- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________ to ____________________
Commission File No. 1-6639
MAGELLAN HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1076937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3414 Peachtree Road, NE, Suite 1400
Atlanta, Georgia 30326
(Address of principal executive offices)
(Zip Code)
(404) 841-9200
(Registrant's telephone number, including area code)
See Table of Additional Registrants below.
------------------------------------
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
The number of shares of the Registrant's Common Stock outstanding as of January
31, 1997, was 28,686,091.
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<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
<S> <C> <C> <C>
Behavioral Heath Systems Indiana 35-1990127 3414 Peachtree Rd., N.E.
of Indiana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Beltway Community Hospital, Texas 58-1324281 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Blue Grass Physician Kentucky 66-1294402 3050 Rio Dosa Drive
Management Group, Inc. Lexington, KY 40509
(606) 269-2325
C.A.C.O. Services, Inc. Ohio 58-1751511 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CCM, Inc. Nevada 58-1662418 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CMCI, Inc. Nevada 88-0224620 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMFC, Inc. Nevada 88-0215629 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMSF, Inc. Florida 58-1324269 3550 Colonial Boulevard
Fort Myers, FL 33912
(813) 939-0403
CPS Associates, Inc. Virginia 58-1761039 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Alvarado Behavioral California 58-1394959 7050 Parkway Drive
Health System, Inc. La Mesa, CA 91942-2352
(619) 465-4411
Charter Asheville North Carolina 58-2097827 60 Caledonia Road
Behavioral Health System, Inc. Asheville, NC 28803
(704) 253-3681
i
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
The Charter Arbor Indy Delaware 58-2265776 3414 Peachtree Rd., N.E.
Behavioral Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Augusta Behavioral Georgia 58-1615676 3100 Perimeter Parkway
Health System, Inc. P.O. Box 14939
Augusta, GA 30909
(404) 868-6625
Charter Bay Harbor Behavioral Florida 58-1640244 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
The Charter Beacon Behavioral Delaware 35-1994155 1720 Beacon Street
Health System, LLC Fort Wayne, IN 46805
(219) 423-3651
Charter Behavioral Health System New Jersey 58-2097832 19 Prospect Street
at Fair Oaks, Inc. Summit, NJ 07901
(908) 277-9102
Charter Behavioral Health System Maryland 52-1866212 522 Thomas Run Road
at Hidden Brook, Inc. Bel Air, MD 21014
(410) 879-1919
Charter Behavioral Health System California 33-0606642 3414 Peachtree Rd., N.E.
at Los Altos, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Florida 65-0519663 1324 37th Avenue, East
at Manatee Adolescent Treatment Bradenton, FL 34208
Services, Inc. (813) 746-1388
Charter Behavioral Health System Maryland 52-1866221 14901 Broschart Road
at Potomac Ridge, Inc. Rockville, MD 20850
(301) 251-4500
Charter Behavioral Health Delaware 58-2213642 3414 Peachtree Rd., N.E.
Systems, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Georgia 58-1513304 240 Mitchell Bridge Road
of Athens, Inc. Athens, GA 30606
(404) 546-7277
Charter Behavioral Health System Texas 58-1440665 8402 Cross Park Drive
of Austin, Inc. Austin, TX 78754
(512) 837-1800
ii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Behavioral Health System Texas 76-0430571 3414 Peachtree Rd., N.E.
of Baywood, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Florida 58-1527678 4480 51st Street, West
of Bradenton, Inc. Bradenton, FL 34210
(813) 746-1388
Charter Behavioral Health System Georgia 58-1408670 3500 Riverside Drive
of Central Georgia, Inc. Macon, GA 31210
(912) 474-6200
Charter Behavorial Health System Virginia 54-1765921 1500 Westbrook Avenue
of Central Virginia, Inc. Richmond, VA 23227
(804) 266-9671
Charter Behavioral Health System South Carolina 58-1761157 2777 Speissegger Drive
of Charleston, Inc. Charleston, SC 29405-8299
(803) 747-5830
Charter Behavioral Health System Virginia 58-1616917 2101 Arlington Boulevard
of Charlottesville, Inc. Charlottesville, VA 22903-1593
(804) 977-1120
Charter Behavioral Health System Illinois 58-1315760 3414 Peachtree Rd., N.E.
of Chicago, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 58-1473063 3414 Peachtree Rd., N.E.
of Chula Vista, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Missouri 61-1009977 200 Portland Street
of Columbia, Inc. Columbia, MO 65201
(314) 876-8000
Charter Behavioral Health System Texas 58-1513305 3126 Rodd Field Road
of Corpus Christi, Inc. Corpus Christi, TX 78414
(512) 993-8893
Charter Behavioral Health System Texas 58-1513306 6800 Preston Road
of Dallas, Inc. Plano, TX 75024
(214) 964-3939
Charter Behavioral Health System Maryland 52-1866214 3680 Warwick Road, Route 1
of Delmarva, Inc. East New Market, MD 21631
(410) 943-8108
The Charter Behavioral Health SystemDelaware 35-1994080 7200 East Indiana
of Evansville, LLC Evansville, IN 47715
(812) 475-7200
iii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Behavioral Health System Texas 58-1643151 3414 Peachtree Rd., N.E.
of Fort Worth, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Mississippi 58-1616919 3531 Lakeland Drive
of Jackson, Inc. Jackson, MS 39208
(601) 939-9030
Charter Behavioral Health System Florida 58-1483015 3414 Peachtree Rd., N.E.
of Jacksonville, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health SystemDelaware 35-1994087 2700 River City Park Drive
of Jefferson, LLC Jeffersonville, IN 47130
(812) 284-3400
Charter Behavioral Health System Kansas 58-1603154 8000 West 127th Street
of Kansas City, Inc. Overland Park, KS 66213
(913) 897-4999
Charter Behavioral Health System Louisiana 72-0686492 302 Dulles Drive
of Lafayette, Inc. Lafayette, LA 70506
(318) 233-9024
Charter Behavioral Health System Louisiana 62-1152811 4250 Fifth Avenue, South
of Lake Charles, Inc. Lake Charles, LA 70605
(318) 474-6133
The Charter Behavioral Health SystemDelaware 35-1994736 3414 Peachtree Rd., N.E.
of Michigan City, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Mississippi 58-2138622 3414 Peachtree Rd., N.E.
of Mississippi, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Alabama 58-1569921 3414 Peachtree Rd., N.E.
of Mobile, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System New Hampshire 02-0470752 29 Northwest Boulevard
of Nashua, Inc. Nashua, NH 03063
(603) 886-5000
Charter Behavioral Health System Nevada 58-1321317 7000 West Spring Mountain Rd.
of Nevada, Inc. Las Vegas, NV 89117
(702) 876-4357
iv
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Behavioral Health System New Mexico 58-1479480 5901 Zuni Road, SE
of New Mexico, Inc. Albuquerque, NM 87108
(505) 265-8800
Charter Behavioral Health System North Carolina 56-1908581 3414 Peachtree Rd., N.E.
of North Carolina, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 58-1857277 101 Cirby Hills Drive
of Northern California, Inc. Roseville, CA 95678
(916) 969-4666
Charter Behavioral Health System Arkansas 58-1449455 4253 Crossover Road
of Northwest Arkansas, Inc. Fayetteville, AR 72703
(501) 521-5731
The Charter Behavioral Health SystemDelaware 35-1994154 101 West 61st Avenue
of Northwest Indiana, LLC State Road 51
Hobart, IN 46342
(219) 947-4464
Charter Behavioral Health System Kentucky 61-1006115 435 Berger Road
of Paducah, Inc. Paducah, KY 42002-7609
(502) 444-0444
Charter Behavioral Health Georgia 66-0523678 Caso Bldg., Suite 1504
of Puerto Rico, Inc. 1225 Ponce de Leon Avenue
Santurce, PR 00907
Charter Behavioral Health System California 58-1747020 455 Silicon Valley Boulevard
of San Jose, Inc. San Jose, CA 95138
(408) 224-2020
Charter Behavioral Health System Georgia 58-1750583 1150 Cornell Avenue
of Savannah, Inc. Savannah, GA 31406
(912) 354-3911
Charter Behavioral Health System Arkansas 71-0752815 3414 Peachtree Rd., N.E.
of Texarkana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 95-2685883 2055 Kellogg Drive
of the Inland Empire, Inc. Corona, CA 91719
(714) 735-2910
Charter Behavioral Health System Ohio 58-1731068 1725 Timberline Road
of Toledo, Inc. Maumee, Ohio 43537
(419) 891-9333
Charter Behavioral Health System Arizona 86-0757462 3414 Peachtree Rd., N.E.
of Tucson, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
v
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Behavioral Health System California 33-0606644 3414 Peachtree Rd., N.E.
of Visalia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Minnesota 41-1775626 109 North Shore Drive
of Waverly, Inc. Waverly, MN 55390
(612) 658-4811
Charter Behavioral Health System North Carolina 56-1050502 3637 Old Vineyard Road
of Winston-Salem, Inc. Winston-Salem, NC 27104
(919) 768-7710
Charter Behavioral Health System California 33-0606646 3414 Peachtree Rd., N.E.
of Yorba Linda, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Georgia 58-1900736 811 Juniper St., N.E.
Systems of Atlanta, Inc. Atlanta, GA 30308
(404) 881-5800
Charter Brawner Behavioral Georgia 58-0979827 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter By-The-Sea Georgia 58-1351301 2927 Demere Road
Behavioral Health System, Inc. St. Simons Island, GA 31522
(912) 638-1999
Charter Canyon Behavioral Health Utah 58-1557925 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Canyon Springs California 33-0606640 69696 Ramon Road
Behavioral Health System, Inc. Cathedral City, CA 92234
(619) 321-2000
Charter Centennial Peaks Colorado 58-1761037 2255 South 88th Street
Behavioral Health System, Inc. Louisville, CO 80027
(303) 673-9990
Charter Community Hospital, California 58-1398708 21530 South Pioneer Boulevard
Inc. Hawaiian Gardens, CA 90716
(310) 860-0401
Charter Contract Services, Inc. Georgia 58-2100699 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
vi
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Cove Forge Behavioral Pennsylvania 25-1730464 New Beginnings Road
Health System, Inc. Williamsburg, PA 16693
(814) 832-2121
Charter Fairmount Behavioral Pennsylvania 58-1616921 561 Fairthorne Avenue
Health System, Inc. Philadelphia, PA 19128
(215) 487-4000
Charter Fenwick Hall South Carolina 57-0995766 3414 Peachtree Rd., N.E.
Behavioral Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Financial Offices, Inc. Georgia 58-1527680 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Forest Behavioral Louisiana 58-1508454 9320 Linwood Avenue
Health System, Inc. Shreveport, LA 71106
(318) 688-3930
Charter Grapevine Behavioral Texas 58-1818492 2300 William D. Tate Ave.
Health System, Inc. Grapevine, TX 76051
(817) 481-1900
Charter Greensboro Behavioral North Carolina 58-1335184 700 Walter Reed Drive
Health System, Inc. Greensboro, NC 27403
(919) 852-4821
Charter Health Management Texas 58-2025056 6800 Park Ten Blvd.
of Texas, Inc. Suite 275-W
San Antonio, TX 78213
(210) 699-8585
Charter Hospital of Ohio 58-1598899 3414 Peachtree Rd., N.E.
Columbus, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Denver, Colorado 58-1662413 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Ft. Collins, Colorado 58-1768534 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
vii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Hospital of Miami, Inc. Florida 61-1061599 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Mobile, Inc. Alabama 58-1318870 5800 Southland Drive
Mobile, AL 36693
(334) 661-3001
Charter Hospital of Santa New Mexico 58-1584861 3414 Peachtree Rd., N.E.
Teresa, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of St. Louis, Inc. Missouri 58-1583760 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Torrance, Inc. California 58-1402481 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Indiana BHS Indiana 58-2247985 3414 Peachtree Rd., N.E.
Holding, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Indianapolis Behavioral Delaware 35-1994923 5602 Caito Drive
Health System, LLC Indianapolis, IN 46226
(317) 545-2111
The Charter Lafayette Behavioral Delaware 35-1994151 3700 Rome Drive
Health System, LLC Lafayette, IN 47905
(317) 448-6999
Charter Lakehurst New Jersey 22-3286879 3414 Peachtree Rd., N.E.
Behavioral Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Behavioral Tennessee 62-0892645 2911 Brunswick Road
Health System, Inc. Memphis, TN 38134
(901) 377-4700
Charter Laurel Heights Georgia 58-1558212 3414 Peachtree Rd., N.E.
Behavioral Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Linden Oaks Illinois 36-3943776 852 West Street
Behavioral Health System, Inc. Naperville, IL 60540
(708) 305-5500
viii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Little Rock Behavioral Arkansas 58-1747019 1601 Murphy Drive
Health System, Inc. Maumelle, AR 72113
(501) 851-8700
Charter Louisiana Behavioral Louisiana 72-1319231 1514 Doctor's Drive
Health System, Inc. Suite 102
Bossier City, LA 71111
(318) 747-4362
Charter Louisville Behavioral Kentucky 58-1517503 1405 Browns Lane
Health System, Inc. Louisville, KY 40207
(502) 896-0495
Charter Meadows Behavioral Maryland 52-1866216 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - California, Inc. Georgia 58-1357345 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - Clayton Georgia 58-1579404 3414 Peachtree Rd., N.E.
County, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - Cleveland, Inc. Texas 58-1448733 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - Long California 58-1366604 3414 Peachtree Rd., N.E.
Beach, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical - New York, Inc. New York 58-1761153 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical (Cayman Cayman Islands, BWI 58-1841857 Caledonian Bank & Trust
Islands) Ltd. Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical Executive Georgia 58-1538092 3414 Peachtree Rd., N.E.
Corporation Suite 1400
Atlanta, GA 30326
(404) 841-9200
ix
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Medical Information Georgia 58-1530236 3414 Peachtree Rd., N.E.
Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical International, Cayman Islands, BWI N/A Caledonian Bank & Trust
Inc. Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical International, Nevada 58-1605110 3414 Peachtree Rd., N.E.
S.A., Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Managed Care Sales and Georgia 58-1195352 3414 Peachtree Rd., N.E.
Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of East Arizona 58-1643158 2190 N. Grace Boulevard
Valley, Inc. Chandler, AZ 85224
(602) 899-8989
Charter Medical of England United Kingdom N/A 111 Kings Road
Limited Box 323
London SW3 4PB
London, England
44-71-351-1272
Charter Medical of Florida, Inc. Florida 58-2100703 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of North Arizona 58-1643154 6015 W. Peoria Avenue
Phoenix, Inc. Glendale, AZ 85302
(602) 878-7878
Charter Medical of Puerto Commonwealth of 58-1208667 Caso Building, Suite 1504
Rico, Inc. Puerto Rico 1225 Ponce De Leon Avenue
Santurce, P.R. 00907
(809) 723-8666
Charter Milwaukee Behavioral Wisconsin 58-1790135 11101 West Lincoln Avenue
Health System, Inc. West Allis, WI 53227
(414) 327-3000
Charter Mission Viejo Behavioral California 58-1761156 23228 Madero
Health System, Inc. Mission Viejo, CA 92691
(714) 830-4800
x
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter MOB of Virginia 58-1761158 1023 Millmont Avenue
Charlottesville, Inc. Charlottesville, VA 22901
(804) 977-1120
Charter North Behavioral Alaska 58-1474550 2530 DeBarr Road
Health System, Inc. Anchorage, AK 99508-2996
(907) 258-7575
Charter Northbrooke Wisconsin 39-1784461 46000 W. Schroeder Drive
Behavioral Health System, Inc. Brown Deer, WI 53223
(414) 355-2273
Charter North Counseling Alaska 58-2067832 2530 DeBarr Road
Center, Inc. Anchorage, AK 99508-2996
(907) 258-7575
Charter Northridge Behavioral North Carolina 58-1463919 400 Newton Road
Health System, Inc. Raleigh, NC 27615
(919) 847-0008
Charter Oak Behavioral California 58-1334120 1161 East Covina Boulevard
Health System, Inc. Covina, CA 91724
(818) 966-1632
Charter of Alabama, Inc. Alabama 63-0649546 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Palms Behavioral Texas 58-1416537 1421 E. Jackson Avenue
Health System, Inc. McAllen, TX 78502
(512) 631-5421
Charter Peachford Behavioral Georgia 58-1086165 2151 Peachford Road
Health System, Inc. Atlanta, GA 30338
(404) 455-3200
Charter Pines Behavioral North Carolina 58-1462214 3621 Randolph Road
Health System, Inc. Charlotte, NC 28211
(704) 365-5368
Charter Plains Behavioral Texas 58-1462211 801 N. Quaker Avenue
Health System, Inc. Lubbock, TX 79408
(806) 744-5505
Charter-Provo School, Inc. Utah 58-1647690 4501 North University Ave.
Provo, UT 84604
(801) 227-2000
Charter Real Behavioral Texas 58-1485897 8550 Huebner Road
Health System, Inc. San Antonio, TX 78240
(512) 699-8585
xi
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Ridge Behavioral Kentucky 58-1393063 3050 Rio Dosa Drive
Health System, Inc. Lexington, KY 40509
(606) 269-2325
Charter Rivers Behavioral South Carolina 58-1408623 2900 Sunset Boulevard
Health System, Inc. West Columbia, SC 29169
(803) 796-9911
Charter Rockford Behavioral Delaware 51-0374617 100 Rockford Drive
Health System, Inc. Newark, DE 19713
(302) 996-5480
Charter San Diego Behavioral California 58-1669160 11878 Avenue of Industry
Health System, Inc. San Diego, CA 92128
(619) 487-3200
Charter Sioux Falls Behavioral South Dakota 58-1674278 2812 South Louise Avenue
Health System, Inc. Sioux Falls, SD 57106
(605) 361-8111
The Charter South Bend Behavioral Delaware 35-1994307 6704 N. Gumwood Drive
Health System, LLC Granger, IN 46530
(219) 272-9799
Charter Springs Behavioral Florida 58-1517461 3130 S.W. 27th Avenue
Health System, Inc. Ocala, FL 32674
(904) 237-7293
Charter Springwood Virginia 58-2097829 Route 4, Box 50
Behavioral Health System, Inc. Leesburg, VA 22075
(703) 777-0800
Charter Suburban Hospital Texas 75-1161721 3414 Peachtree Rd., N.E.
of Mesquite, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Terre Haute Behavioral Delaware 35-1994308 1400 Crossing Boulevard
Health System, LLC Terre Haute, IN 47802
(812) 299-4196
Charter Thousand Oaks Behavioral California 58-1731069 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Westbrook Behavioral Virginia 54-0858777 1500 Westbrook Avenue
Health System, Inc. Richmond, VA 23227
(804) 266-9671
Charter White Oak Behavioral Maryland 52-1866223 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
xii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Charter Wichita Behavioral Kansas 58-1634296 8901 East Orme
Health System, Inc. Wichita, KS 67207
(316) 686-5000
Charter Woods Behavioral Alabama 58-1330526 700 Cottonwood Road
Health System, Inc. Dothan, AL 36301
(205) 794-4357
Correctional Behavioral Delaware 58-2180940 3414 Peachtree Rd., N.E.
Solutions, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral Indiana 35-1978792 3414 Peachtree Rd., N.E.
Solutions of Indiana, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral New Jersey 22-3436964 3000 Atrium Way
Solutions of New Jersey, Inc. Suite 410
Mount Laurel, NJ
(609) 235-2339
Correctional Behavioral Ohio 34-1826431 Allen Correctional Institute
Solutions of Ohio, Inc. 2338 North West Street
Lima, OH 45801
(419) 224-8000
Desert Springs Hospital, Inc. Nevada 88-0117696 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Employee Assistance Services, Inc. Georgia 58-1501282 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Florida Health Facilities, Inc. Florida 58-1860493 21808 State Road 54
Lutz, FL 33549
(813) 948-2441
Gulf Coast EAP Services, Inc. Alabama 58-2101394 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
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
xiii
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
Magellan Public Solutions, Inc. Delaware 58-2227841 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Mandarin Meadows, Inc. Florida 58-1761155 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Magellan Public Network, Inc. Delaware 51-0374654 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Massachusetts Mentor, Inc. Massachusetts 04-2799071 313 Congress St.
Boston, MA 02210
(617) 790-4800
Metroplex Behavioral Healthcare Texas 58-2138596 1000 South Main Street
Services, Inc. Suite 100
Grapevine, TX 76051
(817) 540-6948
National Mentor, Inc. Delaware 04-3250732 313 Congress St.
Boston, MA 02210
(617) 790-4800
National Mentor Healthcare, Inc. Massachusetts 04-2893910 313 Congress St.
Boston, MA 02210
(617) 790-4800
NEPA - Massachusetts, Inc. Massachusetts 58-2116751 #6 Courthouse Lane
Chelmsford, MA 01863
(508) 441-2332
NEPA - New Hampshire, Inc. New Hampshire 58-2116398 29 Northwest Boulevard
Nashua, NH 03063
(603) 886-5000
Nevada Behavioral Services, Inc. Nevada Applied for 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
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
xiv
<PAGE>
ADDITIONAL REGISTRANTS(1)
Address including zip code,
State or other and telephone number
Exact name of jurisdiction of I.R.S. Employer including area code,
registrant as specified incorporation Identification of registrant's principal
in its charter or organization Number executive offices
- -------------------- -------------- -------------- ------------------------
South Carolina Mentor, Inc. South Carolina 57-0782160 313 Congress St.
Boston, MA 02210
(617) 790-4800
Southeast Behavioral Systems, Georgia 58-2100700 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Schizophrenia Treatment and Georgia 58-1672912 209 Church Street
Rehabilitation, Inc. Decatur, GA 30030
(404) 377-1986
Sistemas De Terapia Georgia 58-1181077 3414 Peachtree Rd., N.E.
Respiratoria, S.A., Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Western Behavioral California 58-1662416 3414 Peachtree Rd., N.E.
Systems, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Wisconsin Mentor, Inc. Wisconsin 39-1840054 313 Congress St.
Boston, MA 00210
(617) 790-4800
</TABLE>
(1) The Additional Registrants listed are wholly-owned subsidiaries of the
Registrant and are guarantors of the Registrant's 11 1/4% Series A
Senior Subordinated Notes due 2004. The Additional Registrants have
been conditionally exempted, pursuant to Section 12(h) of the
Securities Exchange Act of 1934, from filing reports under Section 13
of the Securities Exchange Act of 1934.
xv
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - Financial Information:
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1996.............................1
Condensed Consolidated Statements of Operations -
For the Three Months ended December 31, 1995 and 1996................3
Condensed Consolidated Statements of Cash Flows -
For the Three Months ended December 31, 1995 and 1996................4
Notes to Condensed Consolidated Financial Statements..................5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................13
PART II - Other Information:
Item 1. - Legal Preceedings..........................................19
Item 5. - Other Information..........................................19
Item 6. - Exhibits and Reports on Form 8-K...........................20
Signatures...........................................................21
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I - FINANCIAL INFORMATION
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, December 31,
1996 1996
------------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................. $ 120,945 $ 114,452
Accounts receivable, net .................. 189,878 191,862
Supplies .................................. 4,753 4,913
Refundable income taxes ................... 1,323 --
Other current assets ...................... 21,251 27,122
----------- -----------
Total Current Assets ................. 338,150 338,349
Property and Equipment:
Land ...................................... 83,431 82,751
Buildings and improvements ................ 388,821 388,832
Equipment ................................. 146,915 150,217
----------- -----------
619,167 621,800
Accumulated depreciation .................. (126,053) (135,083)
----------- -----------
493,114 486,717
Construction in progress .................. 2,276 3,624
----------- -----------
495,390 490,341
Assets Restricted for Settlement of Unpaid Claims
and Other Long-Term Liabilities ........... 105,303 94,786
Other Long-Term Assets ........................... 30,755 28,033
Goodwill, net .................................... 128,012 126,991
Other Intangible Assets, net ..................... 42,527 40,457
----------- -----------
$ 1,140,137 $ 1,118,957
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
September 30, December 31,
1996 1996
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable ..................................... $ 78,966 $ 72,797
Accrued liabilities .................................. 189,599 163,555
Current maturities of long-term debt and
capital lease obligations ......................... 5,751 5,785
----------- -----------
Total Current Liabilities ................... 274,316 242,137
Long-Term Debt and Capital Lease Obligations ................ 566,307 581,202
Deferred Income Taxes ....................................... 12,368 12,250
Reserve for Unpaid Claims ................................... 73,040 70,449
Deferred Credits and Other Long-Term Liabilities ............ 39,769 30,039
Minority Interest ........................................... 52,520 54,816
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, without par value
Authorized - 10,000 shares
Issued and outstanding - none
Common Stock, par value $0.25 per share
Authorized - 80,000 shares
Issued and outstanding - 33,007 shares at
September 30, 1996 and 33,030 shares
at December 31, 1996 ........................ 8,252 8,259
Other Stockholders' Equity
Additional paid-in capital ........................ 327,681 328,390
Accumulated deficit ............................... (129,457) (125,266)
Warrants outstanding .............................. 54 54
Common Stock in Treasury, 4,424 shares at September
30, 1996 and December 31, 1996 .............. (82,731) (82,731)
Cumulative foreign currency adjustments ........... (1,982) (642)
----------- -----------
Stockholders' Equity ........................ 121,817 128,064
----------- -----------
$ 1,140,137 $ 1,118,957
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
2
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
For the Three Months
ended
December 31,
---------------------
1995 1996
--------- ---------
<S> <C> <C>
Net revenue ............................................. $ 295,665 $ 346,819
--------- ---------
Costs and expenses:
Salaries, supplies and other operating expenses . 231,326 284,123
Bad debt expense ................................. 19,788 20,235
Depreciation and amortization .................... 10,180 13,099
Interest, net .................................... 13,822 13,569
Stock option expense ............................. 1,823 604
--------- ---------
276,939 331,630
--------- ---------
Income before provision for income taxes,
minority interest and extraordinary item ......... 18,726 15,189
Provision for income taxes .............................. 7,959 6,075
--------- ---------
Income before minority interest and extraordinary item .. 10,767 9,114
Minority interest ....................................... 1,019 1,973
--------- ---------
Income before extraordinary item ........................ 9,748 7,141
Extraordinary item - loss on early extinquishment of debt
(net of income tax benefit of $1,967) ............ -- (2,950)
--------- ---------
Net income .............................................. $ 9,748 $ 4,191
========= =========
Average number of common shares outstanding ............. 27,994 28,589
========= =========
Income per common share:
Income before extraordinary item ................. $ 0.35 $ 0.25
Extraordinary loss on early extinguishment of debt -- (0.10)
--------- ---------
Net income .............................................. $ 0.35 $ 0.15
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months
ended
December 31
----------------------
1995 1996
---------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income ...................................................... $ 9,748 $ 4,191
--------- ---------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ............................ 10,180 13,099
Stock option expense ..................................... 1,823 604
Non-cash interest expense ................................ 600 483
Gain on sale of assets ................................... (139) (493)
Extraordinary loss on early extinguishment of debt ....... -- 4,917
Cash flows from changes in assets and liabilities, net
of effects from sales and acquisitions of businesses:
Accounts receivable, net .......................... (5,595) (1,984)
Other assets ...................................... (2,443) (4,109)
Accounts payable and other accrued liabilities .... (33,602) (32,046)
Reserve for unpaid claims ......................... (1,690) (2,351)
Income taxes payable .............................. 6,196 1,517
Other liabilities ................................. (1,311) (9,729)
Minority interest, net of dividends paid .......... 1,163 2,296
Other ............................................. 168 216
--------- ---------
Total adjustments ............................ (24,650) (27,580)
--------- ---------
Net cash used in operating activities ... (14,902) (23,389)
--------- ---------
Cash Flows From Investing Activities
Capital expenditures ............................................ (4,368) (7,012)
Acquisitions of businesses, net of cash acquired ................ (47,327) (1,612)
Decrease (increase) in assets restricted for settlement of
unpaid claims ................................................. (3,614) 10,381
Proceeds from sale of assets .................................... 503 4,822
--------- ---------
Net cash provided by (used in)
investing activities .................. (54,806) 6,579
--------- ---------
Cash Flows From Financing Activities
Proceeds from issuance of debt, net of issuance costs ........... 68,125 126,825
Payments on debt and capital lease obligations .................. (448) (116,620)
Proceeds from exercise of stock options and warrants ............ -- 112
--------- ---------
Net cash provided by financing activities 67,677 10,317
--------- ---------
Net decrease in cash and cash equivalents .............................. (2,031) (6,493)
Cash and cash equivalents at beginning of period ....................... 105,514 120,945
--------- ---------
Cash and cash equivalents at end of period ............................. $ 103,483 $ 114,452
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Unaudited)
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation, have been included.
These financial statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended September
30, 1996, included in the Company's Annual Report on Form 10-K, as amended.
NOTE B - Nature of Business
The Company's hospital business is seasonal in nature, with a reduced
demand for certain services generally occurring in the first fiscal quarter
around major holidays, such as Thanksgiving and Christmas, and during the summer
months comprising the fourth fiscal quarter. The Company's business is also
subject to general economic conditions and other factors. Accordingly, the
results of operations for the interim periods are not necessarily indicative of
the actual results expected for the year.
NOTE C - Supplemental Cash Flow Information
Below is supplemental cash flow information related to the three months
ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
For the Three Months ended
December 31
1995 1996
--------- --------
(In thousands)
<S> <C> <C>
Income taxes paid, net of refunds received........................................$ 700 $ 2,540
Interest paid, net of amounts capitalized......................................... 23,498 24,939
Notes payable assumed in connection with acquisitions of businesses............... 12,000 --
</TABLE>
5
<PAGE>
NOTE D - Long-Term Debt and Leases
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1996 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1996
------------- ------------
(In thousands)
<S> <C> <C>
Revolving Credit Agreement due through 2001
(6.9375% at December 31, 1996) ................... $105,593 $121,000
11.25% Senior Subordinated Notes due 2004 ............... 375,000 375,000
6.66% to 10.75% Mortgage and other notes
payable through 1999 ............................. 12,163 11,957
Variable rate secured notes due through 2013
(3.15% to 4.35% at December 31, 1996............ 60,875 60,825
7.5% Swiss Bonds ........................................ 6,443 6,443
3.2% to 11.50% capital lease obligations due through 2014 12,333 12,089
-------- --------
572,407 587,314
Less amounts due within one year ................. 5,751 5,785
Less debt service funds .......................... 349 327
-------- --------
$566,307 $581,202
======== ========
</TABLE>
On October 28, 1996, the Company entered into a new Credit Agreement with
certain financial institutions for a five-year senior secured reducing revolving
credit facility in an aggregate committed amount of $400 million (the "New
Revolving Credit Agreement"). The Company borrowed approximately $121.0 million
under the New Revolving Credit Agreement in October 1996 to (i) pay-off the
existing borrowings outstanding under the previous Revolving Credit Agreement
that was terminated and (ii) pay for fees and expenses related to the New
Revolving Credit Agreement.
The loans outstanding under the New Revolving Credit Agreement bear
interest (subject to certain potential adjustments) at a rate per annum equal to
one, two, three or six-month LIBOR plus 1.25% or the Prime Lending Rate.
Interest on Prime Lending Rate Loans is payable at the end of each fiscal
quarter and upon conversion to a LIBOR based loan. Interest on LIBOR based loans
is payable at the end of their respective one, two, three or six-month terms.
The Company recorded an extraordinary loss from the early extinguishment
of debt of approximately $3.0 million, net of tax, in the quarter ended December
31, 1996 to write off unamortized deferred financing costs related to its
previous Revolving Credit Agreement.
NOTE E - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1996
------------- ------------
<S> <C> <C>
Salaries and wages .................. $ 39,841 $ 36,433
Amounts due health insurance programs 27,223 15,345
Medical claims payable .............. 26,552 25,781
Interest ............................ 20,348 9,958
Other ............................... 75,635 76,038
-------- --------
$189,599 $163,555
======== ========
</TABLE>
6
<PAGE>
NOTE F - Facility Closures
During fiscal 1996, the Company consolidated, closed or sold nine
psychiatric facilities (the "Closed Facilities"). 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 $4.1 million related to
facility closures in fiscal 1996.
Severance and related benefits related to the closed facilities have been
fully paid as of December 31, 1996. Other exit costs paid and applied against
the resulting liabilities recorded during fiscal 1996 were approximately
$250,000 during the quarter ended December 31, 1996. -
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expenses and depreciation and amortization of
the Closed Facilities (in thousands):
<TABLE>
<CAPTION>
Quarter ended December 31,
--------------------------
1995 1996
---- ----
<S> <C> <C>
Net Revenue ................................... $12,740 $ 81
Salaries, supplies and other operating expenses
and bad dept expenses .................. 13,237 785
Depreciation and Amortization ................. 327 --
</TABLE>
The Company also recorded a charge of approximately $2.0 million in the
fourth quarter of fiscal 1996 related to severance and related benefits for
employees who were terminated pursuant to planned overhead reductions.
Substantially all of such severance and benefits have been paid through December
31, 1996.
NOTE G - Contingencies
The Company is self-insured for a substantial portion of its general and
professional liability risks. The reserves for self-insured general and
professional liability losses, including loss adjustment expenses, are based on
actuarial estimates that are discounted at an average rate of 6% to their
present value based on the Company's historical claims experience adjusted for
current industry trends. The reserve for unpaid claims is adjusted periodically
as such claims mature, to reflect changes in actuarial estimates based on actual
experience. While management and its actuaries believe that the present reserve
is reasonable, ultimate settlement of losses may vary from the amount provided.
Certain of the Company's subsidiaries are subject to claims, civil suits,
and governmental investigations and inquiries relating to their operations and
certain alleged business practices. In the opinion of management, based on
consultation with counsel, resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
On August 1, 1996, the United States Department of Justice, Civil
Division, filed its First Amended Complaint in a civil qui tam action initiated
in November of 1994 against the Company and its Orlando South hospital
subsidiary ("Charter Orlando") by two former employees. The First Amended
Complaint alleges that Charter Orlando violated the civil False Claims Act (the
"Act") in billing for inpatient treatment provided to elderly patients. The
Court granted the Company's motion to dismiss the government's First Amended
Complaint yet granted the government leave to its First Amended Complaint. The
government filed a Second Amended Complaint on December 12, 1996 which, similar
to the First Amended Complaint alleges that the Company and its subsidiary
violated the Act in billing for the treatment of geriatric patients. Like the
First Amended Complaint, the Second Amended Complaint is based on disputed
clinical and factual issues which the Company believes do not constitute a
violation of the Act. The Company and its subsidiary,therefore, have filed a
motion to dismiss the Second Amended Complaint. The Company
7
<PAGE>
and its subsidiary deny the allegations made in the Second Amended Complaint and
will vigorously defend against its claims. The Company does not believe this
matter will have a material adverse effect on its financial position or results
of operations.
8
<PAGE>
<TABLE>
<CAPTION>
NOTE H - Guarantor Condensed Consolidating Financial Statements
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, 1996
--------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
ASSETS Subsidiaries Subsidiaries Corporation)
------------ ------------ --------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents .......................................... $ 29,751 $ 79,552 $ 11,642
Accounts receivable, net ........................................... 139,523 44,904 5,451
Supplies ........................................................... 4,091 394 268
Other current assets ............................................... 8,379 121 14,074
----------- ----------- -----------
Total Current Assets ............................... 181,744 124,971 31,435
Assets restricted for settlement of unpaid claims and
other long-term liabilities ........................................ -- 78,542 26,761
Property and Equipment
Land ............................................................... 74,790 6,657 1,984
Buildings and improvements ......................................... 350,187 33,493 5,141
Equipment .......................................................... 112,748 25,206 8,961
----------- ----------- -----------
537,725 65,356 16,086
Accumulated depreciation ........................................... (111,556) (10,313) (4,184)
Construction in progress ........................................... 1,586 621 69
----------- ----------- -----------
427,755 55,664 11,971
Other Long-Term Assets (1) ................................................ 98,191 (56,176) 1,187,042
Goodwill, net ............................................................. 20,645 94,682 12,685
----------- ----------- -----------
$ 728,335 $ 297,683 $ 1,269,894
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................... $ 32,644 $ 34,057 $ 12,265
Accrued liabilities and income tax payable ......................... 57,948 55,208 76,443
Current maturities of long-term debt and capital lease obligations . 2,620 3,131 --
----------- ----------- -----------
Total Current Liabilities .......................... 93,212 92,396 88,708
Long-Term Debt and Capital Lease Obligations .............................. (455,333) 8,815 1,012,825
Deferred Income Tax Liabilities .......................................... -- (4,252) 16,620
Reserve for Unpaid Claims ................................................. -- 72,494 546
Deferred Credits and Other Long-Term Liabilities(1) ....................... 352,044 43,565 29,378
Minority interest ......................................................... -- -- --
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,007 shares ............................ 2,764 (483) 8,252
Committments and contingencies
Other Stockholders' Equity
Additional paid-in capital ......................................... 609,627 30,237 327,681
Retained earnings (Accumulated deficit) ............................ 126,826 58,932 (129,457)
Warrants outstanding ............................................... -- -- 54
Common Stock in treasury, 4,424 shares ............................. -- (4,736) (82,731)
Cumulative foreign currency adjustments ............................ (805) 715 (1,982)
----------- ----------- -----------
738,412 84,665 121,817
----------- ----------- -----------
$ 728,335 $ 297,683 $ 1,269,894
=========== =========== ===========
September 30, 1996
---------------------------
Consolidated
Elimination Consolidated
Entries Total
------------ ------------
Current Assets
Cash and cash equivalents .......................................... $ -- $ 120,945
Accounts receivable, net ........................................... -- 189,878
Supplies ........................................................... -- 4,753
Other current assets ............................................... -- 22,574
----------- -----------
Total Current Assets ............................... -- 338,150
Assets restricted for settlement of unpaid claims and
other long-term liabilities ........................................ -- 105,303
Property and Equipment
Land ............................................................... -- 83,431
Buildings and improvements ......................................... -- 388,821
Equipment .......................................................... -- 146,915
----------- -----------
-- 619,167
Accumulated depreciation ........................................... -- (126,053)
Construction in progress ........................................... -- 2,276
----------- -----------
-- 495,390
Other Long-Term Assets (1) ................................................ (1,155,775) 73,282
Goodwill, net ............................................................. -- 128,012
----------- -----------
$(1,155,775) $ 1,140,137
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................... $ -- $ 78,966
Accrued liabilities and income tax payable ......................... -- 189,599
Current maturities of long-term debt and capital lease obligations . -- 5,751
----------- -----------
Total Current Liabilities .......................... -- 274,316
Long-Term Debt and Capital Lease Obligations .............................. -- 566,307
Deferred Income Tax Liabilities .......................................... -- 12,368
Reserve for Unpaid Claims ................................................. -- 73,040
Deferred Credits and Other Long-Term Liabilities(1) ....................... (385,218) 39,769
Minority interest ......................................................... 52,520 52,520
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,007 shares ............................ (2,281) 8,252
Committments and contingencies
Other Stockholders' Equity
Additional paid-in capital ......................................... (639,864) 327,681
Retained earnings (Accumulated deficit) ............................ (185,758) (129,457)
Warrants outstanding ............................................... -- 54
Common Stock in treasury, 4,424 shares ............................. 4,736 (82,731)
Cumulative foreign currency adjustments ............................ 90 (1,982)
----------- -----------
(823,077) 121,817
----------- -----------
$(1,155,775) $ 1,140,137
=========== ===========
</TABLE>
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
The accompanying Notes to Condensed Consolidating Financial
Statements are an integral part of these balance sheets.
9
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands, except per share amounts)
December 31, 1996
--------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
ASSETS Subsidiaries Subsidiaries Corporation)
------------ ------------ --------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents .......................................... $ 49,927 $ 58,757 $ 5,768
Accounts receivable, net ........................................... 129,712 55,503 6,647
Supplies ........................................................... 4,220 390 303
Other current assets ............................................... 1,761 4,424 20,937
----------- ----------- -----------
Total Current Assets ............................... 185,620 119,074 33,655
Assets restricted for settlement of unpaid claims
and other long-term liabilities .................................... -- 71,872 22,914
Property and Equipment
Land ............................................................... 75,959 5,778 1,014
Buildings and improvements ......................................... 353,039 30,652 5,141
Equipment .......................................................... 113,971 27,106 9,140
----------- ----------- -----------
542,969 63,536 15,295
Accumulated depreciation ........................................... (118,994) (11,479) (4,610)
Construction in progress ........................................... 2,068 1,450 106
----------- ----------- -----------
426,043 53,507 10,791
Other Long-Term Assets (1) ................................................ 96,592 (55,377) 1,176,805
Goodwill, net ............................................................. 20,171 94,219 12,601
----------- ----------- -----------
$ 728,426 $ 283,295 $ 1,256,766
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................... $ 44,716 $ 23,106 $ 4,975
Accrued liabilities and income tax payable ......................... 55,839 56,699 51,017
Current maturities of long-term debt and capital lease obligations . 2,654 3,131 --
----------- ----------- -----------
Total Current Liabilities .......................... 103,209 82,936 55,992
Long-Term Debt and Capital Lease Obligations .............................. (473,615) 7,935 1,046,882
Deferred Income Tax Liabilities ........................................... -- (4,283) 16,533
Reserve for Unpaid Claims ................................................. -- 77,480 (7,031)
Deferred Credits and Other Long-Term Liabilities (1) ...................... 402,482 35,955 16,326
Minority interest ......................................................... -- -- --
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,030 shares ............................. 2,766 (483) 8,259
Commitments and contingencies ............................................. -- -- --
Other Stockholders' Equity
Additional paid-in capital ......................................... 735,915 35,947 328,390
Retained earnings (Accumulated deficit) ............................ (42,687) 52,683 (125,266)
Warrants outstanding ............................................... -- -- 54
Common stock in Treasury, 4,424 shares ............................. -- (4,736) (82,731)
Cumulative foreign currency adjustments ............................ 356 (139) (642)
----------- ----------- -----------
696,350 83,272 128,064
----------- ----------- -----------
$ 728,426 $ 283,295 $ 1,256,766
=========== =========== ===========
December 31, 1996
---------------------------
Consolidated
Elimination Consolidated
Entries Total
ASSETS ------------ ------------
Current Assets
Cash and cash equivalents .......................................... $ -- $ 114,452
Accounts receivable, net ........................................... -- 191,862
Supplies ........................................................... -- 4,913
Other current assets ............................................... -- 27,122
----------- -----------
Total Current Assets ............................... -- 338,349
Assets restricted for settlement of unpaid claims
and other long-term liabilities .................................... -- 94,786
Property and Equipment
Land ............................................................... -- 82,751
Buildings and improvements ......................................... -- 388,832
Equipment .......................................................... -- 150,217
----------- -----------
-- 621,800
Accumulated depreciation ........................................... -- (135,083)
Construction in progress ........................................... -- 3,624
----------- -----------
-- 490,341
Other Long-Term Assets (1) ................................................ (1,149,530) 68,490
Goodwill, net ............................................................. -- 126,991
----------- -----------
$(1,149,530) $ 1,118,957
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................... $ -- $ 72,797
Accrued liabilities and income tax payable ......................... -- 163,555
Current maturities of long-term debt and capital lease obligations . -- 5,785
----------- -----------
Total Current Liabilities .......................... -- 242,137
Long-Term Debt and Capital Lease Obligations .............................. -- 581,202
Deferred Income Tax Liabilities ........................................... -- 12,250
Reserve for Unpaid Claims ................................................. -- 70,449
Deferred Credits and Other Long-Term Liabilities (1) ...................... (424,724) 30,039
Minority interest ......................................................... 54,816 54,816
Stockholders' Equity
Common Stock, par value $0.25 per share; Authorized - 80,000 shares
Issued and outstanding - 33,030 shares ............................. (2,283) 8,259
Commitments and contingencies ............................................. -- --
Other Stockholders' Equity
Additional paid-in capital ......................................... (771,862) 328,390
Retained earnings (Accumulated deficit) ............................ (9,996) (125,266)
Warrants outstanding ............................................... -- 54
Common stock in Treasury, 4,424 shares ............................. 4,736 (82,731)
Cumulative foreign currency adjustments ............................ (217) (642)
----------- -----------
(779,622) 128,064
----------- -----------
$(1,149,530) $ 1,118,957
=========== ===========
</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.
10
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
For the Three Months ended December 31, 1995
--------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------ ------------ ----------------
<S> <C> <C> <C>
Net revenue ............................................................ $ 247,754 $ 44,528 $ 7,847
Costs and expenses
Salaries, supplies and other operating expenses ................ 193,846 37,360 4,584
Bad debt expense ................................................ 19,964 669 (845)
Depreciation and amortization ................................... 8,745 1,256 179
Interest, net ................................................... (10,100) 80 23,842
Stock option expense (credit) ................................... -- -- 1,823
--------- --------- ---------
212,455 39,365 29,583
--------- --------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ............................ 35,299 5,163 (21,736)
Provision for income taxes ............................................ 653 632 269
--------- --------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries ......... 34,646 4,531 (22,005)
Equity in earnings (loss) of subsidiaries .............................. 289 (301) 18,075
--------- --------- ---------
Net income (loss) ...................................................... $ 34,935 $ 4,230 $ (3,930)
========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities ........................ $ (15,884) $ 8,975 $ (7,993)
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................................ (3,919) (256) (193)
Acquisitions of businesses, net of cash acquired ................ -- 38,226 (85,553)
Proceeds from sale of assets .................................... 503 -- --
Increase in assets restricted for the settlement of unpaid claims -- (4,265) 651
--------- --------- ---------
Cash provided by (used in) investing activities ........................ (3,416) 33,705 (85,095)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt .............................. -- 125 68,000
Payments on debt and capital obligations ........................ (430) (18) --
--------- --------- ---------
Cash provided by (used in) financing activities ........................ (430) 107 68,000
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................... (19,730) 42,787 (25,088)
Cash and cash equivalents at beginning of period ....................... 60,719 10,279 34,516
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 40,989 $ 53,066 $ 9,428
========= ========= =========
Consolidated
Elimination Consolidated
Entries Total
------------ ------------
Net revenue ............................................................ $ (4,464) $ 295,665
Costs and expenses
Salaries, supplies and other operating expenses ................ (4,464) 231,326
Bad debt expense ................................................ -- 19,788
Depreciation and amortization ................................... -- 10,180
Interest, net ................................................... -- 13,822
Stock option expense (credit) ................................... -- 1,823
--------- ---------
(4,464) 276,939
--------- ---------
Income (loss) before income taxes and
equity in earnings (loss) of subsidiaries ............................ -- 18,726
Provision for income taxes ............................................ 6,405 7,959
--------- ---------
Income (loss) before equity in earnings (loss) of subsidiaries ......... (6,405) 10,767
Equity in earnings (loss) of subsidiaries .............................. (19,082) (1,019)
--------- ---------
Net income (loss) ...................................................... $ (25,487) $ 9,748
========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities ........................ $ -- $ (14,902)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................................ -- (4,368)
Acquisitions of businesses, net of cash acquired ................ -- (47,327)
Proceeds from sale of assets .................................... -- 503
Increase in assets restricted for the settlement of unpaid claims -- (3,614)
--------- ---------
Cash provided by (used in) investing activities ........................ -- (54,806)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt .............................. -- 68,125
Payments on debt and capital obligations ........................ -- (448)
--------- ---------
Cash provided by (used in) financing activities ........................ -- 67,677
--------- ---------
Net increase (decrease) in cash and cash equivalents ................... -- (2,031)
Cash and cash equivalents at beginning of period ....................... -- 105,514
--------- ---------
Cash and cash equivalents at end of period ............................. $ -- $ 103,483
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements are an
integral part of these statements.
11
<PAGE>
<TABLE>
<CAPTION>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands, except shares and per share amounts)
For the Three Months ended December 31, 1996
---------------------------------------------
Magellan
Health
Services, Inc.
Guarantor Nonguarantor (Parent
Subsidiaries Subsidiaries Corporation)
------------ ------------- -------------
<S> <C> <C> <C>
Net revenue ...................................................................... $ 223,877 $ 112,591 $ 10,706
Costs and expenses
Salaries, supplies and other operating expenses ........................... 177,681 100,260 6,537
Bad debt expense .......................................................... 19,024 1,211 0
Depreciation and amortization ............................................. 8,617 3,750 732
Interest, net ............................................................. (12,106) (443) 26,118
Stock option expense ...................................................... 0 0 604
--------- --------- ---------
193,216 104,778 33,991
--------- --------- ---------
Income (loss) from continuing operations before income taxes and
equity in earnings (loss) of subsidiaries ...................................... 30,661 7,813 (23,285)
Provision for (benefit from) income taxes ........................................ 831 2,855 2,389
--------- --------- ---------
Income (loss) from continuing operations before
equity in earnings (loss) of subsidiaries ...................................... 29,830 4,958 (25,674)
Equity in earnings (loss) of continuing subsidiaries ............................. (53) (1,842) 32,815
--------- --------- ---------
Income (loss) before extraordinary item .......................................... 29,777 3,116 7,141
Extraordinary item - loss on early extinguishment of debt (net of
income tax benefit of $1,967) .................................................. (1,193) 0 (2,950)
--------- --------- ---------
Net income (loss) ................................................................ $ 28,584 $ 3,116 $ 4,191
========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities .................................. $ 18,476 $ (22,153) $ (19,712)
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures ...................................................... (3,133) (3,663) (216)
Acquisition of businessess ................................................ (170) (1,442) 0
Decrease(increase) in assets restricted for the settlement of unpaid claims 0 6,670 3,711
Proceeds from the sale of assets .......................................... 4,822 0 0
--------- --------- ---------
Cash provided by (used in) investing activities .................................. 1,519 1,565 3,495
--------- --------- ---------
Cash Flows from Financing Activities:
Payments on debt and capital lease obligations ........................... (71,435) (207) (44,978)
Proceeds from the issuance of debt ........................................ 71,616 0 55,209
Proceeds from exercixe of stock options & warrants ........................ 0 0 112
--------- --------- ---------
Cash provided by (used in) financing activities .................................. 181 (207) 10,343
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............................. (20,176) (20,795) (5,874)
Cash and cash equivalents at beginning of period ................................. 29,751 79,552 11,642
--------- --------- ---------
Cash and cash equivalents at end of period ....................................... $ 49,927 $ 58,757 $ 5,768
========= ========= =========
Consolidated
Elimination Consolidated
Entries Total
---------------------------
Net revenue ...................................................................... $ (355) $ 346,819
Costs and expenses
Salaries, supplies and other operating expenses ........................... (355) 284,123
Bad debt expense .......................................................... 0 20,235
Depreciation and amortization ............................................. 0 13,099
Interest, net ............................................................. 0 13,569
Stock option expense ...................................................... 0 604
--------- ---------
(355) 331,630
--------- ---------
Income (loss) from continuing operations before income taxes and
equity in earnings (loss) of subsidiaries ...................................... 0 15,189
Provision for (benefit from) income taxes ........................................ 0 6,075
--------- ---------
Income (loss) from continuing operations before
equity in earnings (loss) of subsidiaries ...................................... 0 9,114
Equity in earnings (loss) of continuing subsidiaries ............................. (32,893) (1,973)
--------- ---------
Income (loss) before extraordinary item .......................................... (32,893) 7,141
Extraordinary item - loss on early extinguishment of debt (net of
income tax benefit of $1,967) .................................................. 1,193 (2,950)
--------- ---------
Net income (loss) ................................................................ $ (31,700) $ 4,191
========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating activities .................................. $ 0 $ (23,389)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ...................................................... 0 (7,012)
Acquisition of businessess ................................................ 0 (1,612)
Decrease(increase) in assets restricted for the settlement of unpaid claims 0 10,381
Proceeds from the sale of assets .......................................... 0 4,822
--------- ---------
Cash provided by (used in) investing activities .................................. 0 6,579
--------- ---------
Cash Flows from Financing Activities:
Payments on debt and capital lease obligations ........................... 0 (116,620)
Proceeds from the issuance of debt ........................................ 0 126,825
Proceeds from exercixe of stock options & warrants ........................ 0 112
--------- ---------
Cash provided by (used in) financing activities .................................. 0 10,317
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................. 0 (6,493)
Cash and cash equivalents at beginning of period ................................. 0 120,945
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 0 $ 114,452
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidating Financial Statements are an
integral part of these statements.
12
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
December 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements regarding the sufficiency of the Company's
liquidity and sources of capital and the statements under the heading "Outlook".
Actual results may differ materially from those projected in such forward
looking statements. These forward-looking statements are subject to certain
risks, uncertainties and other factors which could cause actual results to
differ materially from those anticipated, including, without limitation,
potential reductions in reimbursement by third-party payers and changes in
hospital payer mix, governmental budgetary constraints and healthcare reform,
the impact of potential hospital closures, competition in the provider business
and the managed care business, and the regulatory environment for the Company's
businesses, as well as the other factors discussed in Exhibit 99 hereto, which
is hereby incorporated by reference.
Green Spring Acquisition
On December 13, 1995, the Company acquired a 51% ownership interest in
Green Spring for approximately $68.9 million in cash, the issuance of 215,458
shares of Magellan Common Stock valued at approximately $4.3 million and the
contribution of GPA, a wholly-owned subsidiary of the Company, which became a
wholly-owned subsidiary of Green Spring. On December 20, 1995, the Company
acquired an additional 10% ownership interest in Green Spring for approximately
$16.7 million in cash as a result of an exercise by a minority stockholder of
its Exchange Option ("Exchange Option") for a portion of the stockholder's
interest in Green Spring. Green Spring provides managed behavioral healthcare
services, which includes utilization management, care management and employee
assistance programs through a 50-state provider network covering approximately
13.7 million people nationwide. The Company has accounted for the acquisition of
Green Spring using the purchase method of accounting, which resulted in
additional intangible assets of approximately $113 million.
The minority stockholders of Green Spring consist of four Blue Cross/Blue
Shield organizations (the "Blues") that are key customers of Green Spring. In
addition, two other Blues organizations that formerly owned a portion of Green
Spring have continued as customers of Green Spring. As of December 31, 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.
Psychiatric Hospital Results
Selected statistics (from the date of acquisition for acquired facilities)
for the psychiatric hospitals in operation by quarter for fiscal 1996 and fiscal
1997 are as follows:
13
<PAGE>
<TABLE>
<CAPTION>
Fiscal Fiscal %
1996 1997 Change
---------- ----------- --------
<S> <C> <C> <C>
Hospitals in operation:
December 31 .................... 102 95 (7)%
March 31 ....................... 99
June 30 ........................ 96
September 30 .................. 95
Average licensed beds at:
Quarter:
First ..................... 9,110 8,463 (7)%
Second .................... 9,040
Third ..................... 8,677
Fourth .................... 8,469
Year ........................... 8,805
Net revenue (in thousands):
Quarter:
First ..................... $ 253,565 $ 229,064 (9)%
Second .................... 257,690
Third ..................... 249,145
Fourth .................... 228,597
----------
Year ........................... $ 988,997
==========
Patient days:
Quarter:
First ..................... 432,474 392,352 (9)%
Second .................... 463,327
Third ..................... 452,864
Fourth .................... 404,346
----------
Year ........................... 1,753,011
==========
Equivalent patient days:
Quarter:
First ..................... 478,693 437,960 (9)%
Second .................... 513,502
Third ..................... 503,622
Fourth .................... 450,708
----------
Year ........................... 1,946,525
==========
Net revenue per equivalent patient day:
Quarter:
First ..................... $ 530 $ 523 (1)%
Second .................... 502
Third ..................... 495
Fourth .................... 507
Year ........................... 508
Admissions:
Quarter:
First ..................... 32,865 32,326 (2)%
Second .................... 37,966
Third ..................... 35,854
Fourth .................... 33,861
----------
Year ........................... 140,546
==========
Average length of stay (days):
Quarter:
First ..................... 12.4 11.5 (7)%
Second .................... 12.2
Third ..................... 12.5
Fourth .................... 12.5
Year ........................... 12.4
</TABLE>
Note: Includes Northstar Hospital in Anchorage, Alaska that is managed pursuant
to a joint venture arrangement.
14
<PAGE>
Results of Operations
The following table summarizes, for the periods indicated, changes in
selected operating indicators.
<TABLE>
<CAPTION>
Percentage of Net Revenue
--------------------------------------
For the Three Months Ended December 31
--------------------------------------
1995 1996
---------- ---------
<S> <C> <C>
Net revenue ................................... 100.% 100.%
Salaries, supplies and other operating expenses 78.2 82.0
Bad debt expense .............................. 6.7 5.8
--------- --------
Total expenses ................................ 84.9 87.8
Operating margin .............................. 15.1 12.2
========= ========
</TABLE>
Patient days at the Company's hospitals decreased 9% for the quarter ended
December 31, 1996, as compared to the same period of fiscal 1996. The decrease
resulted primarily from patient days attributable to the hospitals closed during
fiscal 1996 and a decline in average length of stay. Total admissions decreased
2% for the quarter ended December 31, 1996, as compared to the prior year
period. The decrease resulted primarily from the hospitals closed in fiscal 1996
offset by admissions growth of 4% at the Company's continuing hospitals.
The Company's net revenue for the quarter ended December 31, 1996 increased
17.3% compared to the same period in fiscal 1996. The increase resulted
primarily from the Green Spring acquisition reduced by the closure of hospitals
during fiscal 1996. Green Spring (excluding GPA), which was acquired on December
13, 1995, had revenues of approximately $10.7 million and $79.1 million for the
quarters ended December 31, 1995 and 1996, respectively. Net revenue for the
quarters ended December 31, 1995 and 1996 included $7.8 million and $11.0
million, respectively, for the normal settlement and adjustments related to
reimbursement issues related to earlier fiscal periods ("reimbursement issues").
Net revenue per equivalent patient day at the Company's psychiatric hospitals
decreased in the quarter ending December 31, 1996 by 1.3% compared to the same
period in the prior year. The decrease was primarily due to (i) continued shift
in payer mix from private payer sources to managed care payers, (ii) reduction
in payments from certain payers, including Medicare, and (iii) shifts in program
mix to residential treatment settings from acute care settings, offset by higher
revenues related to reimbursement issues.
The Company's salaries, supplies and other operating expenses increased
22.8% in the quarter ended December 31, 1996 compared to the same period in
fiscal 1996. The increase resulted primarily from the Green Spring acquisition
less the effect of hospitals closed during fiscal 1996. Expenses incurred by
Green Spring (excluding GPA) were approximately $9.1 million and $70.4 million
for the quarter ended December 31, 1995 and 1996, respectively.
The Company's bad debt expense increased 2.3% or approximately $447,000, in
the quarter ended December 31, 1996 compared to the same period in fiscal 1996.
Bad debt expense decreased to 5.8% of net revenue in the quarter ended December
31, 1996 compared to 6.7% for the prior year period. This decrease was primarily
the result of bad debt expense for Green Spring representing less than 1% of its
revenue in each period.
Depreciation and amortization increased 28.7% in the first quarter of
fiscal 1997 compared to the same period in fiscal 1996. The increase resulted
primarily from depreciation and amortization related to the Green Spring
Acquisition .
Stock option expense for the first quarter of fiscal 1997 decreased $1.2
million from the previous year primarily due to fluctuations in the market price
of the Company's common stock.
Minority interest increased $1.0 million in the first quarter of fiscal
1997 as compared to the prior year period.
15
<PAGE>
The increase is primarily due to the Company acquiring a controlling interest in
Green Spring in December 1995.
Recent Accounting Pronouncements
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which
became effective for fiscal years beginning after December 15, 1995. FAS 123
established new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense for
stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting in
APB Opinion No. 25 will be required to make pro forma disclosures of net income
and earnings per share as if the provisions of FAS 123 had been applied. The
Company is adopting FAS 123 in fiscal 1997 on a proforma disclosure basis.
Liquidity and Sources of Capital
Operating Activities. The Company's net cash used in operating
activities was approximately $14.9 million and $23.4 million for the quarters
ended December 31, 1995 and 1996, respectively. The Company had negative cash
flows from operations during the first quarter of fiscal 1996 and fiscal 1997
primarily as a result of insurance settlement payments ($14.0 million and $11.4
million for the quarters ended December 31, 1995 and December 31, 1996,
respectively) and the $21.1 million semi-annual interest payment paid in October
each year for the 11.25% Senior Subordinated Notes. Management believes that the
Company will have positive cash flows from operations in fiscal 1997, which will
be adequate to fund operations, capital expenditures and debt service
obligations.
Investing Activities. The Company acquired a 61% ownership interest in
Green Spring during the first quarter of fiscal 1996. The consideration paid for
Green Spring and related acquisition costs resulted in the use of cash of
approximately $87.2 million.
Management believes that its cash on hand, future cash flows from
operations, borrowing capacity under the New Revolving Credit Agreement and its
ability to issue debt and equity securities under current market conditions will
provide adequate capital resources to support the Company's anticipated
investing strategies.
Financing Activities. The Company borrowed approximately $68.1 million
and $15.4 million (excluding borrowings of approximately $115.6 million to pay
off the previous Revolving Credit Agreement), respectively, during the quarters
ended December 31, 1995 and 1996, primarily to fund the acquisition of Green
Spring in fiscal 1996 and to fund working capital needs and fees and expenses
related to the New Revolving Credit Agreement in fiscal 1997. The Company
believes that its businesses will generate sufficient cash flows from operations
to meet its future debt service requirements.
On September 27, 1996, the Company repurchased approximately 4.0
million shares of its Common Stock for approximately $73.5 million, including
transaction costs, pursuant to a "Dutch Auction" self-tender offer to its
stockholders. On November 1, 1996, the Company announced that its board of
directors approved the repurchase of an additional 3.0 million shares of its
Common Stock from time to time subject to the terms of the New Revolving Credit
Agreement. The Company expects to use cash on hand, future cash flows from
operations and borrowings under its New Revolving Credit Facility to fund any
future treasury stock purchases.
As of December 31, 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 December 31, 1996.
Outlook
On January 30, 1997, the Company announced that it had signed
definitive agreements for a series of transactions (the "Crescent Transactions")
with Crescent Real Estate Equities, limited partnership. ("Crescent"),
16
<PAGE>
which are described in "Item 5 - Other Information" and incorporated herein by
reference. The Company expects to close the Crescent Transactions in the third
quarter of fiscal 1997.
The Crescent Transactions, if consummated, would result in the Company
relinquishing control of substantially all of its domestic provider business.
The Company expects to record a loss before income taxes of approximately $45
million to $55 million as a result of the Crescent Transactions. In addition,
the Company believes that the Crescent Transactions would allow the holders of
the Company's 11.25% Senior Subordinated Notes (the "Notes") to put their notes
to the Company at 101% of face value. If the Company is required to repurchase
all of the Notes, it would record an extraordinary loss for the early
extinguishment of debt of approximately $7.5 million to $8.0 million, net of
tax.
The Company expects to have approximately $200 million of net proceeds
remaining from the Crescent Transactions ("Remaining Proceeds") after paying off
long-term debt, excluding any Notes repurchased. The Company also expects to
enter into a new credit agreement with a group of commercial banks prior to the
closing of the Crescent Transactions. Under the terms of the new credit
agreement, the Company may borrow up to $200 million plus additional unspecified
amounts sufficient to repurchase all of the Notes, if necessary. The Company
anticipates that the Crescent Transactions could result in reduced net income
until the Remaining Proceeds are used to repurchase Notes or are reinvested at
an acceptable rate of return to the Company.
If the Company is required to repurchase all the Notes as a result of
the Crescent Transactions, it would result in increased net income. However, the
Company's liquidity and capital resources would be significantly reduced, which
would limit the level of investing activities (e.q. acquisitions) the Company
may choose or be able to pursue.
The remaining portion of "Outlook" is prepared with a view toward the
existing operating structure of the Company as of December 31, 1996 before the
effects of the Crescent Transactions:
Management continually assesses events and changes in circumstances
that could affect 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 F for further information regarding
facility closures in fiscal 1996. 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 December 31, 1996 had operating
income of approximately $100,000 (net revenue less salaries, supplies and other
operating expenses and bad debt expense) in aggregate during fiscal 1996, and
operating income of approximately $200,000 in aggregate during the quarter ended
December 31, 1996, excluding the normal settlement of reimbursement issues. When
events or changes in circumstances are present that indicate the carrying amount
of long-lived assets may not be recoverable, the Company assesses the
recoverability of long-lived assets by determining whether the carrying value of
such assets will be recovered through future cash flows expected from the use of
the asset and its eventual disposition. The Company may record additional
impairment losses in future periods as circumstances warrant.
The Company's hospitals continue to experience a shift in payer mix to
managed care payers from other payers, which contributed to a reduction in
revenue per equivalent patient day in fiscal 1996 and the first quarter of
fiscal 1997 compared to prior periods. Management anticipates continued shifting
in its hospitals' payer mix towards
17
<PAGE>
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, 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.
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. No such reductions of expenses were recorded
during the first quarter of fiscal 1996 or fiscal 1997. While management and its
actuaries believe that the present reserve is reasonable, ultimate settlement of
losses may vary from the amount recorded and result in additional fluctuations
in income in future periods.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Certain of the Company's subsidiaries are subject to or parties to
claims, civil suits and governmental investigations and inquiries relating to
their operations and certain alleged business practices. In the opinion of
management, based on consultation with counsel, resolution of these matters will
not have a material adverse effect on the Company's financial position or
results or operations.
Item 5. - Other Information
On January 30, 1997, the Company announced that it had entered into a
definitive agreement to sell substantially all of its domestic hospital real
estate and related personal property (the "Assets") to Crescent. In addition,
the Company's domestic portion of its provider business segment will be operated
as a joint venture ("CBHS") that is equally owned by Magellan and an affiliate
of Crescent (the "Affiliate"). The Company will receive $400 million in cash,
subject to adjustment, and warrants in the Affiliate for the purchase of 2.5% of
the Affiliate's common stock, exercisable over 12 years, as consideration for
the assets. In addition to the assets, Crescent and the Affiliate will each
receive 1,283,500 warrants to purchase Magellan Common Stock at $30 per share,
exercisable over 12 years.
In related agreements, (i) Crescent will lease the real estate and
related assets to CBHS for annual rent beginning at $40 million, subject to
adjustment, with a 5% annual escalation clause compounded annually and (ii) CBHS
will pay Magellan approximately $81 million in annual franchise fees, subject to
increase, for the use of assets retained by Magellan and for support in certain
areas. The franchise fees paid by CBHS will be subordinated to the lease
obligation with Crescent. The assets retained by Magellan include, but are not
limited to, the "CHARTER" name, intellectual property, treatment protocols and
procedures, clinical quality management, operating processes and the
"1-800-CHARTER" telephone call center. Magellan will provide CBHS ongoing
support in areas including managed care contracting services, advertising and
marketing assistance, risk management services, outcomes monitoring, and
consultation on matters relating to reimbursement, government relations,
clinical strategies, regulatory matters, strategic planning and business
development.
The Company intends to initially use the proceeds from the sale of the
Assets to reduce its long-term debt, including borrowings under the New
Revolving Credit Agreement. The Company believes that under the terms of the
Notes indenture, these proposed transactions would allow the Noteholders to put
their Notes to the Company at 101% of face value. The Company intends to
maintain adequate cash reserves and borrowing capacity to extinguish all the
Notes, if necessary. The Noteholders right to put the Notes will expire up to 70
days subsequent to the consummation of the Crescent Transactions. The Company
intends to use the remaining proceeds from the sale of the Assets, if any after
debt reductions, to pursue acquisitions in its managed care and public sector
business segments, develop new products and increase managed care and public
sector marketing efforts.
The Company will account for its 50% investment in CBHS under the
equity method of accounting. The Company expects to record a loss before income
taxes of approximately $45 million to $55 million as a result of these proposed
transactions, including, but not limited to, the write off of certain
hospital-based intangible assets, collection fees associated with accounts
receivable and certain restructuring and exit costs offset by the expected gain
on the sale of the Assets.
These transactions are subject to approval by Magellan stockholders,
federal antitrust authorities and other customary closing conditions, including
the negotiation of certain financing matters.
19
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) 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, which was filed as Exhibit
4(ai) to the Company's Annual Report on Form 10-K for
the year ended September 30, 1996, and is
incorporated herein by reference.
27 Financial Data Schedule
99 Safe Harbor for Forward-Looking Statements under the
Private Litigation Reform Act of 1995: Certain
Cautionary Statements.
(b) Report on Form 8-K
There were no current reports on Form 8-K filed by
the Registrant with the Securities and Exchange
Commission during the quarter ended December 31,
1996.
20
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAGELLAN HEALTH SERVICES, INC.
(Registrant)
Date: February 11, 1997 /s/ Craig L. McKnight
------------------------ ---------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
Date: February 11, 1997 /s/ Howard A. McLure
------------------------ --------------------
Howard A. McLure
Vice President and Controller
(Principal Accounting Officer)
21
<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.
333-20371).
On January 30, 1997, the Company announced that it had signed
definitive agreements for a series of transactions (the "Crescent Transactions")
with Crescent Real Estate Equities, limited partnership ("Crescent"), which are
described in "Item 5 - Other Information". The Company expects to close the
Crescent Transactions in the third quarter of fiscal 1997. The following risk
factors are prepared with a view toward the existing operating structure of the
Company as of December 31, 1996 before the effects of the Crescent Transaction:
Limitations Imposed by the New Revolving Credit Agreement
and Senior Note Indenture
In May 1994, the Company entered into a Second Amended and Restated
Credit Agreement (the "Credit Agreement") with certain financial institutions
and issued $375 million of Senior Subordinated Notes (the "Senior Notes") to
institutional investors. The Credit Agreement was terminated in October 1996 and
the Company entered into a new Credit Agreement (the "New Revolving Credit
Agreement"). The New Revolving Credit Agreement and the indenture for the Senior
Notes contain a number of restrictive covenants which, among other things, limit
the ability of the Company and certain of its subsidiaries to incur other
indebtedness, enter into certain joint venture transactions, incur liens, make
certain restricted payments and investments, enter into certain business
combination and asset sale transactions and make capital expenditures. These
restrictions could adversely affect the Company's ability to conduct its
operations, finance its capital needs or to pursue attractive business
combinations and joint ventures if such opportunities arise. Under the New
Revolving Credit Agreement, the Company also is required to maintain certain
specified financial ratios. Failure by the Company to maintain such financial
ratios or to comply with the restrictions contained in the New Revolving Credit
Agreement and the indenture for the Senior Notes could cause such indebtedness
(and by reason of cross-acceleration provisions, other indebtedness) to become
immediately due and payable and/or could cause the cessation of funding under
the New Revolving Credit Agreement.
Acquisition Growth Strategy
The Company has historically grown through acquisitions. There can be
no assurance that the Company will be able to make successful acquisitions in
the future or that any such acquisitions will be successfully integrated into
its operations. In addition, future acquisitions could have an adverse effect
upon the Company's operating results, particularly in the fiscal quarters
immediately following the consummation of such transactions while the acquired
operations are being integrated into its operations.
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.
<PAGE>
("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.
Historical Operating Losses
The Company experienced losses from continuing operations before
reorganization items, extraordinary items and the cumulative effect of a change
in accounting principle during each fiscal year since the completion of a
management buyout in 1988 through fiscal 1995. Such losses amounted to $81.7
million for the ten-month period ended July 31, 1992, $8.1 million for the
two-month period ended September 30, 1992 and $39.6 million, $47.0 million and
$43.0 million for the fiscal years ended September 30, 1993, 1994 and 1995,
respectively. The Company reported net revenue and income from continuing
operations of approximately $1.35 billion and $32.4 million, respectively, for
the year ended September 30, 1996. The Company also reported net revenue and net
income from continuing operations before extraordinary items of approximately
$295.7 million and $9.7 million, respectively, compared to net revenue and
income from continuing operations before extraordinary items of $346.8 million
and $7.1 million, respectively, for the three months ended December 31, 1996.
There can be no assurance that the Company's profitability for the year ended
September 30, 1996 and the three months ended December 31, 1996 will continue in
future periods. The Company's history of losses could have an adverse effect on
its operations.
Potential Hospital Closures
The Company continually assesses events and changes in circumstances
that could 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.
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
December 31, 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 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
<PAGE>
conducts, failure to do so could adversely affect its operations.
Physician ownership of or investment in healthcare entities to which
they refer patients has come under increasing scrutiny at both state and federal
levels. Congress passed legislation (commonly referred to as "Stark I") which
prohibits physicians from referring Medicare patients for clinical laboratory
services to an entity with which the physician has a financial relationship. The
Department recently published final Stark I regulations on August 14, 1995. Such
regulations will govern how the Department views and reviews these financial
relationships. Additionally, Congress passed legislation (commonly referred to
as "Stark II") which prohibits physicians from referring Medicare or Medicaid
patients for certain designated health services, including inpatient and
outpatient hospital services, to entities in which they have an ownership or
investment interest or with which they have a compensation arrangement. The
entity is also prohibited from billing the Medicare or Medicaid programs for
such services rendered pursuant to a prohibited referral. To the extent
designated services are provided by the Company's provider and managed care
operations, physicians who have a financial relationship with the Company and
the Company will be subject to the provisions of Stark II. Some states have
passed similar legislation which prohibits the referral of private pay patients.
To date, the Department has not published Stark II regulations. However, the
Department indicated that it will review referrals involving any of the
designated services under the language and interpretations set forth in the
Stark I rule.
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 December 31, 1996,
approximately 35% of Green Spring's managed care members were under capitated
arrangements. During fiscal 1996, approximately 70% of Green Spring's revenues
were from at-risk contracts. Increases in utilization levels under capitated
contractual arrangements could adversely effect the operations of the managed
care business.
Some jurisdictions are taking the position that capitated agreements in
which the provider bears the risk should be regulated by insurance laws. In this
regard, Green Spring's primary customers are comprised of Blue Cross/Blue Shield
Plans and other insurance entities which are licensed insurance organizations in
their respective states. Green Spring offers "carved out" managed mental health
benefits, on a wholesale basis, as a vendor to the regulated insurance
organizations. Most current employer group relationships are also contracted
through the respective regulated insurance organizations. However, as Magellan
and Green Spring develop more direct risk arrangements on a retail basis
directly with employer groups or other non-insurance entity customers, the
Company may be required to obtain insurance licenses in the respective states
where the direct risk arrangements are to be pursued. There can be no assurance
that the Company can obtain the insurance licenses required by the respective
states in a timely or cost effective manner to respond to market demand.
Mental Health Parity Legislation
In October 1996, President Clinton signed a bill submitted by the U.S.
Congress that prohibits health plans from setting annual or lifetime caps on
mental health coverage ("parity") at levels below those set for general
<PAGE>
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 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
ON PAGES 1, 2, AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 114,452,000
<SECURITIES> 0
<RECEIVABLES> 191,862,000
<ALLOWANCES> 0
<INVENTORY> 4,913,000
<CURRENT-ASSETS> 338,349,000
<PP&E> 625,424,000
<DEPRECIATION> 135,083,000
<TOTAL-ASSETS> 1,118,957,000
<CURRENT-LIABILITIES> 242,137,000
<BONDS> 581,202,000
<COMMON> 8,259,000
0
0
<OTHER-SE> 119,805,000
<TOTAL-LIABILITY-AND-EQUITY> 1,118,957,000
<SALES> 346,819,000
<TOTAL-REVENUES> 346,819,000
<CGS> 0
<TOTAL-COSTS> 284,123,000
<OTHER-EXPENSES> 13,703,000
<LOSS-PROVISION> 20,235,000
<INTEREST-EXPENSE> 13,569,000
<INCOME-PRETAX> 15,189,000
<INCOME-TAX> 6,075,000
<INCOME-CONTINUING> 7,141,000
<DISCONTINUED> 0
<EXTRAORDINARY> 2,950,000
<CHANGES> 0
<NET-INCOME> 4,191,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0
</TABLE>
