or by such person and
one or more wholly owned subsidiaries of such person.
"WITHDRAWAL LIABILITY" shall mean liability to a Multiemployer Plan as
a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. TERMS GENERALLY. The definitions in Section 1.01 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context shall require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, (a) any reference in this Agreement to any Loan
Document shall mean such document as amended, restated, supplemented or
otherwise modified from time to time and (b) all terms of an accounting or
financial nature shall be construed in accordance with GAAP, as in effect from
time to time; PROVIDED, HOWEVER, that for purposes of determining compliance
with the covenants contained in
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23
Article VI, all accounting terms herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with GAAP as in effect on
the date of this Agreement and applied on a basis consistent with the
application used in the financial statements referred to in Section 3.05(a).
ARTICLE II
THE CREDITS
SECTION 2.01. COMMITMENTS. Subject to the terms and conditions and
relying upon the representations and warranties herein set forth, (a) each
Refinancing Facility Lender agrees, severally and not jointly, to make
Refinancing Revolving Loans to the Borrowers, at any time and from time to time
on or after the date hereof, and until the earlier of the Refinancing Revolving
Facility Maturity Date and the termination of the Refinancing Loan Commitment of
such Lender in accordance with the terms hereof, in an aggregate principal
amount at any time outstanding that will not result in (i) such Lender's Credit
Exposure exceeding (ii) such Lender's Refinancing Loan Commitment and (b) each
Additional Facility Lender agrees, severally and not jointly, to make Additional
Revolving Loans to the Borrowers, at any time and from time to time on or after
the date specified in Section 4.03(a), and until the earlier of the Additional
Revolving Facility Maturity Date and the termination of the Additional Loan
Commitment of such Lender in accordance with the terms hereof, in an aggregate
principal amount at any time outstanding not to exceed such Lender's Additional
Loan Commitment. Within the limits set forth in the preceding sentence and
subject to the terms, conditions and limitations set forth herein, the Borrowers
may borrow, pay or prepay and reborrow Refinancing Revolving Loans and
Additional Revolving Loans.
SECTION 2.02. LOANS. (a) Each Loan shall be made as part of a
Borrowing consisting of Loans made by the Lenders ratably in accordance with
their respective Refinancing Loan Commitments or Additional Loan Commitments, as
applicable; PROVIDED, HOWEVER, that the failure of any Lender to make any Loan
shall not in itself relieve any other Lender of its obligation to lend hereunder
(it being understood, however, that no Lender shall be responsible for the
failure of any other Lender to make any Loan required to be made by such other
Lender). Except for Loans deemed made pursuant to Section 2.02(f), the Loans
comprising any Borrowing shall be in an aggregate principal amount that is (i)
an integral multiple of $1,000,000 and not less than $5,000,000 or (ii) equal to
the remaining available balance of the Commitments.
(b) Subject to Sections 2.08 and 2.14, each Borrowing shall be
comprised entirely of ABR Loans or Eurodollar Loans as the applicable Borrower
may request pursuant to Section 2.03. Each Lender may at its option make any
Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such
Lender to make such Loan; PROVIDED that any exercise of such option shall not
affect the obligation of the applicable Borrower to repay such Loan in
accordance with the terms of this Agreement. Borrowings of more than one Type
may be outstanding at the same time; PROVIDED, HOWEVER, that the Borrowers shall
not be entitled to request any Borrowing that, if made, would result in more
than five Eurodollar Borrowings outstanding hereunder at any time. For purposes
of the foregoing, only Borrowings having different Interest Periods, regardless
of whether they commence on the same date, shall be considered separate
Borrowings.
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24
(c) Except with respect to Loans made pursuant to Section 2.02(f) and
subject to Section 4.03(d) in the case of certain Additional Revolving Facility
Borrowings, each Lender shall make each Loan to be made by it hereunder on the
proposed date thereof by wire transfer of immediately available funds to such
account in New York City as the Administrative Agent may designate not later
than 11:00 a.m., New York City time, and the Administrative Agent shall by 12:00
(noon), New York City time, credit the amounts so received to a domestic account
designated in the applicable Borrowing Request (PROVIDED that such designated
account shall be an account of a Borrower or a Guarantor) or, if a Borrowing
shall not occur on such date because any condition precedent herein specified
shall not have been met, return the amounts so received to the respective
Lenders.
(d) Subject to Section 4.03(d) in the case of certain Additional
Revolving Facility Borrowings, unless the Administrative Agent shall have
received notice from a Lender prior to the date of any Borrowing that such
Lender will not make available to the Administrative Agent such Lender's portion
of such Borrowing, the Administrative Agent may assume that such Lender has made
such portion available to the Administrative Agent on the date of such Borrowing
in accordance with paragraph (c) above, and the Administrative Agent may, in
reliance upon such assumption, make available to the applicable Borrower on such
date a corresponding amount. If the Administrative Agent shall have so made
funds available then, to the extent that such Lender shall not have made such
portion available to the Administrative Agent, such Lender and the applicable
Borrower severally agree to repay to the Administrative Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to such Borrower until the date such
amount is repaid to the Administrative Agent at (i) in the case of any Borrower,
the interest rate applicable at the time to the Loans comprising such Borrowing
and (ii) in the case of such Lender, a rate determined by the Administrative
Agent to represent its cost of overnight or short-term funds (which
determination shall be conclusive absent manifest error). If such Lender shall
repay to the Administrative Agent such corresponding amount, such amount shall
constitute such Lender's Loan as part of such Borrowing for purposes of this
Agreement.
(e) Notwithstanding any other provision of this Agreement, the
Borrowers shall not be entitled to request any Borrowing if the Interest Period
requested with respect thereto would end after the Refinancing Revolving
Facility Maturity Date or the Additional Revolving Facility Maturity Date, as
applicable.
(f) If an Issuing Bank shall not have received from the applicable
Borrower any payment required to be made to such Issuing Bank by Section
2.21(e) within the time specified in such Section, such Issuing Bank will
promptly notify the Administrative Agent of the L/C Disbursement and the
Administrative Agent will promptly notify each Refinancing Facility Lender of
such L/C Disbursement and its Pro Rata Percentage thereof. Each Refinancing
Facility Lender shall pay by wire transfer of immediately available funds to the
Administrative Agent not later than 2:00 p.m., New York City time, on such date
(or, if such Refinancing Facility Lender shall have received such notice later
than 12:00 (noon), New York City time, on any day, not later than 10:00 a.m.,
New York City time, on the immediately following Business Day), an amount equal
to such Lender's Pro Rata Percentage of such L/C Disbursement (it being
understood that such amount shall be deemed to constitute an ABR Loan that is a
Refinancing Revolving Loan of such Lender and such payment shall be deemed to
have reduced the L/C Exposure), and the Administrative Agent will promptly pay
to such Issuing Bank amounts so received by it from the Refinancing Facility
Lenders. The Administrative Agent will promptly pay to such Issuing Bank
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25
any amounts received by it from the applicable Borrower pursuant to
Section 2.21(e) prior to the time that any Refinancing Facility Lender makes any
payment pursuant to this paragraph (f); any such amounts received by the
Administrative Agent thereafter will be promptly remitted by the Administrative
Agent to the Refinancing Facility Lenders that shall have made such payments and
to such Issuing Bank, as their interests may appear. If any Refinancing
Facility Lender shall not have made its Pro Rata Percentage of such L/C
Disbursement available to the Administrative Agent as provided above, such
Lender and the applicable Borrower severally agree to pay interest on such
amount, for each day from and including the date such amount is required to be
paid in accordance with this paragraph to but excluding the date such amount is
paid, to the Administrative Agent for the account of such Issuing Bank at (i) in
the case of such Borrower, a rate per annum equal to the interest rate
applicable to Loans pursuant to Section 2.06(a), and (ii) in the case of such
Lender, for the first such day, the Federal Funds Effective Rate, and for each
day thereafter, the Alternate Base Rate.
SECTION 2.03. BORROWING PROCEDURE. In order to request a Borrowing
(other than a deemed Borrowing pursuant to Section 2.02(f), as to which this
Section 2.03 shall not apply), a Borrower shall hand deliver or telecopy to the
Administrative Agent a duly completed Borrowing Request (a) in the case of a
Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three
Business Days before a proposed Borrowing, and (b) in the case of an ABR
Borrowing, not later than 12:00 noon, New York City time, one Business Day
before a proposed Borrowing. Each Borrowing Request shall be irrevocable, shall
be signed by or on behalf of the applicable Borrower and shall specify the
following information: (i) whether the Borrowing then being requested is to be
a Refinancing Revolving Facility Borrowing or an Additional Revolving Facility
Borrowing and whether such Borrowing is to be a Eurodollar Borrowing or an ABR
Borrowing, PROVIDED that any Borrowing on the Closing Date shall be an ABR
Borrowing comprised solely of Refinancing Revolving Loans; (ii) the date of such
Borrowing (which shall be a Business Day), (iii) the number and location of the
account to which funds are to be disbursed (which shall be an account that
complies with the requirements of Section 2.02(c)); (iv) the amount of such
Borrowing; and (v) if such Borrowing is to be a Eurodollar Borrowing, the
Interest Period with respect thereto; PROVIDED, HOWEVER, that, notwithstanding
any contrary specification in any Borrowing Request, each requested Borrowing
shall comply with the requirements set forth in Section 2.02. In the case of an
Additional Revolving Facility Borrowing, the Parent Borrower shall also deliver
each applicable document specified in Section 4.03. If no election as to the
Type of Borrowing is specified in any such notice, then the requested Borrowing
shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar
Borrowing is specified in any such notice, then the applicable Borrower shall be
deemed to have selected an Interest Period of one month's duration. The
Administrative Agent shall promptly advise the Lenders of any notice given
pursuant to this Section 2.03 (and the contents thereof), and of each Lender's
portion of the requested Borrowing.
SECTION 2.04. EVIDENCE OF DEBT; REPAYMENT OF LOANS. (a) The
Borrowers, jointly and severally, unconditionally promise to pay to the
Administrative Agent for the account of each Lender the then unpaid principal
amount of (i) each Refinancing Revolving Loan on the Refinancing Revolving
Facility Maturity Date and (ii) each Additional Revolving Loan on the Additional
Revolving Facility Maturity Date.
(b) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing the indebtedness of the Borrowers to such
Lender resulting from each Loan
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26
made by such Lender from time to time, including the amounts of principal and
interest payable and paid to such Lender from time to time under this Agreement.
(c) The Administrative Agent shall maintain accounts in which it will
record (i) the amount of each Loan made hereunder, the Type thereof and the
Interest Period applicable thereto, (ii) the amount of any principal or interest
due and payable or to become due and payable from the Borrowers to each Lender
hereunder and (iii) the amount of any sum received by the Administrative Agent
hereunder from any Borrower or any Guarantor and each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
paragraphs (b) and (c) above shall be prima facie evidence of the existence and
amounts of the obligations therein recorded; PROVIDED, HOWEVER, that the failure
of any Lender or the Administrative Agent to maintain such accounts or any error
therein shall not in any manner affect the obligations of the Borrowers to repay
the Loans in accordance with their terms.
(e) Notwithstanding any other provision of this Agreement, in the
event any Lender shall request and receive a promissory note payable to such
Lender and its registered assigns, the interests represented by such note shall
at all times (including after any assignment of all or part of such interests
pursuant to Section 9.04) be represented by one or more promissory notes payable
to the payee named therein or its registered assigns.
SECTION 2.05. FEES. (a) The Borrowers agree to pay to each Lender,
through the Administrative Agent, on the Closing Date and on the last day
Business Day of March, June, September and December in each year (calculated to
such last Business Day, as applicable, of March, June, September and December)
and on the date on which the Refinancing Loan Commitment or the Additional Loan
Commitment, as applicable, of such Lender shall expire or be terminated as
provided herein, a commitment fee (a "COMMITMENT FEE") equal to the Applicable
Percentage per annum in effect from time to time on the average daily unused
amount of the Refinancing Loan Commitment or the Additional Loan Commitment, as
applicable, of such Lender during the preceding quarter (or other period
commencing with the date of acceptance by the Borrowers of the Refinancing Loan
Commitment or Additional Loan Commitment, as applicable, of such Lender or
ending with the Refinancing Revolving Facility Maturity Date or the Additional
Revolving Facility Maturity Date, as applicable, or the date on which the
Refinancing Loan Commitment or Additional Loan Commitment, as applicable, of
such Lender shall expire or be terminated) (it being understood that for
purposes of this paragraph (a), an assignment of interest shall not be
considered a termination of the Refinancing Loan Commitment or the Additional
Loan Commitment, as applicable, of such Lender), PROVIDED that the aggregate
fees payable on any such day shall not exceed the amount that would have been
payable if no assignment of any Lender's interest had occurred during the
applicable three month period. All Commitment Fees shall be computed on the
basis of the actual number of days elapsed in a year of 360 days. The
Commitment Fee due to each Lender shall commence to accrue on the date of
acceptance by the Borrowers of the Refinancing Loan Commitment or the Additional
Loan Commitment, as applicable, of such Lender and shall cease to accrue on the
date on which the Refinancing Loan Commitment or the Additional Loan Commitment,
as applicable, of such Lender shall expire or be terminated as provided herein.
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27
(b) The Borrowers agree to pay to the Administrative Agent, for its
own account, the administrative fees set forth in the Fee Letter at the times
and in the amounts specified therein (the "ADMINISTRATIVE AGENT FEES").
(c) The Borrowers agree to pay (i) to each Refinancing Facility
Lender, through the Administrative Agent, on the last Business Day of March,
June, September and December of each year (calculated to such last Business Day,
as applicable, of March, June, September and December) and on the date on which
the Refinancing Loan Commitment of such Lender shall be terminated as provided
herein, a fee (an "L/C PARTICIPATION FEE") calculated on such Lender's Pro Rata
Percentage of the average daily aggregate L/C Exposure (excluding the portion
thereof attributable to unreimbursed L/C Disbursements) during the preceding
quarter (or shorter period commencing with the date hereof or ending with the
Refinancing Revolving Facility Maturity Date or the date on which all Letters of
Credit have been canceled or have expired and the Refinancing Loan Commitments
of all Lenders shall have been terminated) at a rate equal to the Applicable
Percentage from time to time used to determine the interest rate on Borrowings
comprised of Eurodollar Loans pursuant to Section 2.06, PROVIDED that the
aggregate fees payable on any such day shall not exceed the amount that would
have been payable if no assignment of any Lender's interest had occurred during
the applicable three month period, and (ii) to each Issuing Bank with respect to
each Letter of Credit (x) a fee equal to 0.125% per annum of the face amount of
such Letter of Credit issued by it, payable quarterly in arrears on the last
Business Day of each quarter (calculated to such last Business Day, as
applicable, of March, June, September and December) and (y) the standard
issuance and administration fees specified from time to time by each Issuing
Bank (the "ISSUING BANK FEES"). All L/C Participation Fees and Issuing Bank
Fees shall be computed on the basis of the actual number of days elapsed in a
year of 360 days.
(d) All Fees shall be paid on the dates due, in immediately available
funds, to the Administrative Agent for distribution, if and as appropriate,
among the Lenders, except that the Issuing Bank Fees shall be paid directly to
the respective Issuing Banks. Once paid, none of the Fees shall be refundable
under any circumstances.
SECTION 2.06. INTEREST ON LOANS. (a) Subject to the provisions of
Section 2.07, the Loans comprising each ABR Borrowing shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be, when the Alternate Base Rate is determined by
reference to the Prime Rate and over a year of 360 days at all other times) at a
rate per annum equal to the Alternate Base Rate; PROVIDED that in the event that
the Leverage Ratio is greater than 3.50 to 1.00, each ABR Borrowing shall bear
interest (computed on the basis described above) at a rate per annum equal to
the Alternate Base Rate plus 0.25%.
(b) Subject to the provisions of Section 2.07, the Loans comprising
each Eurodollar Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 360 days) at a rate per annum equal
to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing
plus the Applicable Percentage in effect from time to time.
Interest on each Loan shall be payable on the Interest Payment Dates
applicable to such Loan except as otherwise provided in this Agreement. The
applicable Alternate Base Rate or Adjusted LIBO Rate for each Interest Period or
day within an Interest Period, as the case may be, shall be determined by the
Administrative Agent, and such determination shall be conclusive absent manifest
error.
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28
SECTION 2.07. DEFAULT INTEREST. If the Borrowers shall default in
the payment of the principal of or interest on any Loan or any other amount
becoming due hereunder, by acceleration or otherwise, or under any other Loan
Document, the Borrowers shall on demand from time to time pay interest, to the
extent permitted by law, on such defaulted amount to, but excluding, the date of
actual payment (after as well as before judgment) (a) in the case of overdue
principal, at the rate otherwise applicable to such Loan pursuant to Section
2.06 plus 2.00% per annum and (b) in all other cases, at a rate per annum
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be, when determined by reference to the Prime Rate
and over a year of 360 days at all other times) equal to the sum of the
Alternate Base Rate plus 2.00%.
SECTION 2.08. ALTERNATE RATE OF INTEREST. If, and on each occasion
that, on the day two Business Days prior to the commencement of any Interest
Period for a Eurodollar Borrowing the Administrative Agent shall have determined
that dollar deposits in the principal amounts of the Loans comprising such
Borrowing are not generally available in the London interbank market, or that
the rates at which such dollar deposits are being offered will not adequately
and fairly reflect the cost to any Lender of making or maintaining its
Eurodollar Loan during such Interest Period, or that reasonable means do not
exist for ascertaining the Adjusted LIBO Rate, the Administrative Agent shall,
as soon as practicable thereafter, give written or telecopy notice of such
determination to the Borrowers and the Lenders. In the event of any such
determination, until the Administrative Agent shall have advised the Borrowers
and the Lenders that the circumstances giving rise to such notice no longer
exist, any request by the Borrowers for a Eurodollar Borrowing pursuant to
Section 2.03 shall be deemed to be a request for an ABR Borrowing. Each
determination by the Administrative Agent hereunder shall be conclusive absent
manifest error.
SECTION 2.09. TERMINATION AND REDUCTION OF COMMITMENTS. (a) The
Refinancing Loan Commitments and the L/C Commitments shall automatically
terminate on the Refinancing Revolving Facility Maturity Date. The Additional
Loan Commitments shall automatically terminate on the Additional Revolving
Facility Maturity Date. Notwithstanding the foregoing, all the Commitments and
L/C Commitments shall automatically terminate at 5:00 p.m., New York City time,
on October 31, 1996, if the initial Credit Event shall not have occurred by such
time.
(b) Upon at least two Business Days' prior irrevocable written or
telecopy notice to the Administrative Agent, the Borrowers may at any time in
whole permanently terminate, or from time to time in part permanently reduce,
the Total Refinancing Loan Commitment and/or the Total Additional Loan
Commitment; PROVIDED, HOWEVER, that (i) each partial reduction of the Total
Refinancing Loan Commitment and the Total Additional Loan Commitment shall be in
an integral multiple of $1,000,000 and in a minimum amount of $5,000,000,
(ii) the Total Refinancing Loan Commitment shall not be reduced to an amount
that is less than the Aggregate Credit Exposure at the time and (iii) the Total
Additional Loan Commitment shall not be reduced to an amount that is less than
the aggregate principal amount of Additional Revolving Loans outstanding at the
time.
(c) Each reduction in the Total Refinancing Loan Commitment or the
Total Additional Loan Commitment, as applicable, hereunder shall be made ratably
among the Lenders in accordance with their respective Refinancing Loan
Commitments or Additional Loan Commitments, as applicable. The Borrowers shall
pay to the Administrative Agent for the account of the Lenders, on the date of
each termination or reduction, the Commitment Fees on the amount of the Total
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29
Refinancing Loan Commitment or the Total Additional Loan Commitment, as
applicable, so terminated or reduced accrued to (but excluding the date of) such
termination or reduction.
SECTION 2.10. CONVERSION AND CONTINUATION OF BORROWINGS. The
applicable Borrower shall have the right at any time upon prior irrevocable
notice to the Administrative Agent (a) not later than 12:00 (noon), New York
City time, one Business Day prior to conversion, to convert any Eurodollar
Borrowing into an ABR Borrowing, (b) not later than 10:00 a.m., New York City
time, three Business Days prior to conversion or continuation, to convert any
ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar
Borrowing as a Eurodollar Borrowing for an additional Interest Period, and
(c) not later than 10:00 a.m., New York City time, three Business Days prior to
conversion, to convert the Interest Period with respect to any Eurodollar
Borrowing to another permissible Interest Period, subject in each case to the
following:
(i) each conversion or continuation shall be made PRO RATA among the
Lenders in accordance with the respective principal amounts of the Loans
comprising the converted or continued Borrowing;
(ii) if less than all the outstanding principal amount of any
Borrowing shall be converted or continued, then each resulting Borrowing
shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b)
regarding the principal amount and maximum number of Borrowings of the
relevant Type;
(iii) each conversion shall be effected by each Lender and the
Administrative Agent by recording for the account of such Lender the new
Loan of such Lender resulting from such conversion and reducing the Loan
(or portion thereof) of such Lender being converted by an equivalent
principal amount; accrued interest on any Eurodollar Loan (or portion
thereof) being converted shall be paid by the Borrowers at the time of
conversion;
(iv) if any Eurodollar Borrowing is converted at a time other than the
end of the Interest Period applicable thereto, the Borrowers shall pay,
upon demand, any amounts due to the Lenders pursuant to Section 2.15;
(v) any portion of a Borrowing maturing or required to be repaid in
less than one month may not be converted into or continued as a Eurodollar
Borrowing;
(vi) any portion of a Eurodollar Borrowing that cannot be converted
into or continued as a Eurodollar Borrowing by reason of the immediately
preceding clause shall be automatically converted at the end of the
Interest Period in effect for such Borrowing into an ABR Borrowing; and
(vii) upon notice to the Borrowers from the Administrative Agent given
at the request of the Required Lenders, after the occurrence and during the
continuance of a Default or Event of Default, no outstanding Loan may be
converted into, or continued as, a Eurodollar Loan.
Each notice pursuant to this Section 2.10 shall refer to this
Agreement and specify (i) the identity and amount of the Borrowing that the
applicable Borrower requests be converted or continued, (ii) whether such
Borrowing is to be converted to or continued as a Eurodollar Borrowing or an
ABR Borrowing, (iii) if such notice requests a conversion, the date of such
conversion (which shall be a Business Day) and (iv) if such Borrowing is to be
converted to or
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30
continued as a Eurodollar Borrowing, the Interest Period with respect thereto.
If no Interest Period is specified in any such notice with respect to any
conversion to or continuation as a Eurodollar Borrowing, the applicable Borrower
shall be deemed to have selected an Interest Period of one month's duration.
The Administrative Agent shall advise the Lenders of any notice given pursuant
to this Section 2.10 and of each Lender's portion of any converted or continued
Borrowing. If the applicable Borrower shall not have given notice in accordance
with this Section 2.10 to continue any Borrowing into a subsequent Interest
Period (and shall not otherwise have given notice in accordance with this
Section 2.10 to convert such Borrowing), such Borrowing shall, at the end of the
Interest Period applicable thereto (unless repaid pursuant to the terms hereof),
automatically be continued into a new Interest Period as an ABR Borrowing.
SECTION 2.11. PREPAYMENT. (a) The Borrowers shall have the right at
any time and from time to time to prepay any Borrowing, in whole or in part,
upon at least two Business Days' prior written or telecopy notice (or telephone
notice promptly confirmed by written or telecopy notice) to the Administrative
Agent before 11:00 a.m., New York City time; PROVIDED, HOWEVER, that each
partial prepayment shall be in an amount that is an integral multiple of
$1,000,000 and not less than $5,000,000.
(b) In the event of any termination of all the Refinancing Loan or
Additional Loan Commitments, the Borrowers shall repay or prepay all applicable
outstanding Borrowings on the date of such termination. In the event of any
partial reduction of the Total Refinancing Loan Commitment, then (i) at or prior
to the effective date of such reduction, the Administrative Agent shall notify
the Borrowers and the Refinancing Facility Lenders of the Aggregate Credit
Exposure after giving effect thereto and (ii) if the Aggregate Credit Exposure
would exceed the Total Refinancing Loan Commitment after giving effect to such
reduction, then the Borrowers shall, on the date of such reduction, repay or
prepay Refinancing Revolving Facility Borrowings in an amount sufficient to
eliminate such excess. In the event of any partial reduction of the Total
Additional Loan Commitment, then (x) at or prior to the effective date of such
reduction, the Administrative Agent shall notify the Borrowers and the
Additional Facility Lenders of the outstanding principal amount of Additional
Revolving Loans after giving effect thereto and (y) if the outstanding principal
amount of Additional Revolving Loans after giving effect to such reduction would
exceed the Total Additional Loan Commitment, then the Borrowers shall, on the
date of such reduction, repay or prepay Additional Revolving Facility Borrowings
in an amount sufficient to eliminate such excess.
(c) Each notice of prepayment shall specify the prepayment date and
the principal amount of each Borrowing (or portion thereof) to be prepaid, shall
be irrevocable and shall commit the Borrowers to prepay such Borrowing by the
amount stated therein on the date stated therein. All prepayments under this
Section 2.11 shall be subject to Section 2.15 but otherwise without premium or
penalty. All prepayments under this Section 2.11 shall be accompanied by
accrued interest on the principal amount being prepaid to the date of payment.
SECTION 2.12. MANDATORY COMMITMENT REDUCTIONS. (a) The Total
Refinancing Loan Commitment and the Total Additional Loan Commitment shall be
subject to reduction (i) on September 30 of each year and (ii) on the second
Business Day following each date on which 50% of the aggregate Net Cash Proceeds
received in respect of Asset Sales and in respect of transactions described in
Section 6.05(e), and not previously taken into account in a prior reduction of
the Total Refinancing Loan Commitment or the Total Additional Loan Commitment
pursuant to this Section 2.12(a), equals or exceeds $5,000,000. The amount of
the reduction on each such
<PAGE>
31
applicable date shall equal 50% of the Net Cash Proceeds received on or prior to
such date (or, in the case of clause (ii) in the preceding sentence on or prior
to the second Business Day immediately preceding such date) and not previously
taken into account in a prior reduction of the Total Refinancing Loan Commitment
or the Total Additional Loan Commitment pursuant to this Section 2.12(a). If
during the one-year period following any Asset Sale or transaction described in
Section 6.05(e), the Borrowers and the Guarantors have not reinvested in their
businesses an amount equal to 50% of the Net Cash Proceeds from such Asset Sale
or transaction, the Total Refinancing Loan Commitment and the Total Additional
Loan Commitment shall be further reduced on the first anniversary of such Asset
Sale or transaction by the portion of such amount not so reinvested.
Notwithstanding anything to the contrary in this Section 2.12(a), the Borrowers
may elect, with respect to the initial $50,000,000 of reductions in Commitments
required by this Section 2.12(a), by giving notice by telephone (promptly
confirmed by writing or telecopy notice) prior to any reduction pursuant to this
Section 2.12(a), to cause all or any portion of the applicable Net Cash Proceeds
to reduce the Total Additional Loan Commitment or the Total Refinancing Loan
Commitment or both. All other reductions in Commitments under this
Section 2.12(a) shall be applied pro rata between the Total Refinancing Loan
Commitment and the Total Additional Loan Commitment. Each reduction under this
Section 2.12(a) shall be effected in accordance with Section 2.11(b).
(b) Each reduction in the Total Refinancing Loan Commitment or the
Total Additional Loan Commitment, as applicable, hereunder shall be made ratably
among the Lenders in accordance with their respective Refinancing Loan
Commitments or Additional Loan Commitments, as applicable. The Borrowers shall
pay to the Administrative Agent for the account of the Lenders, on the date of
each reduction, the Commitment Fee on the amount of the Total Refinancing Loan
Commitment or the Total Additional Loan Commitment, as applicable, so reduced
accrued to (but excluding) the date of such reduction.
(c) If following any reduction of the Total Refinancing Loan
Commitment pursuant to Section 2.12 and any payments required pursuant to
Section 2.11(b)(ii), the Total Refinancing Loan Commitment is less than the
aggregate L/C Exposure, the Borrowers shall, on the date of such reduction,
provide cash collateral, in accordance with Section 2.21(j), in an amount equal
to the amount that the aggregate L/C Exposure exceeds the Total Refinancing Loan
Commitment upon such date of reduction.
(d) The Borrowers shall deliver to the Administrative Agent, at the
time of each reduction required under Section 2.12(a), a certificate signed by a
Financial Officer of the Parent Borrower setting forth in reasonable detail the
calculation of the amount of such reduction.
SECTION 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES.
(a) Notwithstanding any other provision of this Agreement, if after the date of
this Agreement any change in applicable law or regulation or in the
interpretation or administration thereof by any Governmental Authority charged
with the interpretation or administration thereof (whether or not having the
force of law) shall change the basis of taxation of payments to any Lender or an
Issuing Bank of the principal of or interest on any Eurodollar Loan made by such
Lender or any Fees or other amounts payable hereunder (other than changes in
respect of taxes imposed on the overall net income of such Lender or Issuing
Bank by the jurisdiction in which such Lender or Issuing Bank has its principal
office or by any political subdivision or taxing authority therein), or shall
impose, modify or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the account of or credit
extended by any Lender or an Issuing Bank (except any
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32
such reserve requirement which is reflected in the Adjusted LIBO Rate) or shall
impose on such Lender or Issuing Bank or the London interbank market any other
condition affecting this Agreement or Eurodollar Loans made by such Lender or
any Letter of Credit or participation therein, and the result of any of the
foregoing shall be to increase the cost to such Lender of making or maintaining
any Eurodollar Loan or increase the cost to any Lender of issuing or maintaining
any Letter of Credit or purchasing or maintaining a participation therein or to
reduce the amount of any sum received or receivable by such Lender or Issuing
Bank hereunder (whether of principal, interest or otherwise) by an amount deemed
by such Lender or Issuing Bank to be material, then the Borrowers will pay to
such Lender or Issuing Bank, as the case may be, upon demand such additional
amount or amounts as will compensate such Lender or Issuing Bank, as the case
may be, for such additional costs incurred or reduction suffered.
(b) If any Lender or an Issuing Bank shall have determined that the
adoption after the date hereof of any law, rule, regulation, agreement or
guideline regarding capital adequacy, or any change after the date hereof in any
such law, rule, regulation, agreement or guideline (whether such law, rule,
regulation, agreement or guideline has been adopted) or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof, or compliance by any Lender (or any
lending office of such Lender) or an Issuing Bank or any Lender's or Issuing
Bank's holding company with any request or directive regarding capital adequacy
(whether or not having the force of law) of any Governmental Authority has or
would have the effect of reducing the rate of return on such Lender's or Issuing
Bank's capital or on the capital of such Lender's or Issuing Bank's holding
company, if any, as a consequence of this Agreement or the Loans made or
participations in Letters of Credit purchased by such Lender pursuant hereto or
the Letters of Credit issued by such Issuing Bank pursuant hereto to a level
below that which such Lender or Issuing Bank or such Lender's or Issuing Bank's
holding company could have achieved but for such applicability, adoption, change
or compliance (taking into consideration such Lender's or Issuing Bank's
policies and the policies of such Lender's or Issuing Bank's holding company
with respect to capital adequacy) by an amount deemed by such Lender or Issuing
Bank to be material, then from time to time the Borrowers shall pay to such
Lender or Issuing Bank, as the case may be, such additional amount or amounts as
will compensate such Lender or Issuing Bank or such Lender's or Issuing Bank's
holding company for any such reduction suffered.
(c) A certificate of a Lender or Issuing Bank setting forth the
amount or amounts necessary to compensate such Lender or an Issuing Bank or its
holding company, as applicable, as specified in paragraph (a) or (b) above shall
be delivered to the Borrowers and shall be conclusive absent manifest error.
Such certificate (i) shall set forth in reasonable detail the conditions giving
rise to a circumstance or situation under Section 2.13(a) or (b), and
(ii) shall set forth the calculations of the amounts to be paid by the
applicable Borrower (which calculations shall be made in the same manner as for
similar outstanding loans made by such Lender of a similar type and amount as
Loans by such Lender under this Agreement to Persons of creditworthiness similar
to that of the Parent Borrower), and, if made in accordance with this sentence,
shall be conclusive absent manifest error. The Borrowers shall pay such Lender
or Issuing Bank the amount shown as due on any such certificate delivered by it
within 10 days after its receipt of the same.
(d) Failure or delay on the part of any Lender or any Issuing Bank to
demand compensation for any increased costs or reduction in amounts received or
receivable or reduction in return on capital shall not constitute a waiver of
such Lender's or Issuing Bank's right to demand such compensation. The
protection of this Section shall be available to each Lender and Issuing
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33
Bank regardless of any possible contention of the invalidity or inapplicability
of the law, rule, regulation, agreement, guideline or other change or condition
that shall have occurred or been imposed.
SECTION 2.14. CHANGE IN LEGALITY. (a) Notwithstanding any other
provision of this Agreement, if, after the date hereof, any change in any law or
regulation or in the interpretation thereof by any Governmental Authority
charged with the administration or interpretation thereof shall make it unlawful
for any Lender to make or maintain any Eurodollar Loan or to give effect to its
obligations as contemplated hereby with respect to any Eurodollar Loan, then, by
written notice to the Borrowers and to the Administrative Agent:
(i) such Lender may declare that Eurodollar Loans will not thereafter
(for the duration of such unlawfulness) be made by such Lender hereunder
(or be continued for additional Interest Periods and ABR Loans will not
thereafter (for such duration) be converted into Eurodollar Loans),
whereupon any request for a Eurodollar Borrowing (or to convert an ABR
Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing
for an additional Interest Period) shall, as to such Lender only, be deemed
a request for an ABR Loan (or a request to continue an ABR Loan as such for
an additional Interest Period or to convert a Eurodollar Loan into an ABR
Loan, as the case may be), unless such declaration shall be subsequently
withdrawn; and
(ii) such Lender may require that all outstanding Eurodollar Loans
made by it be converted to ABR Loans, in which event all such Eurodollar
Loans shall be automatically converted to ABR Loans as of the effective
date of such notice as provided in paragraph (b) below.
If any Lender shall exercise its rights under (i) or (ii) above, all payments
and prepayments of principal that would otherwise have been applied to repay the
Eurodollar Loans that would have been made by such Lender or the converted
Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans
made by such Lender in lieu of, or resulting from the conversion of, such
Eurodollar Loans.
(b) For purposes of this Section 2.14, a notice to the Borrowers by
any Lender shall be effective as to each Eurodollar Loan made by such Lender, if
lawful, on the last day of the Interest Period currently applicable to such
Eurodollar Loan; in all other cases such notice shall be effective on the date
of receipt by the Borrowers.
SECTION 2.15. INDEMNITY. The Borrowers, jointly and severally, shall
indemnify each Lender against any loss (but excluding lost profits) or expense
that such Lender may sustain or incur as a consequence of (a) any event, other
than a default by such Lender in the performance of its obligations hereunder,
which results in (i) such Lender receiving or being deemed to receive any amount
on account of the principal of any Eurodollar Loan prior to the end of the
Interest Period in effect therefor, (ii) the conversion of any Eurodollar Loan
to an ABR Loan, or the conversion of the Interest Period with respect to any
Eurodollar Loan, in each case other than on the last day of the Interest Period
in effect therefor, or (iii) any Eurodollar Loan to be made by such Lender
(including any Eurodollar Loan to be made pursuant to a conversion or
continuation under Section 2.10) not being made after notice of such Loan shall
have been given by the Borrowers hereunder (any of the events referred to in
this clause (a) being called a "BREAKAGE EVENT") or (b) any default in the
making of any payment or prepayment required to be made hereunder. In the case
of any
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34
Breakage Event, such loss shall include an amount equal to the excess, as
reasonably determined by such Lender, of (i) its cost of obtaining funds for the
Eurodollar Loan that is the subject of such Breakage Event for the period from
the date of such Breakage Event to the last day of the Interest Period in effect
(or that would have been in effect) for such Loan over (ii) the amount of
interest likely to be realized by such Lender in redeploying the funds released
or not utilized by reason of such Breakage Event for such period. A certificate
of any Lender setting forth any amount or amounts which such Lender is entitled
to receive pursuant to this Section 2.15 shall be delivered to the Borrowers and
shall be conclusive absent manifest error.
SECTION 2.16. PRO RATA TREATMENT. Except as required under
Section 2.14, each Borrowing, each payment or prepayment of principal of any
Borrowing, each payment of interest on the Loans, each payment of the Commitment
Fees, each reduction of the Commitments and each conversion of any Borrowing to
or continuation of any Borrowing as a Borrowing of any Type shall be allocated
pro rata among the Revolving Facility Lenders or the Additional Facility
Lenders, as the case may be, in accordance with their respective applicable
Commitments (or, if such applicable Commitments shall have expired or been
terminated, in accordance with the respective principal amounts of their
outstanding Loans). Each Lender agrees that in computing such Lender's portion
of any Borrowing to be made hereunder, the Administrative Agent may, in its
discretion, round each Lender's percentage of such Borrowing to the next higher
or lower whole dollar amount.
SECTION 2.17. SHARING OF SETOFFS. Each Lender agrees that if it
shall, through the exercise of a right of banker's lien, setoff or counterclaim
against the Borrowers or any other Loan Party, or pursuant to a secured claim
under Section 506 of Title 11 of the United States Code or other security or
interest arising from, or in lieu of, such secured claim, received by such
Lender under any applicable bankruptcy, insolvency or other similar law or
otherwise, or by any other means, obtain payment (voluntary or involuntary) in
respect of any Loan or Loans or L/C Disbursement as a result of which the unpaid
principal portion of its Loans and participations in L/C Disbursements shall be
proportionately less than the unpaid principal portion of the Loans and
participations in L/C Disbursements of any other Lender, it shall be deemed
simultaneously to have purchased from such other Lender at face value, and shall
promptly pay to such other Lender the purchase price for, a participation in the
Loans and L/C Exposure of such other Lender, so that the aggregate unpaid
principal amount of the Loans and L/C Exposure and participations in Loans and
L/C Exposure held by each Lender shall be in the same proportion to the
aggregate unpaid principal amount of all Loans and L/C Exposure then outstanding
as the principal amount of its Loans and L/C Exposure prior to such exercise of
banker's lien, setoff or counterclaim or other event was to the principal amount
of all Loans and L/C Exposure outstanding prior to such exercise of banker's
lien, setoff or counterclaim or other event; PROVIDED, HOWEVER, that if any such
purchase or purchases or adjustments shall be made pursuant to this Section 2.17
and the payment giving rise thereto shall thereafter be recovered, such purchase
or purchases or adjustments shall be rescinded to the extent of such recovery
and the purchase price or prices or adjustment restored without interest. The
Borrowers expressly consent to the foregoing arrangements and agree that any
Lender holding a participation in a Loan or L/C Disbursement deemed to have been
so purchased may exercise any and all rights of banker's lien, setoff or
counterclaim with respect to any and all moneys owing by the Borrowers to such
Lender by reason thereof as fully as if such Lender had made a Loan directly to
the Borrowers in the amount of such participation.
SECTION 2.18. PAYMENTS. (a) The Borrowers shall make each payment
(including principal of or interest on any Borrowing or any L/C Disbursement or
any Fees or other
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35
amounts) hereunder and under any other Loan Document not later than
12:00 (noon), New York City time, on the date when due in immediately available
dollars, without setoff, defense or counterclaim. Each such payment (other than
Issuing Bank Fees, which shall be paid directly to the respective Issuing
Banks,) shall be made to the Administrative Agent at its offices at Grand
Central Tower, 140 East 45th Street, 29th Floor, New York, New York 10017.
(b) Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of
interest or Fees, if applicable.
SECTION 2.19. TAXES. (a) Any and all payments by or on behalf of
the Borrowers or any Loan Party hereunder and under any other Loan Document
shall be made, in accordance with Section 2.18, free and clear of and without
deduction for any and all current or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, EXCLUDING
(i) income taxes imposed on the net income of the Administrative Agent, any
Lender or either Issuing Bank (or any permitted assignee thereof, (any such
entity a "TRANSFEREE")) and (ii) franchise taxes imposed on the net income of
the Administrative Agent, any Lender or an Issuing Bank (or Transferee), in each
case by the jurisdiction under the laws of which the Administrative Agent, such
Lender or an Issuing Bank (or Transferee) is organized or any political
subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities, collectively or individually, being
called "TAXES"). If the Borrowers or any Loan Party shall be required to deduct
any Taxes from or in respect of any sum payable hereunder or under any other
Loan Document to the Administrative Agent, any Lender or an Issuing Bank (or any
Transferee), (i) the sum payable shall be increased by the amount (an
"ADDITIONAL AMOUNT") necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this
Section 2.19) the Administrative Agent, such Lender or an Issuing Bank (or
Transferee), as the case may be, shall receive an amount equal to the sum it
would have received had no such deductions been made, (ii) the Borrowers or such
Loan Party shall make such deductions and (iii) the Borrowers or such Loan Party
shall pay the full amount deducted to the relevant Governmental Authority in
accordance with applicable law.
(b) In addition, the Borrowers agree to pay to the relevant
Governmental Authority in accordance with applicable law any current or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies that arise from any payment made hereunder or under any other
Loan Document or from the execution, delivery or registration of, or otherwise
with respect to, this Agreement or any other Loan Document ("OTHER TAXES").
(c) The Borrowers shall indemnify the Administrative Agent, each
Lender and each Issuing Bank (or Transferee) for the full amount of Taxes and
Other Taxes paid by the Administrative Agent, such Lender or such Issuing Bank
(or Transferee), as the case may be, and any liability (including penalties,
interest and expenses (including reasonable attorney's fees and expenses))
arising therefrom or with respect thereto, whether or not such Taxes or Other
Taxes were correctly or legally asserted by the relevant Governmental Authority.
A certificate as to the amount of such payment or liability prepared by the
Administrative Agent, a Lender or an Issuing Bank (or Transferee), or the
Administrative Agent on its behalf and accompanied by a copy of any relevant
notices received from a Governmental Authority and any return or form prepared
or filed by the Administrative Agent, a Lender or an Issuing Bank (or
Transferee) in connection with such
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36
payment or liability, absent manifest error, shall be conclusive for all
purposes. Such indemnification shall be made within 30 days after the date the
Administrative Agent, any Lender or any Issuing Bank (or Transferee), as the
case may be, makes written demand therefor.
(d) As soon as practicable after the date of any payment of Taxes or
Other Taxes by the Borrowers or any other Loan Party to the relevant
Governmental Authority, the Borrowers or such other Loan Party will deliver to
the Administrative Agent, at its address referred to in Section 9.01, the
original or a certified copy of a receipt issued by such Governmental Authority
evidencing payment thereof.
(e) Each Lender (or Transferee) that is organized under the laws of a
jurisdiction other than the United States, any State thereof or the District of
Columbia (a "NON-U.S. LENDER") shall deliver to the Parent Borrower and the
Administrative Agent two copies of either United States Internal Revenue Service
Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption
from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code
with respect to payments of "portfolio interest", a Form W-8, or any subsequent
versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a
Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for
purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within
the meaning of Section 871(h)(3)(B) of the Code) of the Borrowers and is not a
controlled foreign corporation related to the Borrowers (within the meaning of
Section 864(d)(4) of the Code)), properly completed and duly executed by such
Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S.
Federal withholding tax on payments by the Borrowers under this Agreement and
the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender
on or before the date it becomes a party to this Agreement and on or before the
date, if any, such Non-U.S. Lender changes its applicable lending office by
designating a different lending office (a "NEW LENDING OFFICE"). In addition,
each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or
invalidity of any form previously delivered by such Non-U.S. Lender.
Notwithstanding any other provision of this Section 2.19(e), a Non-U.S. Lender
shall not be required to deliver any form pursuant to this Section 2.19(e) that
such Non-U.S. Lender is not legally able to deliver.
(f) The Borrowers shall not be required to indemnify any Non-U.S.
Lender or to pay any additional amounts to any Non-U.S. Lender, in respect of
United States Federal withholding tax pursuant to paragraph (a) or (c) above to
the extent that (i) the obligation to withhold amounts with respect to United
States Federal withholding tax existed on the date such Non-U.S. Lender became a
party to this Agreement or, with respect to payments to a New Lending Office,
the date such Non-U.S. Lender designated such New Lending Office with respect to
a Loan or a Letter of Credit; PROVIDED, HOWEVER, that this paragraph (f) shall
not apply (x) to any Transferee or New Lending Office that becomes a Transferee
or New Lending Office as a result of an assignment, transfer or designation made
at the request of the Borrowers and (y) to the extent the indemnity payment or
additional amounts any Transferee, or any Lender (or Transferee), acting through
a New Lending Office, would be entitled to receive (without regard to this
paragraph (f)) do not exceed the indemnity payment or additional amounts that
the person making the assignment, or transfer to such Transferee, or Lender (or
Transferee) making the designation of such New Lending Office, would have been
entitled to receive in the absence of such assignment, transfer or designation
or (ii) the obligation to pay such additional amounts would not have arisen but
for a failure by such Non-U.S. Lender to comply with the provisions of paragraph
(e) above.
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37
(g) Nothing contained in this Section 2.19 shall require any Lender
or Issuing Bank (or any Transferee) or the Administrative Agent to make
available any of its tax returns (or any other information that it deems to be
confidential or proprietary).
SECTION 2.20. ASSIGNMENT OF COMMITMENTS UNDER CERTAIN CIRCUMSTANCES;
DUTY TO MITIGATE. (a) If (i) any Lender delivers a certificate requesting
compensation pursuant to Section 2.13, (ii) any Lender delivers a notice
described in Section 2.14 or (iii) the Borrowers are required to pay any
additional amount to any Lender or any Governmental Authority on account of any
Lender pursuant to Section 2.19, the Borrowers may, at their sole expense and
effort (including with respect to the processing and recordation fee referred to
in Section 9.04(b)), upon notice to such Lender and the Administrative Agent,
require such Lender or Issuing Bank to transfer and assign, without recourse (in
accordance with and subject to the restrictions contained in Section 9.04), all
of its interests, rights and obligations under this Agreement to an assignee
that shall assume such assigned obligations (which assignee may be another
Lender, if a Lender accepts such assignment); PROVIDED that (x) such assignment
shall not conflict with any law, rule or regulation or order of any court or
other Governmental Authority having jurisdiction, (y) the Borrowers shall have
received the prior written consent of the Administrative Agent (and, if a
Refinancing Loan Commitment is being assigned, of each Issuing Bank), which
consent shall not unreasonably be withheld, and (z) the Borrowers or such
assignee shall have paid to the affected Lender in immediately available funds
an amount equal to the sum of the principal of and interest accrued to the date
of such payment on the outstanding Loans or L/C Disbursements of such Lender,
respectively, plus all Fees and other amounts accrued for the account of such
Lender hereunder (including any amounts under Section 2.13 and Section 2.15);
PROVIDED FURTHER that, if prior to any such transfer and assignment the
circumstances or event that resulted in such Lender's claim for compensation
under Section 2.13 or notice under Section 2.14 or the amounts paid pursuant to
Section 2.19, as the case may be, cease to cause such Lender to suffer increased
costs or reductions in amounts received or receivable or reduction in return on
capital, or cease to have the consequences specified in Section 2.14, or cease
to result in amounts being payable under Section 2.19, as the case may be
(including as a result of any action taken by such Lender pursuant to paragraph
(b) below), or if such Lender shall waive its right to claim further
compensation under Section 2.13 in respect of such circumstances or event or
shall withdraw its notice under Section 2.14 or shall waive its right to further
payments under Section 2.19 in respect of such circumstances or event, as the
case may be, then such Lender shall not thereafter be required to make any such
transfer and assignment hereunder.
(b) If (i) any Lender shall request compensation under Section 2.13,
(ii) any Lender delivers a notice described in Section 2.14 or (iii) the
Borrowers are required to pay any additional amount to any Lender or any
Governmental Authority on account of any Lender, pursuant to Section 2.19, then
such Lender shall use reasonable efforts (which shall not require such Lender to
incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any
action inconsistent with its internal policies or legal or regulatory
restrictions or suffer any disadvantage or burden deemed by it to be
significant) (x) to file any certificate or document (including any document
contesting the imposition of any such amount or requesting a refund of such
amount by any relevant Governmental Authority) reasonably requested in writing
by the Borrowers or (y) to assign its rights and delegate and transfer its
obligations hereunder to another of its offices, branches or affiliates, if such
filing or assignment would reduce its claims for compensation under Section 2.13
or enable it to withdraw its notice pursuant to Section 2.14 or would reduce
amounts payable pursuant to Section 2.19, as the case may be, in the future.
The Borrowers hereby agree to pay all reasonable costs and expenses incurred by
any Lender in
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38
connection with any such filing or assignment, delegation and transfer. Any
Lender receiving any refund or rebate of any amounts paid by a Borrower pursuant
to Section 2.19 shall promptly pay the same to the applicable Borrower.
SECTION 2.21. LETTERS OF CREDIT. (a) GENERAL. Any Borrower may
request the issuance by an Issuing Bank of a Letter of Credit for such
Borrower's own account, in a form reasonably acceptable to the Administrative
Agent and such Issuing Bank, at any time and from time to time while the
Refinancing Loan Commitments remain in effect. This Section shall not be
construed to impose an obligation upon an Issuing Bank to issue any Letter of
Credit that is inconsistent with the terms and conditions of this Agreement.
(b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL, EXTENSION; CERTAIN
CONDITIONS. In order to request the issuance of a Letter of Credit (or to
amend, renew or extend an existing Letter of Credit), the Parent Borrower or a
Guarantor shall hand deliver or telecopy to an Issuing Bank and the
Administrative Agent (reasonably in advance of the requested date of issuance,
amendment, renewal or extension) a notice requesting the issuance of a Letter of
Credit, or identifying the Letter of Credit to be amended, renewed or extended,
the date of issuance, amendment, renewal or extension, the date on which such
Letter of Credit is to expire (which shall comply with paragraph (c) below), the
amount of such Letter of Credit, the name and address of the beneficiary thereof
and such other information as shall be necessary to prepare such Letter of
Credit. Following receipt of such notice and prior to the issuance of the
requested Letter of Credit or the applicable amendment, renewal or extension,
the Administrative Agent shall notify the Borrowers and the applicable Issuing
Bank of the amount of the Aggregate Credit Exposure after giving effect to (i)
the issuance, amendment, renewal or extension of such Letter of Credit, (ii) the
issuance or expiration of any other Letter of Credit that is to be issued or
will expire on or prior to the requested date of issuance of such Letter of
Credit and (iii) the borrowing or repayment of any Refinancing Revolving Loans
that (based upon notices delivered to the Administrative Agent by the Borrowers)
are to be borrowed or repaid on or prior to the requested date of issuance of
such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or
extended only if, and upon issuance, amendment, renewal or extension of each
Letter of Credit the Borrowers shall be deemed to represent and warrant that,
after giving effect to such issuance, amendment, renewal or extension (A) the
L/C Exposure shall not exceed $100,000,000 and (B) the Aggregate Credit Exposure
shall not exceed the Total Refinancing Loan Commitment.
(c) EXPIRATION DATE. Each Letter of Credit (other than any Back-up
Letter of Credit, which shall expire not less than 30 days after the expiry date
set forth on Schedule 1.01(a) of the letter of credit that such Back-up Letter
of Credit supports) shall expire at the close of business on the earlier of the
date one year after the date of the issuance of such Letter of Credit and the
date that is five Business Days prior to the Refinancing Revolving Facility
Maturity Date, unless such Letter of Credit expires by its terms on an earlier
date.
(d) PARTICIPATIONS. By the issuance of a Letter of Credit and
without any further action on the part of the applicable Issuing Bank or the
Lenders, the Issuing Bank in respect of such Letter of Credit hereby grants to
each Refinancing Facility Lender, and each such Lender hereby acquires from such
Issuing Bank, a participation in such Letter of Credit equal to such Lender's
Pro Rata Percentage of the aggregate amount available to be drawn under such
Letter of Credit, effective upon the issuance of such Letter of Credit. In
consideration and in furtherance of the foregoing, each Refinancing Facility
Lender hereby absolutely and unconditionally agrees to pay to the Administrative
Agent, for the account of such Issuing Bank, such Lender's Pro Rata Percentage
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39
of each L/C Disbursement made by such Issuing Bank and not reimbursed by the
Borrowers (or, if applicable, another party pursuant to its obligations under
any other Loan Document) forthwith on the date due as provided in Section
2.02(f). Each Refinancing Facility Lender acknowledges and agrees that its
obligation to acquire participations pursuant to this paragraph in respect of
Letters of Credit is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the occurrence and continuance of a Default
or an Event of Default, and that each such payment shall be made without any
offset, abatement, withholding or reduction whatsoever.
(e) REIMBURSEMENT. If an Issuing Bank shall make any L/C
Disbursement in respect of a Letter of Credit, the Borrowers shall pay to the
Administrative Agent an amount equal to such L/C Disbursement not later than
2:00 p.m. on the day the Borrowers shall have received notice from such Issuing
Bank that payment of such draft will be made, or, if the Borrowers shall have
received such notice later than 10:00 a.m., New York City time, on any Business
Day, not later than 10:00 a.m., New York City time, on the immediately following
Business Day.
(f) OBLIGATIONS ABSOLUTE. The Borrowers' obligations to reimburse
L/C Disbursements as provided in paragraph (e) above shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement, under any and all circumstances whatsoever,
and irrespective of:
(i) any lack of validity or enforceability of any Letter of Credit or
any Loan Document, or any term or provision therein;
(ii) any amendment or waiver of or any consent to departure from all
or any of the provisions of any Letter of Credit or any Loan Document;
(iii) the existence of any claim, setoff, defense or other right that
the Borrowers, any other party guaranteeing, or otherwise obligated with,
the Borrowers, any Subsidiary or other Affiliate thereof or any other
person may at any time have against the beneficiary under any Letter of
Credit, either Issuing Bank, the Administrative Agent or any Lender or any
other person, whether in connection with this Agreement, any other Loan
Document or any other related or unrelated agreement or transaction;
(iv) any draft or other document presented under a Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect;
(v) payment by an Issuing Bank under a Letter of Credit against
presentation of a draft or other document that does not comply with the
terms of such Letter of Credit; and
(vi) any other act or omission to act or delay of any kind of either
Issuing Bank, the Lenders, the Administrative Agent or any other person or
any other event or circumstance whatsoever, whether or not similar to any
of the foregoing, that might, but for the provisions of this Section,
constitute a legal or equitable discharge of the Borrowers' obligations
hereunder.
Without limiting the generality of the foregoing, it is expressly
understood and agreed that the absolute and unconditional obligation of the
Borrowers hereunder to reimburse L/C Disbursements will not be excused by the
gross negligence or willful misconduct of either Issuing
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40
Bank. However, the foregoing shall not be construed to excuse an Issuing Bank
from liability to the Borrowers to the extent of any direct damages (as opposed
to consequential damages, claims in respect of which are hereby waived by the
Borrowers to the extent permitted by applicable law) suffered by the Borrowers
that are caused by such Issuing Bank's gross negligence or willful misconduct in
determining whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof; it is understood that an Issuing Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary and, in making any payment under any Letter of
Credit (i) an Issuing Bank's exclusive reliance on the documents presented to it
under such Letter of Credit as to any and all matters set forth therein,
including reliance on the amount of any draft presented under such Letter of
Credit, whether or not the amount due to the beneficiary thereunder equals the
amount of such draft and whether or not any document presented pursuant to such
Letter of Credit proves to be insufficient in any respect, if such document on
its face appears to be in order, and whether or not any other statement or any
other document presented pursuant to such Letter of Credit proves to be forged
or invalid or any statement therein proves to be inaccurate or untrue in any
respect whatsoever and (ii) any noncompliance in any immaterial respect of the
documents presented under such Letter of Credit with the terms thereof shall, in
each case, be deemed not to constitute willful misconduct or gross negligence of
such Issuing Bank.
(g) DISBURSEMENT PROCEDURES. An Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. Such Issuing Bank shall as
promptly as possible give telephonic notification, confirmed by telecopy, to the
Administrative Agent and the Borrowers of such demand for payment and whether
such Issuing Bank has made or will make an L/C Disbursement thereunder (it being
understood that such notice shall not be required if prior to any L/C
Disbursement the Borrowers have made available to the applicable Issuing Bank
funds sufficient to reimburse such Issuing Bank for such L/C Disbursement),
PROVIDED that any failure to give or delay in giving such notice shall not
relieve the Borrowers of their obligation to reimburse such Issuing Bank and the
Refinancing Facility Lenders with respect to any such L/C Disbursement. The
Administrative Agent shall promptly give each Refinancing Facility Lender notice
thereof.
(h) INTERIM INTEREST. If an Issuing Bank shall make any L/C
Disbursement in respect of a Letter of Credit, then, unless the Borrowers shall
reimburse such L/C Disbursement in full on such date, the unpaid amount thereof
shall bear interest for the account of such Issuing Bank, for each day from and
including the date of such L/C Disbursement, to but excluding the earlier of the
date of payment by the Borrowers or the date on which interest shall commence to
accrue thereon as provided in Section 2.02(f), at the rate per annum that would
apply to such amount if such amount were an ABR Loan.
(i) RESIGNATION OR REMOVAL OF AN ISSUING BANK. An Issuing Bank may
resign at any time by giving 180 days' prior written notice to the
Administrative Agent, the Lenders and the Borrowers, and may be removed at any
time by the Borrowers by notice to such Issuing Bank, the Administrative Agent
and the Lenders. Subject to the last sentence of this paragraph (i), upon the
acceptance of any appointment as an Issuing Bank hereunder by a Lender that
shall agree to serve as successor Issuing Bank, such successor shall succeed to
and become vested with all the interests, rights and obligations of the retiring
Issuing Bank and the retiring Issuing Bank shall be discharged from its
obligations to issue additional Letters of Credit hereunder. At the time such
removal or resignation shall become effective, the Borrowers shall pay all
accrued and unpaid fees due to the retiring Issuing Bank pursuant to Section
2.05(c)(ii). The acceptance of any appointment as an
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41
Issuing Bank hereunder by a successor Lender shall be subject to approval,
unless an Event of Default has occurred and is continuing, by the Parent
Borrower (which approval shall not be unreasonably withheld) and shall be
evidenced by an agreement entered into by such successor, in a form satisfactory
to the Borrowers and the Administrative Agent, and, from and after the effective
date of such agreement, (i) such successor Lender shall have all the rights and
obligations of the previous Issuing Bank under this Agreement and the other Loan
Documents and (ii) references herein and in the other Loan Documents to the term
"Issuing Bank" shall be deemed to include such successor or any previous Issuing
Bank, or to such successor and all previous Issuing Banks, as the context shall
require. After the resignation or removal of an Issuing Bank hereunder, the
retiring Issuing Bank shall remain a party hereto and shall continue to have all
the rights and obligations of an Issuing Bank under this Agreement and the other
Loan Documents with respect to Letters of Credit issued by it prior to such
resignation or removal, but shall not be required to issue additional Letters of
Credit.
(j) CASH COLLATERALIZATION. If any Event of Default shall occur and
be continuing or if the Total Refinancing Loan Commitment is less than the
aggregate L/C Exposure, the Borrowers shall, on the Business Day they receive
notice from the Administrative Agent or the Required Lenders thereof and of the
amount to be deposited, deposit in an account with the Collateral Agent, for the
benefit of the Refinancing Facility Lenders, an amount in cash equal to the L/C
Exposure as of such date. Such deposit shall be held by the Collateral Agent as
collateral for the payment and performance of the Obligations. The Collateral
Agent shall have exclusive dominion and control, including the exclusive right
of withdrawal, over such account. Other than any interest earned on the
investment of such deposits in Permitted Investments, which investments shall be
made by the Collateral Agent and selected in its sole discretion, such deposits
shall not bear interest. Interest or profits, if any, on such investments shall
accumulate in such account. Moneys in such account shall (i) automatically be
applied by the Administrative Agent to reimburse the Issuing Banks for L/C
Disbursements for which they have not been reimbursed, (ii) be held for the
satisfaction of the reimbursement obligations of the Borrowers for the L/C
Exposure at such time and (iii) if the maturity of the Loans has been
accelerated, be applied to satisfy the Obligations. If the Borrowers are
required to provide an amount of cash collateral hereunder as a result of the
occurrence of an Event of Default, such amount (to the extent not applied as
aforesaid) shall be returned to the Borrowers within three Business Days after
all Events of Default have been cured or waived. If the Borrowers are required
to provide an amount of cash collateral hereunder pursuant to Section 2.12(d),
such amount shall be returned to the Borrowers from time to time to the extent
that the amount of such cash collateral held by the Collateral Agent exceeds the
excess, if any, of the aggregate L/C Exposure over the Total Refinancing Loan
Commitment; PROVIDED, that such return shall not be required at any time that an
Event of Default has occurred and is continuing.
SECTION 2.22. ADDITIONAL BORROWERS. The parties hereto agree that
wholly owned Domestic Subsidiaries that are not Borrowers as of the Closing Date
may enter into and become a party to this Agreement by executing a New Borrower
Agreement. Upon execution and delivery after the date hereof by the
Administrative Agent, the Collateral Agent and such a wholly owned Subsidiary of
a New Borrower Agreement, such Subsidiary shall become a Borrower hereunder with
the same force and effect as if originally named as a Borrower herein. The
Parent Borrower may terminate any Subsidiary Borrower's interests, rights and
obligations under this Agreement by executing and delivering to the
Administrative Agent a Subsidiary Borrower Termination with respect to such
Subsidiary, whereupon such Subsidiary shall cease to be a Subsidiary Borrower
and a party to this Agreement. Notwithstanding the preceding sentence, no
Subsidiary Borrower Termination will become effective as to any Subsidiary
Borrower at a time
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when any principal of or interest on any Loan to such Subsidiary Borrower shall
be outstanding hereunder, PROVIDED that such Subsidiary Borrower Termination
shall be effective to terminate such Subsidiary Borrower's right to make further
Borrowings under this Agreement unless and until such Subsidiary executes
subsequent to such termination a New Borrower Agreement. The execution and
delivery of a New Borrower Agreement or a Subsidiary Borrower Termination shall
not require the consent of any other Borrower hereunder. The rights and
obligations of each Borrower hereunder shall remain in full force and effect
notwithstanding the addition of any new Borrower or termination of any Borrower
as a party to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each of the Borrowers represents and warrants to the Administrative
Agent, the Syndication Agent, the Collateral Agent, the Issuing Banks and each
of the Lenders that:
SECTION 3.01. ORGANIZATION; POWERS. Each of the Borrowers and the
Subsidiaries (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (b) has all
requisite power and authority to own its property and assets and to carry on its
business as now conducted and as proposed to be conducted, (c) is qualified to
do business in, and is in good standing in, every jurisdiction where such
qualification is required, except where the failure so to qualify could not
reasonably be expected to result in a Material Adverse Effect, and (d) has the
corporate power and authority to execute, deliver and perform its obligations
under each of the Loan Documents and each other agreement or instrument
contemplated hereby to which it is or will be a party and, in the case of the
Borrowers, to borrow hereunder.
SECTION 3.02. AUTHORIZATION. The execution, delivery and performance
by each Loan Party of each of the Loan Documents to which it is a party and the
borrowings hereunder (a) have been duly authorized by all requisite corporate
and, if required, stockholder action and (b) will not (i) violate (A) any
provision of law, statute, rule or regulation, or of the certificate or articles
of incorporation or other constitutive documents or by-laws of the Borrowers or
any Subsidiary, (B) any order of any Governmental Authority or (C) any provision
of any indenture, agreement or other instrument to which the Borrowers or any
Subsidiary is a party or by which any of them or any of their property is or may
be bound, (ii) be in conflict with, result in a breach of or constitute (alone
or with notice or lapse of time or both) a default under, or give rise to any
right to accelerate or to require the prepayment, repurchase or redemption of
any obligation under any such indenture, agreement or other instrument or (iii)
result in the creation or imposition of any Lien upon or with respect to any
property or assets now owned or hereafter acquired by the Borrowers or any
Subsidiary (other than any Lien created hereunder or under the Security
Documents).
SECTION 3.03. ENFORCEABILITY. This Agreement has been duly executed
and delivered by the Borrowers and constitutes, and each other Loan Document
when executed and delivered by each Loan Party thereto will constitute, a legal,
valid and binding obligation of such Loan Party enforceable against such Loan
Party in accordance with its terms (subject, as to enforceability, to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
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43
transfer and other similar laws affecting creditors' rights generally from time
to time in effect and to general principles of equity, regardless of whether in
a proceeding in equity or at law).
SECTION 3.04. GOVERNMENTAL APPROVALS. No action, consent or approval
of, registration or filing with or any other action by any Governmental
Authority is or will be required in connection with the Transactions, except for
(a) the filing of Uniform Commercial Code financing statements and filings with
the United States Patent and Trademark Office and the United States Copyright
Office, (b) filings and recordings necessary to release security interests and
mortgages under the Existing Credit Agreement and (c) such as have been made or
obtained and are in full force and effect.
SECTION 3.05. FINANCIAL STATEMENTS. The Parent Borrower has
heretofore furnished to the Lenders its consolidated balance sheets and
statements of operations and cash flows and changes in stockholders' equity (a)
as of and for the fiscal year ended September 30, 1995, audited by and
accompanied by the opinion of Arthur Anderson LLP, independent public
accountants, and (b) except for a statement of changes in stockholders' equity,
as of and for the fiscal quarter and the portion of the fiscal year ended June
30, 1996, certified by its chief financial officer. Such financial statements
present fairly in all material respects the financial condition and results of
operations and cash flows of the Parent Borrower and its consolidated
Subsidiaries as of such dates and for such periods. Such balance sheets and the
notes thereto disclose all material liabilities, direct or contingent, of the
Parent Borrower and its consolidated Subsidiaries as of the dates thereof. Such
financial statements were prepared in accordance with GAAP applied on a
consistent basis, except that the financial statements described in clause (b)
are condensed and comply as to form and presentation with the requirements of
Form 10-Q of the forms promulgated under the Securities Exchange Act of 1934.
SECTION 3.06. NO MATERIAL ADVERSE CHANGE. There has been no material
adverse change in the business, assets, operations, prospects, condition,
financial or otherwise, or material agreements of the Parent Borrower and the
Subsidiaries, taken as a whole, since June 30, 1996.
SECTION 3.07. TITLE TO PROPERTIES; POSSESSION UNDER LEASES. (a)
Each of the Borrowers and the Subsidiaries has good and marketable title to, or
valid leasehold interests in, all its material properties and assets, except for
minor defects in title that do not interfere with its ability to conduct its
business as currently conducted or to utilize such properties and assets for
their intended purposes. All such material properties and assets are free and
clear of Liens, other than Liens expressly permitted by Section 6.02.
(b) Each of the Borrowers and the Subsidiaries has complied with all
obligations under all leases to which it is a party and that are material to the
Borrowers and the Subsidiaries taken as a whole and all such leases are in full
force and effect. Each of the Borrowers and the Subsidiaries enjoys peaceful
and undisturbed possession under all such material leases in which a Borrower or
a Subsidiary is a lessee.
SECTION 3.08. SUBSIDIARIES. Schedule 3.08 sets forth as of the
Closing Date a list of all Subsidiaries and the percentage ownership interest,
direct or indirect, of the Parent Borrower therein. The shares of capital stock
or other ownership interests so indicated on Schedule 3.08 are fully paid and
non-assessable and are owned by the Parent Borrower, directly or indirectly,
free and clear of all Liens, except Liens under the Loan Documents.
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44
SECTION 3.09. LITIGATION; COMPLIANCE WITH LAWS. (a) Except as set
forth on Schedule 3.09, there are not any actions, suits or proceedings at law
or in equity or by or before any Governmental Authority now pending or, to the
knowledge of Parent Borrower, threatened against or affecting any Borrower or
any Subsidiary or any business, property or rights of any such person (i) that
involve any Loan Document or the Transactions or (ii) as to which there is a
reasonable probability of an adverse determination and that, if adversely
determined, could reasonably be expected, individually or in the aggregate, to
result in a Material Adverse Effect.
(b) None of the Borrowers or any of the Subsidiaries or any of their
respective material properties or assets is in violation of, nor will the
continued operation of their material properties and assets as currently
conducted violate, any law, rule or regulation, or is in default with respect to
any judgment, writ, injunction, decree or order of any Governmental Authority,
where such violation or default could reasonably be expected to result in a
Material Adverse Effect.
SECTION 3.10. AGREEMENTS. (a) None of the Borrowers or any of the
Subsidiaries is a party to any agreement or instrument or subject to any
corporate restriction that has resulted or could reasonably be expected to
result in a Material Adverse Effect.
(b) None of the Borrowers or any of the Subsidiaries is in default in
any manner under any provision of any indenture or other agreement or instrument
evidencing Indebtedness, or any other material agreement or instrument to which
it is a party or by which it or any of its properties or assets are or may be
bound, where such default could reasonably be expected to result in a Material
Adverse Effect.
SECTION 3.11. FEDERAL RESERVE REGULATIONS. (a) None of the
Borrowers or any of the Subsidiaries is engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
buying or carrying Margin Stock.
(b) No part of the proceeds of any Loan or any Letter of Credit will
be used, whether directly or indirectly, and whether immediately, incidentally
or ultimately, for any purpose that entails a violation of, or that is
inconsistent with, the provisions of the Regulations of the Board, including
Regulation G, T, U or X.
SECTION 3.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY
ACT. Neither the Borrowers nor any Subsidiary is (a) an "investment company" as
defined in, or subject to regulation under, the Investment Company Act of 1940
or (b) a "holding company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935.
SECTION 3.13. USE OF PROCEEDS. The Borrowers will use the proceeds
of the Loans and will request the issuance of Letters of Credit only for the
purposes specified in the preamble to this Agreement.
SECTION 3.14. TAX RETURNS. Each of the Borrowers and the
Subsidiaries has filed or caused to be filed all Federal and state income tax
returns and all other material tax returns or materials required to have been
filed by it and has paid or caused to be paid all material taxes due and payable
by it and all assessments received by it, except taxes that are being contested
in good faith by appropriate proceedings and for which such Borrower or such
Subsidiary, as applicable, shall have set aside on its books adequate reserves.
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45
SECTION 3.15. NO MATERIAL MISSTATEMENTS. None of (a) the
Confidential Information Memorandum or (b) any other information, report,
financial statement, exhibit or schedule furnished by or on behalf of the Parent
Borrower to the Administrative Agent or any Lender in connection with the
negotiation of any Loan Document or included therein or delivered pursuant
thereto contained, contains or will contain any material misstatement of fact or
omitted, omits or will omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were, are
or will be made, not misleading; PROVIDED that to the extent any such
information, report, financial statement, exhibit or schedule was based upon or
constitutes a forecast or projection, the Parent Borrower represents only that
it acted in good faith and utilized reasonable assumptions and due care in the
preparation of such information, report, financial statement, exhibit or
schedule.
SECTION 3.16. EMPLOYEE BENEFIT PLANS. Each of the Borrowers and its
ERISA Affiliates is in compliance in all material respects with the applicable
provisions of ERISA and the Code and the regulations and published
interpretations thereunder. No ERISA Event has occurred or is reasonably
expected to occur that, when taken together with all other such ERISA Events,
could reasonably be expected to result in material liability of the Borrowers or
any of its ERISA Affiliates. The present value of all benefit liabilities under
each Plan (based on those assumptions used to fund such Plan) did not, as of the
last annual valuation date applicable thereto, exceed by more than $2,000,000
the fair market value of the assets of such Plan, and the present value of all
benefit liabilities of all underfunded Plans (based on those assumptions used to
fund each such Plan) did not, as of the last annual valuation dates applicable
thereto, exceed by more than $7,500,000 the fair market value of the assets of
all such underfunded Plans.
SECTION 3.17. ENVIRONMENTAL MATTERS. Except as set forth in Schedule
3.17:
(a) The properties owned or operated by the Borrowers and the
Subsidiaries (the "PROPERTIES") do not contain any Hazardous Materials in
amounts or concentrations which (i) constitute, or constituted a violation of,
(ii) require Remedial Action under, or (iii) could give rise to liability under,
Environmental Laws, which violations, Remedial Actions and liabilities, in the
aggregate, could result in a Material Adverse Effect;
(b) The Properties and all operations of the Borrowers and the
Subsidiaries are in compliance, and in the last three years have been in
compliance, with all Environmental Laws and all necessary Environmental Permits
have been obtained and are in effect, except to the extent that such non-
compliance or failure to obtain any necessary permits, in the aggregate, could
not result in a Material Adverse Effect;
(c) There have been no Releases or threatened Releases at, from,
under or proximate to the Properties or otherwise in connection with the
operations of the Borrowers or the Subsidiaries, which Releases or threatened
Releases, in the aggregate, could result in a Material Adverse Effect;
(d) Neither the Borrowers nor any of the Subsidiaries has received
any notice of an Environmental Claim in connection with the Properties or the
operations of the Borrowers or the Subsidiaries or with regard to any person
whose liabilities for environmental matters any of the Borrowers or the
Subsidiaries has retained or assumed, in whole or in part, contractually, by
operation of law or otherwise, which, in the aggregate, could result in a
Material Adverse Effect,
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46
nor do the Borrowers or the Subsidiaries have reason to believe that any such
notice will be received or is being threatened; and
(e) Hazardous Materials have not been transported from the
Properties, nor have Hazardous Materials been generated, treated, stored or
disposed of at, on or under any of the Properties in a manner that could give
rise to liability under any Environmental Law, nor have the Borrowers or the
Subsidiaries retained or assumed any liability, contractually, by operation of
law or otherwise, with respect to the generation, treatment, storage or disposal
of Hazardous Materials, which transportation, generation, treatment, storage or
disposal, or retained or assumed liabilities, in the aggregate, could result in
a Material Adverse Effect.
SECTION 3.18. INSURANCE. Schedule 3.18 sets forth a true, complete
and correct description of all insurance maintained by the Borrowers or by the
Borrowers for their Subsidiaries as of the date hereof and the Closing Date. As
of each such date, such insurance is in full force and effect and all premiums
have been duly paid. The Parent Borrower and its Subsidiaries have insurance in
such amounts and covering such risks and liabilities as are in accordance with
normal industry practice.
SECTION 3.19. SECURITY DOCUMENTS. (a) The Pledge Agreement is
effective to create in favor of the Collateral Agent, for the ratable benefit of
the Secured Parties, a legal, valid and enforceable security interest in the
Collateral (as defined in the Pledge Agreement) and, when the Collateral is
delivered to the Collateral Agent, the Pledge Agreement shall constitute a fully
perfected first priority Lien on, and security interest in, all right, title and
interest of the pledgors thereunder in such Collateral, in each case prior and
superior in right to any other person.
(b) The Security Agreement is effective to create in favor of the
Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid
and enforceable security interest in the Collateral (as defined in the Security
Agreement) and, when financing statements in appropriate form are filed in the
offices specified on Schedule 6 to the Perfection Certificate, the Security
Agreement shall constitute a fully perfected Lien on, and security interest in,
all right, title and interest of the grantors thereunder in such Collateral
(other than the Intellectual Property, as defined in the Security Agreement), in
each case (assuming release of security interests under the Existing Credit
Agreement) prior and superior in right to any other person, other than with
respect to Liens expressly permitted by Section 6.02.
(c) When the Security Agreement is filed in the United States Patent
and Trademark Office and the United States Copyright Office, the Security
Agreement shall constitute a fully perfected Lien on, and security interest in,
all right, title and interest of the grantors thereunder in the Intellectual
Property (as defined in the Security Agreement), in each case prior and superior
in right to any other person (it being understood that subsequent recordings in
the United States Patent and Trademark Office and the United States Copyright
Office may be necessary to perfect a lien on registered trademarks, trademark
applications and copyrights acquired by the grantors after the date hereof).
SECTION 3.20. LABOR MATTERS. As of the date hereof and the Closing
Date, there are no strikes, lockouts or slowdowns against any Borrower or any
Subsidiary pending or, to the knowledge of any Borrower, threatened. The hours
worked by and payments made to employees of the Borrowers and the Subsidiaries
have not been in violation in any material respect
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47
of the Fair Labor Standards Act or any other applicable Federal, state, local or
foreign law dealing with such matters. All payments due from any Borrower or
any Subsidiary, or for which any claim may be made against any Borrower or any
Subsidiary, on account of wages and employee health and welfare insurance and
other benefits, have in all material respects been paid or accrued as a
liability on the books of such Borrower or such Subsidiary. The consummation of
the Transactions will not give rise to any right of termination or right of
renegotiation on the part of any union under any collective bargaining agreement
to which any Borrower or any Subsidiary is bound.
SECTION 3.21. SOLVENCY. Immediately after the consummation of the
Transactions to occur on the Closing Date and immediately following the making
of each Loan made on the Closing Date and after giving effect to the application
of the proceeds of such Loans, (i) the fair value of the assets of each Loan
Party will exceed its debts and liabilities, subordinated, contingent or
otherwise; (ii) the present fair saleable value of the property of each Loan
Party will be greater than the amount that will be required to pay the probable
liability of its debts and other liabilities, subordinated, contingent or
otherwise, as such debts and other liabilities become absolute and matured;
(iii) each Loan Party will be able to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured; and (iv) each Loan Party will not have unreasonably small
capital with which to conduct the business in which it is engaged as such
business is now conducted and is proposed to be conducted following the Closing
Date.
ARTICLE IV
CONDITIONS OF LENDING
The obligations of the Lenders to make Loans and of the Issuing Banks
to issue Letters of Credit hereunder are subject to the satisfaction of the
following conditions:
SECTION 4.01. ALL CREDIT EVENTS. On the date of each Borrowing,
including on the date of each issuance of a Letter of Credit (each such event
being called a "CREDIT EVENT"):
(a) The Administrative Agent shall have received a notice of such
Borrowing as required by Section 2.03 (or such notice shall have been
deemed given in accordance with Section 2.03) or, in the case of the
issuance of a Letter of Credit, the applicable Issuing Bank and the
Administrative Agent shall have received a notice requesting the issuance
of such Letter of Credit as required by Section 2.21(b).
(b) Except in the case of a Borrowing that does not increase the
aggregate principal amount of Loans outstanding of any Lender, the
representations and warranties set forth in Article III hereof shall be
true and correct in all material respects on and as of the date of such
Credit Event with the same effect as though made on and as of such date,
except to the extent such representations and warranties expressly relate
to an earlier date.
(c) Each Borrower and each other Loan Party shall be in compliance
with all the terms and provisions set forth herein and in each other Loan
Document on its part to be
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48
observed or performed, and at the time of and immediately after such Credit
Event, no Event of Default or Default shall have occurred and be
continuing.
Each Credit Event shall be deemed to constitute a representation and warranty by
each Borrower on the date of such Credit Event as to the matters specified in
paragraphs (b) (except as aforesaid) and (c) of this Section 4.01.
SECTION 4.02. FIRST CREDIT EVENT. On the Closing Date:
(a) The Administrative Agent and the Syndication Agent shall have
received, on behalf of itself, the Lenders and the Issuing Banks, a
favorable written opinion of (i) King & Spalding, counsel for the
Borrowers, substantially to the effect set forth in Exhibit H-1 and (ii)
each foreign counsel listed on Schedule 4.02(a), substantially to the
effect set forth in Exhibit H-2, in each case (A) dated the Closing Date,
(B) addressed to the Issuing Banks, the Administrative Agent, the
Syndication Agent and the Lenders, and (C) covering such other matters
relating to the Loan Documents and the Transactions as the Administrative
Agent or the Syndication Agent shall reasonably request, and the Borrowers
hereby request such counsel to deliver such opinions.
(b) All legal matters incident to this Agreement, the Borrowings and
extensions of credit hereunder and the other Loan Documents shall be
satisfactory to the Lenders, to the Issuing Banks and to Cravath, Swaine &
Moore, counsel for the Administrative Agent and the Syndication Agent.
(c) The Administrative Agent and the Syndication Agent shall have
received (i) a copy of the certificate or articles of incorporation,
including all amendments thereto, of each Loan Party, certified as of a
recent date by the Secretary of State of the state of its organization, and
a certificate as to the good standing of each Loan Party as of a recent
date, from such Secretary of State; (ii) a certificate of the Secretary or
Assistant Secretary of each Loan Party dated the Closing Date and
certifying (A) that attached thereto is a true and complete copy of the by-
laws of such Loan Party as in effect on the Closing Date and at all times
sincea date prior to the date of the resolutions described in clause (B)
below, (B) that attached thereto is a true and complete copy of resolutions
duly adopted by the Board of Directors of such Loan Party authorizing the
execution, delivery and performance of the Loan Documents to which such
person is a party and, in the case of the Borrowers, the borrowings
hereunder, and that such resolutions have not been modified, rescinded
or amended and are in full force and effect, (C) that the certificate or
articles of incorporation of such Loan Party have not been amended since
the date of the last amendment thereto shown on the certificate of good
standing furnished pursuant to clause (i) above, and (D) as to the
incumbency and specimen signature of each officer executing any Loan
Document or any other document delivered in connection herewith on behalf of
such Loan Party; (iii) a certificate of another officer as to the incumbency
and specimen signature of the Secretary or Assistant Secretary executing the
certificate pursuant to (ii) above; and (iv) such other documents as the
Lenders, the Issuing Banks or Cravath, Swaine & Moore, counsel for the
Administrative Agent and the Syndication Agent, may reasonably request.
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49
(d) The Administrative Agent and the Syndication Agent shall have
received a certificate, dated the Closing Date and signed by a Financial
Officer of the Parent Borrower, confirming compliance with the conditions
precedent set forth in paragraphs (b) and (c) of Section 4.01.
(e) The Administrative Agent and the Syndication Agent shall have
received all Fees and other amounts due and payable on or prior to the
Closing Date, including, to the extent invoiced, reimbursement or payment
of all out-of-pocket expenses required to be reimbursed or paid by the
Borrowers hereunder or under any other Loan Document.
(f) The Pledge Agreement shall have been duly executed by the parties
thereto and delivered to the Collateral Agent and shall be in full force
and effect, and each of the Borrowers and the Guarantors shall have duly
and validly pledged thereunder all the shares of capital stock or other
equity interests held by them in their direct Subsidiaries to the
Collateral Agent for the ratable benefit of the Secured Parties and
certificates representing such shares, accompanied by instruments of
transfer and stock powers endorsed in blank, shall be in the actual
possession of the Collateral Agent; PROVIDED that (i) neither the Parent
Borrower nor any Guarantor that is a Domestic Subsidiary shall be required
to pledge the capital stock of Societe Anonyme De La Metairie or more than
65% of the capital stock of any other Foreign Subsidiary and (ii) no
Foreign Subsidiary shall be required to pledge the capital stock of any of
its Foreign Subsidiaries.
(g) The Security Agreement shall have been duly executed by the Loan
Parties thereto and shall have been delivered to the Collateral Agent and
shall be in full force and effect on such date and each document (including
each Uniform Commercial Code financing statement) required by law or
reasonably requested by the Administrative Agent or the Syndication Agent
to be filed, registered or recorded in order to create in favor of the
Collateral Agent for the benefit of the Secured Parties a valid, legal and
perfected first-priority security interest in and lien on the Collateral
(subject to any Lien expressly permitted by Section 6.02) described in such
agreement shall have been delivered to the Collateral Agent.
(h) The Collateral Agent shall have received the results of a search
of the Uniform Commercial Code filings (or equivalent filings) made with
respect to the Loan Parties in the states (or other jurisdictions) in which
the chief executive office of each such person is located and the other
jurisdictions in which Uniform Commercial Code filings (or equivalent
filings) are to be made pursuant to the preceding paragraph, together with
copies of the financing statements (or similar documents) disclosed by such
search, and accompanied by evidence satisfactory to the Collateral Agent
that the Liens indicated in any such financing statement (or similar
document) would be permitted under Section 6.02 or have been released or
documents providing for the release of such financing statements (or
similar documents) have been delivered to the Collateral Agent.
(i) The Guarantee Agreement shall have been duly executed by each
Guarantor, shall have been delivered to the Collateral Agent and shall be
in full force and effect.
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(j) The Indemnity, Subrogation and Contribution Agreement shall have
been duly executed by each Loan Party, shall have been delivered to the
Collateral Agent and shall be in full force and effect.
(k) The Collateral Agent shall have received a Perfection Certificate
with respect to the Loan Parties dated the Closing Date and duly executed
by a Responsible Officer of the Parent Borrower.
(l) Substantially contemporaneously with the first Credit Event, the
Borrowers shall have repaid in full the principal of all loans outstanding,
interest thereon and other amounts due and payable under the Existing
Credit Agreement and under each other agreement related thereto, and the
Administrative Agent and Syndication Agent shall have received duly
executed documentation either evidencing or necessary for (i) the
termination of the Existing Credit Agreement and each other agreement
related thereto, (ii) the cancellation of all commitments thereunder (other
than the existing letters of credit that the Back-up Letters of Credit
support) and (iii) the termination of all related agreements and guarantees
and security interests granted by any Loan Party or any Subsidiary or any
other person in connection therewith and the discharge of all obligations
or interests thereunder.
(m) After giving effect to the Transactions, the Borrowers and the
Subsidiaries shall have outstanding no Indebtedness or preferred stock
other than (a) the Loans hereunder and (b) the Indebtedness set forth on
Schedule 6.01(a) or otherwise permitted pursuant to Section 6.01.
(n) The Lenders shall be satisfied that the consummation of the
Transactions will not (i) violate any applicable law, statute, rule or
regulation or (ii) conflict with, or result in a default or event of
default under, (A) any indenture relating to any existing Indebtedness of
any Loan Party or any subsidiary of any Loan Party that is not being
repaid, repurchased or redeemed in full on or prior to the Closing Date in
connection with the Transactions or any other indenture of any Loan Party
or any subsidiary of any Loan Party to be in effect after the Closing Date
or (B) any other material agreement of any Loan Party or any subsidiary of
any Loan Party.
(o) The Administrative Agent and the Syndication Agent shall have had
the opportunity to review existing environmental reports in form, scope and
substance reasonably satisfactory to them, as to any environmental hazards,
liabilities or Remedial Action to which any Borrower or any of the
Subsidiaries may be subject and shall be reasonably satisfied with the
nature and cost of any such hazards, liabilities or Remedial Action and
with the applicable Borrower's or applicable Subsidiary's plans with
respect thereto.
(p) The Administrative Agent and the Syndication Agent shall be
reasonably satisfied with the corporate structure of the Parent Borrower
and the Subsidiaries.
(q) There shall not have occurred any event, or none of the
Administrative Agent, the Syndication Agent or the Lenders shall have
discovered or otherwise become aware of
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information not previously known by the Administrative Agent, the
Syndication Agent or any such Lender that, in each case, in the reasonable
judgment of the Administrative Agent, the Syndication Agent or the Required
Lenders, could reasonably be expected to have a Material Adverse Effect.
SECTION 4.03. CREDIT EVENTS IN RESPECT OF ADDITIONAL REVOLVING
FACILITY BORROWINGS. (a) Prior to the first Additional Revolving Facility
Borrowing, the Administrative Agent shall have received the financial statements
and certificates required to be delivered pursuant to Section 5.04(a) with
respect to the fiscal year ending September 30, 1996.
(b) Simultaneously with the delivery of a Borrowing Request (but not in
connection with the delivery of any notice of conversion or continuation of
outstanding Borrowings pursuant to Section 2.10) that requests the Additional
Facility Lenders to make Additional Revolving Loans, the Parent Borrower shall
deliver to the Administrative Agent a certificate of a Financial Officer
certifying that such Borrowing will be permitted by, and will constitute "Senior
Indebtedness" (as defined in the Series A Notes Indenture) under, the Series A
Notes Indenture, and such certificate shall also set forth the specific
provision of the Series A Notes Indenture upon which such Financial Officer is
relying in making such certification (it being understood that such provision
shall not be Section 5.08(i) of the Series A Notes Indenture).
(c) If the provision upon which such Financial Officer is relying in
making the certification described in clause (b) above is Section 5.08(xiii) of
the Series A Notes Indenture, (i) such certification shall also set forth a list
specifying all other outstanding "Indebtedness" (as defined in the Series A
Notes Indenture), if any, that has been incurred by the Parent Borrower and the
"Restricted Subsidiaries" (as defined in the Series A Notes Indenture) in
reliance upon Section 5.08(xiii) of the Series A Notes Indenture and (ii) the
Parent Borrower shall also cause to be delivered to the Administrative Agent any
documents that the Administrative Agent may reasonably request with respect to
the compliance of the applicable Additional Revolving Facility Borrowing with
Section 5.08(xiii) of the Series A Notes Indenture, including a written
statement of the type described in clause (d) below from Arthur Andersen LLP or
other independent public accountants of recognized national standing or the
opinion of King & Spalding or other counsel to the Parent Borrower reasonably
satisfactory to the Administrative Agent as to the legal requirement applicable
to such "Indebtedness" under the Series A Notes Indenture, in either case as so
requested.
(d) If the provision upon which such Financial Officer is relying in
making the certification described above in clause (b) is the first paragraph of
Section 5.08 of the Series A Notes Indenture, the applicable certificate
described above in clause (b) shall also set forth the Consolidated Interest
Coverage Ratio (as defined in the Series A Indenture), which shall be computed
in accordance with, and as of the date specified in, the Series A Notes
Indenture. Such certification shall be accompanied by the written statement of
Arthur Andersen LLP or other independent public accountants of recognized
national standing confirming that such accountants have read such certification,
including the computation of the Consolidated Interest Coverage Ratio, and have
analyzed the supporting documents relied upon by the Parent Borrower in making
such certification and computation, and indicating that such accountants are not
aware of any information that would cause such certification or computation to
be inaccurate. If the applicable Additional Revolving Facility Borrowing will
occur prior to the date that the financial statements for the fiscal quarter
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52
ending immediately prior to such Borrowing have been delivered pursuant to
Section 5.04(a) or (b) hereof, the Parent Borrower shall deliver to the
Administrative Agent, simultaneously with such certificate, financial statements
and information, as are available, for the twelve-month period ending on the
last day of such fiscal quarter. Notwithstanding anything to the contrary in
this Section 4.03(d), if the Consolidated Interest Coverage Ratio specified in
such certificate is less than 2.25 to 1.00, the Lenders shall not be obligated
to make any Additional Revolving Loans requested in such Borrowing Request.
SECTION 4.04. NEW SUBSIDIARY BORROWER CREDIT EVENT. On or prior to
the date of the first Borrowing by any Subsidiary Borrower that was not a
Subsidiary Borrower on the Closing Date:
(a) The Administrative Agent (or its counsel) shall have received
from each party thereto either (i) a counterpart of the applicable New
Borrower Agreement or (ii) written evidence satisfactory to the
Administrative Agent (which may include telecopy transmission of a signed
signature page thereof) that such party has signed a counterpart of such
New Borrower Agreement.
(b) The Administrative Agent shall have received (either at such time
or in connection with the initial borrowing hereunder) such documents
(including legal opinions) and certificates as the Administrative Agent or
its counsel may reasonably request relating to the organization, existence
and good standing of such Subsidiary Borrower and the authorization of the
transactions relating to such Subsidiary Borrower and any other legal
matters relating to such Subsidiary Borrower and the applicable New
Borrower Agreement, all in form and substance satisfactory to the
Administrative Agent and its counsel.
ARTICLE V
AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees with each Lender that so long as
this Agreement shall remain in effect and until the Commitments have been
terminated and the principal of and interest on each Loan, all Fees and all
other expenses or amounts payable under any Loan Document shall have been paid
in full and all Letters of Credit have been canceled or have expired and all
amounts drawn thereunder have been reimbursed in full, unless the Required
Lenders shall otherwise consent in writing, the Borrowers will, and will cause
each of the Subsidiaries (unless otherwise set forth below) to:
SECTION 5.01. EXISTENCE; BUSINESSES AND PROPERTIES. (a) Do or cause
to be done all things necessary to preserve, renew and keep in full force and
effect its legal existence, except as otherwise expressly permitted under
Section 6.05.
(b) Do or cause to be done all things necessary to obtain, preserve,
renew, extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
material to the conduct of its business; comply in all
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53
material respects with all applicable laws, rules, regulations and decrees and
orders of any Governmental Authority, whether now in effect or hereafter
enacted; and at all times maintain and preserve all property material to the
conduct of such business and keep such property in good repair, working order
and condition and from time to time make, or cause to be made, all needful and
proper repairs, renewals, additions, improvements and replacements thereto
necessary in order that the business carried on in connection therewith may be
properly conducted at all times.
SECTION 5.02. INSURANCE. (a) Keep its insurable properties
adequately insured at all times by financially sound and reputable insurers;
maintain such other insurance, to such extent and against such risks, including
fire and other risks insured against by extended coverage, as is customary with
companies in the same or similar businesses operating in the same or similar
locations, including public liability insurance against claims for personal
injury or death or property damage occurring upon, in, about or in connection
with the use of any properties owned, occupied or controlled by it; and maintain
such other insurance as may be required by law.
(b) Cause all policies of casualty insurance to be endorsed or
otherwise amended to include a "standard" or "New York" lender's loss payable
endorsement, in form and substance satisfactory to the Administrative Agent and
the Collateral Agent, which endorsement shall provide that, from and after the
Closing Date, if the insurance carrier shall have received written notice from
the Administrative Agent or the Collateral Agent of the occurrence of an Event
of Default, the insurance carrier shall pay all proceeds otherwise payable to
the Borrowers or the Loan Parties under such policies directly to the Collateral
Agent; cause all such policies to provide that none of the Borrowers, the
Administrative Agent, the Syndication Agent, the Collateral Agent or any other
party shall be a coinsurer thereunder and to contain a "Replacement Cost
Endorsement" (for at least 85% of replacement cost), without any deduction for
depreciation, and such other provisions as the Administrative Agent or the
Collateral Agent may reasonably require from time to time to protect their
interests; deliver original or certified copies of all such policies to the
Collateral Agent; cause each such policy to provide that it shall not be
canceled, modified or not renewed (i) by reason of nonpayment of premium upon
not less than 10 days' prior written notice thereof by the insurer to the
Administrative Agent and the Collateral Agent (giving the Administrative Agent
and the Collateral Agent the right to cure defaults in the payment of premiums)
or (ii) for any other reason upon not less than 30 days' prior written notice
thereof by the insurer to the Administrative Agent and the Collateral Agent;
deliver to the Administrative Agent and the Collateral Agent, prior to the
cancellation, modification or nonrenewal of any such policy of insurance, a copy
of a renewal or replacement policy (or other evidence of renewal of a policy
previously delivered to the Administrative Agent, and the Collateral Agent)
together with evidence satisfactory to the Administrative Agent and the
Collateral Agent of payment of the premium therefor.
SECTION 5.03. OBLIGATIONS AND TAXES. Pay its Indebtedness and other
obligations promptly and in accordance with their terms and pay and discharge
promptly when due all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or in respect of its property,
before the same shall become delinquent or in default, as well as all lawful
claims for labor, materials and supplies or otherwise that, if unpaid, might
give rise to a Lien upon such properties or any part thereof (other than where
failure to so do could not be reasonably expected to have a Material Adverse
Effect); PROVIDED, HOWEVER, that such payment and discharge shall not be
required with respect to any such tax, assessment, charge, levy or claim so
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54
long as the validity or amount thereof shall be contested in good faith by
appropriate proceedings and such Borrower or such Subsidiary shall have set
aside on its books adequate reserves with respect thereto in accordance with
GAAP and such contest operates to suspend collection of the contested
obligation, tax, assessment or charge and enforcement of a Lien.
SECTION 5.04. FINANCIAL STATEMENTS, REPORTS, ETC. In the case of the
Parent Borrower, furnish to the Administrative Agent, the Syndication Agent and
each Lender:
(a) within 5 Business Days after any filing of its annual report on
Form 10-K with the Securities and Exchange Commission (but in no event
later than 120 days after the end of each fiscal year), (i) its
consolidated balance sheet and related statements of operations, changes in
stockholders' equity and cash flows, all audited by Arthur Andersen LLP or
other independent public accountants of recognized national standing
reasonably acceptable to the Required Lenders and accompanied by an opinion
of such accountants (which shall not be qualified in any material respect)
to the effect that such consolidated financial statements fairly present in
all material respects the financial condition, results of operations,
changes in stockholders' equity and cash flows of the Parent Borrower and
its consolidated Subsidiaries on a consolidated basis in accordance with
GAAP consistently applied; and (ii) an unaudited consolidated balance sheet
and statement of operations for each of Charter Behavioral, Green Spring
and Public Solutions.
(b) within 5 Business Days after any filing of its quarterly report
on Form 10-Q with the Securities and Exchange Commission (but in no event
later than 60 days after the end of each of the first three fiscal quarters
of each fiscal year), (i) its consolidated balance sheet and related
statements of operations and cash flows showing the financial condition of
the Parent Borrower and its consolidated Subsidiaries, all certified by one
of its Financial Officers as fairly presenting in all material respects the
financial condition and results of operations of the Parent Borrower and
its consolidated Subsidiaries on a consolidated basis in accordance with
GAAP, applied on a basis consistent with the application of GAAP to the
Parent Borrower's most recent financial statements delivered pursuant to
Section 5.04(a), subject to normal year-end audit adjustments, the absence
of notes that are not required by GAAP and the condensed presentation
permitted by Form 10-Q of the forms promulgated under the Securities
Exchange Act of 1934 and (ii) consolidated balance sheets and statements of
operations of each of Charter Behavioral, Green Spring and Public
Solutions, showing the financial condition of Charter Behavioral, Green
Spring and Public Solutions, in the cases of (i) and (ii) of this paragraph
as of the close of such fiscal quarter and the results of its operations
and the operations of such Subsidiaries during such fiscal quarter and the
then elapsed portion of the fiscal year.
(c) within 30 days after the end of each month (other than the last
month of any fiscal quarter), its unaudited consolidated balance sheet and
related statements of income and cash flows, showing the consolidated
financial condition of the Parent Borrower and its consolidated
subsidiaries, in all cases as of the close of such month and the
consolidated results of its operations and cash flows during such month and
the then-elapsed portion of the fiscal year;
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55
(d) concurrently with any delivery of financial statements under
paragraph (a) or (b) above, a certificate of the accounting firm or
Financial Officer opining on or certifying such statements (which
certificate, when furnished by an accounting firm, may be limited to
accounting matters and disclaim responsibility for legal interpretations)
(i) certifying that no Event of Default or Default has occurred or, if such
an Event of Default or Default has occurred, specifying the nature and
extent thereof and any corrective action taken or proposed to be taken with
respect thereto and (ii) setting forth computations in reasonable detail
satisfactory to the Administrative Agent demonstrating compliance with the
covenants contained in Sections 6.10, 6.11 and 6.12 (it being understood
that nothing herein requires such computation to be prepared by an
accounting firm), PROVIDED that if the accounting firm and other
independent certified public accountants of recognized national standing
are prohibited by applicable industry guidelines from delivering such
certificates, the Parent Borrower shall no longer be required to cause the
delivery of such certificate;
(e) as soon as available but in any event not later than 45 days
after the end of each of the first three fiscal quarters, and, in the case
of the fourth fiscal quarter, not later than the date financial statements
for such fiscal year are delivered pursuant to Section 5.04(a), a report in
form and substance satisfactory to the Administrative Agent, of (i) (A) all
Permitted Acquisitions consummated during such quarter of $1,000,000 or
more, which shall include the total consideration for each such Permitted
Acquisition (including a breakdown of any Indebtedness permitted under
Section 6.01(d)); and (B) the amount expended for Permitted Acquisitions
from the Closing Date through the end of such quarter; (ii) the aggregate
sales price of assets sold or disposed of pursuant to each transaction that
constitutes an Asset Sale permitted hereunder from the Closing Date through
the end of such fiscal quarter and a schedule that identifies each such
sale or disposition; (iii) all Permitted Debt Repurchases and all Permitted
Stock Repurchases, which shall include amount of securities purchased
thereto, from the Closing Date through the end of such quarter, segregated
by type of security; and (iv) all Permitted Non-Guarantor Transactions and
all Permitted Non-Control Investments, which shall (A) include the value of
such Transactions and Investments completed during the period from the
Closing Date through the end of such quarter and (B) in the case of
Permitted Non-Control Investments, describe the management structure of the
entity into which such Investment is made;
(f) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials (except
for registration statements on Form S-8) filed by any Borrower or any
Subsidiary with the Securities and Exchange Commission, or any Governmental
Authority succeeding to any or all of the functions of said Commission, or
with any national securities exchange, or distributed to its stockholders,
as the case may be;
(g) promptly, from time to time, such other information regarding the
operations, business affairs and financial condition of any Borrower or any
Subsidiary, or compliance with the terms of any Loan Document, as the
Administrative Agent or any Lender may reasonably request; and
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(h) within 5 Business Days after their availability (but in no event
later than the beginning of the third month of each fiscal year), a copy of
the budget for its consolidated statements of income and cash flows for
each fiscal year, with a certificate signed by a Financial Officer
certifying that such budget has been prepared in good faith.
SECTION 5.05. LITIGATION AND OTHER NOTICES. Furnish to the
Administrative Agent prompt written notice of the following:
(a) any Event of Default or Default, specifying the nature and extent
thereof and the corrective action (if any) taken or proposed to be taken
with respect thereto;
(b) the filing or commencement of, or any threat or notice of
intention of any person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any Governmental
Authority, against any Borrower or any Affiliate thereof that could
reasonably be expected to result in a Material Adverse Effect; and
(c) any development (including any development relating to Medicare
or Medicaid) that has resulted in, or could reasonably be expected to
result in, a Material Adverse Effect.
SECTION 5.06. EMPLOYEE BENEFITS. (a) Comply in all material
respects with the applicable provisions of ERISA and the Code relating to
employee benefits and (b) furnish to the Administrative Agent (i) as soon as
possible after, and in any event within 10 days after any Responsible Officer of
any Borrower or any ERISA Affiliate knows or has reason to know that, any ERISA
Event has occurred that, alone or together with any other ERISA Event could
reasonably be expected to have a Material Adverse Effect.
SECTION 5.07. MAINTAINING RECORDS; ACCESS TO PROPERTIES AND
INSPECTIONS. Keep proper books of record and account in which in all material
respects full, true and correct entries in conformity with GAAP and all
requirements of law are made of all dealings and transactions in relation to its
business and activities. Each Loan Party will, and will cause each of its
Subsidiaries to, permit any representatives designated by the Administrative
Agent, the Syndication Agent or any Lender to visit and inspect the financial
records and the properties of any Borrower or any Subsidiary at reasonable times
and as often as reasonably requested of the Parent Borrower and to make extracts
from and copies of such financial records, and permit any representatives
designated by the Administrative Agent or any Lender to discuss after reasonable
notice to the Parent Borrower the affairs, finances and condition of any
Borrower or any Subsidiary with the officers thereof and independent accountants
therefor; PROVIDED, that all such visits and inspections shall be subject to
health, safety and patient confidentiality procedures regularly enforced by the
Subsidiaries that provide patient care.
SECTION 5.08. USE OF PROCEEDS. Use the proceeds of the Loans and
request the issuance of Letters of Credit only for the purposes set forth in the
preamble to this Agreement.
SECTION 5.09. COMPLIANCE WITH ENVIRONMENTAL LAWS. Comply, and cause
all lessees and other persons occupying its Properties to comply, in all
material respects with all
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57
Environmental Laws and Environmental Permits applicable to its operations and
Properties; obtain and renew all material Environmental Permits necessary for
its operations and Properties; and conduct any Remedial Action in accordance
with Environmental Laws.
SECTION 5.10. PREPARATION OF ENVIRONMENTAL REPORTS. If a Default
caused by reason of a breach of Section 3.17 or 5.09 shall have occurred and be
continuing, at the request of the Required Lenders through the Administrative
Agent, provide to the Lenders within 45 days after such request, at the expense
of the Borrowers, an environmental site assessment report for the Properties
which are the subject of such default prepared by an environmental consulting
firm acceptable to the Administrative Agent and indicating the presence or
absence of Hazardous Materials and the estimated cost of any compliance or
Remedial Action in connection with such Properties.
SECTION 5.11. FURTHER ASSURANCES. Execute any and all further
documents, financing statements, agreements and instruments, and take all
further action (including filing Uniform Commercial Code and other financing
statements) that may be required under applicable law, or that the Required
Lenders, the Administrative Agent or the Collateral Agent may reasonably
request, in order to effectuate the transactions contemplated by the Loan
Documents and in order to grant, preserve, protect and perfect the validity and
first priority of the security interests created or intended to be created by
the Security Documents. The Borrowers will cause any subsequently acquired or
organized wholly owned Domestic Subsidiary (other than any wholly owned
Subsidiary that has total assets not in excess of $500,000 and has no
Indebtedness other than to the Parent Borrower or any Guarantor (an "INACTIVE
SUBSIDIARY")) or any wholly owned Domestic Subsidiary upon ceasing to be an
Inactive Subsidiary to become a party to the Guarantee Agreement, Indemnity
Subrogation and Contribution Agreement and each applicable Security Document in
the manner provided therein. In addition, from time to time, the Borrowers and
the Guarantors will, at their cost and expense, promptly secure the Obligations
by pledging or creating, or causing to be pledged or created, perfected security
interests with respect to assets acquired subsequent to the Closing Date as
required by any Security Document. Such security interests and Liens will be
created under the Security Documents and other security agreements and other
instruments and documents in form and substance satisfactory to the Collateral
Agent, and the Borrowers shall deliver or cause to be delivered to the Lenders
all such instruments and documents (including legal opinions and lien searches)
as the Collateral Agent shall reasonably request to evidence compliance with
this Section. Each Borrower agrees to provide such evidence as the Collateral
Agent shall reasonably request as to the perfection and priority status of each
such security interest and Lien.
ARTICLE VI
NEGATIVE COVENANTS
Each Borrower covenants and agrees with each Lender that, so long as
this Agreement shall remain in effect and until the Commitments have been
terminated and the principal of and interest on each Loan, all Fees and all
other expenses or amounts payable under any Loan Document have been paid in full
and all Letters of Credit have been cancelled or have expired and
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all amounts drawn thereunder have been reimbursed in full, unless the Required
Lenders shall otherwise consent in writing, the Borrowers will not, and will not
cause or permit any of the Subsidiaries (other than the Subsidiary Non-
Guarantors, except with respect to Section 6.01 and Section 6.09) to:
SECTION 6.01. INDEBTEDNESS. Incur, create, assume or permit to exist
any Indebtedness, except for Indebtedness satisfying one of the following
paragraphs:
(a) Indebtedness existing on the date hereof and set forth in Schedule
6.01(a);
(b) Indebtedness created hereunder and the other Loan Documents;
(c) unsecured Indebtedness of the Parent Borrower, PROVIDED that (i)
such Indebtedness shall not have any principal payments due on a date that
is on or prior to the Refinancing Revolving Facility Maturity Date; (ii)
such Indebtedness contains covenants (including financial and negative
covenants) and events of default that are no more restrictive in any
material respect than the analogous covenants and events of default
contained in this Agreement and (iii) on the date that any such
Indebtedness is incurred and immediately after giving effect thereto, no
Default or Event of Default shall have occurred and be continuing;
(d) unsecured Indebtedness assumed by the Parent Borrower in
connection with a Permitted Acquisition made after the date hereof or of
any Subsidiary acquired after the date hereof pursuant to a Permitted
Acquisition, which Indebtedness exists at the time of such Permitted
Acquisition and is not created in contemplation of such Permitted
Acquisition, PROVIDED that on the date any such Indebtedness is incurred
and immediately after giving effect thereto, no Default or Event of Default
shall have occurred and be continuing;
(e) unsecured Indebtedness of the Parent Borrower in an aggregate
principal amount not to exceed $25,000,000 at any time outstanding,
PROVIDED that on the date any such Indebtedness is incurred and immediately
after giving effect thereto, no Default or Event of Default shall have
occurred and be continuing;
(f) unsecured Indebtedness of any Subsidiary in an aggregate principal
amount (for all the Subsidiaries) not to exceed $50,000,000 at any time
outstanding, PROVIDED that (i) no more than an aggregate principal amount
of $25,000,000 of such Indebtedness may have any principal payments due on
a date that is on or prior to the Refinancing Revolving Facility Maturity
Date, (ii) such Indebtedness contains covenants (including financial and
negative covenants) and events of default that are no more restrictive in
any material respect than the analogous covenants and events of default
contained in this Agreement and (iii) on the date that any such
Indebtedness is incurred and immediately after giving effect thereto, no
Default or Event of Default shall have occurred and be continuing;
(g) secured Indebtedness of the Parent Borrower or any Subsidiary
(including purchase money Indebtedness) in an aggregate principal amount
(for the Parent Borrower
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59
and all the Subsidiaries) not to exceed $50,000,000 at any time
outstanding, PROVIDED that (i) no more than an aggregate principal amount
of $25,000,000 of such Indebtedness may have any principal payments due on
a date that is on or prior to the Refinancing Revolving Facility Maturity
Date; (ii) such Indebtedness contains covenants (including financial and
negative covenants) and events of default that are no more restrictive in
any material respect than the analogous covenants and events of default
contained in this Agreement; (iii) on the date that any such Indebtedness
is incurred and immediately after giving effect thereto, no Default or
Event of Default shall exist and be continuing; and (iv) the aggregate
principal amount of such Indebtedness shall not exceed 80% of the fair
market value of the assets and property securing such Indebtedness (as
determined in good faith by a Financial Officer of the Parent Borrower);
(h) Guarantees in respect of Indebtedness permitted pursuant to this
Section 6.01 (except that Guarantees by the Parent Borrower and the
Guarantors of Indebtedness of Controlled Non-Guarantor Entities shall be
limited to Permitted Non-Guarantor Transactions);
(i) Indebtedness of the Parent Borrower, any wholly owned Subsidiary
or any Guarantor to any other wholly owned Subsidiary, any other Guarantor
or the Parent Borrower, so long as such Indebtedness is subordinated to all
Indebtedness incurred pursuant hereto and pursuant to the Guarantee
Agreement and evidenced by a note pledged to the Collateral Agent for the
benefit of the Lenders to the extent required by the Pledge Agreement;
(j) Indebtedness incurred pursuant to any sale and leaseback
transaction permitted by Section 6.03;
(k) Indebtedness incurred under any Interest Rate Protection
Agreement;
(l) Indebtedness incurred in connection with any Permitted Receivables
Financing;
(m) Permitted Subordinated Indebtedness;
(n) Indebtedness incurred in connection with any Permitted Non-
Guarantor Transaction; and
(o) extensions, renewals or refinancings of Indebtedness under
paragraphs (a), (c) (d) and (g) so long as (i) such Indebtedness
("REFINANCING INDEBTEDNESS") is in an aggregate principal amount not
greater than the aggregate principal amount of the Indebtedness being
extended, renewed or refinanced plus the amount of any premiums required to
be paid thereon and fees and expenses associated therewith, (ii) such
Refinancing Indebtedness has a later or equal final maturity and a longer
or equal weighted average life than the Indebtedness being extended,
renewed or refinanced, (iii) the interest rate applicable to such
Refinancing Indebtedness shall be a market interest rate (as determined in
good faith by a Financial Officer of the Parent Borrower) as of the time of
such extension, renewal or refinancing, (iv) if the Indebtedness being
extended, renewed or refinanced is subordinated
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to the Obligations, such Refinancing Indebtedness is subordinated to the
Obligations to the extent of the Indebtedness being extended, renewed or
refinanced, (v) each of the covenants, events of default or other
provisions thereof (including any Guarantees thereof) shall be
substantially no less favorable to the Lenders than those contained in the
Indebtedness being refinanced and (vi) at the time and after giving effect
to such extension, renewal or refinancing, no Default or Event of Default
shall have occurred and be continuing.
SECTION 6.02. LIENS. Create, incur, assume or permit to exist any
Lien on any property or assets (including stock or other securities of any
person, including any Subsidiary) now owned or hereafter acquired by it or on
any income or revenues or rights in respect of any thereof, except:
(a) Liens on property or assets of the Parent Borrower and the
Subsidiaries existing on the date hereof and set forth in Schedule 6.02(a);
PROVIDED that such Liens shall secure only those obligations which they
secure on the date hereof;
(b) any Lien created under the Loan Documents;
(c) any Lien existing on any property or asset prior to the
acquisition thereof by any Borrower or any Subsidiary pursuant to a
Permitted Acquisition, PROVIDED that (i) such Lien is not created in
contemplation of or in connection with such acquisition and (ii) such Lien
does not apply or extend to any other property or assets of any Borrower or
any Subsidiary;
(d) Liens for taxes not yet due or which are being contested in
compliance with Section 5.03 or Liens for unpaid local or state taxes that
are not in the aggregate material.
(e) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business and securing
obligations that are not in the aggregate material;
(f) pledges and deposits made in the ordinary course of business in
compliance with workmen's compensation, unemployment insurance and other
social security laws or regulations;
(g) deposits to secure the performance of bids, trade contracts (other
than for Indebtedness), leases (other than Capital Lease Obligations),
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business;
(h) zoning restrictions, easements, rights-of-way, restrictions on use
of real property and other similar encumbrances incurred in the ordinary
course of business which, in the aggregate, are not substantial in amount
and do not materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of the business of the
Borrowers and the Subsidiaries taken as a whole;
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(i) purchase money security interests in real property, improvements
thereto or equipment hereafter acquired (or, in the case of improvements,
constructed) by any Borrower or any Subsidiary; PROVIDED that (i) such
security interests secure Indebtedness permitted by Section 6.01, (ii) such
security interests are incurred, and the Indebtedness secured thereby is
created, within 180 days after such acquisition (or construction), (iii)
the Indebtedness secured thereby does not exceed the lesser of the cost and
the fair market value of such real property, improvements or equipment at
the time of such acquisition (or construction) and (iv) such security
interests do not apply to any other property or assets of any Borrower or
any Subsidiary;
(j) any Lien securing Indebtedness permitted by Section 6.01(g),
PROVIDED that such Lien does not apply or extend to any other assets or
property of any Borrower or any Subsidiary;
(k) any Lien on an asset sold pursuant to a sale and leaseback
transaction permitted by Section 6.03, PROVIDED that such Lien does not
apply or extend to any other assets or property of any Borrower or any
Subsidiary;
(l) any Lien securing Indebtedness permitted by 6.01(i), PROVIDED
that such Indebtedness is subordinated and evidenced by a note pledged in
accordance with Section 6.01(i);
(m) Liens on accounts receivables and related assets financed in
connection with any Permitted Receivables Financing;
(n) Liens securing Refinancing Indebtedness, to the extent that the
Indebtedness being refinanced was originally permitted to be secured
pursuant to this Section 6.02, PROVIDED that any such Lien does not apply
or extend to any property or assets of any Borrower or any Subsidiary other
than property or assets subject to the Liens securing the Indebtedness
being refinanced;
(o) bankers' liens and Liens (other than any Lien imposed by ERISA)
incurred or deposits made in the ordinary course of business consistent
with past practices in connection with title insurance, purchase
agreements, judgment liens (if released, bonded or stayed within 60 days)
and leases and subleases;
(p) prejudgment liens in respect of property of a Foreign Subsidiary
that is incurred in connection with a claim or action against such Foreign
Subsidiary before a court or tribunal outside of the United States,
PROVIDED that such liens do not, individually or in the aggregate, have a
Material Adverse Effect;
(q) Liens on the assets of the Insurance Subsidiaries securing self
insurance and reinsurance obligations and letters of credit or bonds issued
in support of such self insurance and reinsurance obligations, PROVIDED
that the assets subject to such Liens shall only be assets of the Insurance
Subsidiaries; and
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(r) deposits made prior to 1992 plus interest and income earned
thereon to secure the Parent Borrower's obligations in respect of its
Public Issue of 7.5% Dual Currency Swiss Franc Bonds dated 1986 and due
1998/2001.
SECTION 6.03. SALE AND LEASEBACK TRANSACTIONS. Enter into any
arrangement, directly or indirectly, with any person whereby it shall sell or
transfer any property, real or personal, used or useful in its business, whether
now owned or hereafter acquired, and thereafter rent or lease such property or
other property which it intends to use for substantially the same purpose or
purposes as the property being sold or transferred, PROVIDED that the Parent
Borrower and the Subsidiaries may enter into any such transaction so long as (i)
the aggregate fair market value of assets subject to all such transactions (as
determined in good faith by the board of directors of the Parent Borrower) shall
not exceed on a cumulative basis during the term of this Agreement $50,000,000,
(ii) all the proceeds of any such transaction shall be in cash (except for
obligations assumed by the buyer thereof) and the Net Cash Proceeds related to
such transaction shall be applied to reduce the Commitments to the extent
required by Section 2.12(a) and (iii) on the date that any such transaction is
consummated and immediately after giving effect thereto, no Default or Event of
Default shall have occurred and be continuing.
SECTION 6.04. INVESTMENTS, LOANS, ADVANCES AND CERTAIN OTHER
TRANSACTIONS. Purchase, hold or acquire any capital stock, evidences of
indebtedness or other securities of, make or permit to exist any loans or
advances to, or make or permit to exist any investment or any other interest in,
any other person, or transfer any assets to any Controlled Non-Guarantor Entity,
or engage in any transaction that causes any Guarantor to become a Controlled
Non-Guarantor Entity, except:
(a) investments made by the Parent Borrower or any Subsidiary (i)
prior to the date hereof in the capital stock of the Subsidiaries that are
existing on the date hereof and (ii) after the date hereof in the capital
stock of the Borrowers, the Guarantors and wholly owned Domestic
Subsidiaries not required to be Guarantors or Borrowers because of the
second sentence of Section 5.11;
(b) Permitted Investments;
(c) Permitted Acquisitions;
(d) Permitted Debt Repurchases;
(e) Permitted Non-Guarantor Transactions;
(f) Permitted Non-Control Investments;
(g) Permitted Stock Repurchases;
(h) loans and advances to (i) directors, officers and employees not in
excess of $5,000,000 at any time outstanding and (ii) physicians and other
health care professionals
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not in excess of $10,000,000, in each case in the ordinary course of
business and consistent with past practices;
(i) investments in real property in the ordinary course of business
and consistent with past practices not in excess of $10,000,000 at any time
outstanding so long as such property is being used or will be used by an
officer or employee of any Borrower or Guarantor primarily as a residence;
(j) investments consisting of non-cash consideration from a sale of
assets that is permitted pursuant to Section 6.05;
(k) investments by any Borrower to the extent necessary in connection
with a Permitted Receivables Financing;
(l) loans or advances by the Parent Borrower, any wholly owned
Subsidiary or any Guarantor to the Parent Borrower, any wholly owned
Subsidiary or any Guarantor that are permitted under Section 6.01(i),
PROVIDED that such loans or advances are subordinated and evidenced by a
note pledged in accordance with Section 6.01(i);
(m) investments, loans or advances existing on the date hereof and
set forth on Schedule 6.04(m);
(n) investments in the ordinary course of business and consistent
with past practices in property (including debt and equity securities)
issued by debtors as part of the reorganization of such debtors, PROVIDED
that such property is issued in exchange for property originally issued
when such debtors were solvent and were obtained in the ordinary course of
business;
(o) investments by Foreign Subsidiaries in instruments or securities
of the highest grade investment available in local currencies or in
certificates of deposit (or comparable instruments) of any bank with which
such Subsidiary regularly transacts business;
(p) any Interest Rate Protection Agreement permitted under Section
6.01(k); and
(q) acquisition by Parent Borrower of shares of the capital stock of
Green Spring pursuant to the Green Spring Exchange Agreement or the Green
Spring Stockholders' Agreement.
SECTION 6.05. MERGERS, CONSOLIDATIONS, SALES OF ASSETS AND
ACQUISITIONS. Merge into or consolidate with any other person, or permit any
other person to merge into or consolidate with it, or conduct any Asset Sale of
(in one transaction or in a series of transactions)
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all or any substantial part of its assets (whether now owned or hereafter
acquired) or any capital stock of any Subsidiary, or purchase, lease or
otherwise acquire (in one transaction or a series of transactions) all or any
substantial part of the assets of any other person, except:
(a) if at the time thereof and immediately after giving effect
thereto no Event of Default or Default shall have occurred and be
continuing (i) any wholly owned Subsidiary or any Guarantor may merge or
consolidate into any Borrower or Guarantor in a transaction in which such
Borrower or Guarantor is the surviving corporation and no person other than
the Borrower, the Parent Borrower, a Guarantor or any wholly owned
Subsidiary receives any consideration, (ii) any Borrower (other than the
Parent Borrower) may merge into or consolidate with any wholly-owned
Subsidiary or Guarantor in a transaction in which no person other than a
Borrower, Guarantor or wholly-owned Subsidiary receives any consideration
and the surviving or resulting corporation upon the consummation of such
merger or consolidation is or becomes a Borrower, and (iii) any wholly
owned Subsidiary or any Guarantor may merge into or consolidate with any
other wholly owned Subsidiary in a transaction in which the surviving
entity is a wholly owned Subsidiary and no person other than any Borrower
or a wholly owned Subsidiary receives any consideration and so long as the
surviving entity is a Guarantor or becomes a Guarantor to the extent
required by Section 5.11;
(b) the Parent Borrower and the Subsidiaries may conduct any Asset
Sale so long as the fair market value of all the assets sold, transferred
or otherwise disposed of pursuant to this Section 6.05(b) (excluding any
Casualty Event or Condemnation Event) shall not exceed $50,000,000 on a
cumulative basis during the term of this Agreement (as determined in good
faith by a Financial Officer of the Parent Borrower) and so long as the Net
Cash Proceeds from any such sale shall be applied to reduce the Commitments
to the extent required by Section 2.12(a); PROVIDED, HOWEVER, that any
Asset Sale otherwise permitted by Section 6.05(b) shall not be permitted
unless (A) such sale, transfer or other disposition is for consideration at
least 70% of which is cash, and (B) such consideration is at least equal to
the fair market value of the assets sold, transferred or disposed of (as
determined in good faith by a Financial Officer of the Parent Borrower)
(c) the Parent Borrower or any Subsidiary may make Permitted
Acquisitions;
(d) any sale and leaseback transaction permitted by Section 6.03 may
be effected, PROVIDED that the Net Cash Proceeds from such sale shall be
applied to reduce the Commitments to the extent required by Section
2.12(a);
(e) any transfer of assets made in connection with any Permitted Non-
Control Investment or any Permitted Non-Guarantor Transaction may be
effected, PROVIDED that any Net Cash Proceeds from such transfer shall be
applied to reduce the Commitments to the extent required by Section
2.12(a);
(f) any Subsidiary may liquidate and distribute assets to any other
Subsidiary, a Guarantor or the Parent Borrower, PROVIDED that if the
Subsidiary that is being liquidated is
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a Guarantor or a Borrower, the Subsidiary that receives the assets pursuant
to following such liquidation shall be a Guarantor or a Borrower;
(g) the Parent Borrower or any Subsidiary may sell accounts receivable
pursuant to any Permitted Receivables Financing; and
(h) any Loan Party or any Subsidiary may lease or sublease properties
in the ordinary course of business and consistent with past practice.
SECTION 6.06. DIVIDENDS AND DISTRIBUTIONS; RESTRICTIONS ON ABILITY OF
SUBSIDIARIES TO PAY DIVIDENDS. (a) Declare or pay, directly or indirectly, any
dividend or make any other distribution (by reduction of capital or otherwise),
whether in cash, property, securities or a combination thereof, with respect to
any shares of its capital stock or directly or indirectly redeem, purchase,
retire or otherwise acquire for value (or permit any Subsidiary to purchase or
acquire) any shares of any class of its capital stock or set aside any amount
for any such purpose; PROVIDED, HOWEVER, that:
(i) any Subsidiary may declare and pay dividends or make other
distributions to any Borrower or any wholly owned Subsidiary;
(ii) Permitted Stock Repurchases may be effected;
(iii) the Parent Borrower may repurchase common stock distributed in
the ordinary course of business consistent with past practices to trusts
pursuant to any employee-related benefit plan (including any employee stock
ownership plan);
(iv) the Parent Borrower may acquire warrants and options for the
purchase of capital stock acquired upon the exercise of such warrants or
options, PROVIDED that the sole consideration for any such warrants or
options shall be the Parent Borrower's common stock;
(v) the Parent Borrower may purchase, redeem or otherwise acquire for
nominal consideration rights in connection with the Rights Plan;
(vi) any Guarantor may declare and pay dividends PRO RATA to its
shareholders, partners or other equity holders, as the case may be; and
(vii) so long as no Default or Event of Default shall have occurred
and be continuing, the Parent Borrower may declare and pay in each fiscal
year PRO RATA cash dividends on its capital stock in a cumulative amount
for such fiscal year not to exceed 6% of (x) the cash proceeds received by
the Parent Borrower, net of underwriter's and broker's fees and commissions
and costs and expenses incurred in connection therewith, from issuances of
its common stock after the Closing Date pursuant to public or private
offerings LESS (y) all amounts spent by the Parent Borrower to repurchase
any shares of its common stock pursuant to a Permitted Stock Repurchase.
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(b) Permit any of its Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any such Subsidiary to (i) pay any dividends or
make any other distributions on its capital stock or any other interest or (ii)
make or repay any loans or advances to the Parent Borrower or the parent of such
Subsidiary (dividends, distributions and other payments described in subclauses
(i) and (ii) are collectively referred to herein as "UPSTREAM PAYMENTS"), other
than encumbrances and restrictions:
(A) pursuant to the Loan Documents;
(B) existing under, or by reason of, applicable law;
(C) contained in any debt instrument governing Indebtedness of a
Subsidiary that becomes a Borrower or a Guarantor acquired or assumed
pursuant to a Permitted Acquisition and permitted by Section 6.01(d) or (g)
or refinancings thereof permitted by Section 6.01(o), PROVIDED that (x)
such instrument was in existence at the time of such acquisition and was
not created in contemplation of or in connection with the applicable
Permitted Acquisition, (y) a Financial Officer of the Parent Borrower
reasonably believes at the time such Indebtedness is acquired that the
terms of such instrument will not encumber or restrict the ability of such
acquired Subsidiary to make an Upstream Payment, except upon a default or
an event of default under such Indebtedness and (z) such instrument
contains no express encumbrances, or restrictions on the ability of such
acquired Subsidiary to make an Upstream Payment, except upon a default or
an event of default under such Indebtedness;
(D) existing on the date hereof and set forth on Schedule 6.06(b);
(E) contained in sale and leaseback agreements permitted by Section
6.03 and any debt instrument governing any Indebtedness permitted by
Section 6.01(g); and
(F) that are Permitted Restrictions in the case of a Controlled
Venture.
SECTION 6.07. TRANSACTIONS WITH AFFILIATES. Sell or transfer any
property or assets to, or purchase or acquire any property or assets from, or
otherwise engage in any other transactions with, any of its Affiliates, except
that any Borrower or any Subsidiary may engage in any of the foregoing
transactions in the ordinary course of business at prices and on terms and
conditions substantially not less favorable to such Borrower or such Subsidiary
than could be obtained on an arm's-length basis from unrelated third parties,
PROVIDED that the foregoing restriction shall not apply to any Permitted
Receivables Financing or any Permitted Non-Guarantor Transaction.
SECTION 6.08. OTHER INDEBTEDNESS AND AGREEMENTS. (a) Permit any
waiver, supplement, modification, amendment, termination or release of any
indenture, instrument or agreement governing any Indebtedness or preferred stock
of any Borrower or any Subsidiary, or modify its charter or by-laws, in each
case to the extent that any such waiver, supplement, modification, amendment,
termination or release would be adverse to the Lenders in any material respect.
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(b) Make any distribution, whether in cash, property, securities or a
combination thereof, other than scheduled payments of principal and interest as
and when due (to the extent not prohibited by applicable subordination
provisions), in respect of, or pay, or offer or commit to pay, or directly or
indirectly redeem, repurchase, retire or otherwise acquire for consideration, or
set apart any sum for the aforesaid purposes, any subordinated Indebtedness for
borrowed money of any Loan Party or any Subsidiary except for Permitted Debt
Repurchases and Indebtedness permitted by Section 6.01(i).
SECTION 6.09. BUSINESS OF THE BORROWERS AND SUBSIDIARIES. Engage at
any time in any business or business activity that is not a health care business
or activity and business activities reasonably related (ancillary or
complementary) to such business or business activity.
SECTION 6.10. INTEREST EXPENSE COVERAGE RATIO. Permit the Interest
Expense Coverage Ratio as of the end of any fiscal quarter, beginning with the
fiscal quarter ending on December 31, 1996, to be less than 2.50 to 1.00.
SECTION 6.11. LEVERAGE RATIO. Permit the Leverage Ratio as of the
end of any fiscal quarter, beginning with the fiscal quarter ending on December
31, 1996, to be in excess of 4.00 to 1.00.
SECTION 6.12. SENIOR DEBT RATIO. Permit the Senior Debt Ratio as of
the end of any fiscal quarter, beginning with the fiscal quarter ending on
December 31, 1996, to be in excess of 2.00 to 1.00.
SECTION 6.13. FISCAL YEAR. Change the end of its fiscal year from
September 30 to any other date.
ARTICLE VII
EVENTS OF DEFAULT
In case of the happening of any of the following events ("EVENTS OF
DEFAULT"):
(a) any representation or warranty made or deemed made in or in
connection with any Loan Document or the borrowings or issuances of Letters
of Credit hereunder, or any representation, warranty, statement or
information contained in any report, certificate, financial statement or
other instrument furnished in connection with or pursuant to any Loan
Document, shall prove to have been false or misleading in any material
respect when so made, deemed made or furnished;
(b) default shall be made in the payment of any principal of any Loan
when and as the same shall become due and payable, whether at the due date
thereof or at a date fixed for prepayment thereof or by acceleration
thereof or otherwise;
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(c) default shall be made in the payment of any Fee, any L/C
Disbursement that is not satisfied by a deemed Loan pursuant to the second
sentence of Section 2.02(f) or interest on any Loan or L/C Disbursement or
any other amount (other than an amount referred to in (b) above) due under
any Loan Document, when and as the same shall become due and payable, and
such default shall continue unremedied for a period of three Business Days;
(d) default shall be made in the due observance or performance by any
Borrower or any Subsidiary of any covenant, condition or agreement
contained in Section 5.01(a), 5.05 or 5.08 or in Article VI;
(e) default shall be made in the due observance or performance by any
Borrower or any Subsidiary of any covenant, condition or agreement
contained in any Loan Document (other than those specified in (b), (c) or
(d) above) and such default shall continue unremedied for a period of 15
days after notice thereof from the Administrative Agent or any Lender to
the Borrowers;
(f) any Borrower or any Subsidiary shall (i) fail to pay any principal
or interest, regardless of amount, due in respect of any Indebtedness
(other than the Indebtedness evidenced by any Loan Document) in a principal
amount in excess of $12,500,000, when and as the same shall become due and
payable (subject to any grace period), or (ii) fail to observe or perform
any other term, covenant, condition or agreement contained in any agreement
or instrument evidencing or governing any such Indebtedness if the effect
of any failure referred to in this clause (ii) is to cause, or to permit
the holder or holders of such Indebtedness or a trustee on its or their
behalf to cause, such Indebtedness to become due prior to its stated
maturity;
(g) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i)
relief in respect of any Borrower or any Subsidiary, or of a substantial
part of the property or assets of any Borrower or a Subsidiary, under Title
11 of the United States Code, as now constituted or hereafter amended, or
any other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for any Borrower or any
Subsidiary or for a substantial part of the property or assets of any
Borrower or a Subsidiary or (iii) the winding-up or liquidation of any
Borrower or any Subsidiary; and such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of
the foregoing shall be entered;
(h) any Borrower or any Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other Federal,
state or foreign bankruptcy, insolvency, receivership or similar law, (ii)
consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or the filing of any petition described
in (g) above, (iii) apply for or consent to the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for any
Borrower or any Subsidiary or for a
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substantial part of the property or assets of any Borrower or any
Subsidiary, (iv) file an answer admitting the material allegations of a
petition filed against it in any proceeding relating to the above, (v) make
a general assignment for the benefit of creditors, (vi) become unable,
admit in writing its inability or fail generally to pay its debts as they
become due or (vii) take any action for the purpose of effecting any of the
foregoing;
(i) one or more judgments for the payment of money in an aggregate
amount in excess of $10,000,000 shall be rendered against any Borrower, any
Subsidiary or any combination thereof and the same shall remain
undischarged for a period of 60 consecutive days during which execution
shall not be effectively stayed, or any action shall be legally taken by a
judgment creditor to levy upon assets or properties of any Borrower or any
Subsidiary to enforce any such judgment;
(j) an ERISA Event shall have occurred that, in the opinion of the
Required Lenders, when taken together with all other such ERISA Events,
could reasonably be expected to have a Material Adverse Effect;
(k) any security interest purported to be created by any Security
Document shall cease to be, or shall be asserted by any Borrower or any
other Loan Party not to be, a valid, perfected, first priority (except as
otherwise expressly provided in this Agreement or such Security Document)
security interest in the securities, assets or properties covered thereby,
except to the extent that any such loss of perfection or priority results
from the failure of the Collateral Agent to maintain possession of
certificates representing securities pledged under the Pledge Agreement;
(l) any Loan Document shall not be for any reason, or shall be
asserted by any Loan Party not to be, in full force and effect and
enforceable in accordance with its terms; or
(m) there shall have occurred a Change in Control;
then, and in every such event (other than an event with respect to any Borrower
or any Subsidiary described in paragraph (g) or (h) above), and at any time
thereafter during the continuance of such event, the Administrative Agent may,
and at the request of the Required Lenders shall, by notice to the Borrowers,
take either or both of the following actions, at the same or different times:
(i) terminate forthwith the Commitments and (ii) declare the Loans then
outstanding to be forthwith due and payable in whole or in part, whereupon the
principal of the Loans so declared to be due and payable, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrowers accrued hereunder and under any other Loan Document, shall become
forthwith due and payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived by the Borrowers,
anything contained herein or in any other Loan Document to the contrary
notwithstanding; and in any event with respect to any Borrower or any Subsidiary
described in paragraph (g) or (h) above, the Commitments shall automatically
terminate and the principal of the Loans then outstanding, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrowers accrued hereunder and under any other Loan Document, shall
automatically become due and payable,
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without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived by the Borrowers, anything contained herein or
in any other Loan Document to the contrary notwithstanding.
ARTICLE VIII
THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT AND THE COLLATERAL AGENT
In order to expedite the transactions contemplated by this Agreement,
The Chase Manhattan Bank is hereby appointed to act as Administrative Agent and
Collateral Agent and First Union National Bank of North Carolina is hereby
appointed to act as Syndication Agent, in each case on behalf of the Lenders and
the Issuing Banks (for purposes of this Article VIII, the Administrative Agent,
the Syndication Agent and the Collateral Agent are referred to collectively as
the "AGENTS"). Each of the Lenders and each assignee of any such Lender and
each Issuing Bank, hereby irrevocably authorizes the Agents to take such actions
on behalf of such Lender or assignee or Issuing Bank and to exercise such powers
as are specifically delegated to the Agents by the terms and provisions hereof
and of the other Loan Documents, together with such actions and powers as are
reasonably incidental thereto. The Administrative Agent is hereby expressly
authorized by the Lenders and the Issuing Banks, without hereby limiting any
implied authority, (a) to receive on behalf of the Lenders and the Issuing Banks
all payments of principal of and interest on the Loans, all payments in respect
of L/C Disbursements and all other amounts due to the Lenders hereunder, and
promptly to distribute to each Lender or the applicable Issuing Bank its proper
share of each payment so received; (b) to give notice on behalf of each of the
Lenders to the Borrowers of any Event of Default specified in this Agreement of
which the Administrative Agent has actual knowledge acquired in connection with
its agency hereunder; and (c) to distribute to each Lender copies of all
notices, financial statements and other materials delivered by the Borrowers or
any other Loan Party pursuant to this Agreement or the other Loan Documents as
received by the Administrative Agent. Without limiting the generality of the
foregoing, the Administrative Agent and the Collateral Agent are hereby
expressly authorized to execute any and all documents (including releases) with
respect to the Collateral and the rights of the Secured Parties with respect
thereto, as contemplated by and in accordance with the provisions of this
Agreement and the Security Documents. The Borrowers agree that the
Administrative Agent may designate prior to the Closing Date any other Lender
with the title co-agent and that any such co-agent shall not be obligated to
perform any duties in such capacity as a co-agent.
Neither the Agents nor any of their respective directors, officers,
employees or agents shall be liable as such for any action taken or omitted by
any of them except for its or his own gross negligence or willful misconduct, or
be responsible for any statement, warranty or representation herein or the
contents of any document delivered in connection herewith, or be required to
ascertain or to make any inquiry concerning the performance or observance by the
Borrowers or any other Loan Party of any of the terms, conditions, covenants or
agreements contained in any Loan Document. The Agents shall not be responsible
to the Lenders for the due execution, genuineness, validity, enforceability or
effectiveness of this Agreement or any other Loan Documents, instruments or
agreements. The Agents shall in all cases be fully protected in acting, or
refraining from acting, in accordance with written instructions signed by the
Required
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Lenders and, except as otherwise specifically provided herein, such instructions
and any action or inaction pursuant thereto shall be binding on all the Lenders.
Each Agent shall, in the absence of knowledge to the contrary, be entitled to
rely on any instrument or document believed by it in good faith to be genuine
and correct and to have been signed or sent by the proper person or persons.
Neither the Agents nor any of their respective directors, officers, employees or
agents shall have any responsibility to the Borrowers or any other Loan Party on
account of the failure of or delay in performance or breach by any Lender or any
Issuing Bank of any of its obligations hereunder or to any Lender or any Issuing
Bank on account of the failure of or delay in performance or breach by any other
Lender or Issuing Bank or the Borrowers or any other Loan Party of any of their
respective obligations hereunder or under any other Loan Document or in
connection herewith or therewith. Each of the Agents may execute any and all
duties hereunder by or through agents or employees and shall be entitled to rely
upon the advice of legal counsel selected by it with respect to all matters
arising hereunder and shall not be liable for any action taken or suffered in
good faith by it in accordance with the advice of such counsel.
The Lenders hereby acknowledge that none of the Agents shall be under
any duty to take any discretionary action permitted to be taken by it pursuant
to the provisions of this Agreement unless it shall be requested in writing to
do so by the Required Lenders.
Subject to the appointment and acceptance of a successor Agent as
provided below, any of the Agents may resign at any time by notifying the
Lenders and the Borrowers. Upon any such resignation, the Required Lenders,
with the consent of the Parent Borrower (which consent shall not be unreasonably
withheld), shall have the right to appoint a successor, PROVIDED the consent of
the Parent Borrower shall not be required if an Event of Default has occurred
and is continuing. If no successor shall have been so appointed by the Required
Lenders and shall have accepted such appointment within 30 days after the
retiring Agent gives notice of its resignation, then the retiring Agent may, on
behalf of the Lenders, appoint a successor Agent, with the consent of the Parent
Borrower (which consent shall not be unreasonably withheld), which shall be a
bank that is a Lender and has a combined capital and surplus of at least
$500,000,000 or an Affiliate of any such bank, PROVIDED the consent of the
Parent Borrower shall not be required if an Event of Default has occurred and is
continuing. Upon the acceptance of any appointment as Agent hereunder by a
successor bank, such successor shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent and the retiring
Agent shall be discharged from its duties and obligations hereunder. After the
Agent's resignation hereunder, the provisions of this Article and Section 9.05
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as Agent.
With respect to the Loans made by it hereunder, each Agent in its
individual capacity and not as Agent shall have the same rights and powers as
any other Lender and may exercise the same as though it were not an Agent, and
the Agents and their Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with the Borrowers or any Subsidiary or
other Affiliate thereof as if it were not an Agent.
Each Lender agrees (a) to reimburse the Agents, on demand, in the
amount of its PRO RATA share (based on its Commitment hereunder) of any expenses
incurred for the benefit of the Lenders by the Agents, including counsel fees
and compensation of agents and employees paid for
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services rendered on behalf of the Lenders, that shall not have been reimbursed
by the Borrowers and (b) to indemnify and hold harmless each Agent and any of
its directors, officers, employees or agents, on demand, in the amount of such
PRO RATA share, from and against any and all liabilities, taxes, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by or asserted against it in its capacity as Agent or any of them in any way
relating to or arising out of this Agreement or any other Loan Document or any
action taken or omitted by it or any of them under this Agreement or any other
Loan Document, to the extent the same shall not have been reimbursed by the
Borrowers or any other Loan Party, PROVIDED that no Lender shall be liable to an
Agent or any such other indemnified person for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements that are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Agent or any of its directors,
officers, employees or agents.
Each Lender agrees that such Lender will not challenge the seniority,
with respect to the Series A Notes or other subordinated Indebtedness of the
Parent Borrower or the Subsidiaries permitted to be incurred by Section 6.01, of
the Loans made by other Lenders.
Each Lender acknowledges that it has, independently and without
reliance upon the Agents or any other Lender and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon the Agents or any other Lender and
based on such documents and information as it shall from time to time deem
appropriate, continue to make its own decisions in taking or not taking action
under or based upon this Agreement or any other Loan Document, any related
agreement or any document furnished hereunder or thereunder.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. NOTICES. Notices and other communications provided for
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed by certified or registered mail or sent by telecopy, as follows:
(a) if to any Borrower, to it in care of the Parent Borrower at 3414
Peachtree Road, NE, Suite 1400, Atlanta, GA 30326, Attention of Treasurer
(Telecopy No. (404) 814-5823);
(b) if to the Administrative Agent, to Chase Manhattan Bank Agency
Services Corporation, Grand Central Tower, 29th Floor, 140 East 45th
Street, New York, New York 10017, Attention of Sandra Miklave (Telecopy No.
(212) 622-0002), with a copy to The Chase Manhattan Bank, at 270 Park
Avenue, New York, New York 10017, Attention of Dawn Lee Lum (Telecopy No.
(212) 270-3279);
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(c) if to the Syndication Agent, to First Union National Bank of North
Carolina, 301 South College Street, Charlotte, North Carolina 28288,
Attention of Sue Patterson (Telecopy No. 704-383-9144); and
(d) if to a Lender, to it at its address (or telecopy number) set
forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to
which such Lender shall have become a party hereto.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy or on the date five Business Days after dispatch by certified or
registered mail if mailed, in each case delivered, sent or mailed (properly
addressed) to such party as provided in this Section 9.01 or in accordance with
the latest unrevoked direction from such party given in accordance with this
Section 9.01.
SECTION 9.02. SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made by the Loan Parties herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Lenders and the Issuing Banks and shall survive the
making by the Lenders of the Loans and the issuance of Letters of Credit by the
Issuing Banks, regardless of any investigation made by the Lenders or the
Issuing Banks or on their behalf, and shall continue in full force and effect as
long as the principal of or any accrued interest on any Loan or any Fee or any
other amount payable under this Agreement or any other Loan Document is
outstanding and unpaid or any Letter of Credit is outstanding and so long as the
Commitments have not been terminated. The provisions of Sections 2.13, 2.15,
2.19 and 9.05 shall remain operative and in full force and effect regardless of
the expiration of the term of this Agreement, the consummation of the
transactions contemplated hereby, the repayment of any of the Loans, the
expiration of the Commitments, the expiration of any Letter of Credit, the
invalidity or unenforceability of any term or provision of this Agreement or any
other Loan Document, or any investigation made by or on behalf of the
Administrative Agent, the Syndication Agent, the Collateral Agent, any Lender or
any Issuing Bank.
SECTION 9.03. BINDING EFFECT. This Agreement shall become effective
when it shall have been executed by the Borrowers, the Administrative Agent and
the Syndication Agent and when the Administrative Agent shall have received
counterparts hereof which, when taken together, bear the signatures of each of
the other parties hereto, and thereafter shall be binding upon and inure to the
benefit of the parties hereto and their respective permitted successors and
assigns.
SECTION 9.04. SUCCESSORS AND ASSIGNS. (a) Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the permitted successors and assigns of such party; and all
covenants, promises and agreements by or on behalf of the Borrowers, the
Administrative Agent and the Syndication Agent, the Issuing Banks or the Lenders
that are contained in this Agreement shall bind and inure to the benefit of
their respective permitted successors and assigns.
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(b) Each Lender may assign to one or more assignees all or a portion
of its interests, rights and obligations under this Agreement (including all or
a portion of its Commitment and the Loans at the time owing to it); PROVIDED,
HOWEVER, that (i) except in the case of an assignment to a Lender or an
Affiliate of such Lender, (x) the Parent Borrower, the Administrative Agent and
the Syndication Agent (and, in the case of any assignment of a Commitment, the
Issuing Banks) must give their prior written consent to such assignment (which
consent shall not be unreasonably withheld) and (y) the amount of the Commitment
of the assigning Lender subject to each such assignment (determined as of the
date the Assignment and Acceptance with respect to such assignment is delivered
to the Administrative Agent) shall not be less than $5,000,000 (or, if less, the
entire remaining amount of such Lender's Commitment), (ii) the parties to each
such assignment shall execute and deliver to the Administrative Agent an
Assignment and Acceptance, together with a processing and recordation fee of
$3,500, (iii) the assignee, if it shall not be a Lender, shall deliver to the
Administrative Agent an Administrative Questionnaire and (iv) the assignment by
any Lender of any portion of its Commitment or any portion of the Loans owing to
such Lender must include, to the extent applicable, a ratable portion of both
its Refinancing Loan Commitment and its Additional Loan Commitment and, to the
extent applicable, a ratable portion of Refinancing Revolving Loans and
Additional Revolving Loans owing to such Lender. Upon acceptance and recording
pursuant to paragraph (e) of this Section 9.04, from and after the effective
date specified in each Assignment and Acceptance, which effective date shall be
at least five Business Days after the execution thereof, (A) the assignee
thereunder shall be a party hereto and, to the extent of the interest assigned
by such Assignment and Acceptance, have the rights and obligations of a Lender
under this Agreement and (B) the assigning Lender thereunder shall, to the
extent of the interest assigned by such Assignment and Acceptance, be released
from its obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.15,
2.19 and 9.05, as well as to any Fees accrued for its account and not yet paid).
(c) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the assignee thereunder shall be deemed to
confirm to and agree with each other and the other parties hereto as follows:
(i) such assigning Lender warrants that it is the legal and beneficial owner of
the interest being assigned thereby free and clear of any adverse claim and that
its Commitment, and the outstanding balance of its Loans, in each case without
giving effect to assignments thereof which have not become effective, are as set
forth in such Assignment and Acceptance, (ii) except as set forth in (i) above,
such assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto, or the financial condition of any Borrower or any Subsidiary or the
performance or observance by any Borrower or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements referred
to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other
documents and information as
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it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (v) such assignee will independently and
without reliance upon the Administrative Agent, the Syndication Agent, the
Collateral Agent, such assigning Lender or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement; (vi) such assignee appoints and authorizes the Administrative Agent
and the Collateral Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Administrative
Agent and the Collateral Agent, respectively, by the terms hereof, together with
such powers as are reasonably incidental thereto; and (vii) such assignee agrees
that it will perform in accordance with their terms all the obligations which by
the terms of this Agreement are required to be performed by it as a Lender.
(d) The Administrative Agent, acting for this purpose as an agent of
the Borrowers, shall maintain at one of its offices a copy of each Assignment
and Acceptance delivered to it and a register for the recordation of the names
and addresses of the Lenders, and the Commitment of, and principal amount of the
Loans owing to, each Lender pursuant to the terms hereof from time to time (the
"REGISTER"). The entries in the Register shall be conclusive and the Borrowers,
the Administrative Agent, the Issuing Banks, the Collateral Agent and the
Lenders may treat each person whose name is recorded in the Register pursuant to
the terms hereof as a Lender hereunder for all purposes of this Agreement,
notwithstanding notice to the contrary. The Register shall be available for
inspection by the Borrowers, the Issuing Banks, the Collateral Agent and any
Lender, at any reasonable time and from time to time upon reasonable prior
notice.
(e) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee, an Administrative Questionnaire
completed in respect of the assignee (unless the assignee shall already be a
Lender hereunder), the processing and recordation fee referred to in paragraph
(b) above and, if required, the written consent of the Parent Borrower, the
Issuing Banks, the Administrative Agent and the Syndication Agent to such
assignment, the Administrative Agent shall (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to the Lenders and the Issuing Banks. No
assignment shall be effective unless it has been recorded in the Register as
provided in this paragraph (e).
(f) Each Lender may without the consent of the Borrowers, the Issuing
Banks or the Administrative Agent sell participations to one or more banks or
other entities in all or a portion of its rights and obligations under this
Agreement (including all or a portion of its Commitment and the Loans owing to
it); PROVIDED, HOWEVER, that (i) such Lender's obligations under this Agreement
shall remain unchanged, (ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii) the
participating banks or other entities shall be entitled to the benefit of the
cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same
extent as if they were Lenders and (iv) the Borrowers, the Administrative Agent,
the Syndication Agent, the Issuing Banks and the Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement, and such Lender shall retain the sole right to
enforce the obligations of the Borrowers relating to the Loans or L/C
Disbursements and to approve any amendment, modification or waiver of any
provision of this Agreement and the other Loan Documents (other than amendments,
modifications
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or waivers decreasing any fees payable hereunder or the amount of principal of
or the rate at which interest is payable on the Loans, extending any scheduled
principal payment date or date fixed for the payment of interest on the Loans,
increasing or extending the Commitments or releasing from any Lien granted under
any Security Document all or any substantial part of the Collateral (except with
respect to sales of, and other transactions relating to, Collateral permitted
pursuant to any Loan Document)).
(g) Any Lender or participant may, in connection with any assignment
or participation or proposed assignment or participation pursuant to this
Section 9.04, disclose to the assignee or participant or proposed assignee or
participant any information relating to the Borrowers furnished to such Lender
by or on behalf of the Borrowers; PROVIDED that, prior to any such disclosure of
information designated by the Borrowers as confidential, each such assignee or
participant or proposed assignee or participant shall execute an agreement
whereby such assignee or participant shall agree (subject to customary
exceptions) to preserve the confidentiality of such confidential information on
terms no less restrictive than those applicable to the Lenders pursuant to
Section 9.16.
(h) Any Lender may at any time assign all or any portion of its
rights under this Agreement to a Federal Reserve Bank to secure extensions of
credit by such Federal Reserve Bank to such Lender; PROVIDED that no such
assignment shall release a Lender from any of its obligations hereunder or
substitute any such Bank for such Lender as a party hereto. In order to
facilitate such an assignment to a Federal Reserve Bank, the Borrowers shall, at
the request of the assigning Lender, duly execute and deliver to the assigning
Lender a promissory note or notes evidencing the Loans made to the Borrowers by
the assigning Lender hereunder.
(i) The Borrowers shall not assign or delegate any of their
respective rights or duties hereunder without the prior written consent of the
Administrative Agent, the Syndication Agent, the Issuing Banks and each Lender,
and any attempted assignment without such consent shall be null and void.
SECTION 9.05. EXPENSES; INDEMNITY. (a) The Borrowers agree to pay
all reasonable out-of-pocket expenses incurred by the Administrative Agent, the
Syndication Agent, the Collateral Agent and the Issuing Banks in connection with
the syndication of the credit facilities provided for herein and the preparation
and administration of this Agreement and the other Loan Documents or in
connection with any amendments, modifications or waivers of the provisions
hereof or thereof (whether or not the transactions hereby or thereby
contemplated shall be consummated) or incurred by the Administrative Agent, the
Syndication Agent, the Collateral Agent, an Issuing Bank or any Lender in
connection with the enforcement or protection of its rights in connection with
this Agreement and the other Loan Documents or in connection with the Loans made
or Letters of Credit issued hereunder, including the reasonable fees, charges
and disbursements of Cravath, Swaine & Moore, counsel for the Administrative
Agent, the Syndication Agent and the Collateral Agent, and, in connection with
any such enforcement or protection, the reasonable fees, charges and
disbursements of any other counsel for the Administrative Agent, the Syndication
Agent, the Collateral Agent, an Issuing Bank or any Lender.
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(b) The Borrowers agree, jointly and severally, to indemnify the
Administrative Agent, the Syndication Agent, the Collateral Agent, each co-
agent, each Lender and each Issuing Bank, each Affiliate of any of the foregoing
persons and each of their respective directors, officers, employees and agents
(each such person being called an "INDEMNITEE") against, and to hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including reasonable counsel fees, charges and disbursements,
incurred by or asserted against any Indemnitee arising out of, in any way
connected with, or as a result of (i) the execution or delivery of this
Agreement or any other Loan Document or any agreement or instrument contemplated
thereby, the performance by the parties thereto of their respective obligations
thereunder or the consummation of the Transactions and the other transactions
contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of
Letters of Credit, (iii) any claim, litigation, investigation or proceeding
relating to any of the foregoing, whether or not any Indemnitee is a party
thereto, or (iv) any actual or alleged presence or Release of Hazardous
Materials on any property owned or operated by the Borrowers or any of the
Subsidiaries, or any Environmental Claim related in any way to the Borrowers or
the Subsidiaries; PROVIDED that such indemnity shall not, as to any Indemnitee,
be available to the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the gross negligence or willful
misconduct of such Indemnitee.
(c) The provisions of this Section 9.05 shall remain operative and in
full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the expiration of the Commitments, the expiration
of any Letter of Credit, the invalidity or unenforceability of any term or
provision of this Agreement or any other Loan Document, or any investigation
made by or on behalf of the Administrative Agent, the Syndication Agent, the
Collateral Agent, any Lender or either Issuing Bank. All amounts due under this
Section 9.05 shall be payable on written demand therefor.
SECTION 9.06. RIGHT OF SETOFF. If an Event of Default shall have
occurred and be continuing, each Lender and Issuing Bank is hereby authorized at
any time and from time to time, except to the extent prohibited by law, to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by such Lender or Issuing Bank to or for the credit or the account of any
Borrower against any of and all the obligations of any Borrower now or hereafter
existing under this Agreement and other Loan Documents held by such Lender or
Issuing Bank, irrespective of whether or not such Lender or Issuing Bank shall
have made any demand under this Agreement or such other Loan Document and
although such obligations may be unmatured. The rights of each Lender and
Issuing Bank under this Section 9.06 are in addition to other rights and
remedies (including other rights of setoff) which such Lender or Issuing Bank
may have.
SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS (OTHER THAN LETTERS OF CREDIT AND AS EXPRESSLY SET FORTH IN OTHER LOAN
DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF
CREDIT, OR IF NO
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SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE,
PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY
THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9.08. WAIVERS; AMENDMENT. (a) No failure or delay of the
Administrative Agent, the Syndication Agent, the Collateral Agent, any Lender or
either Issuing Bank in exercising any power or right hereunder or under any
other Loan Document shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The
rights and remedies of the Administrative Agent, the Syndication Agent, the
Collateral Agent, the Issuing Banks and the Lenders hereunder and under the
other Loan Documents are cumulative and are not exclusive of any rights or
remedies that they would otherwise have. No waiver of any provision of this
Agreement or any other Loan Document or consent to any departure by the
Borrowers or any other Loan Party therefrom shall in any event be effective
unless the same shall be permitted by paragraph (b) below, and then such waiver
or consent shall be effective only in the specific instance and for the purpose
for which given. No notice or demand on the Borrowers in any case shall entitle
the Borrowers to any other or further notice or demand in similar or other
circumstances.
(b) Neither this Agreement nor any other Loan Document (excluding
Letters of Credit) nor any provision hereof or thereof may be waived, amended or
modified except pursuant to an agreement or agreements in writing entered into
by the Borrowers and the Required Lenders (or, in the case of any other such
Loan Document, the parties thereto with the prior written consent of the
Required Lenders); PROVIDED, HOWEVER, that no such agreement (i) shall (A)
decrease the principal amount of, or extend the maturity of or any scheduled
principal payment date or date for the payment of any interest on any Loan or
any date for reimbursement of an L/C Disbursement, or waive or excuse any such
payment or any part thereof, or decrease the rate of interest on any Loan or L/C
Disbursement, without the prior written consent of each Lender affected thereby,
(B) change or extend the Commitment or decrease or extend the date for payment
of the Commitment Fees of any Lender without the prior written consent of such
Lender or (C) amend or modify the provisions of Section 2.12(a), 2.16, 4.03(b)
or 9.04(i), the provisions of this Section, the definition of the term "Required
Lenders" or release any Guarantor from its obligations under the Guarantee
Agreement (other than in accordance with the Guarantee Agreement) or release
from any Lien granted under any Security Document all or any substantial part of
the Collateral (except with respect to sales of, and other transactions relating
to, Collateral permitted pursuant to the Security Documents), without the prior
written consent of each Lender, (ii) shall change the allocation between the
Total Refinancing Loan Commitment and the Total Additional Loan Commitment of
any prepayment or reduction pursuant to Section 2.09, 2.11 or 2.12 without the
prior written consent of (A) Refinancing Facility Lenders representing more than
50% of the sum of the Aggregate Credit Exposure and unused Refinancing Loan
Commitments and (B) Additional Facility Lenders representing more than 50% of
the sum of the aggregate outstanding principal amount of the Additional
Revolving Loans and unused Additional Loan Commitments or (iii) shall amend or
modify Section 4.03(a), (c) or (d) without the prior written consent of
Additional Facility Lenders representing more than 50% of the sum of the
aggregate outstanding principal amount of Additional
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Revolving Loans and unused Additional Loan Commitments; PROVIDED, FURTHER that
no such agreement shall amend, modify or otherwise affect the rights or duties
of the Administrative Agent, the Syndication Agent, the Collateral Agent or
either Issuing Bank hereunder or under any other Loan Document without the prior
written consent of the Administrative Agent, the Syndication Agent, the
Collateral Agent or such Issuing Bank.
SECTION 9.09. INTEREST RATE LIMITATION. Notwithstanding anything
herein to the contrary, if at any time the interest rate applicable to any Loan
or participation in any L/C Disbursement, together with all fees, charges and
other amounts which are treated as interest on such Loan or participation in
such L/C Disbursement under applicable law (collectively the "CHARGES"), shall
exceed the maximum lawful rate (the "MAXIMUM RATE") which may be contracted for,
charged, taken, received or reserved by the Lender holding such Loan or
participation in accordance with applicable law, the rate of interest payable in
respect of such Loan or participation hereunder, together with all Charges
payable in respect thereof, shall be limited to the Maximum Rate and, to the
extent lawful, the interest and Charges that would have been payable in respect
of such Loan or participation but were not payable as a result of the operation
of this Section 9.09 shall be cumulated and the interest and Charges payable to
such Lender in respect of other Loans or participations or periods shall be
increased (but not above the Maximum Rate therefor) until such cumulated amount,
together with interest thereon at the Federal Funds Effective Rate to the date
of repayment, shall have been received by such Lender.
SECTION 9.10. ENTIRE AGREEMENT. This Agreement, the Fee Letter and
the other Loan Documents constitute the entire contract between the parties
relative to the subject matter hereof. Any other previous agreement among the
parties with respect to the subject matter hereof is superseded by this
Agreement and the other Loan Documents. Nothing in this Agreement or in the
other Loan Documents, expressed or implied, is intended to confer upon any party
other than the parties hereto and thereto any rights, remedies, obligations or
liabilities under or by reason of this Agreement or the other Loan Documents.
SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT
OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED TO SUCH PARTY, EXPRESSLY OR
OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11.
SECTION 9.12. SEVERABILITY. In the event any one or more of the
provisions contained in this Agreement or in any other Loan Document should be
held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby (it being
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understood that the invalidity of a particular provision in a particular
jurisdiction shall not in and of itself affect the validity of such provision in
any other jurisdiction). The parties shall endeavor in good-faith negotiations
to replace the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which comes as close as possible to that of
the invalid, illegal or unenforceable provisions.
SECTION 9.13. COUNTERPARTS. This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original but all of which when taken together shall
constitute a single contract, and shall become effective as provided in Section
9.03. Delivery of an executed signature page to this Agreement by facsimile
transmission shall be as effective as delivery of a manually signed counterpart
of this Agreement.
SECTION 9.14. HEADINGS. Article and Section headings and the Table
of Contents used herein are for convenience of reference only, are not part of
this Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 9.15. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) Each
Borrower hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that the
Administrative Agent, the Syndication Agent, the Collateral Agent, either
Issuing Bank or any Lender may otherwise have to bring any action or proceeding
relating to this Agreement or the other Loan Documents against the Borrowers or
its properties in the courts of any jurisdiction.
(b) Each Borrower hereby irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection which it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the other Loan
Documents in any New York State or Federal court. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
SECTION 9.16. CONFIDENTIALITY. The Administrative Agent, the
Syndication Agent, the Collateral Agent, each Issuing Bank and each of the
Lenders agrees to keep confidential (and to use its best efforts to cause its
respective agents and representatives to keep confidential) the Information (as
defined below) and all copies thereof, extracts therefrom and analyses or other
<PAGE>
81
materials based thereon, except that the Administrative Agent, the Syndication
Agent, the Collateral Agent, either Issuing Bank or any Lender shall be
permitted to disclose Information (a) to such of its respective officers,
directors, employees, agents, auditors, affiliates and representatives as need
to know such Information, (b) to the extent requested by any regulatory
authority, (c) to the extent otherwise required by applicable laws and
regulations or by any subpoena or similar legal process, (d) in connection with
any suit, action or proceeding relating to the enforcement of its rights
hereunder or under the other Loan Documents or (e) to the extent such
Information (i) becomes publicly available other than as a result of a breach of
this Section 9.16 or (ii) becomes available to the Administrative Agent, the
Syndication Agent, either Issuing Bank, any Lender or the Collateral Agent on a
nonconfidential basis from a source other than the Borrowers. For the purposes
of this Section, "INFORMATION" shall mean all financial statements,
certificates, reports, agreements and information (including all analyses,
compilations and studies prepared by the Administrative Agent, the Syndication
Agent, the Collateral Agent, either Issuing Bank or any Lender based on any of
the foregoing) that (i) are received from the Borrowers and related to the
Borrowers, any shareholder of any of the Borrowers or any employee, customer or
supplier of the Borrowers, other than any of the foregoing that were available
to the Administrative Agent, the Syndication Agent, the Collateral Agent, either
Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure
thereto by the Borrowers, and (ii) are in the case of Information provided after
the date hereof, clearly identified at the time of delivery as confidential.
The provisions of this Section 9.16 shall remain operative and in full force and
effect regardless of the expiration and term of this Agreement.
SECTION 9.17. OBLIGATIONS JOINT AND SEVERAL. (a) Each Borrower
agrees that it shall, jointly with the other Borrowers and severally, be liable
for all the Obligations. Each Borrower further agrees that the Obligations of
the other Borrowers may be extended and renewed, in whole or in part, without
notice to or further assent from it, and that it will remain bound upon its
agreement hereunder notwithstanding any extension or renewal of any Obligation
of the other Borrowers.
(b) Each Borrower waives presentment to, demand of payment from and
protest to the other Borrowers of any of the Obligations, and also waives notice
of acceptance of its obligations and notice of protest for nonpayment. The
Obligations of a Borrower hereunder shall not be affected by (i) the failure of
any Lender or Issuing Bank or the Administrative Agent or Collateral Agent to
assert any claim or demand or to enforce any right or remedy against the other
Borrowers under the provisions of this Agreement or any of the other Loan
Documents or otherwise; (ii) any rescission, waiver, amendment or modification
of any of the terms or provisions of this Agreement, any of the other Loan
Documents or any other agreement; or (iii) the failure of any Lender or Issuing
Bank to exercise any right or remedy against any other Borrower.
(c) Each Borrower further agrees that its agreement hereunder
constitutes a promise of payment when due and not of collection, and waives any
right to require that any resort be had by any Lender or Issuing Bank to any
balance of any deposit account or credit on the books of any Lender or Issuing
Bank in favor of any other Borrower or any other person.
(d) The Obligations of each Borrower hereunder shall not be subject
to any reduction, limitation, impairment or termination for any reason,
including compromise, and shall not be subject to any defense or setoff,
counterclaim, recoupment or termination whatsoever by
<PAGE>
82
reason of the invalidity, illegality or unenforceability of the Obligations of
the other Borrowers or otherwise. Without limiting the generality of the
foregoing, the Obligations of each Borrower hereunder shall not be discharged or
impaired or otherwise affected by the failure of the Administrative Agent, the
Collateral Agent or any Lender or Issuing Bank to assert any claim or demand or
to enforce any remedy under this Agreement or under any other Loan Document or
any other agreement, by any waiver or modification in respect of any thereof, by
any default, failure or delay, willful or otherwise, in the performance of the
Obligations of the other Borrowers, or by any other act or omission which may or
might in any manner or to any extent vary the risk of such Borrower or otherwise
operate as a discharge of such Borrower as a matter of law or equity.
(e) Each Borrower further agrees that its obligations hereunder shall
continue to be effective or be reinstated, as the case may be, if at any time
payment, or any part thereof, of principal of or interest on any Obligation of
the other Borrowers is rescinded or must otherwise be restored by the
Administrative Agent, the Collateral Agent or any Lender or Issuing Bank upon
the bankruptcy or reorganization of any of the other Borrowers or otherwise.
(f) In furtherance of the foregoing and not in limitation of any
other right which the Administrative Agent, the Collateral Agent or any Lender
or Issuing Bank may have at law or in equity against any Borrower by virtue
hereof, upon the failure of a Borrower to pay any Obligation when and as the
same shall become due, whether at maturity, by acceleration, after notice of
prepayment or otherwise, each other Borrower hereby promises to and will, upon
receipt of written demand by the Administrative Agent, forthwith pay, or cause
to be paid, in cash the amount of such unpaid Obligations, and thereupon each
Lender shall, in a reasonable manner, assign the amount of the Obligations of
the other Borrowers owed to it and paid by such Borrower pursuant to this
guarantee to such Borrower, such assignment to be PRO TANTO to the extent to
which the Obligations in question were discharged by such Borrower, or make such
disposition thereof as such Borrower shall direct (all without recourse to any
Lender and without any representation or warranty by any Lender).
<PAGE>
83
(g) Upon payment by a Borrower of any sums as provided above, all
rights of such Borrower against another Borrower, as the case may be, arising as
a result thereof by way of right of subrogation or otherwise shall in all
respects be subordinated and junior in right of payment to the prior
indefeasible payment in full of all the Obligations to the Lenders and Issuing
Banks.
IN WITNESS WHEREOF, the parties hereto have 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/ James R. Bedenbaugh
-----------------------------------
Name: James R. Bedenbaugh
Title: Vice President and Treasurer
CHARTER BEHAVIORAL HEALTH SYSTEM
OF CENTRAL
GEORGIA, INC.
CHARTER BEHAVIORAL HEALTH SYSTEM
OF CHARLESTON, INC.
CHARTER BEHAVIORAL HEALTH SYSTEM
OF NEW MEXICO, INC.
CHARTER BEHAVIORAL HEALTH SYSTEM
OF NORTHERN
CALIFORNIA, INC.
CHARTER BEHAVIORAL HEALTH SYSTEM
OF NORTHWEST
ARKANSAS, INC.
CHARTER BEHAVIORAL HEALTH SYSTEMS
OF ATLANTA, INC.
CHARTER FAIRMONT BEHAVIORAL
HEALTH SYSTEM, INC.
CHARTER FOREST BEHAVIORAL HEALTH
SYSTEM, INC.
CHARTER HOSPITAL OF ST. LOUIS, INC.
CHARTER LAKESIDE BEHAVIORAL
HEALTH SYSTEM, INC.
CHARTER MISSION VIEJO BEHAVIORAL
HEALTH SYSTEM, INC.
CHARTER PALMS BEHAVIORAL HEALTH
SYSTEM, INC.
CHARTER PLAINS BEHAVIORAL HEALTH
SYSTEM, INC.
<PAGE>
84
CHARTER RIDGE BEHAVIORAL HEALTH
SYSTEM, INC.
CHARTER RIVERS BEHAVIORAL HEALTH
SYSTEM, INC.
CHARTER SAN DIEGO BEHAVIORAL
HEALTH SYSTEM, INC.
CHARTER SPRINGS BEHAVIORAL HEALTH
SYSTEM,
INC.
CHARTER SPRINGWOOD BEHAVIORAL
HEALTH SYSTEM, INC.
CHARTER WOODS BEHAVIORAL HEALTH
SYSTEM, INC.
CMSF, INC.
FLORIDA HEALTH FACILITIES, INC.
THE CHARTER BEHAVIORAL HEALTH SYSTEM
OF NORTHWEST INDIANA, LLC
THE CHARTER INDIANAPOLIS BEHAVIORAL
HEALTH SYSTEM,
LLC
THE CHARTER SOUTH BEND BEHAVIORAL
HEALTH SYSTEM,
LLC
THE CHARTER TERRE HAUTE BEHAVIORAL
HEALTH SYSTEM, LLC,
each as a Subsidiary Borrower,
by
/s/ Charlote A. Sanford
------------------------
Name: Charlote A. Sanford
Title: Treasurer
THE CHASE MANHATTAN BANK, individually and
as Administrative Agent, Collateral Agent and
an Issuing Bank,
by
/s/ Dawn Lee Lum
----------------
Name: Dawn Lee Lum
Title: Vice President
<PAGE>
85
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
individually and as Syndication Agent and an
Issuing Bank,
by
/s/ Ann M. Dodd
-------------------------
Name: Ann M. Dodd
Title: Senior Vice President
BANK OF IRELAND GRAND CAYMAN BRANCH,
by
/s/ John G. Cusack
------------------------------
Name: John G. Cusack
Title: Assistant Vice President
by
/s/ Randolph H. Ross
------------------------------
Name: Randolph H. Ross
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
by
/s/ Margaret Sheridan Sunier
------------------------------
Name: Margaret Sheridan Sunier
Title: Vice President and Manager
BANQUE FRANCAISE DU COMMERCE EXTERIEUR,
by
/s/ Mark A. Harrington
------------------------------
Name: Mark A. Harrington
Title: Vice President and Regional
Manager
by
/s/ Timothy L. Polvado
------------------------------
Name: Timothy L. Polvado
Title Assistant Vice President
<PAGE>
86
CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Co-Agent,
by
/s/ Farboud Tavangar
------------------------------
Name: Farboud Tavangar
Title: Vice President
DRESDNER BANK AG, NEW YORK AND GRAND
CAYMAN BRANCHES,
by
/s/ Andrew P. Nesi
------------------------------
Name: Andrew P. Nesi
Title: Vice President
by
/s/ Richard W. Conroy
------------------------------
Name: Richard W. Conroy
Title: Vice President
FIRST AMERICAN NATIONAL BANK,
by
/s/ Sandra G. Hamrick
------------------------------
Name: Sandra G. Hamrick
Title: Vice President
GENERAL ELECTRIC CAPITAL CORPORATION,
as Co-Agent and as Lender,
by
/s/ Cheryl P. Boyd
------------------------------
Name: Cheryl P. Boyd
Title: Duly Authorized Signatory
<PAGE>
87
GIROCREDIT BANK AKTIENGESELLSCHAFT
DER SPARKASSEN, GRAND CAYMAN BRANCH,
by
/s/ Richard Stone
------------------------------
Name: Richard Stone
Title: First Vice President
by
/s/ Sharad Gupta
------------------------------
Name: Sharad Gupta
Title: Senior Vice President
MITSUBISHI TRUST AND BANKING
CORPORATION,
by
/s/ Patricia Loret de Mola
------------------------------
Name: Patricia Loret de Mola
Title: Senior Vice President
THE BANK OF NEW YORK,
by
/s/ Gregory L. Batson
------------------------------
Name: Gregory L. Batson
Title: Vice President
THE BANK OF NOVA SCOTIA,
by
/s/ Dana Maloney
------------------------------
Name: Dana Maloney
Title: Relationship Manager
THE NIPPON CREDIT BANK, LTD.,
by
/s/ Clifford Abramsky
------------------------------
Name: Clifford Abramsky
Title: Senior Manager
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and effective this 28th day of February, 1996, by
and between GREEN SPRING HEALTH SERVICES, INC., a Delaware corporation
(hereinafter "Employer") and Henry T. Harbin, M.D. (hereinafter "Employee").
WITNESSETH:
WHEREAS, Employee currently serves in the capacity of President and Chief
Executive Officer.
WHEREAS, Employee and Employer are parties to an Employment Agreement dated
March 18, 1993 (the "Previous Agreement");
WHEREAS, it is the intention of the parties hereto to terminate the
Previous Agreement effective with the date of this Agreement and to set out the
terms and conditions of the employment and the rights and duties of Employee in
fulfilling the capacity of President and Chief Executive Officer for Employer.
NOW, THEREFORE, in consideration of the mutual promises of the parties and
the mutual benefits they will gain by the performance thereof, all in accordance
with the provisions hereinafter set forth, it is agreed by and between the
parties hereto as follows:
1. (a) Effective as of the date hereof Employer confirms the
employment of Employee and Employee agrees to continue to be employed by
Employer and to continue to serve as the President and Chief Executive Officer
of Employer, pursuant to the terms of this Agreement.
(b) This Agreement shall not be construed as a break in service for
purposes of those benefit plans contemplated in paragraph 2(c) below and any
time of service accrued by Employee as of the date of this Agreement for
purposes of determining the level or extent of such benefits in accordance with
the terms of any such benefit plan shall be credited to Employee.
<PAGE>
(c) The term of this employment shall commence on the date hereof and
shall terminate on the last day of the calendar month in which occurs the third
(3rd) anniversary of the date hereof ("Initial Term"). After the Initial Term,
this Agreement shall automatically renew for one year period and for subsequent
one year periods thereafter unless one party presents to the other party written
notice of intent to terminate the Agreement at lease ninety (90) calendar days
prior to the applicable expiration date of this Agreement.
2. (a) Subject to Paragraph 3(b) below, during the term of this
Agreement Employer shall pay Employee a base salary, the amount of which shall
be fixed from time to time by the Board of Directors of Green Spring Health
Services, provided in no event shall the base salary be less than the annual
base salary Employee was receiving on the effective date of this Agreement,
unless all Green Spring Health Services officers are required to accept similar
reductions.
(b) All payments of compensation shall be subject to all lawful
deductions such as Federal Withholding Taxes and FICA; and
(c) In addition to the compensation payable to Employee as
provided by subparagraph 2(a) above, Employee shall be entitled to fringe
benefits similar to those provided to all employees.
3. (a) During the term of this employment Employee shall:
(i) hold the title of President and Chief Executive
Officer; and
(ii) generally perform the duties on behalf of Employer that
he performs as of the date hereof and such other duties which may be required
commensurate with Employee's professional ability and qualifications.
(b) During the term of this employment, if Employer and Employee
mutually agree to a change in the duties and/or title of Employee, then and in
that event the parties shall to the extent necessary and appropriate modify the
terms of this Agreement, including, if such
<PAGE>
modification requires, an adjustment to the salary and/or fringe benefits.
4. (a) Employee agrees:
(i) not to disclose any trade or secret data or any other
proprietary or confidential information acquired during employment by Employer
or its subsidiary, successor or affiliated companies, during employment or after
the termination of employment or retirement, except with the prior permission of
Employer, unless said information becomes generally available to the public or
becomes available to Employee on a non-confidential basis from a source other
than Employer;
(ii) not to interfere with the employment of any other
employee of Employer or its subsidiary, successor or affiliated companies, or
urge, induce or solicit other employees to leave Employer or its subsidiary,
successor or affiliated companies;
(iii) during the term of employment with Employer and
for a period of two (2) years following employment termination, not to solicit
the business of, contract with, or become employed by any entity (including any
subsidiary, successor or affiliated company of such entity) with which Employer
or its subsidiary, successor or affiliated companies has contracts or had
contracts with in the two (2) years period prior to termination, unless agreed
to in advance in writing by Employer; and
(iv) during the term of employment and for one (1) year
after the termination of employment, engage, directly or indirectly, or through
any corporations or associations in any business enterprise or employment which
is directly competitive (including but not limited to the following activities:
utilization management, network management or mental health and/or substance
abuse managed care) with Employer or its subsidiary, successor or affiliated
companies in any state or territory, including the District of Columbia, where
Employer or its subsidiary, successor or affiliated companies do business at the
time of Employee's termination of employment.
<PAGE>
(b) Paragraph 4(a)(iii) and 4(a)(iv) shall not be binding on
Employee if Employee has completed the Initial Term or any renewal periods set
forth in Paragraph 1 and Employee is not offered continued employment with
Employer, or if Employee is offered continued employment upon renewal but with a
substantial reduction in Employee's duties or responsibilities, or if Employee's
employment is terminated pursuant to paragraph 8 earlier than the expiration of
the Initial Term or, if this Agreement is renewed, earlier than the expiration
of the renewal period.
5. In the event of the occurrence of any of the following,
Employee's employment shall terminate immediately and Employer's sole obligation
to Employee shall be the payment of any salary, bonus, and benefits accrued
through the date of such termination:
(a) the death of Employee; or
(b) the disability of Employee as defined by Paragraph 6
hereinbelow; or
(c) the default by Employee as defined by Paragraph 7
hereinbelow.
Notwithstanding the foregoing, any other written contractual agreement duly
signed by Employer and Employee which may be in effect at the time of a
termination pursuant to this paragraph 5 shall not be affected by such
termination unless and only to the extent the terms of such other agreement
expressly so state.
6. For purposes of this Agreement, the term disability means that
Employee is substantially unable to discharge his responsibilities to Employer
and its affiliates by reason of physical or mental illness or incapacity,
whether arising out of sickness, accident or otherwise, and shall be evidenced
by the written determination of a qualified medical doctor acceptable to
Employer, which determination shall specify the date and time when such
disability commenced and that it has continued uninterrupted for a period of at
least one hundred eighty (180) days.
7. For purposes of this Agreement, the term default means that
Employee has:
<PAGE>
(a) by deliberate and intentional actions refused to perform his
duties for Employer as provided by paragraph 3 above. In the event that
Employer determines that Employee has deliberately or intentionally failed to
perform his duties for Employer as provided in paragraph 3, Employer shall
notify Employee in writing of the reasons for its determination and shall
provide Employee a reasonable period in which to either contest the
determination or to correct the defects in performance; or
(b) breached or otherwise failed to comply with the provisions
of paragraph 4 above; or
(c) committed an act of dishonesty, fraud, misrepresentation or
other acts of moral turpitude which in the reasonable opinion of the Board of
Directors of Employer causes it to conclude that the continuation of employment
is not in the best interests of Employer;
8. In the event Employer shall terminate for any reason other than
as set forth in paragraph 5 above the Employment of Employee earlier than the
expiration of the Initial Term or, in the event the parties agree to renew the
Agreement, earlier than the expiration of any renewal period, or Employer shall
change the location of Employee's primary base or employment from Columbia,
Maryland vicinity, such termination shall be deemed to be "without cause" and
Employee shall be entitled to all compensation set forth in paragraph 2(a), and
benefits under paragraph 2(c) to the extent allowable under the terms of such
benefit plans, for the remaining balance of the Initial Term or renewal period,
as the case may be, without any condition or restriction other than as expressly
set forth in this Agreement. This shall constitute Employer's sole obligation
to Employee in the event of a termination pursuant to this paragraph 8. This
provision shall not apply if the Employee's termination occurs as a result of
the expiration of the Initial Term or any renewal period without renewal by the
parties.
Notwithstanding the foregoing, any other written contractual agreement duly
signed by Employer and Employee which may be in effect at the time of a
termination pursuant to this paragraph 8 shall not be affected by such
termination unless and only to the extent the terms of such other agreement
expressly so state.
<PAGE>
9. All notices required hereunder shall be in writing and either
delivered by hand delivery or by certified mail, postage prepaid, return receipt
requested. Notices to Employer shall be addressed as follows: Green Spring
Health Services, Inc., Suite 500, 5565 Sterrett Place, Columbia, Maryland 21044,
Attn: Chairman, with a copy to : General Counsel c/o Green Spring Health
Services, Inc., Suite 500, 5565 Sterrett Place, Columbia, Maryland 21044; and
notices to Employee shall be addressed to the then last known address of
Employee as reflected on the records of Employer.
10. This Agreement shall be binding upon Employee, and Employer and
its successors and assigns. Employee shall not assign any part of his rights
and/or duties under this Agreement, unless Employer agrees thereto in writing.
11. This instrument contains the entire Agreement of the parties. It
may not be changed orally but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
12. This Agreement has been executed in and shall be governed by the
laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the
day and year first above written.
EMPLOYEE: GREEN SPRING HEALTH SERVICES, INC.:
/s/ Henry T. Harbin By: /s/ Donald P. Sacco
- ------------------------------ --------------------------------
Henry T. Harbin, M.D. Donald P. Sacco
Chair of the Board of Directors
<PAGE>
COMPENSATION AGREEMENT
THIS COMPENSATION AGREEMENT (this "Agreement") is made and entered
into as of the 30th day of September, 1996, by and between Magellan Health
Services, Inc., a Delaware corporation ("Magellan"), and Henry T. Harbin, M.D.,
a resident of the State of Maryland ("Executive").
WITNESSETH:
WHEREAS, Green Spring Health Services, Inc. ("Green Spring"), a
Delaware corporation and majority-owned subsidiary of Magellan, is engaged in
the business of providing managed behavioral health care services, including
managed alcohol and other substance abuse services and employee assistance plan
services, including case or care management, administrative services,
utilization review, certification or pre-admission or pre-treatment
certification, assessment and referral, triage, staff clinical services,
provider network services and preferred provider organization services;
WHEREAS, Executive is currently serving as the President and Chief
Executive Officer of Green Spring;
WHEREAS, Green Spring and Executive are parties to that certain
Employment Agreement, effective February 28, 1996 (the "Employment Agreement"),
and that certain letter agreement, dated November 9, 1993, as amended by letter
agreement dated September 19, 1994 (as amended, the "Letter Agreement"),
providing Executive with certain termination and retirement benefits in addition
to those set forth in the Employment Agreement; and
WHEREAS, Magellan desires to provide Executive with certain
compensation and termination benefits in addition to those set forth in the
Employment Agreement and the Letter Agreement, on the terms and conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the receipt and sufficiency of which hereby are acknowledged,
Magellan and Executive agree as follows:
ARTICLE I
CONTRACT BONUS
SECTION 1.1 CONTRACT BONUS. In consideration of Executive's service as
the President and Chief Executive Officer of Green Spring throughout the period
commencing on December 13, 1995 and ending on December 13, 1999 (the "Contract
Bonus Period"), Magellan shall pay to Executive a bonus in the amount determined
in accordance with Section 1.2 hereof (the "Contract Bonus"). Unless
Executive's right to receive the Contract Bonus is terminated in accordance with
Section 1.4 hereof, Executive's right to receive one-half of the Contract Bonus
shall accrue on December 13, 1998 (the "First Accrual Date") and
<PAGE>
Executive's right to receive the remaining one-half of the Contract Bonus shall
accrue upon expiration of the Contract Bonus Period (the "Second Accrual Date").
SECTION 1.2 BONUS AMOUNT. The aggregate Contract Bonus payable
hereunder shall be in an amount equal to (a) Two Million Two Hundred Fifty
Thousand Dollars ($2,250,000) MINUS (b) the "Excluded Amount" determined in
accordance with Section 1.3 hereof. The Contract Bonus shall be paid in
immediately available funds in two installments payable on or prior to the fifth
business day following the First Accrual Date and the Second Accrual Date (each,
an "Accrual Date"), as follows:
(i) the amount of the Contract Bonus payable following the First Accrual
Date shall be equal to One Million One Hundred Twenty-Five Thousand
Dollars ($1,125,000) less the Excluded Amount calculated as of the
First Accrual Date; and
(ii) the amount of the Contract Bonus payable following the Second Accrual
Date shall be equal to Two Million Two Hundred Fifty Thousand Dollars
($2,250,000) less the greater of (A) One Million One Hundred Twenty-
Five Thousand Dollars ($1,125,000) and (B) the Excluded Amount
calculated as of the Second Accrual Date.
SECTION 1.3 EXCLUDED AMOUNT. For purposes of this Agreement, the
Excluded Amount shall mean the aggregate value (without duplication) of all cash
and non-cash compensation paid or payable to or on behalf of Executive by
Magellan, Green Spring or any of their respective affiliates during or in
respect of Executive's services as an employee of Magellan or any subsidiary
thereof, including Green Spring, during the Contract Bonus Period, whether
payable pursuant to the Employment Agreement, the Letter Agreement or otherwise
(the "Excluded Amount"), except that the Excluded Amount shall not include (a)
Executive's current base salary of Two Hundred Eighty-Five Thousand Dollars
($285,000) per annum to the extent paid or payable in respect of Executive's
services as an employee of Magellan or any subsidiary thereof, including Green
Spring, during the Contract Bonus Period and (b) amounts payable to Executive
for service prior to the Contract Bonus Period, including amounts payable
pursuant to the Green Spring Long Term Compensation Plan relating to the
termination of such plan in connection with the equity investment by Magellan in
Green Spring in December 1995. Without limiting the generality of the
foregoing, the Excluded Amount shall include (i) all cash compensation such as
increases in current base salary, cash bonus, car allowance and reimbursement,
deferred cash compensation, 401k match, incentive bonus match, cash accumulation
account contribution and other cash incentive compensation and (ii) the value of
all non-cash compensation such as incentive stock options, restricted stock,
stock appreciation rights, cash value buildup of insurance policies and other
non-cash compensation. For purposes of calculating the Excluded Amount as of
the Second Accrual Date, the Excluded Amount shall also include any portion of
the Contract Bonus payable following the First Accrual Date. With respect to
the options to purchase One Hundred Thousand (100,000) shares of Magellan common
stock
2
<PAGE>
currently held by Executive and any future stock options granted to Executive
during the Contract Bonus Period, the value of such options for purposes of the
Excluded Amount shall be calculated as follows:
(A) the value of options that have not been exercised as of such Accrual
Date ("Unexercised Options") shall be equal to the aggregate number of
Unexercised Options multiplied by the arithmetic average of the
closing prices of the common stock for which such options are
exercisable (on the American Stock Exchange or other stock exchange or
market on which such common stock is then traded) for the ten trading
days preceding such Accrual Date MINUS the aggregate exercise price
payable in connection with the exercise of such options; and
(B) the value of options that have been exercised as of such Accrual Date
("Exercised Options") shall be equal to the greater of (1) the sum of
(a) the closing prices of the common stock for which such options were
exercisable on the date of each such exercise multiplied by (b) the
number of options exercised in connection with such exercise MINUS the
aggregate exercise price payable in connection with such exercises or
(2) the value that would have been ascribed to such Exercised Options
if no exercise of such options had occurred as of such Accrual Date
and such options had been valued as Unexercised Options in accordance
with clause (A) of this Section 1.3.
The Excluded Amount shall not include any value relating to unvested stock
options to the extent that such options will not vest in the ordinary course on
or prior to the end of the Contract Bonus Period.
In the event, on the Second Accrual Date, that compensation (or an estimate
thereof) is included in the Excluded Amount on the basis that such compensation
is in respect of Executive's services during the Contract Bonus Period but is
payable thereafter and Executive does not receive such compensation or receives
compensation in an amount different than the estimated amount used to calculate
the Excluded Amount, Magellan shall promptly reimburse Executive, or Executive
shall promptly reimburse Magellan, as appropriate, in an amount equal to the
difference between the amount of compensation included in the Excluded Amount
and the amount actually paid to Executive. The adjustment set forth in the
preceding sentence shall not apply with respect to the value of any Exercised
Options or Unexercised Options included within the Excluded Amount.
SECTION 1.4 TERMINATION OR RESIGNATION. (a) In the event that (i)
Executive resigns from his position as President and Chief Executive Officer of
Green Spring other than following a Change of Control (as hereinafter defined)
or (ii) is terminated from such position for any of the reasons set forth in
Subsection (b) of this Section 1.4 at any time prior to the Second Accrual Date,
this Agreement, including Executive's right to receive any unpaid
3
<PAGE>
installments of the Contract Bonus, shall terminate effective upon such
resignation or termination.
(b) This Agreement, including Executive's right to receive any unpaid
installments of the Contract Bonus, shall terminate pursuant to Subsection (a)
of this Section 1.4 if at any time prior to the Second Accrual Date, Executive
is terminated by Green Spring for any of the following reasons:
(i) pursuant to paragraph 5 of the Employment Agreement (or if the
Employment Agreement has expired or been terminated or superseded,
upon a termination for any of the reasons set forth in paragraph 5 of
the Employment Agreement);
(ii) for breaching any material term of this Agreement or the Employment
Agreement;
(iii) for committing any material act or acts of dishonesty relating to
Executive's employment that result, or are intended to result, in
material direct or indirect personal gain or enrichment at the expense
of Magellan or its affiliates;
(iv) for engaging in any illegal or other wrongful conduct that is
substantially detrimental or substantially damaging to the reputation,
business, or operations of Magellan, Green Spring or their respective
subsidiaries; or
(v) for refusing, failing or neglecting to perform his duties under the
Employment Agreement in a manner that is substantially detrimental or
substantially damaging to the reputation, business or operations of
Magellan, Green Spring or their respective subsidiaries;
provided, however, that in the case of clauses (ii), (iii) and (v), no such
termination shall be effective unless (A) Green Spring or Magellan shall have
given Executive 30 days' prior written notice of any noncomplying conduct or
deficiency in performance by Executive that, if not discontinued or corrected,
could lead to Executive's termination under this Section 1.4(b) in order that
Executive shall have had an opportunity to cure such noncomplying conduct or
deficiency in performance and (B) Executive shall not have cured such
noncomplying conduct or deficiency in performance during such 30 day period.
(c) In the event that (i) Executive is terminated by Green Spring for any
reason other than as set forth in Subsection(b) of this Section 1.4 at any time
prior to the expiration of the Contract Bonus Period, or (ii) Executive resigns
following a Change of Control, Executive shall be entitled to receive each
installment of the Contract Bonus at the same time and in the same manner as if
Executive's employment had continued through the expiration of the Contract
Bonus Period; provided, however, that all termination or severance payments
payable to Executive in connection with such termination or resignation shall be
included in the calculation of the Excluded Amount pursuant to Section 1.3
hereof.
4
<PAGE>
(d) As used in this Agreement, a "Change of Control" shall be deemed to
have occurred upon any of the following events: (i) the acquisition after the
date hereof in one or more transactions, of beneficial ownership (within the
meaning of Rule 13d-3(a)(1) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) by any person or entity (other than Executive or
Edwin M. Crawford) or any group of persons or entities (other than Executive or
Edwin M. Crawford) who constitute a group (within the meaning of Section
13(d)(3) of the Exchange Act) of any securities of Magellan such that as a
result of such acquisition such person or entity or group beneficially owns
(within the meaning of Rule 13d-3(a)(1) under the Exchange Act) more than 50% of
Magellan's then outstanding voting securities entitled to vote on a regular
basis for a majority of the Board of Directors of Magellan; or (ii) the sale of
all or substantially all of the assets of Magellan (including, without
limitation, by way of merger, consolidation, or transfer) in a transaction
(except for a sale-leaseback or similar transaction) where Magellan or the
holders of common stock of Magellan do not receive (A) voting securities
representing a majority of the voting power entitled to vote on a regular basis
for the Board of Directors of the acquiring entity or of an affiliate which
controls the acquiring entity, or (B) securities representing a majority of the
equity interests in the acquiring entity or of an affiliate that controls the
acquiring entity, if other than a corporation; provided, that if Executive
becomes entitled to any payments (whether hereunder or otherwise) by reason of
an event described in Internal Revenue Code Section 280G(b)(2)(A)(i) (a
"Parachute Event") that would constitute "parachute payments" (as defined in
Internal Revenue Code Section 280G(b)(G)(2)(A)) if paid, then Executive's
entitlement to such payments shall be reduced by such amount as will cause none
of such payments to constitute parachute payments if, and only if, the net
amount received by Executive by reason of the Parachute Event, after imposition
of all applicable taxes (including taxes under Internal Revenue Code Section
4099), would be greater after such reduction than if such reduction were not
made. For purposes of this Agreement, a Change Of Control shall not be deemed
to have occurred upon a sale or transfer of all or substantially all of the
business of Charter Behavioral Health Systems, Inc.
ARTICLE II
MISCELLANEOUS
SECTION 2.1 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
SECTION 2.2 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to a
contract executed and performed in such state without reference to the choice of
law principles of such state.
SECTION 2.3 ENTIRE AGREEMENT. This Agreement, the Employment Agreement
and the Letter Agreement contain the entire agreement between the parties with
respect to the
5
<PAGE>
subject matter of this Agreement and such agreements supersede all prior drafts
of such agreements, all prior and contemporaneous agreements, representations,
negotiations, discussions, correspondence and communications between Magellan,
Green Spring and Executive.
SECTION 2.4 NOTICES. All notices under this Agreement shall be
sufficiently given for all purposes under this Agreement if in writing (a) when
delivered personally; (b) five days after mailing in the United States Postal
Service; (c) one day after sending by documented overnight delivery service; or
(d) when receipt is confirmed, by telecopy, telefax or other electronic
transmission service to the appropriate address or number as set forth below.
IF TO MAGELLAN:
Magellan Health Services, Inc.
Suite 1400
3414 Peachtree Road, N.E.
Atlanta, Georgia 30326
Attention: Cherie M. Fuzzell, Esq.
Telecopier: (404) 814-5795
IF TO EXECUTIVE:
Henry T. Harbin, M.D.
2002 Sulgrave Avenue
Baltimore, Maryland 21209
Telecopier: (410) 740-2686
or to such other address and to the attention of such other person as Magellan
or Executive may designate by written notice in accordance with this Section
2.4.
SECTION 2.5 ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of Magellan and its successors and assigns. Magellan shall be
entitled to assign its rights and obligations under this Agreement to Green
Spring or to any purchaser of Magellan's entire equity interest in Green Spring.
The rights and obligations of Executive under this Agreement are personal to
Executive and shall not be assignable or transferrable in any manner or subject
to alienation, sale, pledge, encumbrance or other legal process or in any manner
subject to the debts or liabilities of Executive, whether by operation of law or
otherwise, except by operation of the laws of descent and distribution upon
Executive's death after an Accrual Date but prior to payment of the Contract
Bonus payable to Executive, if any, relating to such Accrual Date. If Executive
shall, or shall attempt to, transfer, assign, alienate, sell, pledge or
otherwise encumber any of his benefits hereunder or if by reason of bankruptcy
or any other event, the benefits of Executive hereunder would devolve upon any
other person or entity, Magellan, in its discretion, may terminate Executive's
right to receive
6
<PAGE>
the Contract Bonus to the extent necessary or advisable to prevent or limit the
effects of such occurrence.
SECTION 2.6 HEADINGS; DEFINITIONS. The section and article headings
contained in this Agreement are inserted for convenience and reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained in this Agreement mean Sections or Articles of
this Agreement unless otherwise stated. All capitalized terms defined in this
Agreement are equally applicable to both the singular and plural forms of such
terms.
SECTION 2.7 AMENDMENTS AND WAIVERS. This Agreement may not be modified
or amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party to this Agreement may, only by an instrument in writing, waive compliance
by the other party to this Agreement with any term or provision of this
Agreement. The waiver by any parties to this Agreement of a breach of any term
or provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
SECTION 2.8 SEVERABILITY OF PROVISIONS. If any provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated by this Agreement is not affected in
any manner adverse to any party.
IN WITNESS WHEREOF, Executive and Magellan, by a duly authorized officer,
have executed this Compensation Agreement as of this 30th day of September,
1996.
MAGELLAN HEALTH SERVICES, INC.
By: /s/ E. Mac Crawford
-----------------------------------
E. MAC CRAWFORD
Chairman, President and Chief
Executive Officer
/s/ Henry T. Harbin, M.D.
-----------------------------------
HENRY T. HARBIN, M.D.
7
<PAGE>
GREEN SPRING HEALTH SERVICES
Summary Provisions for the Annual
Short Term Incentive
<PAGE>
I. PLAN OBJECTIVES
The primary objective of the Green Spring annual incentive program is to
foster our overall compensation philosophy of paying for performance. The Plan
helps prioritize and focus employees' efforts on the accomplishment of various
goals established through the annual planning and budget process. This is
achieved by linking a significant element of variable cash compensation to the
accomplishment of these specified goals.
While base salaries are targeted to be merely at 50% of market, at targeted
performance levels, the Plan provides incentive compensative opportunities
which, in combination with base salary, will yield total annual compensation
that is very competitive.
II. ELIGIBILITY CRITERIA
All regular non-clinical employees, except commissioned sales, Maryland
clinical and temporary employees. While employees will be immediately eligible
upon employment, it will be up to management to determine whether employees
hired after October 1 have contributed enough to merit an annual incentive.
In order to receive an incentive award, an employee must be employed by the
company at the time of pay out. The one exception to this is an employee who is
separated from employment due to the elimination of his/her position and had
worked at least nine months during the calendar year for which incentives are
being paid.
III. PERFORMANCE GOALS
Incentive award payouts will be tied to the accomplishment of goals and
objectives. These goals will be established and communicated to employees at
the beginning of each year. Each goal should be weighted according to its
relative importance and priority, and the degree to which the employee can
influence its accomplishment. Each goal will have performance standards tied to
target (100%) and maximum (150%) award levels.
IV. FUNDING
Funds for the pay-out of incentives shall be accrued for each unit based
upon financial performance. The national pool shall be established based upon
National's financial results [Earnings Before Taxes - EBT] versus target.
Individual state pools shall be established based 50% upon their financial
performance versus targeted contribution margin and 50% based upon National's
financial results [Earnings Before Taxes - EBT] versus target. The rate the
pools shall increase will be 2% for every 1% above target. The funding pools
may grow up to 150% of target. No funding will be established unless at least
80% of the goal is met (threshold funding).
<PAGE>
V. TARGET INCENTIVE LEVELS
The following are the target incentive levels assuming target performance
and target funding:
GRADE PERCENTAGE
----- ----------
1-9 2%
11-16 3%
17-19 7%
20-23 15%
The amounts are established as a percentage of mid-point for the grade and not
the employee's actual salary. Individual payout may increase by 50% based upon
performance versus established goals (see paragraph III) and increase by 50%
again based upon financial results (see paragraph IV).
VI. PLAN ADMINISTRATION, MODIFICATION AND ADJUSTMENT
The Plan will be administered by Green Spring's CEO and Board of Directors.
The CEO and Board will approve award levels for Plan participants, as
recommended by managers, and be responsible for changes in plan design,
participation, and other aspects of Plan administration.
VII. OTHER CONDITIONS
This Plan and the applicable Incentive Schedules do not constitute either
an express or implied contract of employment.
At their discretion, the CEO and Board reserves the right to amend, change,
interpret, replace and/or terminate this Plan and the individual incentive
opportunities at any time.
<PAGE>
EXHIBIT 21
MAGELLAN HEALTH SERVICES, INC.
SUBSIDIARY CORPORATIONS
SEPTEMBER 30, 1996
The following corporations are all of the direct or indirect subsidiary
corporations of Magellan Health Services, Inc., a Delaware corporation.
Magellan Health Services, Inc. directly or indirectly owns all of the
outstanding voting securities of such subsidiaries except where noted.
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Behavioral Health Systems, Inc. Delaware
Subsidiaries:
Behavioral Health Systems of Indiana, Inc. Indiana
Beltway Community Hospital, Inc. Texas
Blue Grass Physician Management Services, Inc. Kentucky
C.A.C.O. Services, Inc. Ohio
CCM, Inc.(1) Nevada
Charter of Alabama, Inc. Alabama
Charter Alvarado Behavioral Health System, Inc. California
Charter Appalachian Hall Behavioral Health System, North Carolina
Inc.
Charter Augusta Behavioral Health System, Inc. Georgia
Charter Bay Harbor Behavioral Health System, Inc. Florida
Charter Behavioral Health System of Athens, Inc. Georgia
Charter Behavioral Health Systems of Atlanta, Inc. Georgia
Charter Behavioral Health System of Austin, Inc. Texas
Charter Behavioral Health System of Baywood, Inc. Texas
- --------------------
1 50% owned by Charter Behavioral Health Systems, Inc.;
50% owned by CMCI, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Behavioral Health System of Bradenton, Inc. Florida
Subsidiary:
Charter Behavioral Health System at Manatee Florida
Adolescent Treatment Services, Inc.
Charter Behavioral Health System of Central Georgia, Georgia
Inc.
Charter Behavioral Health System of Central Virginia, Virginia
Inc.
Subsidiary:
Mental Healthsource, L.L.C.(2) Virginia
Charter Behavioral Health System of Charleston, Inc. South Carolina
Charter Behavioral Health System of Charlottesville, Virginia
Inc.
Charter Behavioral Health System of Chicago, Inc. Illinois
Charter Behavioral Health System of Chula Vista, Inc. California
Charter Behavioral Health System of Columbia, Inc. Missouri
Charter Behavioral Health System of Corpus Christi, Texas
Inc.
Charter Behavioral Health System of Dallas, Inc. Texas
Charter Behavioral Health System of Delmarva, Inc. Maryland
Charter Behavioral Health System at Fair Oaks, Inc. New Jersey
Charter Behavioral Health System of Fort Worth, Inc. Texas
Charter Behavioral Health System at Hidden Brook, Maryland
Inc.
Charter Behavioral Health System of Jackson, Inc. Mississippi
Subsidiary:
Charter Behavioral Health System of Mississippi,
Inc. Mississippi
- -----------------------
2 50% owned by Charter Behavioral Health System of Central Virginia, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Behavioral Health System of Jacksonville, Florida
Inc.
Charter Behavioral Health System of Kansas City, Inc. Kansas
Charter Behavioral Health System of Lafayette, Inc. Louisiana
Subsidiary:
The Charter Cypress Behavioral Health System, Tennessee
L.L.C.(3)
Charter Behavioral Health System of Lake Charles, Louisiana
Inc.
Charter Behavioral Health System at Los Altos, Inc. California
Charter Behavioral Health System of Massachusetts, Massachusetts
Inc.
Subsidiary:
Westwood/Pembroke Health System Limited
Partnership(4) Massachusetts
Charter Behavioral Health System of Mobile, Inc. Alabama
Charter Behavioral Health System of Nashua, Inc. New Hampshire
Charter Behavioral Health System of Nevada, Inc. Nevada
Charter Behavioral Health System of New Mexico, Inc. New Mexico
Subsidiary:
The Charter Heights Behavioral Health System Delaware
Limited Partnership(5)
Charter Behavioral Health System of North Carolina, North Carolina
Inc.
- -----------------------
3 50% owned by Charter Behavioral Health System of Lafayette, Inc.
4 90% owned by Charter Behavioral Health System of Massachusetts, Inc.
5 67% owned by Charter Behavioral Health System of New Mexico, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Behavioral Health System of Northwest Arkansas
Arkansas, Inc.
Charter Behavioral Health System of Paducah, Inc. Kentucky
Charter Behavioral Health System at Potomac Ridge, Maryland
Inc.
Charter Behavioral Health of Puerto Rico, Inc. Georgia
Charter Behavioral Health System of San Jose, Inc. California
Charter Behavioral Health System of Texarkana, Inc. Arkansas
Charter Behavioral Health System of Toledo, Inc. Ohio
Charter Behavioral Health System of Tucson, Inc. Arizona
Charter Behavioral Health System of Visalia, Inc. California
Charter Behavioral Health System of Waverly, Inc. Minnesota
Charter Behavioral Health System of Winston-Salem, North Carolina
Inc.
Charter Behavioral Health System of Yorba Linda, Inc. California
Charter Brawner Behavioral Health System, Inc. Georgia
Subsidiary:
Charter Behavioral Health System of Savannah, Georgia
Inc.
Charter-By-The-Sea Behavioral Health System, Inc. Georgia
Charter Canyon Behavioral Health System, Inc. Utah
Charter Canyon Springs Behavioral Health System, Inc. California
Charter Centennial Peaks Behavioral Health System, Colorado
Inc.
Charter Community Hospital, Inc. California
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Contract Services, Inc. Georgia
Charter Cove Forge Behavioral Health System, Inc. Pennsylvania
Charter Fairmount Behavioral Health System, Inc. Pennsylvania
Charter Fenwick Hall Behavioral Health System, Inc. South Carolina
Charter Financial Offices, Inc. Georgia
Charter Forest Behavioral Health System, Inc. Louisiana
Charter Grapevine Behavioral Health System, Inc. Texas
Subsidiary:
Metroplex Behavioral Healthcare Services, Inc. Texas
Charter Greensboro Behavioral Health System, Inc. North Carolina
Charter Health Management of Texas, Inc. Texas
Charter Hospital of Columbus, Inc. Ohio
Charter Hospital of Denver, Inc. Colorado
Charter Hospital of Ft. Collins, Inc. Colorado
Charter Hospital of Laredo, Inc. Texas
Charter Hospital of Mobile, Inc. Alabama
Charter Hospital of Santa Teresa, Inc. New Mexico
Charter Hospital of St. Louis, Inc. Missouri
Subsidiary:
Charter Hospital of Miami, Inc. Florida
Charter Hospital of Torrance, Inc. California
Charter Indiana BHS Holding, Inc. Indiana
Subsidiaries(6)
Charter Arbor Indy Behavioral Health System, Indiana
Inc.
- -----------------------
6 Each Delaware limited liability company listed below is 95% owned by
Charter Indiana BHS Holding, Inc. and 5% owned by Behavioral Health Systems
of Indiana, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
The Charter Arbor Indy Behavioral Health System, Delaware
LLC
Charter Beacon Behavioral Health System, Inc. Indiana
Subsidiary:
Indiana Behavioral Health Systems, Indiana
L.L.C.(7)
The Charter Beacon Behavioral Health System, LLC Delaware
Charter Behavioral Health System of Evansville, Indiana
Inc.
The Charter Behavioral Health System of Delaware
Evansville, LLC
Charter Behavioral Health System of Jefferson, Indiana
Inc.
The Charter Behavioral Health System of Delaware
Jefferson, LLC
Charter Behavioral Health System of Michigan Indiana
City, Inc.
The Charter Behavioral Health System of Michigan Delaware
City, LLC
Charter Behavioral Health System of Northwest Indiana
Indiana, Inc.
The Charter Behavioral Health System of Delaware
Northwest Indiana, LLC
Charter Indianapolis Behavioral Health System, Indiana
Inc.
The Charter Indianapolis Behavioral Health Delaware
System, LLC
- -----------------------
7 51% collectively owned by Charter Beacon Behavioral Health System, Inc. and
various other Indiana subsidiaries.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Lafayette Behavioral Health System, Inc. Indiana
The Charter Lafayette Behavioral Health System, Delaware
LLC
Charter South Bend Behavioral Health System, Indiana
Inc.
The Charter South Bend Behavioral Health System, Delaware
LLC
Charter Terre Haute Behavioral Health System, Indiana
Inc.
The Charter Terre Haute Behavioral Health Delaware
System, LLC
Charter Lakehurst Behavioral Health System, Inc. New Jersey
Charter Lakeside Behavioral Health System, Inc. Tennessee
Subsidiary:
Alliance For Behavioral Health(8) Tennessee
Charter Laurel Heights Behavioral Health System, Inc. Georgia
Charter Linden Oaks Behavioral Health System, Inc. Illinois
Subsidiary:
Naperville Psychiatric Ventures(9) Illinois
Charter Little Rock Behavioral Health System, Inc. Arkansas
Charter Louisiana Behavioral Health System, Inc. Louisiana
Charter Louisville Behavioral Health System, Inc. Kentucky
Charter Meadows Behavioral Health System, Inc. Maryland
- --------------------------
8 50% owned by Charter Lakeside Behavioral Health System, Inc.
9 75% owned by Charter Linden Oaks Behavioral Health System, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Medical - California, Inc. Georgia
Subsidiary:
Charter Behavioral Health System of Northern California
California, Inc.
Charter Medical (Cayman Islands) Ltd Cayman Islands
Charter Medical - Clayton County, Inc. Georgia
Charter Medical - Cleveland, Inc. Texas
Subsidiary:
Charter Regional Medical Center, Inc. Texas
Charter Medical - Dallas, Inc. Texas
Charter Medical of East Valley, Inc. Arizona
Charter Medical of England Limited United Kingdom
Charter Medical Executive Corporation Georgia
Charter Medical of Florida, Inc. Florida
Charter Medical Information Services, Inc. Georgia
Charter Medical International, Inc. Cayman Islands
Charter Medical International, S.A., Inc. Nevada
Subsidiary:
Societe Anonyme De La Metairie Switzerland
Charter Medical International Services, Inc. Cayman Islands
Charter Medical Leasing Limited United Kingdom
Charter Medical - Long Beach, Inc. California
Charter Medical Management Company Georgia
Charter Medical - New York, Inc. New York
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Medical of North Phoenix, Inc. Arizona
Subsidiary:
Arizona Behavioral Systems, L.L.C.(10) Arizona
Charter Medical of Puerto Rico, Inc. Commonwealth of
Puerto Rico
Charter Milwaukee Behavioral Health System, Inc. Wisconsin
Charter Mission Viejo Behavioral Health System, Inc. California
Charter MOB of Charlottesville, Inc. Virginia
Charter North Behavioral Health System, Inc. Alaska
Charter North Counseling Center, Inc. Alaska
Charter North Star Behavioral Health System, Tennessee
L.L.C.(11)
Charter Northbrooke Behavioral Health System, Inc. Wisconsin
Charter Northridge Behavioral Health System, Inc. North Carolina
Subsidiary:
Holly Hill/Charter Behavioral Health System, Tennessee
L.L.C.(12)
Charter Oak Behavioral Health System, Inc. California
Charter Palms Behavioral Health System, Inc. Texas
Charter Park Hospital Limited United Kingdom
Charter Peachford Behavioral Health System, Inc. Georgia
Charter Petersburg Behavioral Health System, Inc. Virginia
Charter Pines Behavioral Health System, Inc. North Carolina
- --------------------------
10 Approximately 67% owned by Charter Medical of North Phoenix, Inc.
11 57% owned by Charter Behavioral Health Systems, Inc.
12 50% owned by Charter Northridge Behavioral Health System, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Charter Plains Behavioral Health System, Inc. Texas
Charter - Provo School, Inc. Utah
Charter Real Behavioral Health System, Inc. Texas
Charter Ridge Behavioral Health System, Inc. Kentucky
Charter Rivers Behavioral Health System, Inc. South Carolina
Charter Rockford Behavioral Health System, Inc. Delaware
Charter San Diego Behavioral Health System, Inc. California
Charter Sioux Falls Behavioral Health System, Inc. South Dakota
Charter Springs Behavioral Health System, Inc. Florida
Charter Springwood Behavioral Health System, Inc. Virginia
Charter Suburban Hospital of Mesquite, Inc. Texas
Charter Thousand Oaks Behavioral Health System, Inc. California
Charter Treatment Center Of Michigan, Inc. Michigan
Charter Westbrook Behavioral Health System, Inc. Virginia
Subsidiary:
CPS Associates, Inc. Virginia
Charter White Oak Behavioral Health System, Inc. Maryland
Charter Wichita Behavioral Health System, Inc. Kansas
Charter Woods Behavioral Health System, Inc. Alabama
CMSF, Inc. Florida
Desert Springs Hospital, Inc. Nevada
Subsidiaries:
CMCI, Inc. Nevada
CMFC, Inc. Nevada
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Employee Assistance Services, Inc. Georgia
Florida Health Facilities, Inc. Florida
Subsidiary:
Tampa Bay Behavioral Health Alliance, Inc. Florida
Golden Isle Assurance Company Ltd. Bermuda
Gulf Coast EAP Services, Inc. Alabama
Hospital Investors, Inc. Georgia
Mandarin Meadows, Inc. Florida
NEPA - Massachusetts, Inc. Massachusetts
NEPA - New Hampshire, Inc. New Hampshire
Nevada Behavioral Services, Inc. Nevada
Pacific - Charter Medical, Inc. California
Subsidiary:
Charter Behavioral Health System of the Inland California
Empire, Inc.
Plymouth Insurance Company, Ltd. Bermuda
Schizophrenia Treatment and Rehabilitation, Inc. Georgia
Sistemas De Terapia Respiratoria S.A., Inc. Georgia
Southeast Behavioral Systems, Inc. Georgia
Strategic Advantage, Inc. Minnesota
Western Behavioral Systems, Inc. California
Green Spring Health Services, Inc.(13) Delaware
Subsidiaries:
Advantage Behavioral Systems, Inc. Pennsylvania
- ---------------------------
13 61% owned by Magell an Health Services, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
AdvoCare of Tennessee, Inc. Tennessee
Subsidiary:
Premier Holdings, Inc. Tennessee
Subsidiary:
Premier Behavioral Systems of Tennessee, Tennessee
LLC(14)
Green Spring Health Services of Michigan, Inc. Michigan
Group Practice Affiliates, Inc. Delaware
Subsidiaries:
GMV, LLC(15) Virginia
Capital Area PsySystems, Inc.(16) Texas
GPA Arizona, Inc. Arizona
GPA Pennsylvania, Inc. Pennsylvania
Integrated Behavioral Care, Inc.(17) Virginia
Novapsy Clinic, LLC(18) Virginia
Pacific Behavioral Management, LLC(19) California
Maschhoff, Barr & Associates, Inc. Washington
Magellan Public Solutions, Inc. Delaware
Subsidiary:
Magellan Public Network, Inc. Delaware
- ------------------------
14 Approximately 33% owned by Premier Holdings, Inc.
15 50% owned by Group Practice Affiliates, Inc.
16 50% owned by Group Practice Affiliates, Inc.
17 50% owned by Group Practice Affiliates, Inc.
18 50% owned by Group Practice Affiliates, Inc.
19 70% owned by Group Practice Affiliates, Inc.
<PAGE>
NAME OF CORPORATION: STATE/JURISDICTION
OF INCORPORATION:
Subsidiaries:
Correctional Behavioral Solutions, Inc. Delaware
Subsidiaries:
Correctional Behavioral Solutions of Indiana
Indiana, Inc.
Correctional Behavioral Solutions of New New Jersey
Jersey, Inc.
Correctional Behavioral Solutions of Ohio, Ohio
Inc.
National Mentor, Inc. Delaware
Subsidiaries:
Illinois Mentor, Inc. Illinois
Massachusetts Mentor, Inc. Massachusetts
National Mentor Healthcare, Inc. Massachusetts
Ohio Mentor, Inc. Ohio
South Carolina Mentor, Inc. South Carolina
Wisconsin Mentor, Inc. Wisconsin
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated November 7, 1996 and to all references to our
firm, included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-57210, 33-62542 and 333-12877)
and Form S-3 (File Nos. 33-57817 and 333-01217).
/s/ Arthur Andersen LLP
--------------------------------------
Atlanta, Georgia
December 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-3, F-4, AND F-5 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND
IS QUALIFIED IN ITS ENTIRETY BY RERERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 120,945,000
<SECURITIES> 0
<RECEIVABLES> 189,878,000
<ALLOWANCES> 0
<INVENTORY> 4,753,000
<CURRENT-ASSETS> 338,150,000
<PP&E> 621,443,000
<DEPRECIATION> 126,053,000
<TOTAL-ASSETS> 1,140,137,000
<CURRENT-LIABILITIES> 274,316,000
<BONDS> 566,307,000
0
0
<COMMON> 8,252,000
<OTHER-SE> 113,565,000
<TOTAL-LIABILITY-AND-EQUITY> 1,140,137,000
<SALES> 1,345,279,000
<TOTAL-REVENUES> 1,345,279,000
<CGS> 0
<TOTAL-COSTS> 1,064,445,000
<OTHER-EXPENSES> 87,109,000
<LOSS-PROVISION> 81,470,000
<INTEREST-EXPENSE> 48,017,000
<INCOME-PRETAX> 64,238,000
<INCOME-TAX> 25,695,000
<INCOME-CONTINUING> 32,383,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,383,000
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY
STATEMENTS
Magellan Health Services, Inc. (the "Company") and its representatives may
make forward looking statements (as such term is defined in the Private
Securities Litigation Reform Act) from time-to-time. The Company wants to
invoke to the fullest extent possible the protection of the Private Securities
Litigating Reform Act and the judicially created "bespeaks caution" doctrine
with respect to such statements. Accordingly, the Company is filing this
Exhibit 99, which lists certain factors that may cause actual results to differ
materially from those in such forward looking statements.
This list is not necessarily exhaustive. The Company operates in a rapidly
changing business, and new risk factors emerge periodically. There can be no
assurance that this Exhibit lists all material risks to the Company at any
specific point in time. Readers are also referred to the risk factor disclosure
contained in the Company's Registration Statement on Form S-3 (Registration No.
333-01217).
LIMITATIONS IMPOSED BY THE NEW REVOLVING CREDIT AGREEMENT
AND SENIOR NOTE INDENTURE
In May 1994, the Company entered into a Second Amended and Restated Credit
Agreement (the "Credit Agreement") with certain financial institutions and
issued $375 million of Senior Subordinated Notes (the "Senior Notes") to
institutional investors. The Credit Agreement was terminated in October 1996
and the Company entered into a new Credit Agreement (the "New Revolving Credit
Agreement"). The New Revolving Credit Agreement and the indenture for the
Senior Notes contain a number of restrictive covenants which, among other
things, limit the ability of the Company and certain of its subsidiaries to
incur other indebtedness, enter into certain joint venture transactions, incur
liens, make certain restricted payments and investments, enter into certain
business combination and asset sale transactions and make capital expenditures.
These restrictions could adversely affect the Company's ability to conduct its
operations, finance its capital needs or to pursue attractive business
combinations and joint ventures if such opportunities arise. Under the New
Revolving Credit Agreement, the Company also is required to maintain certain
specified financial ratios. Failure by the Company to maintain such financial
ratios or to comply with the restrictions contained in the New Revolving Credit
Agreement and the indenture for the Senior Notes could cause such indebtedness
(and by reason of cross-acceleration provisions, other indebtedness) to become
immediately due and payable and/or could cause the cessation of funding under
the New Revolving Credit Agreement.
ACQUISITION GROWTH STRATEGY
The Company has historically grown through acquisitions. There can be no
assurance that the Company will be able to make successful acquisitions in the
future or that any such acquisitions will be successfully integrated into its
operations. In addition, future acquisitions could have an adverse effect upon
the Company's operating results, particularly in the fiscal quarters immediately
following the consummation of such transactions while the acquired operations
are being integrated into its operations.
GREEN SPRING HEALTH SERVICES, INC. ACQUISITION AND POTENTIAL ADVERSE REACTION
On December 13, 1995, the Company acquired a controlling interest in Green
Spring Health Services, Inc. ("Green Spring"), a leading provider of managed
behavioral healthcare services. The Company's hospitals have contracts with
behavioral managed care companies other than Green Spring. Such other companies
could decide to terminate their contracts with the Company's hospitals in
reaction to the Company's acquisition of a majority interest in one of their
major competitors. In addition, there can be no assurance that Green Spring
will be successfully integrated into the Company's operations.
HISTORICAL OPERATING LOSSES
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The Company experienced losses from continuing operations before
reorganization items, extraordinary items and the cumulative effect of a change
in accounting principle during each fiscal year since the completion of a
management buyout in 1988 through fiscal 1995. Such losses amounted to $81.7
million for the ten-month period ended July 31, 1992, $8.1 million for the
two-month period ended September 30, 1992 and $39.6 million, $47.0 million and
$43.0 million for the fiscal years ended September 30, 1993, 1994 and 1995,
respectively. The Company reported net revenue and income from continuing
operations of approximately $1.35 billion and $32.4 million, respectively, for
the year ended September 30, 1996. There can be no assurance that the Company's
profitability for the year ended September 30, 1996 will continue in future
periods. The Company's history of losses could have an adverse effect on its
operations.
POTENTIAL HOSPITAL CLOSURES
The Company continually assesses events and changes in circumstances that
could effect its business strategy and the viability of its provider
facilities. During fiscal 1995, the Company consolidated, closed or sold 15
psychiatric hospitals. During fiscal 1996, the Company consolidated, closed
or sold nine psychiatric hospitals. The Company recorded charges of
approximately $4.1 million for the year ended September 30, 1996, as a result
of these consolidations, closures and sales. The Company may elect to
consolidate services in selected markets and to close or sell additional
facilities in future periods depending on market conditions and evolving
business strategies. If the Company closes additional psychiatric hospitals
in future periods, it could result in charges to income for the cost
necessary to exit the hospital operations.
POTENTIAL REDUCTIONS IN REIMBURSEMENT BY
THIRD-PARTY PAYERS AND CHANGES IN HOSPITAL PAYER MIX
The Company's hospitals have been adversely affected by factors influencing
the entire psychiatric hospital industry. Factors which affect the Company
include (i) the imposition of more stringent length of stay and admission
criteria and other cost containment measures by payers; (ii) the failure of
reimbursement rate increases from certain payers that reimburse on a per diem or
other discounted basis to offset increases in the cost of providing services;
(iii) an increase in the percentage of its business that the Company derives
from payers that reimburse on a per diem or other discounted basis; (iv) a trend
toward higher deductibles and co-insurance for individual patients; (v) pricing
pressure related to increasing rate of claims denials by third party payers; and
(vi) a trend toward limiting employee health benefits, such as reductions in
annual and lifetime limits on mental health coverage. Any of these factors
could result in reductions in the amounts that the Company's hospitals can
expect to collect per patient day for services provided.
For the fiscal year ended September 30, 1996, the Company derived
approximately 21% of its gross psychiatric patient service revenue from managed
care organizations (primarily HMOs and PPOs, as hereinafter defined), 25% from
other private payers (primarily commercial insurance and Blue Cross), 28% from
Medicare, 17% from Medicaid, 3% from the Civilian Health and Medical Program for
the Uniformed Services ("CHAMPUS") and 6% from other government programs.
Changes in the mix of the Company's patients among the managed care
organizations, Medicare and Medicaid categories, and among different types of
private-pay sources, can significantly affect the profitability of the Company's
hospital operations. Therefore, there can be no assurance that payments under
governmental and private third-party payer programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs of providing care to patients covered by such programs.
PREVIOUS BANKRUPTCY REORGANIZATION
The Company was reorganized pursuant to Chapter 11 of the United States
Bankruptcy Code, effective on July 21, 1992 (the "Reorganization"). Prior to
the Reorganization, the Company's total indebtedness was approximately $1.8
billion. From February 1991 until July 1992, the Company was in default in the
payment of interest and principal, or both, on substantially all such
indebtedness. The indebtedness was incurred by the Company in connection with a
management buy-out of the Company in 1988 and a hospital-construction program.
As a result of the Reorganization, the Company's long-term debt was reduced by
approximately $700 million and its redeemable preferred stock of $233 million
was eliminated. The holders of such debt and preferred stock received
approximately 97% of Magellan's Common Stock outstanding on July 21, 1992.
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DEPENDENCE ON HEALTHCARE PROFESSIONALS
Physicians traditionally have been the source of a significant portion of
the patients treated at the Company's hospitals. Therefore, the success of
the Company's hospitals is dependent in part on the number and quality of the
physicians on the medical staffs of its hospitals and their admission
practices. A small number of physicians account for a significant portion of
patient admissions at some of the Company's hospitals. There can be no
assurance that the Company can retain its current physicians on staff or that
additional physician relationships will be developed in the future.
Furthermore, hospital physicians generally are not employees of the Company
and in general Magellan does not have contractual arrangements with hospital
physicians restricting the ability of such physicians to practice elsewhere.
POTENTIAL GENERAL AND PROFESSIONAL LIABILITY
Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"), a
wholly-owned Bermuda subsidiary of the Company, provides general and hospital
professional liability insurance up to $25 million per occurrence for the
Company's hospitals. All of the risk of losses from $1.5 million to $25 million
per occurrence has been reinsured with unaffiliated insurers. The Company also
insures with an unaffiliated insurer 100% of the risk of losses between $25
million and $100 million per occurrence, subject to an annual aggregate limit of
$75 million. The Company's general and professional liability coverage is
written on a "claims made or circumstances reported" basis. For reinsured
claims between $10 and $25 million per occurrence, the Company has an annual
aggregate limit of coverage of $30 million. For reinsured claims between $1.5
million and $10 million per occurrence, the Company has no significant
limitations on the aggregate dollar amounts of coverage.
For the six years from June 1, 1989 through May 31, 1995, the Company had a
similar general and hospital professional liability insurance program. For
those years, the per occurrence deductible (with respect to which the Company
was self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2
million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to
the Company's general hospitals sold on September 30, 1993) for the year ended
May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a
per occurrence deductible for the years ended May 31, 1994 and 1995. In
December 1994, the per occurrence deductible for the years ended May 31, 1989
and 1990 was eliminated. Plymouth provides coverage with no per occurrence
deductible for hospital system claims which had not been paid prior to December
31, 1994. Plymouth does not underwrite any insurance policies with any parties
other than the Company or its affiliates and subsidiaries.
The amount of expense relating to Magellan's malpractice insurance may
materially increase or decrease from year to year depending, among other things,
on the nature and number of new reported claims against Magellan and amounts of
settlements of previously reported claims. To date, Magellan has not
experienced a loss in excess of policy limits. Management believes that its
coverage limits are adequate. However, losses in excess of the limits described
above or for which insurance is otherwise unavailable could have a material
adverse effect upon the Company.
POTENTIAL EXPIRATION AND REALIZATION UNCERTAINTIES RELATED
TO ESTIMATED TAX NET OPERATING LOSS CARRYFORWARDS
As of September 30, 1996, the Company had estimated tax net operating loss
( NOL") carryforwards of approximately $250 million available to reduce future
federal taxable income. These NOL carryforwards expire in 2006 through 2010 and
are subject to adjustment upon examination by the Internal Revenue Service. Due
to the ownership change which occurred as a result of the Reorganization, the
Company's utilization of NOLs generated prior to the effective date of the
Reorganization is limited. Based on this limitation and certain other factors,
the Company has recorded a valuation allowance of approximately $102.2 million
against the amount of the NOL deferred tax asset that in Management's opinion,
is not likely to be recovered. There can be no assurance that these NOL
carryforwards will not expire, be reduced or be made subject to further
limitations prior to their potential utilization in future periods.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation has been on budgetary and related funding mechanism
issues. Both the Congress and the Clinton Administration have made proposals to
reduce the rate of increase in projected Medicare and Medicaid expenditures and
to change funding
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mechanisms and other aspects of both programs. If enacted, these proposals would
generally reduce Medicare and Medicaid expenditures. The Company cannot
predict the effect of any such legislation, if adopted, on its operations; but
the Company anticipates that, although overall Medicare and Medicaid funding may
be reduced from projected levels, the changes in such programs may provide
opportunities to the Company to obtain increased Medicare and Medicaid business
through risk-sharing or partial risk-sharing contracts with managed care plans
and state Medicaid programs.
A number of states in which the Company has operations have either adopted
or are considering the adoption of healthcare reform proposals of general
applicability or Medicaid reform proposals, partly in response to possible
changes in Medicaid law. Where adopted, these state reform laws have often not
yet been fully implemented. The Company cannot predict the effect of these
state healthcare reform and Medicaid reform laws on its operations.
PROVIDER BUSINESS-COMPETITION
Each of the Company's hospitals competes with other hospitals, some of
which are larger and have greater financial resources. Some competing hospitals
are owned and operated by governmental agencies, others by nonprofit
organizations supported by endowments and charitable contributions and others by
proprietary hospital corporations. The hospitals frequently draw patients from
areas outside their immediate locale and, therefore, the Company's hospitals
may, in certain markets, compete with both local and distant hospitals. In
addition, the Company's hospitals compete not only with other psychiatric
hospitals, but also with psychiatric units in general hospitals, and outpatient
services provided by the Company may compete with private practicing mental
health professionals and publicly funded mental health centers. The competitive
position of a hospital is, to a significant degree, dependent upon the number
and quality of physicians who practice at the hospital and who are members of
its medical staff. The Company has entered into joint venture arrangements with
other healthcare providers in certain markets to promote more efficiency in the
local delivery system. The Company believes that its provider business competes
effectively with respect to the aforementioned factors. However, there can be
no assurance that Magellan will be able to compete successfully in the provider
business in the future.
Competition among hospitals and other healthcare providers for patients has
intensified in recent years. During this period, hospital occupancy rates for
inpatient behavioral care patients in the United States have declined as a
result of cost containment pressures, changing technology, changes in
reimbursement, changes in practice patterns from inpatient to outpatient
treatment and other factors. In recent years, the competitive position of
hospitals has been affected by the ability of such hospitals to obtain contracts
with Preferred Provider Organizations ("PPO's"), Health Maintenance
Organizations ("HMO's") and other managed care programs to provide inpatient and
other services. Such contracts normally involve a discount from the hospital's
established charges, but provide a base of patient referrals. These contracts
also frequently provide for pre-admission certification and for concurrent
length of stay reviews. The importance of obtaining contracts with HMO's, PPO's
and other managed care companies varies from market to market, depending on the
individual market strength of the managed care companies. State certificate of
need laws regulate the Company and its competitors' ability to build new
hospitals and to expand existing hospital facilities and services. These laws do
provide some protection from competition, as their interest is to prevent
duplication of services. In most cases, these laws do not restrict the ability
of the Company or its competitors to offer new outpatient services. As of
September 30, 1996, the Company operated 39 hospitals in 12 states (Arizona,
Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada, New Mexico,
South Dakota, Texas and Utah) which do not have certificate of need laws
applicable to hospitals.
MANAGED CARE BUSINESS - COMPETITION
The managed healthcare industry is being affected by various external
factors including rising healthcare costs, intense price competition, and market
consolidation by major managed care companies. Magellan faces competition from
a number of sources including other behavioral health managed care companies and
traditional full service managed care companies that contract to provide
behavioral healthcare benefits. Also, to a lesser extent, competition exists
from fully capitated multi-specialty medical groups and individual practice
associations that directly contract with managed care companies and other
customers to provide and manage all components of healthcare for the members
including the behavioral healthcare component. The Company believes that the
most significant factors in a customer's selection of
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a managed behavioral healthcare company include price, the extent and depth of
provider networks and quality of services. The Company also believes that the
acquisition of Green Spring creates opportunities to enhance its revenues
through managed care contracts utilizing the continuum of care and through
information systems that support care management and at-risk pricing mechanisms,
although no such assurance can be given. Management believes that its managed
care business competes effectively with respect to these factors. However,
there can be no assurance that Magellan will be able to compete successfully in
the managed care business in the future.
REGULATORY ENVIRONMENT
The federal government and all states in which the Company operates
regulate various aspects of the Company's businesses. Such regulations provide
for periodic inspections or other reviews of the Company's provider operations
by, among others, state agencies, the United States Department of Health and
Human Services (the "Department") and CHAMPUS to determine compliance with their
respective standards of care and other applicable conditions of participation
which is necessary for continued licensure or participation in identified
healthcare programs, including, but not limited to, Medicare, Medicaid and
CHAMPUS. The Company is also subject to state regulation regarding the
admission and treatment of patients and federal regulations regarding
confidentiality of medical records of substance abuse patients. Although the
Company endeavors to comply with such regulatory requirements, there can be no
assurance that the Company will always be in full compliance. The failure to
obtain or renew any required regulatory approvals or licenses or to qualify for
continued participation in identified healthcare programs could adversely affect
the Company's operations.
The Company is also subject to federal and state laws that govern
financial and other arrangements between healthcare providers. These laws
often prohibit certain direct and indirect payments between healthcare
providers that are designed to induce overutilization of services paid for by
Medicare or Medicaid. Such laws include the anti-kickback provisions of the
federal Medicare and Medicaid Patients and Program Protection Act of 1987.
These provisions prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. GPA, the Company's subsidiary
that owns or manages professional group practices, is subject to the federal
and the state illegal remuneration, practice of medicine and certain other
laws which prohibit the subsidiary from owning, but not managing,
professional practices. In addition, some states prohibit business
corporations from providing, or holding themselves out as a provider of,
medical care. The Company endeavors to comply with all federal and state
laws applicable to its business. However, a violation of these federal and
state laws may result in civil or criminal penalties for individuals or
entities or exclusion from participation in identified healthcare programs.
Magellan's managed care business operations, in some states, are subject to
utilization review, licensure and related state regulation procedures. Green
Spring provides managed behavioral healthcare services to various Blue
Cross/Blue Shield plans that operate Medicare and Medicaid health maintenance
organizations or other at-risk managed care programs and that participate in the
Blue Cross Federal Employees health program. As a contractor to these Blue
Cross/Blue Shield plans, Green Spring is indirectly subject to federal and, with
respect to the Medicaid program, state monitoring and regulation of performance
and financial reporting requirements. Although Magellan believes that it is in
compliance with all current state and federal regulatory requirements applicable
to the managed care business it conducts, failure to do so could adversely
affect its operations.
Physician ownership of or investment in healthcare entities to which they
refer patients has come under increasing scrutiny at both state and federal
levels. Congress passed legislation (commonly referred to as "Stark I")
which prohibits physicians from referring Medicare patients for clinical
laboratory services to an entity with which the physician has a financial
relationship. The Department recently published final Stark I regulations on
August 14, 1995. Such regulations will govern how the Department views and
reviews these financial relationships. Additionally, Congress passed
legislation (commonly referred to as "Stark II") which prohibits physicians
from referring Medicare or Medicaid patients for certain designated health
services, including inpatient and outpatient hospital services, to entities
in which they have an ownership or investment interest or with which they
have a compensation arrangement. The entity is also prohibited from billing
the Medicare or Medicaid programs for such services rendered pursuant to a
prohibited referral. To the extent designated services are provided by the
Company's provider and managed care operations, physicians who have a
financial relationship with the Company and the Company will be subject to
the provisions of Stark II. Some states have passed similar legislation
which prohibits the referral of private pay patients. To date, the
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Department has not published Stark II regulations. However, the Department
indicated that it will review referrals involving any of the designated services
under the language and interpretations set forth in the Stark I rule.
The Company's acquisitions and joint venture activities are also subject to
federal antitrust laws. The healthcare industry has recently been an active
area of antitrust enforcement action by the United States Federal Trade
Commission (the "FTC") and the Department of Justice ("DOJ"). The Company's
acquisitions and joint venture arrangements could be the subject of a DOJ or an
FTC enforcement action which, if determined adversely to the Company, could have
a material adverse effect upon the Company's operations.
Changes in laws or regulations or new interpretations of existing laws or
regulations can have an adverse effect on the Company's operating methods,
costs, reimbursement amounts and acquisition and joint venture activities. In
addition, the healthcare industry is subject to increasing governmental
scrutiny, and additional laws and regulations may be enacted which could require
changes in the Company's operations. A federal or state agency charged with
enforcement of such laws and regulations might assert an interpretation of such
laws and resolutions or may increase scrutiny of a previously ignored area,
which may require changes in the Company's operations.
CAPITATION ARRANGEMENTS
The Company's managed care business contracts with companies holding state
HMO or insurance company licenses on a capitated or "at-risk" basis where the
risk of patient care is assumed by the Company in exchange for a monthly fee per
member regardless of utilization level. As of September 30, 1996, approximately
30% of Green Spring's managed care members were under capitated arrangements.
During fiscal 1996, approximately 70% of Green Spring's revenues were from
at-risk contracts. Increases in utilization levels under capitated contractual
arrangements could adversely effect the operations of the managed care business.
Some jurisdictions are taking the position that capitated agreements in
which the provider bears the risk should be regulated by insurance laws. In
this regard, Green Spring's primary customers are comprised of Blue Cross/Blue
Shield Plans and other insurance entities which are licensed insurance
organizations in their respective states. Green Spring offers "carved out"
managed mental health benefits, on a wholesale basis, as a vendor to the
regulated insurance organizations. Most current employer group relationships
are also contracted through the respective regulated insurance organizations.
However, as Magellan and Green Spring develop more direct risk arrangements on a
retail basis directly with employer groups or other non-insurance entity
customers, the Company may be required to obtain insurance licenses in the
respective states where the direct risk arrangements are to be pursued. There
can be no assurance that the Company can obtain the insurance licenses required
by the respective states in a timely or cost effective manner to respond to
market demand.
MENTAL HEALTH PARITY LEGISLATION
In October 1996, President Clinton signed a bill submitted by the U.S.
Congress that prohibits health plans from setting annual or lifetime caps on
mental health coverage ("parity") at levels below those set for general
medical/surgical healthcare services. The bill does not require a health plan
to offer or provide mental health services and does not affect other terms and
conditions of health plans, such as inpatient day or outpatient visit limits or
scope of benefits, nor does this bill prohibit health plans from utilizing other
forms of cost containment. The definition of mental health services in the bill
excludes substance abuse and chemical dependency. The effective date for the
parity legislation is January 1, 1998. Other key components of the parity
legislation are as follows:
1) Employers with 50 or fewer employees are exempt from the parity
legislation.
2) Health plans that incur increased costs of 1% or more as a result of the
parity legislation will be exempt.
3) The parity legislation expires on September 30, 2001 unless extended by
Congress.
The Company views the parity legislation as an acknowledgment by the
Federal government of the importance of effective treatment of mental health
disorders for society in general. The parity legislation could result in cost
containment mechanisms by third party payers such as the elimination of mental
health benefit plans or encouraging the
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utilization of managed care organizations to administer mental health benefit
plans, which could both result in lower demand and lower revenue per equivalent
patient day in the Company's provider business. However, this bill is subject
to administrative and judicial interpretation, neither of which the Company is
able to predict. There can be no assurance that such interpretations will not
adversely effect the Company's businesses.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes factors such as announcements with respect to
healthcare reform measures, reductions in government healthcare program
projected expenditures, acquisitions and quarter-to-quarter and year-to-year
variations in financial results could cause the market price of Magellan Common
Stock to fluctuate substantially. Any such adverse announcement with respect to
healthcare reform measures or program expenditures, acquisitions or any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
Magellan Common Stock in any given period. As a result, the market for Magellan
Common Stock may experience price and volume fluctuations unrelated to the
operating performance of Magellan.
