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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1076937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3414 PEACHTREE ROAD, N.E.,
SUITE 1400
ATLANTA, GEORGIA 30326
(404) 841-9200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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DAVID J. HANSEN, ESQ.,
GENERAL COUNSEL
MAGELLAN HEALTH SERVICES, INC.
3414 PEACHTREE ROAD, N.E.,
SUITE 1400
ATLANTA, GEORGIA 30326
(404) 841-9200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPY TO:
PHILIP A. THEODORE, ESQ.
KING & SPALDING
191 PEACHTREE ROAD
ATLANTA, GEORGIA 30303-1763
(404) 572-4600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of the Registration Statement.
--------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED (1) PER UNIT (2) OFFERING PRICE (3) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.25 par value per share........... 37,825 $.01 $300.00 $.09
</TABLE>
(1) The maximum number of shares that may be issued by the Registrant under its
agreements in connection with the acquisition of shares of the Common Stock,
no par value, of Care Management Resources, Inc. ("CMR Common Stock")
assuming that the market price of a share of the Registrant's Common Stock
is $26.438, which was the closing price on May 19, 1998, as reported on the
New York Stock Exchange.
(2) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(f)(2), under the Securities Act of 1933, as amended,
the offering price is based on the stated value of the CMR Common Stock as
of March 31, 1998. There were 400,000 shares of issued and outstanding CMR
Common Stock on such date, having an aggregate stated value of $12,000.
(3) The Registrant may obtain a maximum of 30,000 shares of CMR Common Stock.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
37,825 SHARES
MAGELLAN HEALTH SERVICES, INC.
COMMON STOCK
($.25 PAR VALUE)
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The 37,825 shares (the "Shares") of common stock, $.25 par value per share
("Common Stock"), of Magellan Health Services, Inc. ("Magellan" or the
"Company") that are being hereby registered may be offered for sale from time to
time by and for the account of Paul G. Shoffeitt (the "Selling Stockholder").
See "Selling Stockholder." Magellan will not receive any of the proceeds from
the sale of the Shares by the Selling Stockholder. The Selling Stockholder may
acquire the Shares, or a portion thereof, by exercising certain options granted
to him pursuant to an Option Agreement, dated as of December 4, 1997, between
the Company and the Selling Stockholder (the "Option Agreement").
Magellan is registering the Shares as required by the Option Agreement, to
provide the Selling Stockholder with freely tradeable securities. Magellan has
also agreed to pay all fees and expenses incident to such registration, other
than any underwriting discounts or any selling commissions payable in respect of
sales of the Shares, which will be paid by the Selling Stockholder. Magellan
expects to pay fees and expenses of approximately $25,000 in connection with the
preparation and filing of the registration statement of which this Prospectus is
a part (the "Registration Statement"). Magellan has agreed to keep the
Registration Statement effective on a continual basis until December 31, 2001,
subject to certain extensions.
The Common Stock is listed on the New York Stock Exchange under the symbol
"MGL." On May 19, 1998, the last reported sale price of the Common Stock on the
New York Stock Exchange was $26.438 per share.
The sale or distribution of all or any portion of the Shares offered hereby
may be effected from time to time by the Selling Stockholder directly,
indirectly through brokers or dealers or in a distribution by one or more
underwriters on a firm commitment or best efforts basis, on the New York Stock
Exchange, in the over-the-counter market, on any national securities exchange on
which shares of the Common Stock are listed or traded, in privately negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. See
"Plan of Distribution." To the extent required, the names of any agent or
broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." The Selling
Stockholder reserves the sole right to accept or reject, in whole or in part,
any proposed purchase of the Shares to be made directly or through agents.
The Selling Stockholder and any agents or broker-dealers that participate
with the Selling Stockholder in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended
(the "1933 Act"), and any commissions received by them and any profit on the
resale of the Shares may be deemed to be underwriting commissions or discounts
under the 1933 Act.
THERE ARE CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE SHARES. FOR A
DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS" BEGINNING ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY , 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the 1933 Act covering
the Shares being offered by this Prospectus. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement, certain items of which are contained in
exhibits and schedules to the Registration Statement as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Shares offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, and financial statements and notes
filed as a part thereof. Statements made in this Prospectus concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Copies of such material can be obtained from
the Public Reference Section of the Commission, at Room 1024, Judiciary Plaza,
450 Fifth Street, NW, Washington, D.C. 20549 at prescribed rates. In addition,
such reports, proxy statements and other information can be inspected and copied
at the public reference facility referred to above and at Regional Offices of
the Commission located at Seven World Trade Center, Suite 1300, New York, New
York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission also maintains a Web site that contains reports,
proxy statements and other information regarding registrants that file
electronically with the SEC. The address of such site is http:// www.sec.gov.
The Common Stock is listed for trading on the New York Stock Exchange and
reports, proxy statements and other information concerning the Company may be
inspected at the office of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
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'
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the Company
(Commission File No. 1-6639) are incorporated by reference into this Prospectus:
(i) The Company's Current Report on Form 8-K, filed on June 30, 1997, which
includes pro forma financial information for the Crescent Transactions
(as defined);
(ii) The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, filed on December 23, 1997;
(iii) The Company's Proxy Statement on Schedule 14A, filed on January 9,
1998;
(iv) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1997, filed on February 17, 1998;
(v) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998, filed on May 15, 1998;
(vi) The Company's Current Report on Form 8-K, filed on December 17, 1997,
which includes the audited financial statements of HAI (as defined) and
pro forma information for the Company's acquisition of HAI;
(vii) The Company's Current Report on Form 8-K/A, filed on April 3, 1998,
which includes the audited financial statements of Merit (as defined)
and pro forma financial information for the Acquisition (as defined);
(viii) The Company's Current Report on Form 8-K, filed on April 8, 1998, which
includes pro forma financial information for the CBHS Transactions (as
defined);
(ix) The description of the Common Stock in the Company's registration
statement on Form 8-A filed on December 27, 1996.
In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering made pursuant to the Registration
Statement shall be deemed to be incorporated by reference into and to be a part
of this Prospectus from the date of filing of such documents. Any statement
contained in a document so incorporated by reference shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained in this Prospectus, or in any other subsequently filed
document which is also incorporated by reference or deemed to be incorporated by
reference, modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed to constitute a part of this Prospectus except
as so modified or superseded.
The Company will provide, without charge, to each person to whom this
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents incorporated by reference (not including
exhibits to such documents unless such exhibits are specifically incorporated by
reference in such documents). Requests for copies of such documents should be
directed to Mr. Kevin Helmintoller, Vice President--Investor Relations, Magellan
Health Services, Inc., 3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia
30326, telephone (404) 841-9200. These documents may also be accessed from the
Commission's Web site which is located at http://www.sec.gov.
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<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS SET FORTH BELOW OR INCORPORATED HEREIN BY
REFERENCE. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES HEREIN TO THE
"COMPANY" REFER TO MAGELLAN HEALTH SERVICES, INC. AND ITS CONSOLIDATED
SUBSIDIARIES. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS REFER TO YEARS
ENDED SEPTEMBER 30. DATA PRESENTED IN THIS PROSPECTUS ON A PRO FORMA BASIS FOR
THE YEAR ENDED SEPTEMBER 30, 1997 GIVE EFFECT TO: (I) THE CRESCENT TRANSACTIONS
(AS DEFINED); (II) THE COMPANY'S ACQUISITION (THE "ACQUISITION") OF MERIT
BEHAVIORAL CARE CORPORATION ("MERIT"), WHICH WAS CONSUMMATED ON FEBRUARY 12,
1998; (III) THE COMPANY'S ACQUISITION OF HUMAN AFFAIRS INTERNATIONAL,
INCORPORATED ("HAI"), WHICH WAS CONSUMMATED ON DECEMBER 4, 1997; (IV) THE
COMPANY'S ACQUISITION OF ALLIED HEALTH GROUP, INC. AND CERTAIN OF ITS AFFILIATES
("ALLIED"), WHICH WAS CONSUMMATED ON DECEMBER 5, 1997; (V) MERIT'S ACQUISITION
OF CMG HEALTH, INC. ("CMG"), WHICH WAS CONSUMMATED ON SEPTEMBER 12, 1997; (VI)
EACH OF THE OTHER TRANSACTIONS (AS DEFINED) AND (VII) THE CBHS TRANSACTIONS (AS
DEFINED). ON MARCH 3, 1998, THE COMPANY ENTERED INTO DEFINITIVE AGREEMENTS WITH
CRESCENT OPERATING, INC. ("COI") AND CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
("CBHS") TO, AMONG OTHER THINGS, SELL THE COMPANY'S FRANCHISE OPERATIONS,
CERTAIN DOMESTIC PROVIDER OPERATIONS AND CERTAIN OTHER ASSETS AND OPERATIONS
(THE "CBHS TRANSACTIONS"). SEE "--CBHS TRANSACTIONS." UNLESS OTHERWISE
INDICATED, ALL INDUSTRY DATA SET FORTH IN THIS PROSPECTUS HAVE BEEN DERIVED FROM
"MANAGED BEHAVIORAL HEALTH MARKET SHARE IN THE UNITED STATES 1997-1998"
PUBLISHED BY OPEN MINDS, GETTYSBURG, PENNSYLVANIA (HEREINAFTER REFERRED TO AS
"OPEN MINDS "). THE INFORMATION PROVIDED IN THIS PROSPECTUS WITHOUT REFERENCE TO
A SPECIFIC DATE IS CURRENT AS OF THE DATE OF THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS AND INCORPORATES BY REFERENCE CERTAIN
"FORWARD-LOOKING STATEMENTS." THOSE STATEMENTS INCLUDE, AMONG OTHER THINGS, THE
DISCUSSIONS OF THE COMPANY'S BUSINESS STRATEGY AND EXPECTATIONS CONCERNING THE
COMPANY'S POSITION IN THE INDUSTRY, FUTURE OPERATIONS, MARGINS, PROFITABILITY,
LIQUIDITY AND CAPITAL RESOURCES. ALL THESE FORWARD-LOOKING STATEMENTS ARE BASED
ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY THAT, ALTHOUGH
BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE
SHOULD NOT BE PLACED UPON SUCH STATEMENTS AND ESTIMATES. NO ASSURANCE CAN BE
GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED, AND IT IS
LIKELY THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE IDENTIFIED IN THE RISK FACTORS DISCUSSED BELOW. IN
LIGHT OF THESE AND OTHER UNCERTAINTIES, THE INCLUSION OF A FORWARD-LOOKING
STATEMENT HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY THAT
THE COMPANY'S PLANS AND OBJECTIVES WILL BE ACHIEVED.
THE COMPANY
OVERVIEW
According to enrollment data reported in OPEN MINDS, the Company is the
nation's largest provider of managed behavioral healthcare services, offering a
broad array of cost-effective managed behavioral healthcare products. As a
result of the Acquisition, the Company has over 60.5 million covered lives under
managed behavioral healthcare contracts and manages behavioral healthcare
programs for over 4,000 customers. Through its current network of over 34,000
providers and 2,000 treatment facilities, the Company manages behavioral
healthcare programs for Blue Cross/Blue Shield organizations, health maintenance
organizations ("HMOs") and other insurance companies, corporations, federal,
state and local governmental agencies, labor unions and various state Medicaid
programs. The Company believes it has the largest and most comprehensive
behavioral healthcare provider network in the United States as a result of the
Acquisition. In addition to the Company's managed behavioral healthcare
products, the Company offers specialty managed care products related to the
management of certain chronic conditions. The Company also offers a broad
continuum of behavioral healthcare services to approximately 3,100 individuals
who receive healthcare benefits funded by state and local governmental agencies
through National Mentor, Inc., its wholly-owned public-sector provider
("Mentor"). Furthermore, the Company franchises the "CHARTER" System of
behavioral healthcare to the acute-care psychiatric hospitals and other
behavioral care facilities operated by CBHS, an entity in which the Company owns
a 50% equity
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interest. If the CBHS Transactions are consummated, the Company will no longer
have franchise operations or an ownership interest in CBHS.
The Company's professional care managers coordinate and manage the delivery
of behavioral healthcare treatment services through the Company's network of
providers, which includes psychiatrists, psychologists, licensed clinical social
workers, marriage and family therapists and licensed clinical professional
counselors. The treatment services provided by the Company's extensive
behavioral provider network include outpatient programs (such as counseling and
therapy), intermediate care programs (such as sub-acute emergency care,
intensive outpatient programs and partial hospitalization services), inpatient
treatment services and alternative care services (such as residential treatment,
home and community-based programs and rehabilitative and support services). The
Company provides these services through: (i) risk-based products, (ii) employee
assistance programs ("EAPs"), (iii) administrative services-only products ("ASO
products") and (iv) products that combine features of some or all of these
products. Under risk-based products, the Company arranges for the provision of a
full range of behavioral healthcare services for beneficiaries of its customers'
healthcare benefit plans through fee arrangements under which the Company
assumes all or a portion of the responsibility for the cost of providing such
services in exchange for a fixed per member per month fee. Under EAPs, the
Company provides assessment services to employees and dependents of its
customers, and if required, referral services to the appropriate behavioral
healthcare service provider. Under ASO products, the Company provides services
such as utilization review, claims administration and provider network
management. The Company does not assume the responsibility for the cost of
providing healthcare services pursuant to its ASO products. As a result of the
Acquisition, based on total covered lives, the Company is the industry leader
with respect to risk-based, ASO, EAP and integrated products, according to
enrollment data reported in OPEN MINDS. For its fiscal year ended September 30,
1997, on a pro forma basis, risk-based, ASO, EAP and integrated products would
have accounted for 73%, 12%, 9% and 5%, respectively, of the Company's managed
behavioral healthcare net revenues.
The Company was incorporated in 1969 under the laws of the State of
Delaware. The Company's principal executive offices are located at 3414
Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326, and its telephone
number is (404) 841-9200.
HISTORY
The Company has historically derived the majority of its revenue as a
provider of healthcare services in an inpatient setting. Payments from third
party payors are the principal source of revenue for most healthcare providers.
In the early 1990's, many third party payors sought to control the cost of
providing care to their patients by instituting managed care programs or seeking
the assistance of managed care companies. Providers participating in managed
care programs agree to provide services to patients for a discount from
established rates, which generally results in pricing concessions by the
providers and lower margins. Additionally, managed care programs generally
encourage alternatives to inpatient treatment settings and the reduced
utilization of inpatient services. As a result, third party payors established
managed care programs or engaged managed care companies in many areas of
healthcare, including behavioral healthcare. The Company, which until June 1997
was the largest operator of psychiatric hospitals in the United States, was
adversely affected by the adoption of managed care programs by third party
payors.
Prior to the first quarter of fiscal 1996, the Company was not a provider of
behavioral managed care services. During the first quarter of fiscal 1996, the
Company acquired a 61% ownership interest in Green Spring. At that time, the
Company intended to become a fully integrated behavioral healthcare provider by
combining the managed behavioral healthcare products offered by Green Spring
with the direct treatment services offered by the Company's psychiatric
hospitals. The Company believed that an entity that participated in both the
managed care and provider segments of the behavioral healthcare industry could
more efficiently provide and manage behavioral healthcare for insured
populations than an entity that was
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solely a managed care company. The Company also believed that earnings from its
managed care business would offset, in part, the negative impact on the
financial performance of its psychiatric hospitals caused by managed care. Green
Spring was the Company's first significant involvement in managed behavioral
healthcare. During the first quarter of fiscal 1998, the minority shareholders
of Green Spring converted their interests in Green Spring into an aggregate of
2,831,516 shares of Company Common Stock (the "Green Spring Minority Shareholder
Conversion").
Subsequent to the Company's acquisition of Green Spring, the growth of the
managed behavioral healthcare industry accelerated. Under the Company's majority
ownership, Green Spring increased its base of covered lives from 12.0 million as
of the end of calendar year 1995 to 21.1 million as of the end of calendar year
1997, a compound annual growth rate of over 32%. While growth in the industry
was accelerating, the managed behavioral healthcare industry also began to
consolidate. The Company concluded that consolidation presented an opportunity
for the Company to enhance its stockholder value by increasing its participation
in the managed behavioral healthcare industry, which the Company believed
offered growth and earnings prospects superior to those of the psychiatric
hospital industry. Therefore, the Company decided to sell its domestic
psychiatric facilities to obtain capital for expansion in the managed behavioral
healthcare business.
The Company took a significant step toward implementing this strategy during
the third quarter of fiscal 1997, when it sold substantially all of its domestic
acute care psychiatric hospitals and residential treatment facilities
(collectively, the "Psychiatric Hospital Facilities") to Crescent Real Estate
Equities Limited Partnership ("Crescent") for $417.2 million in cash (before
costs of approximately $16.0 million) and certain other consideration.
Simultaneously with the sale of the Psychiatric Hospital Facilities, the Company
and COI, an affiliate of Crescent, formed CBHS, a joint venture, to operate the
Psychiatric Hospital Facilities and certain other facilities transferred to CBHS
by the Company. The Company retained a 50% ownership of CBHS; the other 50% of
the equity of CBHS is owned by COI.
In related transactions, (i) Crescent leased the Psychiatric Hospital
Facilities to CBHS and (ii) the Company entered into a master franchise
agreement (the "Master Franchise Agreement") with CBHS and a franchise agreement
with each of the Psychiatric Hospital Facilities and the other facilities
operated by CBHS (collectively, the "Franchise Agreements"). The Company's sale
of the Psychiatric Hospital Facilities and the related transactions described
above are referred to as the "Crescent Transactions." Pursuant to the Franchise
Agreements, the Company franchises the "CHARTER" System of behavioral healthcare
to each of the Psychiatric Hospital Facilities and other facilities operated by
CBHS. In exchange, CBHS agreed to pay the Company, pursuant to the Master
Franchise Agreement, annual franchise fees (the "Franchise Fees") of
approximately $78.3 million. However, CBHS's obligation to pay the Franchise
Fees is subordinate to its obligation to pay rent for the Psychiatric Hospital
Facilities to Crescent.
The sale of the Psychiatric Hospital Facilities provided the Company with
approximately $200 million of net cash proceeds after debt repayment for use in
implementing its business strategy. The Company used the net cash proceeds to
finance the acquisition of additional managed care companies. Specifically, on
December 4, 1997, the Company consummated the purchase of HAI, formerly a unit
of Aetna/U.S. Healthcare ("Aetna"). HAI provides managed care services to
approximately 16.3 million covered lives, primarily through EAPs and other
managed behavioral healthcare plans. In addition, on December 5, 1997, the
Company purchased the assets of Allied. Allied provides specialty risk-based
products and administrative services to a variety of insurance companies and
other customers, including Blue Cross of New Jersey, CIGNA and NYLCare, for its
3.7 million members. Allied has over 80 physician networks across the eastern
United States. Allied's networks include physicians specializing in cardiology,
oncology and diabetes. The Company continues to pursue a strategy of expanding
its managed care operations and of reducing the extent to which its earnings are
derived from the psychiatric hospital business. In this regard, the Company has
further implemented its business strategy through the Acquisition.
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On March 3, 1998, the Company entered into definitive agreements with COI
and CBHS to, among other things, sell the Company's franchise operations,
certain domestic provider operations and certain other assets and operations. If
the CBHS Transactions are consummated, the Company will have completed the
divestiture of substantially all of its domestic provider operations. See "CBHS
Transactions."
RECENT DEVELOPMENTS
THE ACQUISITION. On February 12, 1998, the Company consummated its
acquisition of Merit for cash consideration of approximately $448.9 million plus
the repayment of Merit's debt. Merit manages behavioral healthcare programs for
approximately 800 customers across all segments of the healthcare industry,
including HMOs, Blue Cross/Blue Shield organizations and other insurance
companies, corporations and labor unions, federal, state and local governmental
agencies and various state Medicaid programs, and provides managed care services
to approximately 21.6 million covered lives at the time of the Acquisition,
including approximately 10.6 million risk-based lives. On September 12, 1997,
Merit completed the acquisition of CMG. CMG is a national managed behavioral
healthcare company with over two million covered lives, including over 1.9
million risk-based lives. Merit paid approximately $48.7 million in cash and
issued approximately 739,000 shares of Merit common stock as consideration for
CMG.
THE TRANSACTIONS. On February 12, 1998, in connection with the consummation
of the Acquisition, the Company consummated certain related transactions
(together with the Acquisition, collectively, the "Transactions"), as follows:
(i) the Company terminated its existing credit agreement (the "Magellan Existing
Credit Agreement"); (ii) the Company repaid all loans outstanding pursuant to
and terminated Merit's existing credit agreement (the "Merit Existing Credit
Agreement") (the Magellan Existing Credit Agreement and the Merit Existing
Credit Agreement are hereinafter referred to as the "Existing Credit
Agreements"); (iii) the Company consummated a tender offer for its 11 1/4%
Series A Senior Subordinated Notes due 2004 (the "Magellan Outstanding Notes");
(iv) Merit consummated a tender offer for its 11 1/2% Senior Subordinated Notes
due 2005 (the "Merit Outstanding Notes") (the Magellan Outstanding Notes and the
Merit Outstanding Notes are hereinafter referred to collectively as the
"Outstanding Notes" and such tender offers are hereinafter referred to
collectively as the "Debt Tender Offers"); (v) the Company entered into a new
senior secured bank credit agreement (the "New Credit Agreement") with The Chase
Manhattan Bank ("Chase") and a syndicate of financial institutions, providing
for credit facilities of $700 million; and (vi) the Company issued its 9% Senior
Subordinated Notes due 2008 (the "Old Notes") pursuant to an indenture, dated
February 12, 1998, between the Company and Marine Midland Bank, as Trustee (the
"Indenture"). The Company intends to effect an exchange offer in which it will
exchange its 9% Series A Senior Subordinated Notes (the "New Notes") for the Old
Notes. The Old Notes and the New Notes are collectively referred to hereinafter
as the "Notes."
GREEN SPRING MINORITY SHAREHOLDER CONVERSION. The minority shareholders of
Green Spring have converted their interests in Green Spring into an aggregate of
2,831,516 shares of Company Common Stock. Such conversion is referred to as the
"Green Spring Minority Shareholder Conversion." As a result of the Green Spring
Minority Shareholder Conversion, the Company owns 100% of Green Spring.
CBHS TRANSACTIONS. On March 3, 1998, the Company and certain of its wholly
owned subsidiaries entered into definitive agreements with COI and CBHS pursuant
to which the Company will, among other things, sell the Company's franchise
operations, certain domestic provider operations and certain other assets and
operations. The definitive agreements include: (i) an equity purchase agreement
between the Company and COI (the "Equity Purchase Agreement"); (ii) a purchase
agreement between the Company, certain of its wholly owned subsidiaries and CBHS
(the "Purchase Agreement"); and (iii) a support agreement between the Company
and COI (the "Support Agreement"). Pursuant to the Equity Purchase Agreement,
the Company agreed to sell to COI the Company's common and preferred equity
interest in CBHS. Pursuant to the Purchase Agreement, the Company and certain of
its wholly owned subsidiaries
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agreed to sell to CBHS: (i) Charter Advantage, LLC, the entity that conducts the
Company's franchise operations; (ii) Charter System, LLC, which owns the
intellectual property comprising the "CHARTER" system of behavioral healthcare;
(iii) Group Practice Affiliates, Inc., the Company's physician practice
management business ("GPA"); (iv) certain behavioral staff model operations; (v)
the Company's Puerto Rican provider management business; (vi) Golden Isle
Assurance Company, Ltd., one of the Company's captive insurance companies
("Golden Isle"); and (vii) Strategic Advantage, Inc., which owns certain
intellectual property used by the Company to monitor clinical results
("Strategic Advantage"). The obligations of CBHS and the Company to consummate
the transactions contemplated by the Purchase Agreement are also subject to,
among other things, the execution of either (i) a Joint Venture Purchase
Agreement pursuant to which the Company will sell to CBHS, for no additional
consideration, its interest in six hospital-based joint ventures that are
managed by CBHS on behalf of the Company (the "Joint Ventures") or (ii)
amendments to the services agreements between the Company and certain
subsidiaries of CBHS relating to the Joint Ventures pursuant to which the
Company will transfer to CBHS all rights to receive certain distributions with
respect to the Joint Ventures and pursuant to which CBHS would assume all
obligations of the Company with respect to the Joint Ventures, in each case
arising after consummation of the CBHS Transactions. The Purchase Agreement
further provides that at the time of the closing of the CBHS Transactions, the
Company and CBHS will execute an amendment to the Master Franchise Agreement
stating that: (i) during the period from February 1, 1998 until the closing of
the CBHS Transactions, the Franchise Fees will be reduced from $6.5 million per
month to $5.0 million per month and (ii) all such Franchise Fees and all accrued
and unpaid Franchise Fees as of March 3, 1998 shall be due and payable 180 days
after the closing of the CBHS Transactions.
Among other things, the Support Agreement obligates COI to provide CBHS
assistance in obtaining financing for its payment obligation under the Purchase
Agreement, including its agreement to: (i) provide assistance in the preparation
of any offering documents required in connection with CBHS's efforts to obtain
financing, (ii) reimburse CBHS for all expenses incurred in connection with
obtaining financing, and (iii) purchase up to $25.0 million of CBHS securities
if necessary to permit CBHS to obtain the required financing. The Support
Agreement also obligates COI, under certain circumstances, to pay the Company a
termination fee equal to $2.5 million in cash and the number of shares of COI
common stock obtained by dividing $2.5 million by the average closing price of a
share of COI common stock for the five trading days prior to the termination of
the Purchase Agreement and for the five trading days after the termination of
the Purchase Agreement, if the CBHS Transactions are not consummated as a result
of the failure of CBHS to obtain sufficient financing for its payment
obligations under the Purchase Agreement.
Upon consummation of the CBHS Transactions, the Company will receive $280.0
million in cash, pursuant to the Purchase Agreement and, pursuant to the Equity
Purchase Agreement, the number of shares of COI common stock obtained by
dividing $30.0 million by the average closing price of a share of COI common
stock for the ten trading days preceding consummation of the CBHS Transactions.
The Company expects to use the cash proceeds, after transaction costs of
approximately $8.0 million, to repay indebtedness outstanding under the term
loan facility of the New Credit Agreement (the "Term Loan Facility"). The CBHS
Transactions are expected to close in the third quarter of fiscal 1998. There
can be no assurance that the Company will consummate the CBHS Transactions.
The obligations of the Company and CBHS to consummate the transactions
contemplated by the Equity Purchase Agreement and the Support Agreement are
conditioned upon the execution and delivery of a services purchase agreement
(the "Services Purchase Agreement"). It is expected that the Services Purchase
Agreement would obligate the Company to purchase from CBHS a designated minimum
amount of behavioral healthcare services for gate-kept risk-based covered lives
if CBHS meets certain standards required of it pursuant to the Provider Services
Agreement (as defined). If the CBHS Transactions are consummated, the Company
also expects to enter into a provider services agreement (the "Provider Services
Agreement") with CBHS pursuant to which the Company would grant CBHS status as a
national preferred provider of behavioral healthcare services to the Company for
ten years provided that CBHS complies during the term of the Provider Services
Agreement with enhanced clinical, quality assurance, reporting and customer
service standards in addition to the standards currently required of other
providers of such services to the Company.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
SHARES.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
As a result of the Transactions, the Company is currently highly leveraged,
with indebtedness that is substantial in relation to its stockholders' equity.
As of March 31, 1998, the Company's aggregate outstanding indebtedness was
approximately $1.2 billion and the Company's stockholders' equity was
approximately $182.0 million as of the same date. The New Credit Agreement and
the Indenture permit the Company to incur or guarantee certain additional
indebtedness, subject to certain limitations.
The Company's high degree of leverage could have important consequences to
owners of Common Stock, including, but not limited to, the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness; (iii) the Company is substantially more leveraged than certain
of its competitors, which might place the Company at a competitive disadvantage;
(iv) the Company may be hindered in its ability to adjust rapidly to changing
market conditions; and (v) the Company's high degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or its
business or in the event of adverse changes in the regulatory environment
applicable to the Company.
The Company's ability to repay or to refinance its indebtedness and to pay
interest on its indebtedness will depend on its financial and operating
performance, which, in turn, is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors, many of which
are beyond the Company's control. These factors could include operating
difficulties, increased operating costs, the actions of competitors, regulatory
developments and delays in implementing strategic projects. The Company's
ability to meet its debt service and other obligations may depend in significant
part on the extent to which the Company can successfully implement its business
strategy. There can be no assurance that the Company will be able to implement
its strategy fully or that the anticipated results of its strategy will be
realized.
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets or seek to obtain additional equity capital or
to restructure its debt. There can be no assurance that the Company's cash flow
and capital resources will be sufficient for payment of principal of and
interest on its indebtedness in the future, or that any such alternative
measures would be successful or would permit the Company to meet its scheduled
debt service obligations. The value of the Common Stock would be adversely
affected if the Company were unable to fund its debt service obligations.
In addition, because the Company's obligations under the New Credit
Agreement bear interest at floating rates, an increase in interest rates could
adversely affect, among other things, the Company's ability to meet its debt
service obligations.
HISTORY OF UNPROFITABLE OPERATIONS
The Company experienced losses from continuing operations before
extraordinary items in each fiscal year from 1993 through 1995. Such losses
amounted to $39.6 million, $47.0 million and $43.0 million for the fiscal years
ended September 30, 1993, 1994 and 1995, respectively. Merit experienced losses
before cumulative effects of accounting changes in fiscal 1996 and 1997 of $16.9
million and $13.9 million, respectively. The Company reported net revenue and
net income of approximately $1.35 billion and $32.4
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million, respectively, for fiscal 1996 and net revenue and income before
extraordinary items of approximately $1.2 billion and $4.8 million,
respectively, for fiscal 1997. The Company's fiscal 1997 net income included a
loss on the Crescent Transactions of $35.9 million, net of taxes. There can be
no assurance that the Company's profitability will continue in future periods.
RESTRICTIVE FINANCING COVENANTS
The New Credit Agreement and the Indenture contain a number of covenants
that restrict the operations of the Company and its subsidiaries. In addition,
the New Credit Agreement requires the Company to comply with specified financial
ratios and tests, including a minimum interest coverage ratio, a maximum
leverage ratio, a minimum net worth test, a maximum senior debt ratio and a
minimum "EBITDA" (as defined in the New Credit Agreement). There can be no
assurance that the Company will be able to comply with such covenants, ratios
and tests in the future. The Company's ability to comply with such covenants,
ratios and tests may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants, ratios or tests could result in a default under the New Credit
Agreement that would permit the lenders thereunder to declare all amounts
outstanding thereunder to be immediately due and payable, together with accrued
and unpaid interest. The breach of any such covenants, ratios or tests could
result in a default under the Notes that would permit the trustee pursuant to
the Indenture to declare the principal amount of the Notes to be immediately due
and payable, together with accrued and unpaid interest. If the indebtedness
outstanding pursuant to the New Credit Agreement or the Notes were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay such indebtedness and the other indebtedness of the Company.
The value of the Common Stock would be adversely affected if the Company were
unable to repay such indebtedness.
CHANGE OF CONTROL
The occurrence of a change of control with respect to the Company may result
in a default, or otherwise require repayment of indebtedness, under both the
Indenture and the New Credit Agreement. In addition, the New Credit Agreement
prohibits the repayment of the Notes by the Company upon the occurrence of a
change of control, unless and until such time as the indebtedness under the New
Credit Agreement is repaid in full. The Company's failure to make such
repayments in such instances would result in a default under both the Indenture
and the New Credit Agreement. Future indebtedness of the Company may also
contain restrictions or repayment requirements with respect to certain events or
transactions that could constitute a change of control. In the event of a change
of control, there can be no assurance that the Company would have sufficient
assets to satisfy all of its obligations under the Notes or the New Credit
Agreement.
The provisions of the Indenture and the New Credit Agreement imposing
restrictions or repayment requirements with respect to a change of control, as
well as certain provisions of the Delaware General Corporation Law and the
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that investors
might be willing to pay in the future for Common Stock which could in turn
adversely affect the ability of the Company to sell additional Common Stock.
RISK-BASED PRODUCTS
As a result of the Acquisition, revenues under risk-based contracts are the
primary source of the Company's revenue from its managed behavioral care
business. On a pro forma basis, such revenues would have accounted for
approximately 56% of the Company's total revenue and 73% of its managed
behavioral healthcare revenue in fiscal 1997. Under a risk-based contract, the
Company assumes all or a portion of the responsibility for the cost of providing
a full or specified range of behavioral healthcare treatment
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services to a specified beneficiary population in exchange, generally, for a
fixed fee per member per month. In order for such contracts to be profitable,
the Company must accurately estimate the rate of service utilization by
beneficiaries enrolled in programs managed by the Company and control the unit
cost of such services. If the aggregate cost of behavioral healthcare treatment
services provided to a given beneficiary population in a given period exceeds
the aggregate of the per member per month fees received by the Company with
respect to the beneficiary population in such period, the Company will incur a
loss with respect to such beneficiary population during such period.
Furthermore, the Company may be required to pay during any period amounts with
respect to behavioral healthcare treatment services provided to a given
beneficiary population that exceed per member per month fees received with
respect to such beneficiary population during the same period. There can be no
assurance that the Company's assumptions as to service utilization rates and
costs will accurately and adequately reflect actual utilization rates and costs,
nor can there be any assurance that increases in behavioral healthcare costs or
higher-than-anticipated utilization rates, significant aspects of which are
outside the Company's control, will not cause expenses associated with such
contracts to exceed the Company's revenue for such contracts. In addition, there
can be no assurance that adjustments will not be required to the estimates,
particularly those regarding cost of care, made in reporting historical
financial results. The Company will attempt to increase membership in its
risk-based products following the Acquisition. If the Company is successful in
this regard, the Company's exposure to potential losses from its risk-based
products will also be increased. Furthermore, certain of such contracts and
certain state regulations limit the profits that may be earned by the Company on
risk-based business and may require refunds if the loss experience is more
favorable than that originally anticipated. Such contracts and regulations may
also require the Company or certain of its subsidiaries to reserve a specified
amount of cash as financial assurance that it can meet its obligations under
such contracts. As of March 31, 1998, the Company had cash reserves of $57.6
million pursuant to such contracts and regulations. Such amounts will not be
available to the Company for general corporate purposes. Furthermore, certain
state regulations restrict the ability of subsidiaries that offer risk-based
products to pay dividends to the Company. Certain state regulations relating to
the licensing of insurance companies may also adversely affect the Company's
risk-based business. See "--Regulation."
RELIANCE ON CUSTOMER CONTRACTS
On a pro forma basis, approximately 78% of the Company's revenue in fiscal
1997 would have been derived from contracts with payors of behavioral healthcare
benefits. The Company's managed care contracts typically have terms of one to
three years, and in certain cases contain renewal provisions providing for
successive terms of between one and two years (unless terminated earlier).
Substantially all of these contracts are immediately terminable with cause and
many, including some of the Company's most significant contracts, are terminable
without cause by the customer upon the provision of requisite notice and the
passage of a specified period of time (typically between 60 and 180 days), or
upon the occurrence of certain other specified events. On a pro forma basis, the
Company's ten largest managed behavioral healthcare customers would have
accounted for approximately 47% of the Company's managed behavioral healthcare
revenue for fiscal 1997. One of such contracts, an agreement between HAI and
Aetna, represents 21% of the Company's pro forma covered lives and would have
represented 5% of its pro forma managed behavioral healthcare revenues for
fiscal 1997. The contract expires on December 3, 2003. There can be no assurance
that such contracts will be extended or successfully renegotiated or that the
terms of any new contracts will be comparable to those of existing contracts.
Loss of all of these contracts or customers would, and loss of any one of these
customers could, have a material adverse effect on the Company. In addition,
price competition in bidding for contracts can significantly affect the
financial terms of any new or renegotiated contract. The Company's customers may
reevaluate their contractual arrangements with the Company as a result of the
consummation of the Transactions.
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SERVICES PURCHASE AGREEMENT
The obligations of the Company and CBHS to consummate the transactions
contemplated by the Equity Purchase Agreement and the Support Agreement are
conditioned upon the execution and delivery of the Services Purchase Agreement.
It is expected that the Services Purchase Agreement would obligate the Company
to purchase from CBHS a designated minimum amount of behavioral healthcare
services for gate-kept risk-based covered lives, subject to certain conditions,
and to make certain payments to CBHS if it fails to do so. It is expected that
such payments could equal up to $59.4 million, subject to increases pursuant to
the terms of the Services Purchase Agreement. There can be no assurance that the
Company will not be required to make such payments.
DEPENDENCE ON GOVERNMENT SPENDING FOR MANAGED HEALTHCARE; POSSIBLE IMPACT OF
HEALTHCARE REFORM
A significant portion of the Company's managed care revenue is derived,
directly or indirectly, from federal, state and local governmental agencies,
including state Medicaid programs. Reimbursement rates vary from state to state,
are subject to periodic negotiation and may limit the Company's ability to
maintain or increase rates. The Company is unable to predict the impact on the
Company's operations of future regulations or legislation affecting Medicaid or
Medicare programs, or the healthcare industry in general, and there can be no
assurance that future regulations or legislation will not have a material
adverse effect on the Company. Moreover, any reduction in government spending
for such programs could also have a material adverse effect on the Company. In
addition, the Company's contracts with federal, state and local governmental
agencies, under both direct contract and subcontract arrangements, generally are
conditioned upon financial appropriations by one or more governmental agencies,
especially with respect to state Medicaid programs. These contracts generally
can be terminated or modified by the customer if such appropriations are not
made. Finally, some of the Company's contracts with federal, state and local
governmental agencies, under both direct contract and subcontract arrangements,
require the Company to perform additional services if federal, state or local
laws or regulations imposed after the contract is signed so require, in exchange
for additional compensation to be negotiated by the parties in good faith.
Government and other third-party payors are generally seeking to impose lower
reimbursement rates and to renegotiate reduced contract rates with service
providers in a trend toward cost control.
In August 1997, Congress enacted the Balanced Budget Act of 1997 (the
"Budget Act"). The Medicare-related provisions of the Budget Act are designed to
reduce Medicare expenditures over the next five years by $115 billion, compared
to projected Medicare expenditures before adoption of the Budget Act. The
Congressional Budget Office projected in July 1997 that $43.8 billion of the
reductions would come from reduced payments to hospitals, $21.8 billion from
increased enrollment in managed care plans and $11.7 billion from reduced
payments to physicians and ambulatory care providers. The five-year savings in
projected Medicare payments to physicians and hospitals would be achieved under
the Budget Act by reduced fee-for-service reimbursement and by changes in
managed care programs designed to increase enrollment of Medicare beneficiaries
in managed care plans. The increase in Medicare enrollment in managed care plans
would be achieved in part by allowing provider-sponsored organizations and
preferred provider organizations to compete with Medicare HMOs for Medicare
enrollees.
The Medicaid-related provisions of the Budget Act are designed to achieve
net federal Medicaid savings of $14.6 billion over the next five years and $56.4
billion over the next ten years. The Budget Act achieves federal Medicaid
savings in three areas. First, two-thirds of the savings over the next ten years
are attributable to limitations on federal matching payments to states for
reimbursements to "disproportionate share" hospitals. The next largest source of
federal savings is a provision allowing states to shift the cost of Medicaid
deductibles and coinsurance requirements for low-income Medicaid beneficiaries
from their Medicaid programs to physicians and other providers. Most of the
remaining savings derive from the repeal of the "Boren Amendment" and other
minimum payment guarantees for hospitals, nursing homes and community health
centers that serve Medicaid patients. These changes may have an adverse effect
on
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the Company if they result in reduced payment levels for providers of managed
behavioral healthcare services.
Prior to adoption of the Budget Act, the states were prohibited from
requiring Medicaid recipients to enroll in managed care products that covered
only Medicaid recipients. The Medicaid laws required that the states enroll
Medicaid recipients in products that also covered a specific number of
commercial enrollees. This requirement of the Medicaid laws was intended to
limit the ability of the states to reduce coverage levels for Medicaid
recipients below those offered to commercial enrollees. Under prior law, the
Secretary of the United States Department of Health and Human Services (the
"Department") could waive the prohibition. The Medicaid-related provisions of
the Budget Act give states broad flexibility to require most Medicaid recipients
to enroll in managed care products that only cover Medicaid recipients, without
obtaining a waiver from the Secretary of the Department that was required under
prior law. The Budget Act also allows states to limit the number of managed care
organizations with which the state will contract to deliver care to Medicaid
beneficiaries. These changes could have a positive impact on the Company's
business, if they result in increased enrollment of Medicaid beneficiaries in
managed care organizations and increased Medicaid spending on managed care.
However, these changes also may have an adverse effect on the Company if a
number of states decide to limit the number of managed care organizations with
which they will contract and to select the organization solely on the basis of
the cost of care, which could result in increased cost competition for state
contracts.
The Company cannot predict the effect of the Budget Act, or other healthcare
reform measures that may be adopted by Congress or state legislatures, on its
managed care operations and no assurance can be given that either the Budget Act
or other healthcare reform measures will not have an adverse effect on the
Company.
REGULATION
The managed healthcare industry and the provision of behavioral healthcare
services are subject to extensive and evolving state and federal regulation. The
Company is subject to certain state laws and regulations, including those
governing: (i) the licensing of insurance companies, HMOs, preferred provider
organizations ("PPOs"), third-party administrators ("TPAs") and companies
engaged in utilization review and (ii) the licensing of healthcare
professionals, including restrictions on business corporations from practicing,
controlling or exercising excessive influence over behavioral healthcare
services through the direct employment of psychiatrists or, in a few states,
psychologists and other behavioral healthcare professionals. In addition, the
Company is subject to certain federal laws as a result of the role the Company
assumes in connection with managing its customers' employee benefit plans. The
Company's managed care operations are also indirectly affected by regulations
applicable to the establishment and operation of behavioral healthcare clinics
and facilities.
The Company believes its operations are structured to comply with applicable
laws and regulations in all material respects and that it has received, or is in
the process of applying for, all licenses and approvals material to the
operation of its business. In many states, entities that assume risk under
contracts with licensed insurance companies or HMOs have not been considered by
state regulators to be conducting an insurance or HMO business. As a result, the
Company has not sought licensure as either an insurer or HMO in certain states.
Regulators in some states, however, have determined that risk assuming activity
by entities that are not themselves providers of care is an activity that
requires some form of licensure. There can be no assurance that other states in
which the Company operates will not adopt a similar view, thus requiring the
Company to obtain additional licenses. Such additional licensure might require
the Company to maintain minimum levels of deposits, net worth, capital, surplus
or reserves, or limit the Company's ability to pay dividends, make investments
or repay indebtedness. The imposition of these additional licensure requirements
could increase the Company's cost of doing business or delay the Company's
conduct or expansion of its business.
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Regulators may impose operational restrictions on entities granted licenses
to operate as insurance companies or HMOs. For example, the California
Department of Corporations (the "DOC") imposed certain restrictions on the
Company in connection with its issuance of an approval of the Company's
acquisition of HAI, including restrictions on the ability of the California
subsidiary of HAI to fund the Company's operations in other states and on the
ability of the Company to make certain operational changes with respect to HAI's
California subsidiary. The DOC imposed substantially identical restrictions on
the Company in connection with the Company's acquisition of Merit. The Company
does not believe such restrictions will materially impact its integration plan.
See "--Integration of Operations."
In addition, utilization review and TPA activities conducted by the Company
are regulated by many states, which states impose requirements upon the Company
that increase its business costs. The Company believes that its TPA activities
performed for its self-insured employee benefit plan customers are exempt from
otherwise applicable state licensing or registration requirements based upon
federal preemption under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and has relied on this general principle in determining not
to seek licensure for certain of its activities in many states. Existing case
law is not uniform on the applicability of ERISA preemption with respect to
state regulation of utilization review or TPA activities. There can be no
assurance that additional licensure will not be required with respect to
utilization review or TPA activities in certain states.
State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which the Company's operations are subject have
broad discretionary powers. A regulatory agency or a court in a state in which
the Company operates could take a position under existing or future laws or
regulations, or change its interpretation or enforcement practices with respect
thereto, that such laws or regulations apply to the Company differently than the
Company believes such laws and regulations apply or should be enforced. The
resultant compliance with, or revocation of, or failure to obtain, required
licenses and governmental approvals could result in significant alteration to
the Company's business operations, delays in the expansion of the Company's
business and lost business opportunities, any of which, under certain
circumstances, could have a material adverse effect on the Company.
The laws of some states limit the ability of a business corporation to
directly provide, control or exercise excessive influence over behavioral
healthcare services through the direct employment of psychiatrists,
psychologists, or other behavioral healthcare professionals. In addition, the
laws of some states prohibit psychiatrists, psychologists, or other healthcare
professionals from splitting fees with other persons or entities. These laws and
their interpretations vary from state to state and enforcement by the courts and
regulatory authorities may vary from state to state and may change over time.
The Company believes that its operations as currently conducted are in material
compliance with the applicable laws, however there can be no assurance that the
Company's existing operations and its contractual arrangements with
psychiatrists, psychologists and other healthcare professionals will not be
successfully challenged under state laws prohibiting fee splitting or the
practice of a profession by an unlicensed entity, or that the enforceability of
such contractual arrangements will not be limited. The Company believes that it
could, if necessary, restructure its operations to comply with changes in the
interpretation or enforcement of such laws and regulations, and that such
restructuring would not have a material adverse effect on its operations.
Several states in which the Company does business have adopted, or are
expected to adopt, "any willing provider" laws. Such laws typically impose upon
insurance companies, PPOs, HMOs or other types of third-party payors an
obligation to contract with, or pay for the services of, any healthcare provider
willing to meet the terms of the payor's contracts with similar providers.
Compliance with any willing provider laws could increase the Company's costs of
assembling and administering provider networks and could, therefore, have a
material adverse effect on its operations.
The Company's managed care operations are also generally affected by
regulations applicable to the operations of healthcare clinics and facilities.
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INTEGRATION OF OPERATIONS
As a result of the Company's acquisition of Merit and HAI, the Company is
the largest provider of managed behavioral healthcare services in the United
States, according to the enrollment data reported in OPEN MINDS. The Company's
ability to operate its acquired managed care businesses successfully depends on
how well and how quickly it integrates the acquired businesses with its existing
operations. The Company expects to achieve approximately $60.0 million of cost
savings on an annual basis within eighteen months following the consummation of
the Acquisition. However, as the Company implements the integration process, it
may need to implement enhanced operational, financial and information systems
and may require additional employees and management, operational and financial
resources. There can be no assurance that the Company will be able to implement
and maintain such operational, financial and information systems successfully or
successfully obtain, integrate and utilize the required employees and
management, operational and financial resources to achieve the successful
integration of the acquired businesses with its existing operations. Failure to
implement such systems successfully and to use such resources effectively could
have a material adverse effect on the Company. Furthermore, implementing such
operational, financial and information systems or obtaining such employees and
management could reduce the cost savings the Company expects to achieve.
HIGHLY COMPETITIVE INDUSTRY
The industry in which the Company conducts its managed care business is
highly competitive. The Company competes with large insurance companies, HMOs,
PPOs, TPAs, provider groups and other managed care companies. Many of the
Company's competitors are significantly larger and have greater financial,
marketing and other resources than the Company, and some of the Company's
competitors provide a broader range of services. The Company may also encounter
substantial competition in the future from new market entrants. Many of the
Company's customers that are managed care companies may, in the future, seek to
provide managed behavioral healthcare services to their employees or subscribers
directly, rather than contracting with the Company for such services.
SUBORDINATION OF FRANCHISE FEES
The Company owns a 50% equity interest in CBHS, from which it receives the
Franchise Fees. The Franchise Fees represent a significant portion of the
Company's earnings and cash flows. The Franchise Fees payable to the Company by
CBHS are subordinated in right of payment to the $41.7 million annual base rent,
5% minimum escalator rent and, in certain circumstances, certain additional rent
due to Crescent. If CBHS encounters a decline in earnings or financial
difficulties, such amounts due to Crescent will be paid before any Franchise
Fees are paid. The remainder of CBHS's available cash will then be applied in
such order of priority as CBHS may determine, in the reasonable discretion of
the CBHS governing board, to all other operating expenses of CBHS, including the
current and accumulated Franchise Fees. The Company will be entitled to pursue
all available remedies for breach of the Master Franchise Agreement, except that
the Company does not have the right to take any action that could reasonably be
expected to force CBHS into bankruptcy or receivership.
As a result of the Crescent Transactions, the Company no longer controls the
operations of the Psychiatric Hospital Facilities and other facilities operated
by CBHS. Accordingly, factors that the Company does not control will likely
influence the amount of the equity in the earnings of CBHS and the amount of
Franchise Fees that the Company will realize in the future. For example, CBHS
may pursue acquisitions in markets where it does not currently have a presence
and in markets where it has existing hospital operations. Furthermore, CBHS may
consolidate services in selected markets by closing additional facilities
depending on market conditions and evolving business strategies. If CBHS closes
additional psychiatric hospitals, it could result in charges to income for the
costs attributable to the closure, which would result in lower equity in
earnings of CBHS for the Company and receipt by the Company of less than the
agreed to amount of Franchise Fees.
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Based on projections of fiscal 1998 operations prepared by management of
CBHS, the Company believes that CBHS will be unable to pay the full amount of
the Franchise Fees it is contractually obligated to pay the Company during
fiscal 1998. The Company currently estimates that CBHS will be able to pay
approximately $58.0 million to $68.0 million of the Franchise Fees in fiscal
1998, a $10.0 million to $20.0 million shortfall relative to amounts payable
under the Master Franchise Agreement.
PROFESSIONAL LIABILITY; INSURANCE
The management and administration of the delivery of managed behavioral
healthcare services, like other healthcare services, entail significant risks of
liability. The Company is regularly subject to lawsuits alleging malpractice and
related legal theories, some of which involve situations in which participants
in the Company's programs have committed suicide. The Company is also subject to
claims of professional liability for alleged negligence in performing
utilization review activities, as well as for acts and omissions of independent
contractors participating in the Company's third-party provider networks. The
Company is subject to claims for the costs of services denied. There can be no
assurance that the Company's procedures for limiting liability have been or will
be effective, or that one or more lawsuits will not have a material adverse
effect on the Company in the future.
The Company carries professional liability insurance, subject to certain
deductibles. There can be no assurance that such insurance will be sufficient to
cover any judgments, settlements or costs relating to present or future claims,
suits or complaints or that, upon expiration thereof, sufficient insurance will
be available on favorable terms, if at all. If the Company is unable to secure
adequate insurance in the future, or if the insurance carried by the Company is
not sufficient to cover any judgments, settlements or costs relating to any
present or future actions or claims, there can be no assurance that the Company
will not be subject to a liability that could have a material adverse effect on
the Company.
The Company has certain liabilities relating to the self-insurance program
it maintained with respect to its provider business prior to the Crescent
Transactions.
16
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Shares are eligible for sale in the open market without restriction. In
January 1996, the Company issued, in a private placement transaction, 4,000,000
shares of Common Stock (the "Rainwater Shares") to Rainwater-Magellan Holdings,
L.P. ("Rainwater-Magellan"), along with warrants ("Warrants") to purchase an
additional 2,000,000 shares of Common Stock (i.e., the Underlying Warrant
Shares) for $26.15 per share. The Warrants expire on January 25, 2000. The
Rainwater Shares are eligible for sale in the open market without restriction.
Any Underlying Warrant Shares issued upon exercise of the Warrants will be
eligible for sale in the open market without restriction. Warrants to purchase
57,004 shares of Common Stock were distributed by Rainwater-Magellan to three of
its limited partners in redemption of their partnership interests. Pursuant to a
pro-rata distribution, Rainwater, Inc. and Richard E. Rainwater received 39,724
and 2,417,554 shares of Common Stock, respectively, from Rainwater-Magellan. In
connection with the Crescent Transactions in June 1997, the Company issued to
Crescent and COI separate warrants to acquire a total of 2,566,622 shares of
Common Stock for $30.00 per share that expire in installments during the years
2001 through 2009. The shares of Common Stock issued upon the exercise of such
Warrants will be eligible for sale in the open market without restriction. In
connection with the Green Spring Minority Shareholder Conversion, 2,831,516
shares of Common Stock are eligible for sale in the open market without
restriction. As of March 31, 1998, the Company's officers, directors and
employees held options for the purchase of 3,906,499 shares of Common Stock
(2,698,507 of which are vested and 1,207,992 of which are subject to vesting
periods of up to four years in duration). Upon exercise, the shares of Common
Stock underlying such options will be eligible for sale on the open market
without restriction, except that directors and certain officers of the Company
must effect such sales pursuant to Rule 144 under the 1933 Act. Following this
offering, sales and potential sales of shares of Common Stock in the public
market pursuant to Rule 144 or otherwise could adversely affect the prevailing
market prices for the Common Stock and impair the Company's ability to raise
additional equity capital.
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 the Company's
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
the Company's Common Stock in any given period. As a result, the market for the
Company's Common Stock may experience price and volume fluctuations unrelated to
the operating performance of the Company.
CBHS RISK FACTORS
The following factors are relevant to an understanding of the risks
associated with CBHS's business and the ability of CBHS to pay Franchise Fees to
the Company.
POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS AND CHANGES IN
HOSPITAL PAYOR MIX. CBHS's hospitals have been adversely affected by factors
influencing the entire psychiatric hospital industry. Such factors include: (i)
the imposition of more stringent length of stay and admission criteria and other
cost containment measures by payors; (ii) the failure of reimbursement rate
increases from certain payors 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 business that CBHS derives from payors that reimburse on a
per diem or other discounted basis; (iv) a trend toward higher deductibles and
co-insurance for individual patients; (v) a trend toward limiting employee
behavorial health benefits, such as reductions in annual and lifetime limits on
behavioral health coverage; and (vi) pricing pressure related to an increasing
rate of claims denials by third party payors. Any of these factors may result in
reductions in the amounts that CBHS's hospitals can expect to collect per
patient day for services provided or the number of equivalent patient days.
17
<PAGE>
For the fiscal year ended September 30, 1997, CBHS derived approximately 24%
of its gross psychiatric patient service revenue from managed care organizations
(primarily HMOs and PPOs), 22% from other private payors (primarily commercial
insurance and Blue Cross), 27% from Medicare, 18% from Medicaid, 2% from the
Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") and
7% from other government programs. Changes in the mix of CBHS's patients among
the private-pay, Medicare and Medicaid categories, and among different types of
private-pay sources, could significantly affect the profitability of CBHS's
hospital operations. Moreover, there can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs of providing care to patients covered by such programs.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM. In the 1995 and
1996 sessions of the United States Congress, the focus of healthcare legislation
was 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. The Budget Act, which was signed into law by
President Clinton in August 1997, reduces federal spending by an estimated $140
billion. The majority of the spending reduction will come from Medicare cuts of
$115.0 billion. The Congressional Budget Office projected in July 1997 that
$43.8 billion of the reductions would come from reduced payments to hospitals,
$21.8 billion from increased enrollment in managed care plans and $11.7 billion
from reduced payments to physicians and ambulatory care providers. The five-year
savings in projected Medicare payments to physicians and hospitals would be
achieved under the Budget Act by reduced fee-for-service reimbursement and by
changes in managed care programs designed to increase enrollment of Medicare
beneficiaries in managed care plans. The increase in Medicare enrollment in
managed care plans would be achieved in part by allowing provider-sponsored
organizations and preferred provider organizations to compete with Medicare HMOs
for Medicare enrollees.
The Medicaid-related provisions of the Budget Act are designed to achieve
net federal Medicaid savings of $14.6 billion over the next five years and $56.4
billion over the next ten years. The Budget Act achieves federal Medicaid
savings in three areas. First, two-thirds of the savings over the next ten years
are attributable to limitations on federal matching payments to states for
reimbursements to "disproportionate share" hospitals. The next largest source of
federal savings is a provision allowing states to shift the cost of Medicaid
deductibles and coinsurance requirements for low-income Medicaid beneficiaries
from their Medicaid programs to physicians and other providers. Most of the
remaining savings derive from the repeal of the "Boren Amendment" and other
minimum payment guarantees for hospitals, nursing homes and community health
centers that service Medicaid patients.
CBHS management estimates that the Budget Act will reduce the amount of
revenue and earnings that CBHS will receive for the treatment of Medicare and
Medicaid patients. CBHS management estimates that such reductions will
approximate $10.0 million in fiscal 1998, and due to the phase in effects of the
bill, approximately $15.0 million in subsequent fiscal years.
A number of states in which CBHS has operations have either adopted or are
considering the adoption of healthcare reform proposals of general applicability
or Medicaid reform proposals. Where adopted, these state reform laws have often
not yet been fully implemented. The Company cannot predict the effect of these
state healthcare reform proposals on CBHS's operations. The Company cannot
predict the effect of other healthcare reform measures that may be adopted by
Congress on the operations of CBHS and no assurance can be given that other
federal healthcare reform measures will not have an adverse effect on CBHS.
DEPENDENCE ON HEALTHCARE PROFESSIONALS. Physicians traditionally have been
the source of a significant portion of the patients treated at CBHS's hospitals.
Therefore, the success of CBHS's hospitals is dependent in part on the number
and quality of the physicians on the medical staffs of the hospitals and their
admission practices. A small number of physicians account for a significant
portion of patient admissions at some of CBHS's hospitals. There can be no
assurance that CBHS can retain its current
18
<PAGE>
physicians on staff or that additional physician relationships will be developed
in the future. Furthermore, hospital physicians generally are not employees of
CBHS and, in general, CBHS does not have contractual arrangements with hospital
physicians restricting the ability of such physicians to practice elsewhere.
POTENTIAL GENERAL AND PROFESSIONAL LIABILITY. In recent years, physicians,
hospitals, and other healthcare professionals and providers have become subject
to an increasing number of lawsuits alleging medical malpractice and related
legal theories. Many of these lawsuits involve large claims and substantial
defense costs. CBHS maintains a general and hospital professional liability
insurance policy with an unaffiliated insurer. In addition, CBHS' hospitals
require all physicians on each hospital's medical staff to maintain professional
liability coverage. Management believes that its coverage limits are adequate,
however, there can be no assurance that a future claim or claims will not exceed
the limits of these existing insurance policies or that a loss or losses for
which insurance is unavailable will not have a material adverse effect on CBHS.
GOVERNMENT REGULATION. The operation of psychiatric hospitals and other
behavioral healthcare facilities and the provision of behavioral healthcare
services are subject to extensive federal, state and local laws and regulations.
These laws and regulations provide for periodic inspections or other reviews by
state agencies, the Department and CHAMPUS to determine compliance with their
respective standards of medical care, staffing, equipment and cleanliness
necessary for continued licensing or participation in the Medicare, Medicaid or
CHAMPUS programs. The admission and treatment of patients at psychiatric
hospitals is also subject to substantial state regulation relating to
involuntary admissions, confidentiality of patient medical information,
patients' rights and federal regulation relating to confidentiality of medical
records of substance abuse patients. CBHS is also subject to state certificate
of need laws that regulate the construction of new hospitals and the expansion
of existing hospital facilities and services.
CBHS also is subject to federal and state laws that govern financial and
other arrangements between healthcare providers. Such laws include the illegal
remuneration provisions of the Social Security Act, the physician self-referral
provisions of the Omnibus Budget Reconciliation Act of 1993 and state illegal
remuneration and self-referral statutes and regulations that prohibit payments
in exchange for referrals and referrals by physicians or other healthcare
providers to persons or entities with which the physician or other healthcare
provider has a financial relationship.
The Medicare and Medicaid Patient and Program Protection Act of 1987
expanded the authority of the Department to exclude from participation in the
Medicare and Medicaid programs those individuals and entities that engage in
defined prohibited activities. The Department's exclusion authority was recently
expanded under the Health Insurance Portability and Accounting Act of 1996
("HIPAA") and the Budget Act, which added additional grounds for exclusion,
established minimum exclusion periods for certain offenses and expanded the
scope of the exclusion to include all federal healthcare programs. The
Department also has the authority to impose civil monetary penalties for certain
prohibited activities. HIPAA increased the amount of authorized penalties from
$2,000 per item or service claimed to $10,000 per item or service claimed, and
increased the assessment to which a person may be subject in lieu of damages
from two times the amount claimed for each item or service to three times the
amount claimed. Both HIPAA and the Budget Act expanded the Department's
authority to impose civil monetary penalties by adding additional activities for
which civil monetary penalties may be imposed.
Provisions contained in HIPAA and the Budget Act also created new criminal
healthcare fraud offenses that are applicable to both government programs and
private health insurance plans and added new programs and increased funding for
fraud and abuse detection and prevention.
CHAMPUS regulations also authorize the exclusion of providers from the
CHAMPUS program, if the provider has committed fraud or engaged in certain
"abusive practices," which are defined broadly to include, among other things,
the provision of medically unnecessary services, the provision of care of
inferior quality and the failure to maintain adequate medical or financial
records.
State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which CBHS' operations are subject have broad
discretionary powers. A regulatory agency or a court in a state in which CBHS
operates could take a position under existing or future laws or regulations, or
change its interpretation or enforcement practices with respect thereto, that
such laws or regulations apply to CBHS differently than CBHS believes such laws
and regulations apply or should be enforced. The resultant compliance with, or
revocation of, or failure to obtain, required licences and governmental
approvals could result in significant alteration to CBHS' business operations,
delays in the expansion of CBHS' business and lost business opportunities, any
of which, under certain circumstances, could have a material adverse effect on
CBHS.
19
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares. All of the proceeds from the sale of the Shares will be received by the
Selling Stockholder.
20
<PAGE>
SELLING STOCKHOLDER
The following table sets forth certain information with respect to the
ownership of the Shares as of March 31, 1998, and as adjusted to reflect the
sale of the Shares offered hereby, by the Selling Stockholder. The Selling
Stockholder has sole voting and investment power with respect to the Shares
owned by him.
<TABLE>
<CAPTION>
OWNERSHIP OF COMMON OWNERSHIP OF
STOCK BEFORE THE COMMON STOCK AFTER
OFFERING THE OFFERING (1)
----------------------- NUMBER OF -----------------------
NUMBER OF SHARES BEING NUMBER OF
NAME SHARES PERCENT OFFERED SHARES PERCENT
- ------------------------------------------------------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Paul G. Shoffeitt...................................... 37,825 .11 37,825 0 --
</TABLE>
- ------------------------
(1) Assumes that all Shares being registered are sold.
The Option Agreement provides that during November 1998 the Selling
Stockholder has the right to cause the Company to purchase 15,000 shares of the
common stock of Care Management Resources, Inc. ("CMR Shares") owned by him in
exchange for the number of shares of Common Stock obtained by dividing $500,000
by the average closing price of a share of Common Stock on the ten trading days
immediately prior to the second trading day preceding the date on which the
Company will issue such stock to the Selling Stockholder (the "1998 Option").
During each of November 1999 and November 2000, the Selling Stockholder has the
right to cause the Company to purchase 7,500 CMR Shares owned by him in exchange
for the number of shares of Common Stock obtained by dividing $250,000 by the
average closing price of a share of Common Stock on the ten trading days
immediately prior to the second trading day preceding the date on which the
Company will issue such stock to the Selling Stockholder (the "1999 Option" and
"2000 Option," respectively, and together with the 1998 Option, the "Put
Options"). Pursuant to the Option Agreement, the Company may elect to pay the
Selling Stockholder cash consideration of $500,000 for the 1998 Option and
$250,000 for each of the 1999 and 2000 Options in lieu of issuing shares of
Common Stock to the Selling Stockholder upon the exercise of such options.
Pursuant to the Option Agreement, the time period during which the Selling
Stockholder may exercise each of the Put Options may be extended under certain
circumstances.
Pursuant to the Option Agreement, for a one year period following the
expiration of each of the Put Options, the Company has the right to purchase
from the Selling Stockholder the CMR Shares subject to the corresponding Put
Options (the "1998 Call Option," "1999 Call Option" and "2000 Call Option,"
respectively, and collectively, the "Call Options"). The consideration to be
paid by the Company upon exercise of the 1998 Call Option is the number of
shares of Common Stock obtained by dividing $500,000 by the average closing
price of a share of Common Stock on the ten trading days immediately prior to
the second trading day preceding the date on which the Company will issue such
shares to the Selling Stockholder. The consideration to be paid to the Selling
Stockholder by the Company upon exercise of each of the 1999 and 2000 Call
Options is the number of shares of Common Stock obtained by dividing $250,000 by
the average closing price of a share of Common Stock on the ten trading days
immediately prior to the second trading day preceding the date on which the
Company will issue such stock to the Selling Stockholder. Pursuant to the Option
Agreement, the time period during which the Company may exercise each of the
Call Options may be extended under certain circumstances.
The Company may elect to pay the Selling Stockholder cash consideration of
$500,000 for the 1998 Call Option or $250,000 for each of the 1999 and 2000 Call
Options in lieu of issuing shares of Common Stock to the Selling Stockholder
upon its exercise of such options. At any time after January 1, 1998, the
Company also may elect to purchase all of the CMR Shares held by the Selling
Stockholder for a total cash purchase price of $1.0 million, plus any additional
amount necessary to offset any adverse tax consequences to the Selling
Stockholder as a result of the Company's election to purchase all of the CMR
Shares in a single transaction prior to the time when the Selling Stockholder
would have been entitled to exercise the Put Options (the "Cash Option").
21
<PAGE>
The Option Agreement obligates the Company to file the Registration
Statement and to keep the Registration Statement effective until December 31,
2001, subject to certain extensions. The Option Agreement includes certain other
customary provisions, including without limitation, certain restrictions on the
Selling Stockholder's private sale of shares of Common Stock acquired pursuant
to the terms of the Option Agreement and anti-dilution provisions. The Option
Agreement also obligates the Selling Stockholder to not dispose of any of the
CMR Shares owned by him, with certain exceptions.
In connection with the execution of the Option Agreement, the Selling
Stockholder executed an Irrevocable Proxy, dated December 4, 1997, granting the
Company the right to vote the CMR Shares owned by the Selling Stockholder at any
and all annual, regular and special meetings of CMR and in any actions by
written consent of the shareholders of CMR, provided such meetings are held or
actions by written consent are executed by November 1, 1998.
The Selling Stockholder entered into an employment agreement, dated April 1,
1997, as amended (the "Employment Agreement"), with the Company, pursuant to
which the Selling Stockholder agreed to serve as the Executive Vice President of
Managed Care of the Company in a part-time capacity. The term of the Employment
Agreement is from April 1, 1997 until December 31, 2001 and will automatically
renew on January 1 of each year thereafter for successive one year terms until
either party elects not to renew the agreement. The Selling Stockholder is
compensated $40,000 per year for his employment under the Employment Agreement.
In connection with amendments to the Employment Agreement, the Company and
the Selling Stockholder entered into a Stock Option Waiver Agreement whereby the
Selling Stockholder waived his rights to all stock option awards made to him
under the Company's 1994 and 1996 Stock Option Plans.
The Selling Stockholder also entered into a letter agreement, dated February
3, 1994, as amended (the "Letter Agreement"), with Green Spring pursuant to
which the Selling Stockholder agreed to serve as a consultant to Green Spring
under the title of Vice Chairman from the date thereof until April 1, 2000.
Prior to entering into the Letter Agreement, the Selling Stockholder served as
President and Chief Executive Officer of Green Spring and his consulting role
pursuant to the Letter Agreement is to provide assistance to Green Spring with
respect to matters with which he was involved during his employment with Green
Spring and to provide other assistance to facilitate such endeavors. The Selling
Stockholder is compensated $4,167 per month for his consulting services. The
Selling Stockholder also serves as a director of Green Spring.
PLAN OF DISTRIBUTION
The sale or distribution of all or any portion of the Shares may be effected
from time to time by the Selling Stockholder directly, indirectly through
brokers or dealers or in a distribution by one or more underwriters on a firm
commitment or best efforts basis, on the New York Stock Exchange, in the over-
the-counter market, on any national securities exchange on which shares of the
Common Stock are listed or traded, in privately negotiated transactions or
otherwise, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. Certain transfer
restrictions have been placed on the Shares offered hereby pursuant to the
Option Agreement. See "Selling Stockholder."
The methods by which the Shares may be sold or distributed include, without
limitation, (i) a block trade (which may involve crosses) in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction, (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus, (iii) exchange distributions and/or
secondary distributions in accordance with the rules of the New York Stock
Exchange, (iv) ordinary brokerage transactions and transactions in which the
broker solicits purchasers, and (v) privately negotiated transactions. The
Selling Stockholder may from time to time deliver all or a portion of the Shares
to cover a short sale or sales or upon the exercise, settlement or
22
<PAGE>
closing of a call equivalent position or a put equivalent position. The Shares
may be sold from time to time at varying prices determined at the time of sale
or at negotiated prices.
At the time a particular offer is made, a Prospectus Supplement, if
required, will be distributed that sets forth the name or names of agents,
broker-dealers or underwriters, any commissions and other terms constituting
compensation and any other required information. In effecting sales,
broker-dealers engaged by the Selling Stockholder and/or the purchasers of the
Shares may arrange for other broker-dealers to participate. Broker-dealers will
receive commissions, concessions or discounts from the Selling Stockholder
and/or the purchasers of the Shares in amounts to be negotiated prior to the
sale. Sales will be made only through broker-dealers registered as such in a
subject jurisdiction or in transactions exempt from such registration. As of the
date of this Prospectus, there are no selling arrangements between the Selling
Stockholder and any broker or dealer.
In offering the Shares, the Selling Stockholder and any brokers, dealers or
agents who participate in a sale of the Shares by the Selling Stockholder may be
considered "underwriters" within the meaning of Section 2(11) of the 1933 Act,
and any profits realized by the Selling Stockholder and the compensation of any
broker/dealers may be deemed to be underwriting discounts and commissions.
As required by the Option Agreement, the Company has filed the Registration
Statement, of which this Prospectus forms a part, with respect to the sale of
the Shares. The Company has agreed to keep the Registration Statement effective
on a continuous basis until December 31, 2001, subject to certain extensions.
Shares not sold pursuant to the Registration Statement of which this
Prospectus is a part may be subject to certain restrictions under the 1933 Act
and could be sold, if at all, only pursuant to Rule 144 under the 1933 Act or
another exemption from the registration requirements of the 1933 Act. In
general, under Rule 144, a person (or persons whose Shares are aggregated) who
has satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of Shares which does not exceed the
greater of one percent of the Company's outstanding Common Stock or the average
weekly reported trading volume of the Company's Common Stock during the four
calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of Shares by a person who is not an affiliate of the
Company and who has satisfied a two-year holding period without any volume
limitation. Therefore, both during and after the effectiveness of the
Registration Statement, sales of the Shares may be made by the Selling
Stockholder pursuant to Rule 144.
The Company will not receive any of the proceeds from the sale of the Shares
by the Selling Stockholder. The Company will bear the costs of registering the
Shares under the 1933 Act, including the registration fee under the 1933 Act,
its legal and accounting fees and any printing fees. The Selling Stockholder
will bear the cost of underwriting commissions and/or discounts, if any, and
selling commissions.
Underwriters, brokers, dealers or agents may be entitled, under agreements
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the 1933 Act in connection with
the registration of the Shares.
LEGAL MATTERS
The legality of the Shares is being passed upon for the Selling Stockholder
by King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303.
EXPERTS
The audited consolidated financial statements and schedule of the Company as
of September 30, 1996 and 1997 and for each of the three years in the period
ended September 30, 1997, included in the Company's Annual Report on Form 10-K
for the year ended September 30, 1997 and incorporated by
23
<PAGE>
reference in this Prospectus and elsewhere in this Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said report.
The consolidated financial statements of Merit as of September 30, 1996 and
1997 and for each of the three years in the period ended September 30, 1997,
included in the Company's Current Report on Form 8-K/A, which was filed April 3,
1998 and incorporated by reference in this Prospectus and elsewhere in this
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report with respect thereto which report expresses
an unqualified opinion and includes an explanatory paragraph which refers to the
change in the method of accounting for deferred contract start-up costs related
to new contracts or expansion of existing contracts and are incorporated by
reference herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The audited consolidated financial statements and schedule of CBHS as of
September 30, 1997 and for the 106 days ended September 30, 1997, included in
the Company's Annual Report on Form 10-K for the year ended September 30, 1997
and incorporated by reference in this Prospectus and elsewhere in this
Registration Statement, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
The audited consolidated financial statements of HAI as of December 31, 1995
and 1996 and for each of the years in the two year period ended December 31,
1996, included in the Company's Current Report on Form 8-K, which was filed on
December 17, 1997, have been incorporated by reference herein and in this
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountant, incorporated by reference herein and
upon the authority of said firm as experts in accounting and auditing.
Future consolidated financial statements and schedules of Magellan Health
Services, Inc. and subsidiaries and Charter Behavioral Health Systems, LLC and
the reports thereon of Arthur Andersen LLP also will be incorporated by
reference in this Registration Statement of which this Prospectus is a part in
reliance upon the authority of said firm as experts in giving said reports to
the extent said firm has audited those financial statements and consented to the
use of their reports thereon.
24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY MAGELLAN OR THE SELLING STOCKHOLDER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 3
Summary................................................................... 4
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 20
Selling Stockholder....................................................... 21
Plan of Distribution...................................................... 22
Legal Matters............................................................. 23
Experts................................................................... 23
</TABLE>
37,825 SHARES
MAGELLAN HEALTH
SERVICES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MAY , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................ $ .09
Legal Fees and Expenses........................................................ 10,000.00
Accounting Fees and Expenses................................................... 10,000.00
Printing....................................................................... 18,000.00
Miscellaneous.................................................................. 4,999.91
----------
Total.......................................................................... $43,000.00
----------
----------
</TABLE>
All of the above items, except for the registration fee, are estimates.
Although the Selling Stockholder will not bear any of the expenses set forth
above, the Selling Stockholder will bear the cost of underwriting commissions
and/or discounts, if any, and selling commissions.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Section 145 of the Delaware General
Corporation Law (the "DGCL") provides that a Delaware corporation has the power
to indemnify its officers and directors in certain circumstances.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of his service as director, officer, employee or agent of the
corporation, or his service, at the corporation's request, as a director,
officer, employee or agent of another corporation or enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action, suit
or proceeding provided that such director or officer acted in good faith and in
a manner reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding,
provided that such director or officer had no reasonable cause to believe his
conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit
provided that such director or officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such director or officer shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such director or officer is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) or (b) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; provided
that indemnification
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provided for by Section 145 or granted pursuant thereto shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him or incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
Article VII of the By-laws of the Company provide in substance that the
Company shall indemnify directors and officers against all liability and related
expenses incurred in connection with the affairs of the Company if: (a), in the
case of action not by or in the right of the Company, the director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and (with respect to a criminal
proceeding) had no reasonable cause to believe his conduct was unlawful; and
(b), in the case of actions by or in the right of the Company, the director or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company, provided that no
indemnification shall be made for a claim as to which the director or officer is
adjudged liable for negligence or misconduct unless (and only to the extent
that) an appropriate court determines that, in view of all the circumstances,
such person is fairly and reasonably entitled to indemnity.
In addition, Section 102(b)(7) of the DGCL permits Delaware corporations to
include a provision in their certificates of incorporation eliminating or
limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provisions shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for unlawful
payment of dividends or other unlawful distributions, or (iv) for any
transactions from which the director derived an improper personal benefit.
Article Twelfth of the Company's Certificate of Incorporation sets forth such a
provision.
The Company maintains directors' and officers' liability insurance with
various providers in the aggregate amount of $80 million.
The foregoing summaries are necessarily subject to the complete text of the
statutes, Certificate of Incorporation, Bylaws, insurance policies and
agreements referred to above and are qualified in their entirety by reference
thereto.
For the undertaking with respect to indemnification, see Item 17.
ITEM 16. EXHIBITS
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2.1 Stock Purchase Agreement, dated February 6, 1997, between the Company, Care
Management Resources, Inc. and John T. Lincoln.
2.2 Shareholders Agreement, dated February 6, 1997, between the Company, Care Management
Resources, Inc., Paul G. Shoffeitt and John T. Lincoln.
2.3 Option Agreement, dated December 4, 1997, between the Company and Paul G. Shoffeitt.
2.4 Stock Option Waiver Agreement, dated December 4, 1997, between the Company and Paul
G. Shoffeitt.
2.5 Letter Agreement, dated February 3, 1994, between Green Spring Health Services, Inc.
and Paul G. Shoffeitt.
2.6 Amendment to Letter Agreement, dated December 4, 1997, between Green Spring Health
Services, Inc. and Paul G. Shoffeitt.
2.7 Employment Agreement, dated April 1, 1997, between the Company and Paul G. Shoffeitt.
</TABLE>
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2.8 Amendment to Employment Agreement, dated December 4, 1997, between the Company and
Paul G. Shoffeitt.
2.9 Irrevocable Proxy, dated December 4, 1997, by Paul G. Shoffeitt regarding shares of
Care Management Resources, Inc.
2.10 Stock Purchase Agreement, dated August 5, 1997, between the Company and Aetna
Insurance Company of Connecticut, which was filed as Exhibit 2(a) to the Company's
Current Report on Form 8-K, which was filed on December 17, 1997, and is incorporated
herein by reference.
2.11 Amendment to Stock Purchase Agreement, dated December 4, 1997, between the Company
and Aetna Insurance Company of Connecticut, which was filed as Exhibit 2(c) to the
Company's Current Report on Form 8-K, which was filed on December 17, 1997, and is
incorporated herein by reference.
2.12 Asset Purchase Agreement, dated October 16, 1997, among the Company; Allied Health
Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida Specialty Network,
LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.;
David Russin, M.D. and Lawrence Schimmel, M.D., which was filed as Exhibit 2(e) to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1997, and is incorporated herein by reference.
2.13 First Amendment to Asset Purchase Agreement, dated December 5, 1997, among the
Company; Allied Health Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida
Specialty Network, LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.;
Jacob Nudel, M.D.; David Russin M.D.; and Lawrence Schimmel, M.D., which was filed as
Exhibit 2(f) to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1997, and is incorporated herein by reference.
2.14 Agreement and Plan of Merger, dated October 24, 1997, among the Company, Merit
Behavioral Care Corporation and MBC Merger Corporation which was filed as Exhibit
2(g) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1997, and is incorporated herein by reference.
2.15 Purchase Agreement, dated March 3, 1998, between the Company, Charter Behavioral
Corporation, Charter Behavioral Health Systems,Inc., Green Spring Health Services,
Inc., Advantage Behavioral Systems, Inc. and Charter Behavioral Health Systems, LLC
which was filed as Exhibit 2(f) to the Company's Registration Statement on Form S-4
(No. 333-49335) filed April 3, 1998, and is incorporated herein by reference.
2.16 Equity Purchase Agreement, dated March 3, 1998, between the Company, Charter
Behavioral Health Systems, Inc. and Crescent Operating, Inc. which was filed as
Exhibit 2(g) to the Company's Registration Statement on Form S-4 (No. 333-49335)
filed April 3, 1998, and is incorporated herein by reference.
2.17 Support Agreement, dated March 3, 1998, between the Company and Crescent Operating,
Inc. which was filed as Exhibit 2(h) to the Company's Registration Statement on Form
S-4 (No. 333-49335) filed April 3, 1998, and is incorporated herein by reference.
2.18 Master Service Agreement, dated August 5, 1997, between the Company, Aetna U.S.
Healthcare, Inc. and Human Affairs International, Incorporated, which was filed as
Exhibit 2(b) to the Company's Current Report on Form 8-K, which was filed on December
17, 1997, and is incorporated herein by reference.
</TABLE>
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<TABLE>
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2.19 First Amendment to Master Services Agreement, dated December 4, 1997, between the
Company, Aetna U.S. Healthcare, Inc. and Human Affairs International, Incorporated,
which was filed as Exhibit 2(d) to the Company's Current Report on Form 8-K, which
was filed on December 17, 1997, and is incorporated herein by reference.
2.20 Real Estate Purchase and Sale Agreement, dated January 29, 1997, between the Company
and Crescent Real Estate Equities Limited Partnership, which was filed as Exhibit
2(a) to the Company's Current Report on Form 8-K which was filed on April 23, 1997,
and is incorporated herein by reference.
2.21 Amendment No. 1, dated February 28, 1997, to the Real Estate Purchase and Sale
Agreement, dated January 29, 1997, between the Company and Crescent Real Estate
Equities Limited Partnership, which was filed as Exhibit 2(b) to the Company's
Current Report on Form 8-K filed on April 23, 1997, and is incorporated herein by
reference.
2.22 Amendment No. 2, dated May 29, 1997, to the Real Estate Purchase and Sale Agreement,
dated January 29, 1997, between the Company and Crescent Real Estate Equities Limited
Partnership, which was filed as Exhibit 2(c) to the Company's Current Report on Form
8-K filed on June 30, 1997, and is incorporated herein by reference.
2.23 Contribution Agreement, dated June 16, 1997, between the Company and Crescent
Operating, Inc., which was filed as Exhibit 2(d) to the Company's Current Report on
Form 8-K which was filed on June 30, 1997, and is incorporated herein by reference.
2.24 Stockholders' Agreement, dated December 13, 1995, among Green Spring Health Services,
Inc., Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service
Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the
Company, which was filed as Exhibit 4(d) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by
reference.
2.25 First Amendment to Stockholders' Agreement, dated February 28, 1997, among Green
Spring Health Services, Inc., Blue Cross and Blue Shield of New Jersey, Inc., Health
Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc.
and the Company, which was filed as Exhibit 10(af) to the Company's Annual Report on
Form 10-K for the year ended September 30, 1997, and is incorporated herein by
reference.
2.26 Exchange Agreement, dated December 13, 1995, among Blue Cross and Blue Shield of New
Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce County
Medical Bureau, Inc. and the Company, which was filed as Exhibit 4(e) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1995, and is incorporated herein by reference.
4.1 Restated Certificate of Incorporation of the Company, as filed in Delaware on October
16, 1992, which was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the year ended September 30, 1992, and is incorporated herein by reference.
4.2 Bylaws of the Company, as amended, effective May 19, 1995, which was filed as Exhibit
3(a) to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended
June 30, 1995, and is incorporated herein by reference.
4.3 Certificate of Ownership and Merger merging Magellan Health Services, Inc. (a
Delaware corporation) into Charter Medical Corporation (a Delaware corporation), as
filed in Delaware on December 21, 1995, which was filed as Exhibit 3(c) to the
Company's Annual Report on Form 10-K for the year ended September 30, 1995, and is
incorporated herein by reference.
</TABLE>
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4.4 Stock and Warrant Purchase Agreement, dated December 22, 1995, between the Company
and Richard E. Rainwater, which was filed as Exhibit 4(f) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1995, and is
incorporated herein by reference.
4.5 Amendment No. 1 to Stock and Warrant Purchase Agreement, dated January 25, 1996,
between the Company and Rainwater-Magellan Holdings, L.P. which was filed as Exhibit
4.7 to the Company's Registration Statement on Form S-3 (File No. 333-01217) filed on
February 26, 1996, and is incorporated herein by reference.
5.1 Opinion of King & Spalding as to the legality of the Common Stock to be registered.
23.1 Consent of King & Spalding (included in Exhibit 5.1).
23.2 Consents of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney (included on signature pages).
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made of
securities registered hereby, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3) of the 1933
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that the undertakings set forth in paragraphs (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant pursuant
to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by
reference in this Registration Statement.
That, for the purpose of determining any liability under the 1933 Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
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<PAGE>
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the 1933 Act, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
that is incorporated by reference in this Registration Statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the registrant, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling persons of the registrant in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the 1933 Act and will be governed
by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Atlanta, State of Georgia, on May 22, 1998.
<TABLE>
<S> <C> <C>
MAGELLAN HEALTH SERVICES, INC.
By: /s/ CRAIG L. MCKNIGHT
-----------------------------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Craig L. McKnight, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ HENRY T. HARBIN
- ------------------------------ President, Chief Executive May 22, 1998
Henry T. Harbin Officer and Director
/s/ CRAIG L. MCKNIGHT Executive Vice President
- ------------------------------ and Chief Financial May 22, 1998
Craig L. McKnight Officer
/s/ JEFFREY T. HUDKINS Vice President and
- ------------------------------ Controller May 22, 1998
Jeffrey T. Hudkins (Chief Accounting Officer)
/s/ EDWIN M. BANKS
- ------------------------------ Director May 22, 1998
Edwin M. Banks
/s/ G. FRED DIBONA, JR.
- ------------------------------ Director May 22, 1998
G. Fred DiBona, Jr.
/s/ ANDRE C. DIMITRIADIS
- ------------------------------ Director May 22, 1998
Andre C. Dimitriadis
</TABLE>
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<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ A.D. FRAZIER, JR.
- ------------------------------ Director May 22, 1998
A.D. Frazier, Jr.
- ------------------------------ Director
Raymond H. Kiefer
- ------------------------------ Director
Gerald L. McManis
/s/ DANIEL S. MESSINA
- ------------------------------ Director May 22, 1998
Daniel S. Messina
/s/ ROBERT W. MILLER
- ------------------------------ Chairman of the May 22, 1998
Robert W. Miller Board of Directors
- ------------------------------ Director
Darla D. Moore
/s/ JEFFREY A. SONNENFELD
- ------------------------------ Director May 22, 1998
Jeffrey A. Sonnenfeld
</TABLE>
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Exhibit 2.1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), is made this 6th day
of February, 1997, by and between Magellan Health Services, Inc., a Delaware
corporation ("Purchaser"), John T. Lincoln ("Shareholder") and Care
Management Resources, Inc., a Florida corporation (the "Corporation").
W I T N E S S E T H:
WHEREAS, Shareholder owns all of the issued and outstanding securities
of the Corporation;
WHEREAS, the parties hereto desire to enter into this Agreement pursuant
to which Purchaser will purchase from Shareholder eighty-five percent (85%)
of the issued and outstanding shares of capital stock of the Corporation (the
"Shares"), all upon the terms and subject to the conditions set forth herein:
NOW, THEREFORE, in consideration of the premises and the mutual
promises, representations, warranties and covenants hereinafter set forth, the
parties hereto agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings unless the context otherwise requires:
1.1. "Closing" shall mean the consummation of the transactions provided
for in this Agreement, which shall occur in accordance with Section 5 hereof.
1.2. "Employment Agreement" shall mean the Employment Agreement
substantially in the form attached hereto as Exhibit A.
1.3. "Intellectual Property" shall have the meaning set forth in Section
3.16 hereof.
1.4. "Noncompete Agreement" shall mean the Covenant Not to Compete to be
entered into between Shareholder and the Corporation substantially in the
form attached hereto as Exhibit B.
1.5. "Package" shall mean the comprehensive business package which will
enable the Corporation to offer managed care services and products that will
include care management and case management, as more specifically described
in Exhibit C attached hereto.
1.6. "Shareholders' Agreement" shall mean the Shareholders' Agreement
between Purchaser and Shareholder, substantially in the form attached hereto
as Exhibit D.
<PAGE>
2. COVENANTS AND UNDERTAKINGS.
2.1. Purchase and Sale of Shares. At the Closing, Shareholder shall
sell, assign, transfer, convey and deliver the Shares to Purchaser, free and
clear of all liens, claims, charges, security interests, and other
encumbrances of any nature whatsoever. Such sale, assignment, transfer and
conveyance shall be evidenced by the delivery to Purchaser of duly endorsed
in blank share certificates or by instruments of transfer reasonably
satisfactory in form and substance to Purchaser and its counsel.
2.2. Consideration. In consideration of the sale, assignment, transfer,
conveyance and delivery of the Shares and in reliance upon the covenants,
representations and warranties made herein by Shareholder and the
Corporation, Purchaser shall pay to Shareholder a total amount equal to One
Million Six Hundred Fifty Thousand Dollars ($1,650,000.00) in full payment
for the Shares, which payment shall be made by wire transfer at Closing to an
account designated by Shareholder.
2.3 Resignation. Shareholder agrees to cause to be delivered to
Purchaser at the Closing the resignation of each of the directors and
officers of the Corporation, except for Shareholder, who shall remain a
director.
3. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER AND THE CORPORATION.
Shareholder and the Corporation represent and warrant to Purchaser, its
successors and assigns, as of the date hereof, as follows:
3.1. Organization, Standing and Foreign Qualification. The Corporation
is a corporation duly organized, validly existing, and in good standing under
the laws of Florida. The Corporation has the full power and authority to
carry on its business in the places and as it is now being conducted and to
own and lease the properties and assets which it now owns or leases.
3.2. Authority and Status. Shareholder and the Corporation have the
capacity and authority to execute and deliver this Agreement, to perform
hereunder and to consummate the transactions contemplated hereby without the
necessity of any act or consent of any other person whomsoever. This
Agreement and each and every agreement, document and instrument to be
executed, delivered and performed by Shareholder and the Corporation in
connection herewith constitute or will, when executed and delivered,
constitute the valid and legally binding obligations of Shareholder and the
Corporation, enforceable against Shareholder and the Corporation in
accordance with their respective terms. Attached hereto as Schedule 3.2 are
true, correct and complete copies of the Articles of Incorporation and Bylaws
of the Corporation.
3.3 Capitalization The entire authorized capital stock of the
Corporation consists of 500,000 shares of common stock, no par value, of
which 400,000 shares are issued and outstanding. All of the shares of
capital stock of the Corporation are owned by Shareholder, free and clear of
all
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<PAGE>
liens, claims, charges and encumbrances of any nature whatsoever, and no
other person or entity has any equitable or beneficial interest in the
Corporation, except that prior to the closing, Shareholder may sell to Paul
G. Shoffeitt up to seven and one half percent (7.5%) of the issued and
outstanding shares of common stock of the Corporation (the "Option"). The
Shares are validly authorized and issued, fully paid and non-assessable.
Except for the Option, there are no outstanding options, warrants, calls,
commitments, or plans by the Corporation to issue any additional shares of
its capital stock, or to pay any dividends on its capital stock or to
purchase, redeem, or retire any outstanding shares of its capital stock, nor
are there outstanding any securities or obligations which are convertible
into or exchangeable for any shares of capital stock of the Corporation.
3.4. Absence of Equity Investments. The Corporation does not, either
directly or indirectly, own of record or beneficially any shares or other
equity interests in any corporation, partnership, limited partnership, joint
venture, trust or other business entity.
3.5. Liabilities and Obligations of the Corporation
3.5.1. Attached hereto as Schedule 3.5.1 is a true, correct and
complete unaudited balance sheet of the Corporation as of January 31, 1997,
and the Corporation's statement of cash flows as of January 31, 1996. Such
balance sheet is complete, has been prepared in accordance with generally
accepted accounting principles, consistently applied, and discloses all
liabilities of the Corporation, whether absolute, contingent, accrued or
otherwise, existing as of the date thereof except those which are of a nature
not required to be reflected in financial statements prepared in accordance
with generally accepted accounting principles and those which have been
incurred in the ordinary course of business since January 31, 1997 and prior
to Closing, all of which shall be discharged by the Corporation from funds of
the Corporation held prior to Closing. Such statement of cash flows has been
prepared in accordance with generally accepted accounting principles. All
debts owed by the Corporation to Shareholder, whether or not shown on
Schedule 3.5.1, have been discharged prior to the date hereof.
3.5.2. The Corporation is not in default with respect to any of
its liabilities or obligations, all of which have been, or are being, paid and
discharged as they become due.
3.6. Taxes. The Corporation is a subchapter S corporation within the
meaning of the Internal Revenue Code of 1986, as amended, and has timely and
accurately filed all federal and local tax returns and reports required to be
filed by it, and Shareholder has timely paid all taxes owed in respect
thereof. The Corporation agrees to authorize Shareholder to prepare, execute
and file all federal, state and local tax returns to be filed by the
Corporation for all periods prior to the Closing, regardless of whether such
returns are prepared prior to or after the Closing.
3.7. Personal Property. Attached hereto as Schedule 3.7 is a list of
all items of tangible personal property owned by the Corporation, and the
Corporation has good title to all such property, free and clear of all liens,
claims, charges and encumbrances of any nature whatsoever.
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<PAGE>
3.8. Real Property. The Corporation does not own, lease or have any
interest, direct or indirect, in any real property.
3.9. Bank Accounts, Powers of Attorney. Set forth and described on
Schedule 3.9 hereto is a complete list of all bank accounts (with account
reflected as of the close of business on January 31, 1997) and all safe
deposit boxes of the Corporation, all powers of attorney in connection with
such accounts, and the names of all persons authorized to draw thereon or to
have access thereto. The parties hereto agree that the cash and bank accounts
of the Corporation (and its accounts receivables) may have zero balances as
of the date hereof. Other than as set forth and described on Schedule 3.9, the
Corporation has not granted any powers of attorney in favor of any person or
entity.
3.10. Agreement Does Not Violate Other Instruments. The execution and
delivery of this Agreement by Shareholder does not, and the consummation of
the transactions contemplated hereby will not, violate any provision of the
Articles of Incorporation, as amended, or Bylaws, as amended, of the
Corporation or violate or constitute an occurrence of default under any
provision of, or conflict with, or result in acceleration of any obligation
under, or give rise to a right by any party to terminate its obligations
under, any agreement, instrument, or any order, judgment, decree, or other
arrangement to which Shareholder or the Corporation is a party or is bound or
by which the assets or business of the Corporation are affected.
3.11. Litigation. There is no suit, action, proceeding, judgment, claim
or investigation instituted by or against the Corporation; no suit, action,
proceeding, judgment, claim or investigation has been threatened against the
Corporation. There exists no basis or grounds for any suit, action,
proceedings, judgment, claim or investigation against the Corporation. The
foregoing sentence shall not be deemed a representation or warranty with
respect to the quality or reliability of the manuals, guidelines, criteria,
and protocols contained in the Package; however, Shareholder has no knowledge
of any material defect or deficiency in such components of the Package.
3.12. Licenses and Permits; Compliance With Law. To the knowledge of
Shareholder, the Corporation holds all licenses, certificates, permits,
franchises and rights from all appropriate federal, state or other public
authorities necessary for the conduct of its business. The parties hereto
acknowledge that the Corporation shall have no UR (utilization review)
licenses and that no applications for such licenses have been made. The
Corporation is presently in compliance, and has at all times since its
formation complied with, all applicable statutes, ordinances, rules,
regulations and orders of any governmental authority.
3.13. Contracts, Etc. Schedule 3.13 hereto consists of a true and
complete list of all written contracts and a summary of all oral agreements
to which the Corporation is a party as of the date hereof.
3.14. Labor Matters. The Corporation has no employees other than
Shareholder. Listed on Schedule 3.14 hereto is the present salary or rate of
compensation for Shareholder.
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3.15. Benefit Plans. The Corporation has no employee benefit plans or
agreements except for those set forth in the Employment Agreement or set
forth in the employment agreement between the Corporation and the Shareholder.
3.16. Intellectual Property. The Corporation has good and marketable title
to all of the copyrights, patents, designs and other intellectual property
used or proposed to be used in the business of the Corporation (all of the
foregoing referred to herein as the "Intellectual Property"), in each case
free and clear of any liens, claims, charges, encumbrances or rights of
others of any nature whatsoever, and the Corporation has the sole ownership
rights in said Intellectual Property, except that the Corporation has applied
for trademark registration of the name and logo described on Schedule 3.16
and makes no warranty or representation with respect to the outcome of such
application or the likelihood of the grant of any trademark protection with
respect thereto.
3.17. Schedules and Exhibits. All Schedules and Exhibits attached hereto
are true, correct and complete as of the date hereof.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Shareholder, as of the date hereof,
as follows:
4.1. Organization and Standing. Purchaser is a corporation duly organized,
validly existing, and in good standing under the laws of Delaware.
4.2. Authority and Status. Purchaser has the full corporate power and
authority to execute and deliver this Agreement, to perform hereunder, and
to consummate the transactions contemplated hereby without the necessity of
any act, approval or consent of any other person or entity whomsoever. The
execution, delivery and performance by Purchaser of this Agreement and each
and every agreement, document and instrument provided for herein have been
duly authorized and approved by the Board of Directors of Purchaser. This
Agreement, and each and every other agreement, document and instrument to be
executed and delivered by Purchaser in connection herewith constitute or
will, when executed and delivered, constitute the valid and binding
obligation of Purchaser, enforceable against it in accordance with their
respective terms.
4.3. No Violation. The execution and delivery by Purchaser of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (a) violate any provision of the charter or bylaws of Purchaser,
(b) violate, conflict with or result in a breach of any agreement, instrument
or understanding to which Purchaser is a party or to which any of its assets
are subject or (c) violate any order, decree, judgment, statute, regulation,
ordinance or other law or requirement to which the Purchaser or any of its
parents, subsidiaries or affiliates are subject.
4.4. Consents and Approvals. No consent, approval, authorization, order,
filing or registration by or with any person not a party to this Agreement or
any governmental or quasi-
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governmental or regulatory agency is required to be obtained by the Purchaser
with regard to the execution of this Agreement or of any other agreement or
instrument contemplated herein, including, without limitation, the
Shareholders Agreement, the Noncompete Agreement or the Employment Agreement,
or of the consummation of the transactions contemplated hereby or thereby.
4.5. Litigation. There is no litigation or proceeding pending or
threatened against the Purchaser or any of its parents, subsidiaries or
affiliates which would question or challenge the execution of this Agreement
or any other agreement or instrument herein contemplated, including, without
limitation, the Shareholders Agreement, the Noncompete Agreement and the
Employment Agreement, or the consummation of the transaction contemplated
hereby and thereby.
4.6. No Bankruptcy or Insolvency. No bankruptcy, insolvency,
reorganization, rearrangement or similar action or proceeding, whether
voluntary or involuntary, is pending, threatened or otherwise contemplated by
or against Purchaser.
4.7. Broker and Finder Fees. Purchaser has not used any broker, finder
or other agent in connection with this transaction. Purchaser agrees to
indemnify Shareholder for any claims brought by any broker, finder or other
agent claiming to have acted on behalf of Purchaser in connection with the
transactions contemplated herein.
4.8. Due Diligence. Purchaser acknowledges that the Corporation was only
recently incorporated and has virtually no financial or business history, has
no customers or immediate sources of income and owns virtually no tangible
assets except those described in the Package. Purchaser further acknowledges
that, except as specifically set forth in this Agreement, neither Shareholder
nor the Corporation nor any of their agents has made any representation or
warranty to Purchaser regarding the Corporation, its business or assets or
the prospects for its success. Purchaser acknowledges that it is buying the
Shares for investment purposes only and not with a view toward resale.
4.9. Bylaws. The Corporation agrees that it shall maintain the
indemnification provisions set forth in Article XI of the Bylaws of the
Corporation, as set forth in Schedule 3.2, so long as either of John T.
Lincoln or Paul G. Shoffeitt is an officer or director of the Corporation,
and any amendment thereto after they cease to be shareholders shall not
retroactively affect any right of any Shareholder thereunder.
Notwithstanding the foregoing, the parties agree that the Corporation shall
have no obligation to indemnify any officer or director for any act, omission
or circumstance occurring or existing prior to the Closing, and Article XI of
the Bylaws shall be amended immediately after Closing consistent with this
sentence.
5. CLOSING.
The Closing shall occur simultaneously with the execution hereof, in
the offices of Dow, Lohnes & Albertson in Atlanta. At the Closing, each of the
following transactions shall occur:
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5.1.2. the resignation of each of the directors and officers of the
Corporation described in Section 2.3;
5.1.3. certificate of status of the Corporation, as of the most recent
practicable date, from the State of Florida;
5.1.4. the Noncompete Agreement executed by Shareholder and the
Corporation;
5.1.5. the Employment Agreement executed by Shareholder and the
Corporation;
5.1.6. the Shareholders' Agreement executed by Shareholder;
5.1.7. an opinion of counsel in substantially the form attached hereto
as Exhibit E;
5.1.8. all books of account, contracts, files and other data and
documents pertaining to the business and operations of the Corporation; and
5.1.9. such other evidence of the performance of all covenants and
satisfaction of all conditions required of Shareholder and the Corporation by
this Agreement, at or prior to the Closing, as Purchaser or its counsel may
reasonably require.
5.2. Performance by Purchaser. Purchaser shall deliver to Shareholder the
following:
5.2.1. cash, by certified check or wire transfer, in the amount of the
purchase price as provided for in Section 2.2;
5.2.2. the Shareholders Agreement and the Noncompete Agreement
executed by Purchaser;
5.2.3. the Employment Agreement executed by the Corporation;
5.2.4. such other evidence of the performance of all the covenants and
satisfaction of all of the conditions required of Purchaser by this
Agreement, at or prior to the Closing, as Shareholder or Shareholder's
counsel may reasonably require;
5.2.5. within 15 days after Closing, certified copies of resolutions
of the Board of Directors of Purchaser, reasonably acceptable to
Shareholder's counsel, ratifying and approving the transactions contemplated
hereby;
5.2.6. a written statement indicating that the Package is fully
complete; and
5.2.7. an opinion of counsel in substantially the form shown in
Exhibit F attached hereto.
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5.2.5. within 15 days after Closing, certified copies of resolutions
of the Board of Directors of Purchaser, reasonably acceptable to
Shareholder's counsel, ratifying and approving the transactions contemplated
hereby;
5.2.6. a written statement indicating that the Package is fully
complete; and
5.2.7. an opinion of counsel in substantially the form shown in
Exhibit F attached hereto.
6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION
6.1. Representations and Warranties. All representations, warranties and
covenants contained in Sections 3 and 4 hereof shall be deemed continuing
representations, warranties and covenants and shall survive the Closing for a
period of eighteen (18) months.
6.2. Indemnification of Purchaser by Shareholder. Shareholder agrees to
indemnify and hold harmless Purchaser against and with respect to:
6.2.1. For a period of eighteen (18) months after the Closing, any and
all actual losses, liabilities or damages arising from or in connection with
any untrue representation, breach of warranty or nonfulfillment of any
covenant by Shareholder contained herein or in any certificate, document or
instrument delivered by Shareholder to Purchaser hereunder;
6.2.2. For a period of three (3) years after the Closing Date, any and
all actual losses, liabilities or damages resulting from the activities of
Shareholder or the Corporation prior to the Closing, except that with respect
to any tax issues, the indemnification provided in this Section 6.2 shall
survive for the entire relevant statute of limitations period; and
6.2.3. Any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including reasonable legal fees
and expenses, incident to any of the foregoing matters set forth in
subsection 6.2.1 or 6.2.2 or incurred in investigating or attempting to avoid
the same or to oppose the imposition thereof, or in enforcing this indemnity.
Notwithstanding any other provision of this Agreement to the contrary, the
Shareholder shall not have any liability under this Section 6.2 until the
aggregate amount of all claims against the Shareholder hereunder exceed Forty
Thousand Dollars ($40,000), and at such time as the aggregate amount of all
claims exceeds such amount, then the Shareholder shall be liable for the full
amount of all such claims, and not limited to the excess.
6.3. Indemnification of Shareholder by the Corporation. The Corporation
agrees to indemnify and hold harmless Shareholder against and with respect to:
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foregoing matters set forth in subsection 6.3.1 or 6.3.2 or incurred in
investigating or attempting to avoid the same or to oppose the imposition
thereof, or in enforcing this indemnity.
6.4. Investigation. Any investigation made at any time by or on behalf of
any party hereto shall not diminish in any respect whatsoever such party's
right to rely on the representations and warranties made by or on behalf of
any other party herein or pursuant to this Agreement.
7. GENERAL PROVISIONS
7.1. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by hand or by overnight
courier service, addressed as follows:
7.1.1. If to Shareholder:
Mr. John T. Lincoln
Care Management Resources, Inc.
1500 Atlantic Boulevard #308
Key West, Florida 33040
With a copy to:
Alan M. Schwartz, Esq.
9861 Broken Land Parkway
Suite 340
Columbia, Maryland 21046
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7.1.2. If to the Corporation:
Care Management Resources, Inc.
c/o Magellan Health Services, Inc.
3414 Peachtree Road, N.E., Suite 1400
Atlanta, Georgia 30326
Attn: Cherie Fuzzell, Esq.
7.1.3. If to Purchaser:
Magellan Health Services, Inc.
3414 Peachtree Road, N.E., Suite 1400
Atlanta, Georgia 30326
Attn: Cherie Fuzzell, Esq.
7.2. Further Assurances. Each party covenants that at any time, and from
time to time after the Closing, it will execute such additional instruments
and take such actions as may be reasonably requested by the other parties to
confirm or perfect or otherwise to carry out the intent and purposes of this
Agreement.
7.3. Waiver. Any failure on the part of any party hereto to comply with
any of its obligations, agreements or conditions hereunder may be waived by
any other party to whom such compliance is owed. No waiver of any provision
of this Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a
continuing waiver.
7.4. Expenses. All expenses incurred by the parties hereto in connection
with or related to the authorization, preparation and execution of this
Agreement and the Closing of the transactions contemplated hereby, including,
without limitation of the generality of the foregoing, all fees and expenses
of agents, representatives, counsel and accountants employed by any such
party, shall be borne solely and entirely by the party which has incurred the
same.
7.5. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
7.6. Headings. The section and other headings in this Agreement are
inserted solely as a matter of convenience and for reference, and are not a
part of this Agreement.
7.7. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto and supersedes and cancels any prior agreements,
representations, warranties, or communications, whether oral, written or
collateral, among the parties hereto relating to the
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transactions contemplated hereby or the subject matter herein. This
Agreement does not modify or supersede the Confidentiality Agreement dated
December 10, 1996 between the parties hereto, a copy of which is attached
hereto as Exhibit G , which agreement shall remain in full force and effect.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, except by an agreement in writing signed by
the party against whom or which the enforcement of such change, waiver,
discharge or termination is sought.
7.8. Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of Georgia which apply to a
contract executed and to be performed entirely within the
State of Georgia, without regard to principles of conflicts of laws.
7.9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.10. Pronouns. All pronouns used herein shall be deemed to refer to the
masculine, feminine or neuter gender as the context requires.
7.11. Schedules and Exhibits Incorporated. All Schedules and Exhibits
attached hereto are incorporated herein by reference, and all blanks in such
Schedules and Exhibits, if any, will be filled in as required in order to
consummate the transactions contemplated herein and in accordance with this
Agreement.
7.12. Construction. The parties acknowledge and agree that this Agreement
is the result of extensive negotiations between the parties and their
respective counsel, and that this Agreement shall not be construed against
either party by virtue of its role or its counsel's in drafting it.
7.13. Assignment. This Agreement may only be assigned with the prior,
written consent of the other parties hereto.
7.14. Time of Essence. Time is of the essence with respect to all
provisions of this Agreement.
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IN WITNESS WHEREOF, each party hereto has executed this Agreement on the
day and year first above written.
SHAREHOLDER:
Witness:
/s/ Cherie Fuzzell, Esq. /s/ John T. Lincoln
- -------------------------------- -------------------------------------
John T. Lincoln
THE CORPORATION:
Care Management Resources, Inc.
Attest: By: /s/ John T. Lincoln
/s/ Cherie Fuzzell, Esq. -------------------------------
- ----------------------------------- Name: John T. Lincoln
Title: President
PURCHASER:
Magellan Health Services, Inc.
Attest: By: /s/ E. Mac Crawford
/s/ Cherie Fuzzell, Esq. --------------------------------
- ---------------------------------- Name: E. Mac Crawford
Title: Chairman, CEO and President
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Exhibit 2.2
SHAREHOLDERS AGREEMENT
This Shareholders Agreement (this "Agreement") is entered into as of this
6th day of February, 1997, by and among Magellan Health Services, Inc., a
Delaware corporation ("Magellan"), John T. Lincoln ("Lincoln"), Paul G.
Shoffeitt ("Shoffeitt") (Magellan, Lincoln and Shoffeitt hereinafter referred
to collectively as the "Shareholders" or individually as a "Shareholder") and
Care Management Resources, Inc., a Florida corporation (the "Corporation").
W I T N E S S E T H:
WHEREAS, the Corporation is authorized to issue 500,000 shares of common
stock (the "Common Stock");
WHEREAS, pursuant to the transactions contemplated by that certain Stock
Purchase Agreement dated of even date herewith between Lincoln, Shoffeitt and
Magellan (the "Stock Purchase Agreement"), each of the Shareholders is or
will be the owner of the number of shares of the Common Stock set forth on
Exhibit A attached hereto (all or a portion of which are sometimes
hereinafter referred to as the "Shares");
WHEREAS, the Shareholders desire to set forth certain rights and
obligations among themselves and the Corporation; and
WHEREAS, the parties hereto desire that certain limitations and
restrictions should be placed upon the sale and transfer of the Shares;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto, intending to
be legally bound, do hereby covenant and agree as follows:
1 Restrictive Legend.
1.1 So long as this Agreement shall remain in force, there shall be
inscribed conspicuously upon each certificate representing the Shares, the
following restrictive legend;
The shares represented by this certificate are subject to a certain
Shareholders Agreement effective as of February 6, 1997, and all amendments
thereto, copies of which Agreement and all amendments thereto are on file at
the principal office of the Corporation, and any sale, bequest, pledge,
encumbrance, mortgage, transfer, gift, assignment, distribution or other
disposition of this certificate in violation of said Agreement shall be
invalid.
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under any state securities
laws. They may not be sold, transferred, conveyed, pledged or hypothecated
unless they have first been registered under said laws or unless the shares
are exempt from registration under said laws.
<PAGE>
1.2 All references in this Agreement to the Shares shall be deemed to
include all subsequent acquisitions of shares of the capital stock of the
Corporation by any of the Shareholders, including without limitation, the
acquisition of shares of capital stock of the Corporation in connection with any
stock dividend, stock split, recapitalization, combination or exchange of
shares, merger, consolidation, acquisition of property or stock, separation,
reorganization or the like, occurring after the date hereof.
2 Right of Co-Sale
2.1 In the event that Magellan desires to make a disposition of all or any
of its Shares pursuant to the terms of a bona fide, written, third party offer
(the "Offer"), Magellan shall deliver written notice of such intention to each
of the other Shareholders (the "Other Shareholders"). If the Offer is for the
purchase of Shares, Magellan shall not sell any Shares unless the party who has
offered to purchase the Shares also extends the Offer in writing (the "Offer
Notice") to each of the Other Shareholders to purchase a proportional amount of
their Shares on the same terms and conditions and at the same price per share as
specified in the Offer, including any remuneration or other benefit paid to
Magellan or any of its parents or subsidiaries, or their respective affiliates
or stockholders. In the case of the Offer being made for consideration other
than cash, the amount of the consideration other than cash shall be deemed to be
the fair market value of such consideration as determined mutually by the Other
Shareholders and the Board of Directors of the Corporation acting in good faith,
as evidenced by a resolution of the Board of Directors, and the Offer Notice
will be deemed to include such cash price terms.
2.2 The Other Shareholders shall have 30 days from the date of receipt of
the Offer Notice to exercise the right of co-sale by delivering to the
Corporation and Magellan notice of such exercise.
2.3 Magellan shall have the right to compel the Other Shareholders to sell
a proportional amount of their Shares pursuant to the terms and conditions
contained in the Offer, provided that Magellan notifies each of the Other
Shareholders of its election to compel such sale in its Offer Notice delivered
to the Other Shareholders, and also provided that the offeror is not an
affiliate, subsidiary or parent of the Corporation or Magellan.
2.4 No Closing shall occur with respect to Magellan unless a Closing will
also occur with respect to the Other Shareholders (if any) who have elected to
participate in the Offer; provided however that in the event the Closing with
respect to the Other Shareholders fails to occur due to a reason other than the
breach of the offeror's duty, the Closing with respect to Magellan shall be
allowed to occur, notwithstanding the failure to close with respect to the Other
Shareholder(s). The Closing of the transactions pursuant to an Offer shall
occur contemporaneously with respect to Magellan's and the Other Shareholder's
Shares and shall be in accordance with the provisions of Section 8 hereof.
2.5 Magellan agrees that in the event that it sells, transfers, conveys or
disposes of all or any of its Shares in a transaction other than as described
in Section 2.1 hereof, whether or not it is part of a reorganization,
recapitalization or other similar event, each of the Other Shareholders shall be
entitled to receive its proportionate share, based on its percentage of the
issued and outstanding shares of capital stock of the Corporation held
immediately prior to such event, of any remuneration, payment or other benefit
paid to Magellan or to any of its parents, subsidiaries, affiliates or
stockholders in connection with such transaction.
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3 OTHER SHAREHOLDERS' PUT RIGHT. At any time after two years from the date
hereof, each of the Other Shareholders shall have the right to sell to
Magellan, and Magellan hereby agrees to purchase, all of the number of shares
of Common Stock specified by the Other Shareholder(s) of either (or both) of
the Other Shareholder's Shares (but in no event shall an Other Shareholder
specify less than the greater of (i) all of his then issued and outstanding
Shares or (ii) 2.5% of the total number of shares of Common Stock then issued
and outstanding) at ninety percent (90%) of the fair market value of such
Shares, as determined at the time of such put notice by an appraiser selected
by mutual agreement of Magellan and the Other Shareholder(s) who elect to
exercise such put option. If the Other Shareholder(s) and Magellan cannot
agree upon an appraiser, each of the Other Shareholder(s) and Magellan shall
select an appraiser (the "Individual Appraisers"), and the Individual
Appraisers shall then mutually select an independent appraiser of national
reputation (the "Independent Appraisers"). The Independent Appraiser shall
then perform the appraisal, and its determination shall be binding and
conclusive on the parties hereto. Each party shall pay all costs and fees of
its Individual Appraiser, and the parties shall each pay one-half (or
one-third, if both of the Other Shareholders are selling) of the costs of the
Independent Appraiser; provided that the Other Shareholder shall pay the
entire costs of the Independent Appraiser in connection with any exercise of
his rights under this Section 3 following the first such exercise of his
rights hereunder. The Other Shareholders may only exercise their rights
under this Section 3 in writing and may do so no more than once in any twelve
month period. In the event that one of the Other Shareholders exercises his
rights under this Section 3, such Other Shareholder and Magellan shall
schedule a Closing, in accordance with the provisions of Section 8 hereof,
for the purchase and sale of such Shares to be held within sixty (60) days of
the exercise of such notice.
4 RIGHT OF FIRST REFUSAL. No Shareholder (a "Selling Shareholder") shall
dispose of any of its Shares without first delivering, in writing, to each of
the other Shareholders (the "Non-Selling Shareholders") notice of such
intended disposition (the "First Notice"), including a summary of the terms
and conditions thereof (the "Section 4 Offer"). The Non-Selling
Shareholders shall have the right and option, which shall be
non-assignable, to purchase, at the price and on the terms and conditions
provided in the Section 4 Offer, all (but not less than all) of the Shares to
which the Section 4 Offer relates (the "Offered Shares"), in proportion to
their then current holdings of shares of the Corporation, or in such other
proportion as the Non-Selling Shareholders may agree. If either or both of
the Non-Selling Shareholders desire to exercise their option, they shall
deliver a notice (the "Second Notice") to that effect to the Selling
Shareholder and to the other Non-Selling Shareholder within twenty (20) days
after the receipt of the Section 4 Offer. In the event that one of the
Non-Selling Shareholders gives a timely Second Notice and other Non-Selling
Shareholder does not, then the electing Non-Selling Shareholder shall have
the right to purchase the remaining Offered Shares by giving notice (the
"THIRD NOTICE") to the first Non-Selling Shareholder and to the Selling
Shareholder no later than ten (10) days after the expiration of the time by
which Second Notices were to have been delivered, and if such Non-Selling
Shareholder fails to timely send a Third Notice electing to purchase all of
the Offered Shares, then the Non-Selling Shareholders shall be deemed to have
elected not to purchase any of the Offered Shares. The Selling Shareholder
and the Non-Selling Shareholders who elect to purchase the Offered Shares
shall agree upon a date, not later than twenty (20) days from the service of
the Second Notice (or Third Notice, if applicable), on which the Closing
shall be held in accordance with Section 8 hereof. In the event that the
Non-Selling Shareholders do not give timely notice of the exercise of their
option to purchase all of the Offered Shares, then within ninety (90) days
from the expiration or termination of such option period, the Offered Shares
may be sold by the Selling Shareholder to a third party; provided
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that the sale is made pursuant to the terms of the Section 4 Offer included in
the First Notice and provided that such third party purchaser executes and
delivers to each of the Non-Selling Shareholders executed counterparts of
this agreement (substituting the name of such third party purchaser in place
of each reference herein to the Selling Shareholder). If for any reason no
such transfer occurs within such ninety (90) day period, the Offered Shares
shall remain subject to this Agreement, and any subsequent disposition of the
Shares must be made in accordance with the provisions hereof.
5 Maintenance of Pro Rate Share
-----------------------------
5.1 During the period commencing on the date hereof and terminating at
such time, if ever, as Magellan and/or its majority owned subsidiaries have
invested or loaned to the Corporation funds equal to Ten Million Dollars
($10,000,000) (the "Funding Period"), the Corporation shall not issue any
equity securities which would reduce the percentage of the issued and
outstanding capital stock of the Corporation held by either of the Other
Shareholders below the percentage held immediately prior to such issuance,
without the consent of each of the Other Shareholders, which may be granted
or denied in their sole and absolute discretion; provided however, that the
Corporation shall be permitted to issue at any time equity securities of any
class to any third party customer of the Corporation in connection with a
transaction pursuant to which the Corporation is acquiring substantial
business and operating revenues from such customer. Nothing contained in
this Section 5.1 or any other provision of this Agreement shall be construed
to obligate Magellan to invest or loan to the Corporation any amount of
funds, all such investments and loans being in the sole discretion of
Magellan.
5.2 After the Funding Period, for as long as one of the Other
Shareholders owns some or all of his Shares, such Other Shareholder shall
have the right to purchase any or all of his pro rata share of any New
Securities (as defined below) which the Corporation may propose to issue and
sell, on the same terms and conditions under which the New Securities are to
be offered to third parties. Such right shall be exercisable by written
notice delivered within 45 days of receipt of written notice from the
Corporation of the proposed issuance of New Securities, which notice shall
include a detailed description of all facts and circumstances relating to
such issuance. The Other shareholder's pro rata share, for purposes of this
section, is the ratio of the number of Shares owned by such Other Shareholder
immediately prior to the issuance of New Securities to the total number of
issued and outstanding shares of Common stock, determined on a fully diluted
basis, immediately prior to the issuance of the New Securities.
5.3 "New Securities" shall mean any capital stock of the Corporation,
whether now authorized or not (including, but not limited to, shares of the
Corporation's capital stock held in its treasury), and rights, options or
warrants to purchase capital stock, and securities of any type whatsoever
that are, or may become, convertible into capital stock, but shall not
include any securities issued in connection with (i) any requirement that the
Corporation issue securities for distribution to a third party customer from
whom the Corporation is receiving or will immediately receive substantial
business and operating revenues or (ii) any additional equity investment by a
third party investor, if all parties hereto consent to such investment.
5.4 The rights granted pursuant to this Section 5 shall expire upon,
and shall not be applicable to, the first sale of Common Stock of the
Corporation to the public, which sale is effected
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pursuant to an underwritten registration statement filed with, and declared
effective by, the Securities and Exchange Commission.
5.5 The rights granted pursuant to this Section 5 shall not be
construed as granting to any Shareholder preemptive rights with respect to
the issuance of New Securities to employees of the Corporation pursuant to
employee incentive stock options.
5.6 Any purchase of New Securities under this Section 5 shall be
made in accordance with the provisions of Section 8 hereof.
5.7 In the event of a stock split, stock dividend, combination of
shares, recapitalization, reorganization or other change in the capital
structure of the Corporation, then the number and the kind of shares covered
by this Agreement shall be appropriately adjusted to reflect such change in
such manner as the Corporation may, in good faith, deem equitable to prevent
dilution of the Shareholders.
6 Incidental Registration Rights
------------------------------
6.1 If the Corporation at any time proposes to register any of its
securities for sale for its own account or for the account of any other
person, it shall give written notice (the "Corporation's Notice") to each of
the Other Shareholders of its intention to do so at least fifteen (15) days
prior to the filing of a registration statement with respect to such
registration with the Securities and Exchange Commission (the "Commission").
If either (or both) of the Other Shareholders desires to exercise his
registration rights hereunder with respect to his Shares, he may demand the
registration of his Shares in connection with the Corporation's registration
at no cost or expense to the Other Shareholder (including without limitation,
for filing fees, attorney fees or any other items) be delivering to the
Corporation, within thirty (30) business days after the delivery of the
Corporation's Notice, written notice of such request (the "Shareholder's
Notice") stating the number of Shares to be registered. The Corporation shall
use its commercially reasonable best efforts to cause all Shares specified in
the Shareholder's Notice to be registered under the Securities Act of 1933,
as amended (the "Securities Act"), so as to permit the sale or other
disposition by such Shareholder.
6.2 If the managing underwriter of such public offering advises the
Corporation in writing that the inclusion in the offering of some or all of
the Shares sought to be registered by the Other Shareholder(s) creates a
significant risk that the price per share which the Corporation will derive
from such offering will be adversely affected, or that the number of shares
sought to be registered is too large a number to be reasonably sold, then
Magellan and the Other Shareholders will proportionally decrease the number
of their Shares to be included in such offering so that no more than the
number of Shares as the managing underwriter advises can be sold without such
adverse impact will be included.
6.3 The Corporation may, for any reason and without the consent of
the Other Shareholders, determine not to proceed with any registration and
abandon the proposed offering, whereupon the Corporation shall be relieved of
any further obligations under the terms of this Section 6 to proceed with
such registration or offering.
6.4 At any time more than 270 days following an offering of Common
Stock of the Corporation, the Other Shareholders shall be entitled to cause
the Corporation to file, by demand made
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jointly or individually by the Other Shareholders (the "Shareholder Demand"),
at no cost or expense to them (including without limitation, for filing fees,
attorney fees or any other items), an additional registration statement with
the Commission to cover all, but not less than all, of their unregistered
Shares of the same class of Shares; provided however, that if a Shareholder
Demand is made independently by one of the Other Shareholders and the second
Other Shareholder elects not to join in the Shareholder Demand, such second
Other Shareholder shall be barred from making a Shareholder Demand for a
period of eighteen (18) months after the expiration of the effectiveness of
the registration statement filed in connection with the earlier Shareholder
Demand.
6.4.1 If all of the Shares sought to be registered under any Shareholder
Demand can be lawfully sold immediately (i.e., without reduction in quantity
due to volume restrictions) pursuant to Rule 144 or Rule 144A of the
Securities Act, then the Corporation shall notify the Shareholder submitting
such Shareholder Demand that Rule 144 or Rule 144A, as applicable, is
available, in which event, the Corporation shall not be required to register
such Shares.
6.4.2 The Other Shareholders shall not be entitled to make or
participate in more than one Shareholder Demand, notwithstanding any
subsequent acquisition by either of them of additional, unregistered Shares.
6.5 Pursuant to any registration subject to a Shareholder's Notice or
Shareholder Demand, the Corporation shall use its commercially reasonable
best efforts to register or qualify the shares covered by such registration
statement under such state securities, blue sky or other applicable laws of
such jurisdictions as each Shareholder with Shares to be covered by the
registration shall reasonably request to enable such Shareholder to
consummate the public sale or other disposition of the Shares owned by such
Shareholder; provided that the Corporation shall not be required in
connection therewith or as an election thereto to qualify to do business or
to file a general consent to service in any such jurisdiction.
Notwithstanding the foregoing, such Shareholder shall have the right to
require the Corporation to complete a registration in any or all of the
states listed on Schedule 6.5 regardless of whether the Corporation is
required thereby to file a qualification to do business or a consent to
service of process.
6.6 Upon receipt of a written notice from the Corporation to suspend sales
to permit the Corporation to correct or update a registration statement or
prospectus, each of the Shareholders shall not (until further notice, not
more than ninety (90) days following the date of the notice to suspend sales)
effect any sales of his Shares.
6.7 Following the effective date of a registration statement filed by the
Corporation hereunder, the Corporation shall prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectuses used in connection therewith as may be necessary to keep
such registration statement effective and current, until the earlier of (i)
the sale of all securities offered for sale pursuant to the registration
statement, or (ii) one hundred eighty (180) days after the effective date of
the registration statement.
6.8 Immediately after the date on which a registration statement filed by
the Corporation under the Securities Act becomes effective, the Corporation
shall use its commercially reasonable best efforts to file with the
Commission all reports, financial statements and other documents and to take
all other actions necessary to make available current public information with
regard to the Corporation to
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enable the Shareholders to make sales of Shares pursuant to Rule 144 and/or
Rule 144A of the Commission under the Securities Act.
6.9 If the Corporation files a registration statement in connection
with an underwritten public offering, each of the Shareholders, if so
requested by the managing underwriter of such public offering, shall not
effect any sale or distribution of any Shares (except pursuant to such
registration statement) of the capital stock of the Company, whether now
owned or hereafter acquired, during the period commencing with the effective
date of such registration statement and ending on the close of business on
the one hundred and eightieth (180th) day thereafter or such time as the
registration statement is withdrawn, whichever is earlier.
6.10 Notwithstanding anything to the contrary contained herein, any
Other Shareholder who elects to have his Shares registered for sale
hereunder, shall bear all fees and expenses of any counsel engaged by such
Other Shareholder in connection therewith, and all underwriting discounts,
brokerage fees or commissions relating to the sale of his Shares.
7 Successor Entity and Subsequent Shareholders
--------------------------------------------
7.1 If the Corporation is merged into or consolidated with another
corporation or other legal entity and the Corporation is not the surviving
entity, (i) in the event Magellan shall be the majority shareholder in the
new entity, Magellan shall make appropriate provision for the preservation of
the rights and obligations of the parties hereto under this Agreement and
(ii) in the event Magellan shall be a minority shareholder in the new entity,
Magellan shall make appropriate provisions such that the Other Shareholders,
if any, who will also become minority shareholders of the new entity will
have the same rights and obligations as Magellan with respect to their status
as minority shareholders in the new entity.
7.2 In the event that a third party shall become a shareholder of the
Corporation prior to any public offering of any securities of the Corporation
pursuant to a transfer under Sections 2 or 4 hereof (a "Subsequent
Shareholder"), such Subsequent Shareholder shall be bound by the terms and
obligations of this Agreement to the same extent as an Other Shareholder.
7.3 In the event that an officer, director or employee of Magellan
or of any of its subsidiaries shall become a shareholder of the Corporation and
shall have additional or differing shareholder rights (and obligations
directly related to those rights) from those set forth herein, the Other
Shareholders, upon their written consent (such consent to be as to the entire
set of rights and obligations and not only as to selected rights and
obligations), shall be deemed to also have such additional or differing
shareholder rights (and obligations directly related to those rights);
provided however, that nothing in this Section 7.3 shall apply to the purchase
price paid by any such shareholder for his or her Shares.
8 CLOSING. At any closing held to transfer Shares pursuant to the
provisions of any sections of this Agreement (a "Closing"):
8.1 The location shall be at the offices of the Corporation unless
otherwise agreed to by all of the parties to the Closing.
8.2 The selling party or parties shall deliver to the purchasing
party certificates representing the Shares to be sold, duly endorsed in blank
or accompanied by stock powers endorsed in blank. In the
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event that the selling party is an Other Shareholder, and that such Other
Shareholder will, after such sale hold less than two percent of the outstanding
Shares, such Other Shareholder shall also deliver to the Corporation, to the
extent applicable, his resignation as a director, officer and/or employee of
the Corporation as well as that of any individual who holds such a position
with the Corporation due to his or her affiliation with the selling party.
8.3 The purchasing party shall pay to the selling party the
applicable purchase price at the closing by delivery of a cashier's check for
the full amount of the purchase price.
8.4 Except as otherwise provided herein, each party shall pay its own
expenses incidental to any transaction provided for in this Agreement.
9 Election of Directors. Magellan agrees to vote its shares to cause John
T. Lincoln to be a member of the Board of Directors of the Corporation until
the later to occur of (i) he no longer holds at least a two percent (2%)
interest in the outstanding Common Stock of the Corporation or (ii) the
termination of his employment with the Corporation.
10 Financial Information. So long as an Other Shareholder holds any
Shares, the Corporation shall deliver to such Other Shareholder (i) such
periodic financial information regarding the Corporation as is routinely
prepared by or on behalf of the Corporation, and (ii) notice of all material
transactions involving the Corporation; provided however, that such notice
may, at the Corporation's discretion, be delivered after the consummation of
such material transaction or transactions.
11 Competing Activities.
11.1 Magellan convenants and agrees, that so long as Magellan holds any
Shares, Magellan and each entity which controls, is controlled by, or is
under common control with Magellan, will refrain from, directly or indirectly
entering into, conducting, carrying on or engaging in the Business (as
defined in Exhibit B attached hereto) anywhere in the United States.
11.2 Each of the Other Shareholders convenants and agrees, that, subject
to the terms of any current or subsequent agreements, including, but not
limited to the Employment Agreement, and any other employment agreements or
noncompete agreements entered into by an Other Shareholder and Magellan or
the Corporation, (i) so long as an Other Shareholder shall be either a
director, officer, employee or consultant of the Corporation, such Other
Shareholder shall refrain from directly or indirectly entering into,
conducting, carrying on or engaging in the Business anywhere in the United
States and (ii) so long as an Other Shareholder owns any Shares, such Other
Shareholder shall refrain from obtaining or having any equity interest in any
entity which is directly or indirectly entering into, conducting, carrying on
or engaging in the Business anywhere in the United States, except for the
ownership of less than 2% of the shares of any company, the shares of which
are traded on any national securities exchange or are quoted on NASDAQ.
11.3 For purposes of this Agreement, the words "directly or indirectly"
shall include participating in any entity or enterprise as an owner, partner,
limited partner, joint venturer, stockholder or in any other capacity,
including without limitation, as principal or agent, or through any person,
subsidiary or employee acting as nominee, agent or otherwise.
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11.4 Notwithstanding anything to the contrary contained herein, the
Business shall not include (i) any consulting business related to behavioral
health care, or (ii) the business conducted by Public Solutions, Inc., which
consists of providing or managing behavioral health care services pursuant to
contracts with federal, state and local governments and governmental
agencies, providing health and human services, including behavioral
healthcare services, to the mentally retarded, the developmentally disabled,
the elderly, persons under the control or supervision of criminal/juvenile
justice systems and other designated populations.
12 Representations and Warranties of Magellan. Magellan represents and
warrants to Shareholder, as of the date hereof, as follows:
12.1 Magellan is a corporation duly organized, validly existing, and
in good standing under the laws of Delaware.
12.2 Magellan has the full corporate power and authority to execute and
deliver this Agreement, to perform hereunder, and to consummate the
transactions contemplated hereby without the necessity of any act, approval
or consent of any other person or entity whomsoever. The execution, delivery
and performance by Magellan of this Agreement and each and every agreement,
document and instrument provided for herein have been duly authorized and
approved by the Board of Directors of Magellan. This Agreement, and each and
every other agreement, document and instrument to be executed and delivered
by Magellan in connection herewith constitute or will, when executed and
delivered, constitute the valid and binding obligation of Magellan,
enforceable against it in accordance with their respective terms.
12.3 The execution and delivery by Magellan of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (a)
violate any provision of the charter or bylaws of Magellan, (b) violate,
conflict with or result in a breach of any agreement, instrument or
understanding to which Magellan is a party or to which any of its assets are
subject or (c) violate any order, decree, judgment, statute, regulation,
ordinance or other law or requirement to which the Magellan or any of its
parents, subsidiaries or affiliates are subject.
12.4 No consent, approval, authorization, order, filing or registration
by or with any person not a party to this Agreement or any governmental or
quasi-governmental or regulatory agency is required to be obtained by
Magellan with regard to the execution of this Agreement or of any other
agreement or instrument contemplated herein or of the consummation of the
transactions contemplated hereby or thereby.
13 Non-Exclusive Remedy. The enforcement by any party hereto of its rights
and remedies pursuant to this Agreement shall not be construed as a waiver of
any other rights or available remedies which it may possess in law or equity
absent this Agreement.
14 Equitable Relief. Each of the Shareholders acknowledges and agrees that a
breach by it of any of the provisions contained in this Agreement will cause
the Corporation and the other Shareholders irreparable injury and damage. By
reason thereof, each of the Shareholders agrees that each party hereto shall
be entitled, in addition to any other remedies it may have under this
Agreement or otherwise and
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without the posting of any bond, to preliminary and permanent injunctive and
other equitable relief to prevent or curtail any breach of this Agreement;
provided, however, that no specification in this Agreement of a specific
legal or equitable remedy shall be construed as a waiver or prohibition
against the pursuing of other legal or equitable remedies in the event of
such a breach.
15. Severability; Independence of Covenants. In the event that any one or
more of the provisions of this Agreement or any word, phrase, clause,
sentence or other portion thereof shall be deemed to be illegal or
unenforceable for any reason, such provision or portion thereof shall be
modified or deleted in such a manner so as to make this Agreement, as
modified, legal and enforceable to the fullest extent permitted under
applicable laws. Each of the parties hereto does hereby expressly authorize
any court of competent jurisdiction to enforce any such provision or portion
thereof or to modify any such provision or portion thereof in order that any
such provision or portion thereof shall be enforced by such court to the
fullest extent permitted by applicable laws.
16. Notices. All notices, demands, requests, consents and approvals which
may be or are required to be given or made pursuant to any provisions of this
Agreement shall be given or made in writing and shall be served personally,
by overnight courier or mailed by prepaid certified or registered mail,
return receipt requested, to the address of each of the parties hereto as set
forth below:
If to the Corporation:
Mr. Steve Davis
Care Management Resources, Inc.
3414 Peachtree Road, N.E., Suite 1400
Atlanta, Georgia 30326
If to Lincoln:
Mr. John T. Lincoln
1500 Atlantic Boulevard #308
Key West, Florida 33040
With a copy to:
Alan M. Schwartz, Esq.
9861 Broken Land Parkway
Suite 340
Columbia, Maryland 21046
If to Shoffeitt:
Paul G. Shoffeitt
2640 Jennings Chapel Road
Woodbine, Maryland 21797
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With a copy to:
Alan M. Schwartz, Esq.
9861 Broken Land Parkway
Suite 340
Columbia, Maryland 21046
If to Magellan:
Magellan Health Services, Inc.
3414 Peachtree Road, N.E., Suite 1400
Atlanta, Georgia 30326
Attn: Cherie Fuzzell, Esq.
or such other address as any of the parties may from time to time advise the
other parties hereto by notice in writing. The date of receipt of any such
notice, demand or request shall be deemed to be the date of giving of such
notice, demand or request if delivered personally, or if mailed or couriered
as aforesaid, the date such notice was delivered to the recipient.
17 Successors and Assigns. This Agreement shall be binding upon, inure to
the benefit of, and be enforceable by the parties hereto and their respective
administrators, legal representatives, personal representatives, nominees,
heirs, successors and permitted assigns and transferees.
18 Counterparts. This Agreement may be executed in multiple counterpart
copies, each of which will be considered an original and all of which
constitute one and the same instrument, binding on all parties hereto, even
though all the parties are not signatory to the same counterpart.
19 Assignment. The Shareholders may only assign this Agreement with the
prior, written consent of the other parties hereto.
20 No Waiver. The failure of any party hereto to enforce the terms of this
Agreement on one or more occasions shall not act to waive any of such party's
rights with respect to any subsequent breach of this Agreement by any other
party.
21 Amendments. This Agreement may not be amended except in a writing duly
executed by each of the parties hereto.
22 Construction. The parties acknowledge and agree that this Agreement is
the result of extensive negotiations between the parties and their respective
counsel, and that this Agreement shall not be construed against either party
by virtue of its role or its counsel's role in the drafting hereof.
23 Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of Georgia which apply to a
contract executed and to be performed entirely within the State of Georgia,
without regard to principles of conflicts of laws.
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24 Headings. The headings in this Agreement are provided for convenience of
reference only and are not to be deemed a part of this Agreement.
25 Conflicts With By-Laws. In the event of a conflict between the provisions
of this Agreement and the By-laws of the Corporation, the provisions of this
Agreement shall govern the conflicting By-law provision.
26 Termination. This Agreement shall remain in effect until terminated by
the mutual written agreement of all the parties hereto; provided however,
that in the event that any Shareholder ceases to hold any Shares, this
Agreement shall terminate with respect to such Shareholder.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
LINCOLN:
Witness:
/s/ Illegible /s/ John T. Lincoln
- ----------------------------- ----------------------------------------
John T. Lincoln
SHOFFEITT:
Witness:
/s/ Illegible /s/ Paul G. Shoffeitt
- ----------------------------- ----------------------------------------
Paul G. Shoffeitt
MAGELLAN:
Magellan Health Services, Inc.
Attest: By: /s/ E.M. Crawford
-------------------------------------
Name: E. Mac Crawford
-----------------------------------
/s/ Illegible Title: Chairman, CEO and President
- ----------------------------- ----------------------------------
CORPORATION:
Care Management Resources, Inc.
By: /s/ John T. Lincoln
------------------------------------
Attest: Name: John T. Lincoln
/s/ Illegible ---------------------------------
- ----------------------------- Title: President
---------------------------------
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EXHIBIT A
LIST OF SHAREHOLDERS' SHARES
Party Number of Shares
----- ----------------
Magellan Health Services, Inc. 340,000
John T. Lincoln 30,000
Paul G. Shoffeitt 30,000
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Schedule 6.5
Registration Territory
California, Florida, Georgia, Illinois, Indiana, Maine, New Jersey, New York,
Pennsylvania, Rhode Island and Texas.
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EXHIBIT B
---------
DEFINITION OF BUSINESS
The term "Business" shall mean the business of providing specialty managed
health care services in the areas of cardiology, ophthalmology, diabetes,
asthma, oncology and other medical sub-specialty areas, including related
case or care management, administrative services, utilization management,
quality management, certification or pre-admission or pre-treatment
certification, assessment and referral, staff clinical services, provider
network services and preferred/exclusive provider organization services.
Notwithstanding the foregoing, the term "Business" shall not include
telemedicine services (e.g., member retention, member/patient satisfaction,
compliance monitoring, physician scheduling and nurse triage), whether
relating to the specialty managed care services provided by the Corporation
otherwise. Notwithstanding the foregoing, it is anticipated that the
Corporation and such subsidiary offering telemedicine services will offer
their respective services in a "bundled" fashion to their respective
customers on such basis as may be mutually agreed by the Corporation and such
subsidiary.
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Exhibit 2.3
OPTION AGREEMENT
This Option Agreement (this "Agreement") is entered into as of this 4th
day of December, 1997, by and among Magellan Health Services, Inc., a Delaware
corporation ("Magellan") and Paul G. Shoffeitt ("Shoffeitt").
WITNESSETH:
WHEREAS, Magellan, John T. Lincoln ("Lincoln"), Shoffeitt and Care
Management Resources, Inc. (the "Corporation") entered into that certain
Shareholders Agreement dated February 6, 1997 (the "Shareholders Agreement");
WHEREAS, Magellan and Shoffeitt desire to set forth additional
agreements as between themselves, which shall not affect or impair the rights of
Lincoln or the Corporation under the Shareholders Agreement;
WHEREAS, Shoffeitt is the owner of 30,000 shares of the Corporation's
stock, which shares represent all of his ownership of shares of the Corporation,
and which represent 7.5% of the total number of issued and outstanding shares of
stock of the Corporation on the date hereof;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto, intending to be
legally bound, do hereby covenant and agree as follows:
1 SHOFFEITT'S PUT RIGHT
1.1 At any time during the period commencing on November 1,1998 and
ending at the close of business on November 30, 1998, Shoffeitt will have the
right to sell Magellan, and Magellan will agree to purchase, Fifteen Thousand
(15,000) shares of the Corporation's stock, in consideration for the issuance of
a number of shares of Magellan's common stock which shall be determined by
dividing Five Hundred Thousand Dollars ($500,000) by the average closing price
per share of Magellan's common stock on the ten Trading Days immediately prior
to the second Trading Day preceding the date on which such stock is to be
issued; provided however, that the number of shares of Magellan's common stock
to be issued shall be adjusted appropriately to account for stock splits, stock
dividends, recapitalizations or other events affecting the number of issued and
outstanding shares of Magellan's common stock, which occur after ten Trading
Days on which such average closing price per share is based.
1.2 At any time during the period commencing on November 1, 1999 and
ending at the close of business on November 30, 1999, Shoffeitt will have the
right to sell to Magellan, and Magellan will agree to purchase, Seven Thousand
Five Hundred (7,500) shares of the Corporation's stock, in consideration for the
issuance of a number of shares of Magellan's common stock which shall be
determined by dividing Two Hundred Fifty Thousand Dollars ($250,000) by the
average closing price per share of Magellan's common stock on the ten Trading
Days immediately prior to the second Trading Day preceding the date on which
such stock is to be issued; provided however,
<PAGE>
that the number of shares of Magellan's common stock to be issued shall be
adjusted appropriately to account for stock splits, stock dividends,
recapitalizations or other events affecting the number of issued and
outstanding shares of Magellan's common stock, which occur after the ten
Trading Days on which such average closing price per share is based.
1.3 At any time during the period commencing on November 1, 2000 and
ending at the close of business on November 30, 2000, Shoffeitt will have
the right to sell to Magellan and Magellan will agree to purchase, Seven
Thousand Five Hundred (7,500) shares of the Corporation's stock, in
consideration for the issuance of a number of shares of Magellan's common
stock which shall be determined by dividing Two Hundred Fifty Thousand
Dollars ($250,000) by the average closing price per share of Magellan's
common stock on the ten Trading Days immediately prior to the second Trading
Day preceding the date on which such stock is to be issued; provided however,
that the number of shares of Magellan's common stock to be issued shall be
adjusted appropriately to account for stock splits, stock dividends,
recapitalizations or other events affecting the number of issued and
outstanding shares of Magellan's common stock, which occur after the ten
Trading Days on which such average closing price per share is based.
1.4 Notwithstanding anything to the contrary contained herein, the
period within which the options described in Sections 1.1, 1.2 and 1.3 may be
exercised may, at Shoffeitt's election, be delayed and extended as provided
in Section 4 below, but in such event, Shoffeitt shall continue to be
entitled to exercise the rights set forth in this Section 1.
1.5 Notwithstanding any other provision of this Agreement to the
contrary, no merger, reorganization, reverse stock split, recapitalization,
consolidation or any other event (a "Reorganization"), shall in any way
reduce or diminish the number of shares of Magellan's stock which Shoffeitt
is entitled to receive upon the exercise of his options under this Section 1
or upon the exercise of Magellan's call option under Section 5, or the amount
of the cash consideration which is payable to Shoffeitt if Magellan elects to
pay cash to Shoffeitt under Section 1.6 or Section 5, or otherwise reduce or
impair any other rights which Shoffeitt has under this Agreement.
Notwithstanding any such Reorganization, Shoffeitt shall be entitled to
exercise all of his rights under this Agreement, including without
limitation, the option to sell and transfer to Magellan (in which event
Magellan shall be obligated to purchase) his original shares of the
Corporation or such substitute securities as he may then hold as a result of
the Reorganization ("Substitute Securities"), in the same manner as he is
entitled to sell to Magellan his shares of the Corporation under this Section 1,
so long as the number of Substitute Securities being sold by Shoffeitt to
Magellan at any one time represents 50% (in the case of the exercise of
options under Section 1.1), or 25% (in the case of the exercise of options
under Section 1.2 or 1.3) of his total holdings of Substitute Securities
(calculated immediately after such Reorganization). For example, if
Shoffeitt were exercising his option under Section 1.1 and immediately prior
to such exercise, he held a total of 3.45 shares of Substitute Securities, he
would sell 50% of his 3.45 Substitute Securities to Magellan under Section
1.1. Without limiting the generality of the foregoing, Shoffeitt
specifically acknowledges and agrees that the parties anticipate that the
Corporation will be merged with and into Allied Specialty Care Services,
Inc., a Florida corporation, and that in the event such merger is consummated
as anticipated, his ownership interest in the surviving entity will be
approximately .63%, but the parties
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agree that such reduced percentage to be held by Shoffeitt shall have no
impact whatsoever on the amount of consideration to be paid (in Magellan
stock or cash) upon the exercise of Shoffeitt's options under this Section 1
or upon the exercise of Magellan's options under Section 5. The parties
hereto agree that all references in this Agreement to shares of the
Corporation held by Shoffeitt shall be deemed to include Substitute
Securities resulting from any Reorganization.
1.6 Notwithstanding any other provision of this Agreement to the
contrary, Magellan may, in its sole discretion, elect to pay cash to
Shoffeitt in the amount referenced in Section 1.1, 1.2 or 1.3, as applicable,
in lieu of the issuance of shares of Magellan's common stock under such
applicable Section, as consideration for the payment of the Corporation's
shares being sold to Magellan pursuant to such applicable Section.
2 Trading Day Defined. A "Trading Day" is defined as a day on which
Magellan's common stock (i) is not suspended from trading on the New York
Stock Exchange (or such other exchange as may then be the primary market for
the trading of Magellan stock) at the close of business; and (ii) has traded
at least once on such exchange.
3 Registration and Resales.
3.1 No later than January 15, 1998, Magellan shall file a registration
statement under the Securities Act of 1933 (the "Securities Act") with
respect to the issuance and resale of the shares of Magellan's common stock
upon the exercise of the options set forth in Section 1 hereof, and shall use
its reasonable efforts to cause such registration statement to become
effective by March 1, 1998. Magellan shall use reasonable efforts to
maintain the effectiveness of such registration statement for a period
commencing on the initial effective date of such registration statement and
terminating on the later of (i) December 31, 2001, or (ii) one year following
the issuance of shares pursuant to the option set forth in Section 1.3 if
such issuance occurs later than December 31, 2000 due to the delay in the
exercise of such options pursuant to Section 4.2 hereof. Shoffeitt agrees to
provide to Magellan such information regarding himself as Magellan may from
time to time reasonably request in writing, and as required by the Securities
Act, and he agrees to immediately notify Magellan of any change in such
information. Shoffeitt agrees to enter into such agreements as are customary
in connection with the registration of shares for resale, including without
limitation, underwriting agreements and powers of attorney in customary form,
substance and scope, and to take such other actions as Magellan or the
underwriters, if any, may reasonably request in order to expedite or
facilitate the resale of the registered shares.
3.2 During any period in which the registration statement filed
pursuant to Section 3.1 is effective, Magellan shall have the right, upon
giving notice to Shoffeitt, to require Shoffeitt not to sell any such shares
pursuant to such registration statement for a period of time which Magellan
deems reasonably necessary (which time shall be specified in such notice but
in no event longer than a period of 90 days), if (i) Magellan is engaged in
an offering of shares of Magellan's common stock by Magellan for its own
account or is engaged in or proposes to engage in discussions or negotiations
with respect to, any merger, acquisition, other form of business
combination, divestiture, tender offer, financing or other transaction, or
there is any other event or state of facts
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relating to Magellan which is material to Magellan (any such transaction,
event or state of facts referred to herein as a "Material Activity"), and
(ii) such Material Activity has not been publicly announced and would, in the
opinion of counsel for Magellan, require disclosure so as to permit the
registered shares to be sold in compliance with applicable law.
3.3 Shoffeitt acknowledges and agrees that the offer and sale of all
shares of Magellan's common stock received upon exercise of the options
contained herein shall be subject to Magellan's Stock Trading Policy dated
August 1, 1997, as it may be amended from time to time (the "Stock Trading
Policy"), to the extent that such Stock Trading Policy is then applicable to
Shoffeitt, and (ii) by applicable federal and state securities laws. In
addition, Shoffeitt hereby agrees that in the event he exercises any such
options, he shall not sell more than Ten Thousand (10,000) shares of
Magellan's common stock on any single Trading Day (such figure to be adjusted
appropriately to account for stock splits, stock dividends, recapitalizations
or other events affecting the number of issued and outstanding shares).
3.4 All expenses incident to the registration of the shares of
Magellan's common stock pursuant to the provisions of this Section 3,
including without limitation, all registration and filing fees, fees and
expenses of compliance with securities laws, printing and engraving expenses,
messenger and delivery expenses and fees and disbursements of counsel for
Magellan and all independent certified public accountants, underwriters
(excluding underwriter discounts and any selling commissions) and any persons
retained by Magellan (all such expenses referred to herein as "Registration
Expenses"), will be paid by Magellan; provided that all expenses incurred by
Shoffeitt to retain any counsel, accountant or other advisor (if any), will
not be deemed Registration Expenses and will be paid by Shoffeitt. The
underwriting discounts or commissions and any selling commissions together
with any stock transfer or similar taxes attributable to sales by Shoffeitt
of the shares of Magellan's common stock, will be paid by Shoffeitt.
4 Exercise of Put Options
4.1 If Shoffeitt desires to exercise his put options hereunder, he
shall give written notice to Magellan during the period in which the option
may be exercised, and such options may only be exercised as to all of the
shares of the Corporation's stock which he is entitled to put to Magellan at
any one time.
4.2 Upon receipt of notice from Shoffeitt of the exercise of his
option hereunder, Magellan shall notify Shoffeitt if (i) Shoffeitt is then
deemed to be a Designated Individual under the Stock Trading Policy, and if
so, whether there is any circumstance or condition then existing that would
cause Shoffeitt's ability to sell all of the shares of Magellan's common
stock which Shoffeitt would receive upon the exercise of such option, during
a then-current Window Period (as defined in the Stock Trading Policy) or
during the next scheduled Window Period, to be suspended or cancelled
altogether, or (ii) the registration statement contemplated by Section 3.1 is
not then effective. In the event that Magellan notifies Shoffeitt of such
anticipated suspension or cancellation of a Window Period, or of the
non-effective status of such registration statement, then Shoffeitt shall
have the right to notify Magellan of his election to delay the exercise of
such option (i) until the then-current Window Period is re-opened (provided
that any such Window Period remains open for not less than twenty (20)
consecutive days after
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Magellan provides written notice to Shoffeitt, and Magellan hereby agrees to
provide written notice of any such re-opening), or the next scheduled Window
Period is opened, as applicable (and such option shall not expire until the
closing of such Window Period), or (ii) in the case of a delay due to a
non-effective registration statement, until such registration statement is
effective.
5 Magellan's Call Option. At any time during the period commencing upon
the expiration of any of the options set forth in Section 1.1, 1.2 or 1.3,
and ending at the close of business one year after the commencement of such
call option hereunder (except in the case of an extension of the exercise
period as set forth below), Magellan shall have the right to acquire from
Shoffeitt, and Shoffeitt shall be obligated to sell to Magellan following
written notice of the exercise of such option, the number of shares of the
Corporation's stock to which the expired put option relates; provided
however, that Lincoln shall be afforded the opportunity to purchase, in
accordance with the terms of the Shareholders Agreement, his pro rata share
of Shoffeitt's shares to be acquired by Magellan. In consideration for such
shares, Magellan shall issue to Shoffeitt a number of shares of Magellan's
common stock determined by dividing the dollar value specified in Section
1.1, 1.2 or 1.3, as applicable, by the average closing price per share of
Magellan's common stock on the ten Trading Days immediately prior to the
second Trading Day preceding the date on which such stock is to be issued;
provided however, that the number of shares of Magellan's common stock to be
issued shall be adjusted appropriately to account for stock splits, stock
dividends, recapitalizations or other events affecting the number of issued
and outstanding shares of Magellan's common stock, which occur after the ten
Trading Days on which such average closing price per share is based.
Notwithstanding the foregoing, Magellan shall not be entitled to exercise
any option under this Section 5 unless there is at the time of exercise an
open Window Period which will remain open for at least 20 consecutive days
after the exercise of such option. In the event that there would not be an
open Window Period for a period of at least 20 consecutive days after the
exercise of the option, then the period in which Magellan may exercise its
option hereunder shall be automatically extended until either a Window Period
is open for at least 20 consecutive days, or until one year after Magellan
notifies Shoffeitt that he is no longer subject to Magellan's Stock Trading
Policy. Notwithstanding any other provision of this Section 5 to the
contrary, Magellan may, in its sole discretion, elect to pay cash to Shoffeitt
in the amount referenced in Section 1.1, 1.2 or 1.3, as applicable, in lieu
of the issuance of the number of shares of Magellan's common stock specified
under such applicable Section, as consideration for the payment of the
Corporation's shares being sold to Magellan upon the exercise of Magellan's
option hereunder. In addition, notwithstanding anything to the contrary
contained herein, Magellan may elect, by delivering ten (10) days' prior
written notice at any time after January 1, 1998, to acquire all of the
shares of the Corporation held by Shoffeitt for a total cash purchase price
of One Million Dollars ($1,000,000) plus such additional amount, if any,
necessary to offset, on an after-tax basis, any adverse tax consequences
which may be suffered by Shoffeitt as a result of the exercise of such option
prior to the time when Shoffeitt would have been entitled to exercise his
options under Section 1, with such cash purchase price payable at the Closing
for the purchase of such shares. In the event that Magellan exercises such
option, Lincoln shall be afforded the opportunity to purchase, in accordance
with the terms of the Shareholders Agreement, his pro rata share of
Shoffeitt's shares to be acquired by Magellan.
6 Closing. In the event that Shoffeitt exercises his rights under
Section 1, or Magellan exercises its rights under Section 5 as to shares of
the Corporation's stock held by Shoffeitt, Magellan shall schedule a Closing
for the purchase and sale of such shares of the Corporation's stock to be
held as soon as practicable considering that Shoffeitt may desire to
immediately sell the shares of Magellan stock to
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<PAGE>
be received at the Closing, and in no event more than 30 days after the
delivery of such exercise notice, or at Shoffeitt's election made by
delivering written notice of such election to Magellan, on a day which is
within the first ten (10) days of the next open Window Period. At any
closing held to transfer shares of the Corporation's stock pursuant to the
provisions of Section 1 or 5 of this Agreement (a "Closing");
6.1 The location shall be at the offices of the Corporation unless
otherwise agreed to by all of the parties to the Closing.
6.2 Shoffeitt shall deliver to Magellan (or its assignee) the
certificates representing the shares of the Corporation's stock to be sold,
duly endorsed in blank or accompanied by stock powers endorsed in blank.
6.3 Magellan shall deliver to Shoffeitt at the Closing, stock
certificates representing the number of shares of Magellan's common stock
required to be issued under Section 1.1, 1.2 or 1.3, as applicable, in payment
for such stock of the Corporation being sold.
6.4 Except as otherwise provided herein, each party shall pay its own
expenses incidental to any transaction provided for in this Agreement.
7 No Transfer Prior to Expiration of Option. Shoffeitt hereby agrees
that during the period commencing on the date hereof and continuing until one
year after the expiration of all of the options granted to Shoffeitt
hereunder, Shoffeitt shall not sell, transfer, assign, pledge, encumber or
otherwise dispose of any of the shares of the Corporation held by Shoffeitt,
other than a transfer to Magellan in a Closing pursuant to Section 6 above
(and to Lincoln to the extent he elects to exercise his right of first
refusal under Section 4 of the Shareholders Agreement), and any sale,
transfer, assignment, pledge, encumbrance or other disposition prior to such
date shall be void and of no effect. Notwithstanding anything to the
contrary contained herein, Shoffeitt shall have no obligation under this
Section 7 in the event that Magellan breaches any material obligation to
Shoffeitt hereunder if such breach is not cured within 30 days of receipt of
written notice of such breach from Shoffeitt.
8 Waiver of Duties
8.1 Shoffeitt hereby agrees that neither Magellan nor the Corporation,
nor the officers or directors of Magellan or the Corporation, shall have any
fiduciary duty, quasi-fiduciary duty or any other express or implied duty, at
law or in equity (in their capacity as officers, directors, majority
shareholder or otherwise), to the Corporation or Shoffeitt as shareholders,
officers, directors, or employees of the Corporation. Accordingly, Magellan
and its affiliates shall be free to engage in any business or activity which
Magellan may desire, in its sole discretion, without regard to whether such
business or activity is competitive with the business of the Corporation, and
without providing any opportunity to Shoffeitt or the Corporation to
participate in any such activity or business, and without any compensation to
Shoffeitt or the Corporation. Shoffeitt further acknowledges that subject to
agreement by Lincoln, Magellan shall be free to cause the Corporation to
transfer or license the right to use any and all of the assets of the
Corporation to any other subsidiary of Magellan for no consideration or for
nominal consideration, as Magellan deems in the best interest of Magellan, in
its sole discretion. Notwithstanding the foregoing, Magellan hereby
6
<PAGE>
agrees that it shall not cause or permit the Corporation to be dissolved
prior to the expiration of the options granted herein or to take any action
which adversely affects any of Shoffeitt's rights under this Agreement, it
being understood and agreed that notwithstanding any sale, dissolution,
cessation of business, or Reorganization, all of Shoffeitt's rights
hereunder, including the put options set forth in Section 1, are absolute,
nonvoidable and vested immediately upon the execution and delivery hereof by
each of the parties. Following the expiration or termination of the options
granted herein, Magellan shall be free to cause the dissolution of the
Corporation in accordance with the Florida Business Corporation Act, and
Shoffeitt acknowedges that he is unlikely to receive any distributions in
connection with any such dissolution after appropriate reserves are
established for the Corporation's known and contingent liabilites. The
parties further agree that the rights of Shoffeitt under this Agreement shall
not be increased, diminished or otherwise affected by any transaction entered
into by the Corporation, by any increase or decrease in the net worth of the
Corporation, or by the insolvency or bankruptcy of the Corporation.
8.2 In consideration of the rights granted to Shoffeitt herein,
Shoffeitt hereby releases and forever discharges Magellan and the Corporation
from any and all obligations and liabilities under the Shareholders
Agreement, including without limitation, all obligations and liabilities
arising under the provisions of Sections 2, 3, 4, 5, 6, 7, 11.1 and 12 of the
Shareholders Agreement. In addition, Shoffeitt hereby agrees that in the
event that Magellan desires to purchase all or any of the shares of the
Corporation from Lincoln, Shoffeitt shall have no right to exercise any right
of first refusal with respect thereto, notwithstanding the provisions of
Section 4 of the Shareholders Agreement. However, Shoffeitt and Magellan
acknowledge and agree that Lincoln continues to have a right of first refusal
with respect to the sale of Shoffeitt's shares of the Corporation, and in the
event that Shoffeitt desires to exercise his option under Section 1.1., 1.2
or 1.3 hereof. Shoffeitt shall give written notice of such intent to Lincoln
at the same time as Shoffeitt gives notice to Magellan of his intent to
exercise such option, and each of Shoffeitt and Magellan acknowledge and
agree that in the event that Lincoln desires to exercise his right of first
refusal under Section 4 of the Shareholders Agreement with respect to
Lincoln's pro rata share of the shares of the Corporation to be sold by
Shoffeitt, then each of Magellan and Shoffeitt shall comply with the
provisions of Section 4 of the Shareholders Agreement with respect thereto,
and in such event, both the number of shares of the Corporation's stock to be
sold to Magellan hereunder, and the number of shares of Magellan's common
stock to be issued to Shoffeitt by Magellan, shall each be reduced
accordingly. Shoffeitt further agrees that in the event that Magellan
presents Shoffeitt with an amendment to the Shareholders Agreement which
incorporates the provisions of this Agreement and imposes no additional
duties, obligations, costs or expenses on Shoffeitt, does not adversely
affect any of his rights under this Agreement, and which includes Lincoln as
a party, Shoffeitt shall execute such agreement and deliver same to Magellan
within 10 days of presentment of such amendment.
9 Representations and Warranties of Magellan. Magellan represents and
warrants to Shoffeitt, as of the date hereof, as follows:
9.1 Magellan is a corporation duly organized, validly existing, and in
good standing under the laws of Delaware.
7
<PAGE>
9.2 Magellan has the full corporate power and authority to execute and
deliver this Agreement, to perform hereunder, and to consummate the
transactions contemplated hereby without the necessity of any act, approval
or consent of any other person, entity or governmental authority. This
Agreement, and each and every other agreement, document and instrument to be
executed and delivered by Magellan in connection herewith, constitute or
will, when executed and delivered, constitute the valid and binding
obligation of Magellan, enforceable against it in accordance with their
respective terms.
9.3 The execution and delivery by Magellan of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
violate any provision of the charter or bylaws of Magellan, (ii) violate,
conflict with or result in a breach of any agreement, instrument or
understanding to which Magellan or the Corporation is a party or to which any
of its assets are subject or (iii) violate any order, decree, judgment,
statute, regulation, ordinance or other law or requirement to which Magellan
or any of its parents, subsidiaries or affiliates are subject.
9.4 No consent, approval, authorization, order, filing or registration
by or with any person not a party to this Agreement or any governmental or
quasi-governmental or regulatory agency is required to be obtained by
Magellan or the Corporation with regard to the execution of this Agreement or
of any other agreement or instrument contemplated herein or of the
consummation of the transactions contemplated hereby or thereby.
10 Representations and Warranties of Shoffeitt. Shoffeitt represents and
warrants to Magellan, as of the date hereof, as follows:
10.1 Shoffeitt has the full capacity to execute and deliver this
Agreement, to perform hereunder, and to consummate the transactions
contemplated hereby without the necessity of any act, approval or consent of
any other person or entity whomsoever. This Agreement, and each and every
other agreement, document and instrument to be executed and delivered by
Shoffeitt in connection herewith constitute or will, when executed and
delivered, constitute the valid and binding obligation of Shoffeitt,
enforceable against him in accordance with their respective terms.
10.2 The execution and delivery by Shoffeitt of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
violate, conflict with or result in a breach of any agreement, instrument or
understanding to which Shoffeitt is a party, or (ii) violate any order,
decree, judgment, statute, regulation, ordinance or other law or requirement
to which Shoffeitt is subject.
10.3 Shoffeitt has been represented by legal counsel in the
negotiation of this Agreement, and has reviewed this Agreement with counsel
and fully understands each of the provisions contained herein.
11 Notices. All notices, demands, requests, consents and approvals which
may be or are required to be given or made pursuant to any provisions of this
Agreement shall be given or made in writing and shall be served personally,
by overnight courier or mailed by prepaid certified or
8
<PAGE>
registered mail, return receipt requested, to the address of each of the
parties hereto as set forth below:
If to Shoffeitt:
Mr. Paul G. Shoffeitt
2640 Jennings Chapel Road
Woodbine, Maryland 21797
With a copy to:
Alan M. Schwartz, Esq.
9861 Broken Land Parkway
Suite 340
Columbia, Maryland 21046
If to Magellan:
Magellan Health Services, Inc.
3414 Peachtree Road, N.E., Suite 1400
Atlanta, Georgia 30326
Attn: Cherie Fuzzell
with a copy to:
J. Eric Dahlgren, Esq.
One Ravinia Drive
Suite 1600
Atlanta, Georgia 30346
or such other address as any of the parties may from time to time advise the
other parties hereto by notice in writing. The date of receipt of any such
notice, demand or request shall be deemed to be the date of giving of such
notice, demand or request if delivered personally, or if mailed or couriered
as aforesaid, the date such notice was delivered to the recipient.
12 Non-Exclusive Remedy. The enforcement by any party hereto of its
rights and remedies pursuant to this Agreement shall not be construed as an
election of remedies or a waiver of any other rights or available remedies
which it may possess in law or equity absent this Agreement. The failure of
any party hereto to enforce the terms of this Agreement on one or more
occasions shall not act to waive any of such party's rights with respect to
any subsequent breach of this Agreement by any other party.
13 Equitable Relief. Each of the parties hereto hereby acknowledges and
agrees that a breach by such party of any of the provisions contained in this
Agreement will cause the other party irreparable
9
<PAGE>
injury and damage. By reason thereof, each party hereby agrees that the
other party shall be entitled, in addition to any other remedies it may have
under this Agreement or otherwise and without the posting of any bond, to
preliminary and permanent injunctive and other equitable relief to prevent or
curtail any breach of this Agreement; provided, however, that no
specification in this Agreement of a specific legal or equitable remedy shall
be construed as a waiver or prohibition against the pursuing of other legal
or equitable remedies in the event of such a breach.
14 Severability; Independence of Covenants. In the event that any one or
more of the provisions of this Agreement or any word, phrase, clause,
sentence or other portion thereof shall be deemed to be illegal or
unenforceable for any reason, such provision or portion thereof shall be
modified or deleted in such a manner so as to make this Agreement, as
modified, legal and enforceable to the fullest extent permitted under
applicable laws without destroying the purpose and intent of this Agreement.
Each of the parties hereto does hereby expressly authorize any court of
competent jurisdiction to enforce any such provision or portion thereof or to
modify any such provision or portion thereof in order that any such provision
or portion thereof shall be enforced by such court to the fullest extent
permitted by applicable laws.
15 Counterparts. This Agreement may be executed in multiple counterpart
copies, each of which will be considered an original and all of which
constitute one and the same instrument, binding on all parties hereto, even
though all the parties are not signatory to the same counterpart.
16 Assignment. Shoffeitt acknowledges and agrees that he may not assign,
pledge or otherwise dispose of any of his rights under this Agreement without
the prior written consent of Magellan, which may be granted or denied in its
sole discretion; provided however, that in the event of the death of
Shoffeitt, this Agreement shall be binding upon, inure to the benefit of, and
be enforceable by the respective administrators, legal representatives,
personal representatives and heirs of Shoffeitt. Magellan acknowledges and
agrees that it may not assign, delegate or otherwise dispose of any of its
duties or obligations under this Agreement.
17 Amendments. This Agreement may not be amended except in a writing duly
executed by each of the parties hereto.
18 Construction. The parties acknowledge and agree that this Agreement is
the result of extensive negotiations between the parties and their respective
counsel, and that this Agreement shall not be construed against either party
by virtue of its role or its counsel's role in the drafting hereto.
19 Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of Georgia which apply to a
contract executed and to be performed entirely within the State of Georgia,
without regard to principles of conflicts of laws.
20 Headings. The headings in this Agreement are provided for convenience
of reference only and are not to be deemed a part of this Agreement.
21 Conflicts With By-Laws. In the event of a conflict between the
provisions of this Agreement and the By-laws of the Corporation, the
provisions of this Agreement shall govern the conflicting By-law provision.
10
<PAGE>
22 Attorneys' Fees. In the event of any dispute or litigation between
Magellan (and/or any of its affiliates) and Shoffeitt arising from or in
connection with this Agreement or with respect to the subject matter of the
Mutual Release, the prevailing party shall be entitled to recover from the
other party all reasonable costs and expenses incurred in connection
therewith, including without limitation, reasonable attorneys' fees.
23 Entire Agreement. This Agreement, together with the Mutual Release
entered into as of the date hereof by and between Magellan, the Corporation
and Shoffeitt, constitutes the entire agreement among the parties hereto and
supersedes and cancels any prior agreements, representations, warranties, or
communications, whether oral, written or collateral, among the parties hereto
relating to the transactions contemplated hereby or the subject matter
herein. The parties hereto acknowledge that notwithstanding anything to the
contrary contained herein, this Agreement shall not operate or be construed
in any manner to affect or modify any of Lincoln's rights under the
Shareholders Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
SHOFFEITT:
Witness:
[illegible] /s/ Paul G. Shoffeitt
- ------------------------------ -------------------------------------
Paul G. Shoffeitt
MAGELLAN:
Magellan Health Services, Inc.
Attest: By: Craig L. McKnight (SEAL)
-------------------------------------
Name: Craig McKnight
------------------------------
Title: Executive Vice President,
[illegible] Finance & Accounting (CFO)
- ------------------------------ ------------------------------
12
<PAGE>
Exhibit 2.4
STOCK OPTION WAIVER AGREEMENT
THIS STOCK OPTION WAIVER AGREEMENT (the "Agreement"), effective as of
December 4, 1997, by and between MAGELLAN HEALTH SERVICES, INC., a Delaware
corporation (the "Company"), and PAUL G. SHOFFEITT ("Executive").
WITNESSETH:
----------
WHEREAS, the Company previously granted to Executive stock option awards
(the "Awards") under the Magellan Health Services, Inc. In 1994 Stock Option
Plan and the Magellan Health Services, Inc. 1996 Stock Option Plan
(collectively, the "Plans"), and, pursuant to the Awards, Executive was
granted the right to purchase an aggregate number of 45,000 shares of the
common stock of the Company (the "Stock");
WHEREAS, Executive has requested that the Company renegotiate certain
terms of his employment agreement, dated as of April 1, 1997 (the "Employment
Agreement"), to result in a reduction in his required workload to take into
account his current medical situation, to extend the term thereof, to entitle
Executive to compensation in the event of early termination due to his
disability and to make other modifications to the Employment Agreement; and
WHEREAS, in consideration of the willingness of the Company to
renegotiate Executive's Employment Agreement, the Company and Executive now
desire to negotiate an agreement pursuant to which Executive shall waive and
extinguish all rights to purchase the Stock under the Awards in accordance
with the terms of this Agreement.
NOW, THEREFORE, the Company and Executive agree, for the consideration
set forth herein, the sufficiency of which hereby is acknowledged, as follows:
1. Waiver. Effective as of the date hereof, Executive permanently and
------
unconditionally waives all rights he possesses under the Awards, whether or
not his rights under the Awards currently are vested. Executive agrees that
the Company, upon execution of this Agreement, shall be under no obligation
to issue shares of Stock to Executive under the Awards. This Agreement shall
have no application to any other rights or benefits of Executive, including
<PAGE>
without limitation, those under the PER Plan of Green Spring Health Services,
Inc. or the Company's Capital Accumulation Account.
2. Miscellaneous.
-------------
(a) This Agreement shall be construed under the laws of the State of
Georgia without reference to the principals of conflicts of laws thereof.
(b) This Agreement is binding upon the heirs, executors and
administrators of Executive and on the successors and assigns of the Company.
(c) This Agreement may be modified only in writing, signed by both
parties hereto.
(d) If any provision of this Agreement is invalid or unenforceable, it
shall not affect the other provisions, and this Agreement shall remain in
effect as though the invalid or unenforceable provisions were omitted. Upon a
court determination that any term or other provision is invalid or
unenforceable, the court shall modify such provision so that it is
enforceable to the extent permitted by applicable law.
IN WITNESS WHEREOF, each of the parties, agreeing to be bound hereby,
adopts this Agreement, effective as set forth herein, by executing, or
causing their authorized representative to execute, this Agreement below.
SHOEFFEITT
Witness:
/s/ Bill [illegible] /s/ Paul G. Shoffeitt
- ---------------------- ---------------------------
Paul G. Shoffeitt
MAGELLAN:
Magellan Health Services, Inc.
Attest: By: /s/ Craig McKnight (SEAL)
------------------------------------
Name: Craig McKnight
----------------------------------
/s/ [illegible] Title: Executive Vice President, Finance
- ----------------------- ---------------------------------
and accounting (CFO)
2
<PAGE>
Exhibit 2.5
February 3, 1994
Mr. Paul G. Shoffeitt
2640 Jennings Chapel Road
Woodbine, Maryland 21797
Dear Paul:
This letter agreement ("Agreement") is in response to your recent
proposal to the Board of Directors of Green Spring Health Services, Inc.
("Green Spring") to alter your role at Green Spring from an employee position
as the President and Chief Executive Officer of Green Spring (and of Green
Spring's subsidiary, Green Spring Mental Health Services of New Jersey, Inc.
("GSNJ")) to a consultant position to the Board of Directors and management
of Green Spring, GSNJ and any other existing subsidiaries or divisions of
Green Spring (sometimes collectively referred to as, the "Company"). More
specifically, you have requested that the Company agree to an arrangement
under which you devote less than full time to the business and affairs of the
Company and modify the restrictive covenants (including, but not limited to,
non-competition and non-solicitation covenants) contained in the Employment
Agreement dated as of April 28, 1993 between you and the Company (the
"Employment Agreement"), in order that you may pursue additional personal
opportunities. Subject to the provisions of Section 15, this Agreement shall
supersede the Employment Agreement and terminate the duties and obligations
of both parties under the Employment Agreement. The Board of Directors of the
Company is willing to accept your decision and agrees that it would be
mutually beneficial for you to continue your relationship with the Company as
a consultant, subject to the terms and conditions regarding your continuing
relationship with the Company set forth in this letter.
Your transition from an employee, as well as the President and
Chief Executive Officer of the Company, to a consultant position with the
Company is subject to the following terms and conditions:
1. POSITION:
Effective as of February 3, 1994, you will assume a consulting
position with the Company (the "Consultancy"), with the title "Vice
Chairman" and only with such powers and duties as from time to time
may be assigned to you by
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1994
Page 2
the Chairman or the Board of Directors of Green Spring in
accordance with the terms and conditions of this Agreement, thereby
resigning your position as an employee, officer and President and
Chief Executive Officer of each of Green Spring and GSNJ.
2. DUTIES:
From February 3, 1994 until written notice of termination of the
Consultancy is given by either party to the other party, you hereby
agree to:
(a) upon the direction of the President and the Board of
Directors, provide assistance to the Company with respect to
matters that you were responsible for or otherwise involved
with during your employment with the Company, as a consultant
to the Company, including but not limited to, the following
areas, (i) account relations and marketing and sales support,
(ii) management recruitment and employee relations, and (iii)
Board of Directors and management consultation and support, and
(b) take such reasonable steps as are requested by the
Company and apply yourself to facilitate the above endeavors.
3. COMPENSATION:
In connection with your relationship with the Company as a
consultant and in consideration of your covenants and agreements
set forth in this Agreement and subject to the terms and conditions
of this Agreement, Green Spring agrees as follows: commencing
February 3, 1994, to pay you at the rate of Four Thousand One
Hundred Sixty-seven and 00/100 Dollars ($4,167.00) per month (the
"Monthly Payments"), payable in accordance with Green Spring's
normal payroll practices until termination, by either party, of the
Consultancy hereunder.
The Company is currently developing a long term incentive
compensation plan (the "Long Term Plan") for its employees. In the
event that such Long Term Plan is adopted and arrangements can be
made to include you as a participant in the Long Term Plan,
notwithstanding that you will not be an employee of the Company,
the Company will do so. The terms of your participation shall be
determined by the Company's Board of Directors in their sole
reasonable discretion.
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1994
Page 3
4. EXPENSES.
For the duration of the Consultancy, the company shall reimburse you for
all reasonable and necessary business expenses incurred by you in the
performance of your consulting services hereunder, consistent with the
Company's expense reimbursement policies as in effect from time to time.
5. INDEPENDENT CONTRACTOR; TERMINATION
Notwithstanding any title you may have, you expressly understand and agree
that, for the duration of the Consultancy, (i) you are an independent
contractor, (ii) you are not an officer, director, agent for, or an
employee of, the company, and (iii) you have no authority to bind the
Company. You further acknowledge and agree that either party to this
Agreement can terminate the Consultancy established under this Agreement
at any time, with or without cause, upon fourteen (14) days written notice
to the other at the address set forth in Section 16 of this Agreement;
provided however, that termination of the Consultancy shall not constitute
termination of Sections 6-10, 12-13 and 17-23 inclusive of this Agreement
which shall continue to apply and remain in full force and effect as set
forth therein.
6. CONFIDENTIALITY; NON-DISCLOSURE
Except as otherwise authorized by the company, its officers, directors,
employees or agents, or except as required by law or judicial process, you
agree not to reveal either directly or indirectly any proprietary
information of the Company. For purposes of this Agreement, "proprietary
information" shall mean any information relating to the Company's Business
(as defined in Section 7) that has not previously been publicly released
by duly authorized representatives of the Company and shall include (but
shall not be limited to) information encompassed in all designs, plans,
proposals, marketing and sales plans, financial information, costs,
pricing information, customer information, and all methods, concepts or
ideas in or reasonably related to the Company's Business (as defined in
Section 7). You further agree to regard and preserve as confidential all
proprietary information pertaining to the Company's Business (as defined
in Section 7) that was obtained by you in the course of your employment
with the Company or during the period of the Consultancy, whether you have
such information in your memory or in writing or
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1994
Page 4
other physical form. You will not, for the duration of the Consultancy,
without authority from the company to do so, and, after termination of
the consultancy, without written authority from the Company to do so,
use for your benefit or purposes, except as reasonably required for the
discharge of your duties as set forth in this Agreement, nor disclose to
others, either during the term of this Agreement or thereafter, except as
permitted hereunder, any proprietary information connected with the
Company's Business (as defined in Section 7), or plans or developments
of the Company. This provision shall not apply after the proprietary
information has been voluntarily disclosed to the public, independently
developed and disclosed by others, or otherwise enters the public
domain. Further, in the event that the company expands its business
beyond the scope of the Company's Business (as defined in Section 7),
and you provide consulting services to the Company in relation to such
expanded business and the Company shares proprietary information regarding
such expanded business with you, you hereby agree to keep such proprietary
information confidential in accordance with the terms of the Section 6.
7. NON-COMPETITION
For the duration of the Consultancy, and for a period of three (3) years
following the termination of the Consultancy by either party, you agree
that you will not in any way, directly or indirectly, manage, operate,
control or accept employment or a consulting position with or otherwise
advise or assist or be connected with, or own, or have any other interest
in or right with respect to (other than through ownership of not more
than five percent (5%) of the outstanding shares of a corporation's stock
which is listed on a national securities exchange) any enterprise which
competes (or is deemed to compete by fulfilling the conditions stated in
the following sentence) with the Company or a subsidiary or affiliate of
the Company in the business engaged in by the Company, which, for purposes
of this Section 7, shall be deemed to be limited to mental health and
substance abuse, utilization review of inpatient and outpatient care,
mental health and/or substance abuse network management, mental health
and/or substance abuse managed care programs, EAP services, mental health
and substance abuse treatment, mental health and/or substance abuse
review guidelines licensure and training, facility site survey or
certification for mental health and/or substance abuse treatment
facilities, mental health
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1996
Page 5
and/or substance abuse care management services, mental health and/or
substance abuse benefit utilization and cost analysis or a mental health
and/or substance abuse managed care network (the "Company's Business"), in
any state or territory, including the District of Columbia. For purposes of
this Section 7, an enterprise shall be deemed to be competing with the
Company's Business notwithstanding the fact that it does not within the
three (3) year period following the termination of the Consultancy
actually compete with the Company if (i) within the three (3) year
period following the termination of the Consultancy the enterprise is
actively developing the capability to compete with the Company (such as by
developing mental health criteria), (ii) you have knowledge of such efforts
and (iii) within six (6) months of developing such capability but in no
event later than six (6) months following three (3) years from the date of
termination of the Consultancy the enterprise actively competes with the
Company. Nothwithstanding any provision of this Agreement to the contrary,
nothing in this Agreement shall be interpreted to restrict you from working
for the Patuxent Medical Group, Incorporated or Columbia Medical Plan,
Incorporated or their subsidiaries or the successors or assigns thereof
after the termination of the Consultancy hereunder or treating clinical
patients during or after the term of this Agreement; provided, however,
that except for treating clincal patients, you shall not provide any
services to Patuxent Medical Group, Incorporated or Columbia Medical Plan,
Incorporated or their subsidiaries, or the successors or assigns thereof
which compete with the Company's Business.
8. NON-SOLICITATION.
You further agree that for the duration of the Consultancy, and for a period
of three (3) years following the termination of the Consultancy by either
party, you will refrain from, directly or indirectly: (i) interfering with
the employment of any other employee of the Company or a subsidiary of the
Company; (ii) urging, soliciting or inducing any employee of the Company to
leave the employ of the Company; (iii) hiring or attempting to hire any
employee of the Company; and (iv) soliciting the trade of, trading with, or
contracting with customers of the Company (including subsidiaries,
affiliates or organizations related to such customers) for any purpose that
competes with the Company's Business (as defined in Section 7).
<PAGE>
Dr Paul G. Shoffeitt
February 3, 1994
Page 6
9. RETURN OF MATERIALS
Upon termination of the Consultancy as provided in Section 5
hereof, you agree to return immediately any and all of the
Company's files and documents (including all copies thereof) and
other Company property and Company issued credit cards in your
possession.
10. MUTUAL GENERAL RELEASE
In connection with your transition from an employee and officer to
of the Company to a consultant to the Company and the payments
and other consideration provided for in this Agreement, you
hereby release and forever discharge the Company, its
stockholders, directors, officers, employees, agents and
representatives, successors and assigns, and the Company, its
successors and assigns, hereby release and forever discharge you,
your heirs, executors, administrators, agents, and
representatives, (hereinafter collectively the ""Released
Parties''), except for any non-vicarious gross negligence or
wilful misconduct by you (excluding any non-vicarious gross
negligence or willful misconduct arising from any act or event
about which any member of the Board of Directors of the Company
has any knowledge as of the date of this Agreement), from any and
all obligations arising from all prior agreements, whether written
or oral, between the Company and you, including, but not limited
to, the Employment Agreement and the Letter Agreement dated
November 9, 1993 between the Company and you (as provided in
paragraph 4 of such letter agreement). Additionally, you hereby
release and forever discharge the Company, its stockholders,
directors, officer, employees, agents and representative,
successors and assigns (hereinafter collectively the "Persons")
from any claim you or your heirs, executors or administrators may
now have, or will have, against the Persons in connection with
your prior employment or termination from employment with the
Company and the Company, its successors and assigns, hereby
release and forever discharge the Released Parties, except for any
non-vicarious gross negligence or willful misconduct arising from
any act or event about which any member of the Board of Directors
of the Company has any knowledge as of the date of this
Agreement), from any claim the Company, its successors and
assigns, may now have, or will have, against you in connection
with your prior employment or termination of your employment with
the Company, including, as set forth in the preceding sentence,
any
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1994
Page 7
claims arising from the Employment Agreement. You hereby confirm and agree
that it is your intention by this general release to release the Persons from
any and all claims, demands, damages, actions, suits of any and every nature,
known or unknown, from the beginning of the world to the date of this
release, including, but not limited to, claims arising under federal or state
statutes, including claims brought under the Age Discrimination in Employment
Act, 29 U.S.C. sections 621-634, or at common law, for wrongful discharge,
breach of contract, or any other claims growing out of any legal restriction
on the Company's right to terminate its employees and further including,
without limitation any claim for incentive compensation, bonuses
[(excluding bonuses accrued through December 31, 1993)], vacation or
severance pay. The Company on behalf of itself, its successors and assigns
hereby confirms and agrees that it is the Company's intention by this general
release to release the Released Parties from any and all claims, demands,
damages, actions, suits of every and any nature, known or unknown, from the
beginning of the world to the date of this release. Notwithstanding any other
provision of this Section 10 to the contrary, this mutual general release
shall not (i) release you or the Company from your or its obligations under
this Agreement, (ii) release you from any non-vicarious gross negligence or
wilful misconduct by you (excluding any non-vicarious gross negligence or
wilful misconduct arising from any act or event about which any member of the
Board of Directors of the Company has any knowledge as of the date of this
Agreement) as described above in this Section 10, (iii) in any way alter,
amend or extinguish any rights that you may have under the Green Spring
Health Services, Inc. Savings Plan, (iv) have any effect with respect to the
parties hereto as it may relate to claims brought by third parties against
either party hereto, or (v) in any way alter, amend or extinguish any right
of indemnification you may have under the Certificate of Incorporation or
By-Laws of the Company, or the General Corporation Law of the State of
Delaware or the Corporation and Associations Article of the Annotated Code of
the State of Maryland.
11. ANNOUNCEMENTS.
The parties agree that, except for employee announcements in the form
attached hereto, no press release or general public communications shall be
issued by any of the parties thereto with respect to your transition from
President and Chief Executive Officer to the Company to a consultant to the
Company; provided that it is not the
<PAGE>
Dr. Pual G. Shoffeitt
February 3, 1994
Page 8
intention of the parties to create the appearance that you have not
terminated your duties and responsibilities under the Employment Agreement.
12. BREACH
You understand and agree that in the event you breach in any material respect
any of your covenants or agreements hereunder, any and all payments under
this Agreement shall cease immediately; provided, however, you shall continue
to remain bound by all of the provisions of this Agreement (except Sections 1
through 5, 11, 14, 15 and 16 inclusive that pertain to the Consultancy).
Provided, further, notwithstanding any other provision of this Agreement to
the contrary, in the event of any alleged breach of this Agreement by you,
the Company shall provide you with written notice of such breach and you
shall have fourteen (14) days to cure such breach.
13. REMEDIES AND INJUNCTIVE RELIEF
In the event of any breach by you of your obligations under this Agreement,
you shall be liable to the Company for any and all direct (but not
consequential except in the event you breach the non-competition provisions
of Section 7 hereof, which shall be limited for the purposes of the
limitation on consequential damages in this Section 13 to mean working for,
consulting with, or advising competitors of the Company in the mental health,
substance abuse, or EAP service areas) loss, cost or expense, incurred by the
Company because of such breach. The Company shall have any and all remedies
available at law or in equity. It is further understood and agreed by the
parties hereto that the rights and privileges granted to the Company in
Sections 6, 7, 8 and 9 of this Agreement by you hereunder are of a special,
unique, extraordinary and intellectual character, which gives them a peculiar
value, the loss of which cannot be reasonably or adequately compensated in
damages in any action at law, and that a breach by you of any of the
provisions contained in Sections 5, 7, 8 and 9 of this Agreement will cause
the Company great and irreparable injury and damage. You hereby expressly
agree that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1994
Page 9
prevent a breach of Sections 6, 7, 8 and 9 of this Agreement by you.
This provision shall not, however, be construed as a waiver of any
of the rights which the Company may otherwise have for damages.
14. REVIEW AND CONSULTATION
Each party hereto certifies that it has consulted with counsel
regarding the terms and conditions set forth in this Agreement,
that it knows and understands the contents and effects hereof and
that it knowingly, voluntarily and freely executes and delivers this
Agreement.
15. AGE DISCRIMINATION NOTIFICATION.
This Agreement affects certain rights you may have under the Age
Discrimination in Employment Act, as amended, and, therefore, you
should consult with an attorney before executing this Agreement. By
executing this Agreement, you certify that in accordance with 29
U.S.C. Section 626(f), you have carefully read the foregoing
Agreement, you know and understand the contents and effects hereof,
and this Agreement is being executed by you knowingly, voluntarily,
freely and after consultation with counsel. You further certify
that you have had the opportunity to consider this Agreement for
a period of twenty-one (21) days prior to its execution, and
that neither the Company nor any of its officers, directors,
stockholders, employees, agents, representatives, affiliates,
subsidiaries, parent or holding companies, successor or assigns
have made any representations concerning the terms, conditions or
effects of this Agreement other than these contained herein.
Furthermore, the parties acknowledge that this Agreement may be
revoked by you within seven (7) days following the execution
hereof, by sending written notice of revocation 16 below, in which
case the Company shall have no Agreement, the terms contained in
Section 4 of the Employment Agreement shall remain unaltered and
shall continue to apply through December 31, 1996.
16. NOTICES
All notices and other communications which are required or may be
given under this Agreement shall be in writing
<PAGE>
Dr. Paul G. Shoffeitt:
February 3, 1994
Page 10
and shall be deemed to have been given if delivered personally or sent
by registered or certified mail, return receipt requested postage
prepaid:
If to the Company:
Green Spring Health Services, Inc.
5565 Starrett Place
Suite 500
Columbia, MD 21044
Attention: President
If to you:
Dr. Paul G. Shoffeit:
2640 Jennings Chapel Road
Woodbine, Maryland 21797
With a copy to:
Alan M. Schwartz, Esquire
Suite 209
9861 Broken Land Parkway
Columbia, Maryland 21046
or to such other place as either party shall have specified by notice
in writing to the other.
17. ASSIGNMENT.
You understand and agree that you may not assign this Agreement nor
assign or delegate any of your rights or obligations under this
Agreement. The Company may not assign this Agreement or any of its
rights or obligations hereunder except for an assignment in connection
with any reorganization, merger, consolidation, dissolution, or sale of
substantially all of the stock or assets of the Company; provided however,
that, upon such permitted assignment, you shall not be obligated to
perform any services or duties under this Agreement. This Agreement shall
be binding upon and inure to the benefit of any permitted assigns.
18. INVALIDITY; SEVERABILITY
The authorship of this Agreement shall not be relevant to the
interpretation of any provision thereof. If any term or provision of this
Agreement shall to any extent be invalid or unenforceable, such invalidity
or unenforceability shall not affect any other provision or
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1994
Page 11
part of a provision of this Agreement, but that this Agreement shall be
reformed and construed as if such invalid or unenforceable provision had
never been contained herein and such provision or part shall be reformed
to that it would be valid and enforceable to the fullest extent permitted
by law.
19. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all of which shall be
deemed to constitute one agreement.
20. ENTIRE AGREEMENT.
This Agreement (inclusive of Exhibit 1 attached hereto and incorporated
herein) constitutes the entire agreement between the Company and you with
respect to the subject matter hereof, it may only be modified in writing
and it supersedes any and all prior agreements between the parties.
21. WAIVER.
The waiver by a party hereto of any breach by the other party of any
provision of this Agreement shall not operate or be construed as a waiver
of any subsequent breach by a party hereto.
22. AUTHORIZATION.
The Company represents and warrants that its execution and delivery of
this Agreement and its performance of this Agreement have been duly
authorized and ratified by any requisite corporate acts and this
Agreement has been approved by all of the directors of the Company. Each
party hereto represents and warrants that its execution and delivery of
this Agreement and its performance of this Agreement shall not conflict
with, violate, result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which such party is bound or affected.
<PAGE>
Dr. Paul G. Shoffeitt
February 3, 1994
Page 12
23. APPLICABLE LAW.
This Agreement shall be governed by and interpreted under the laws of
the State of Maryland.
If you are in agreement with the foregoing, please sign the enclosed
acknowledgement below, and return it to me, whereupon we both become legally
bound.
Very truly yours,
GREEN SPRING HEALTH SERVICES, INC.
By: /s/ Neil Hollander
-------------------------------
Neil Hollander, Chairman
ACCEPTED AND AGREED TO
INTENDING TO BE LEGALLY BOUND.
THIS 7TH DAY OF Feb., 1994
/s/ Paul G. Shoffeitt
- ----------------------
Paul G. Shoffeitt
r
<PAGE>
Exhibit 2.6
AMENDMENT TO LETTER AGREEMENT
This Amendment to Letter Agreement (this "Amendment") is effective as of
December 4, 1997, by and among Green Spring Health Services, Inc., a Delaware
corporation (the "Company") and Paul G. Shoffeitt ("You").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, you and the Company entered into that certain Letter Agreement
dated February 3, 1994 (the "Letter Agreement");
WHEREAS, the parties recognize that due to a current medical condition,
you are unable to fully perform your duties under the Letter Agreement, and
the parties therefore desire to amend the terms of the Letter Agreement as
set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto, intending to be
legally bound, do hereby covenant and agree as follows:
1. The introductory clause in Section 2 of the Letter Agreement is hereby
amended to read as follows: "From February 3, 1994 until April 1, 2000
(unless this Agreement is terminated earlier by you by giving fourteen (14)
days written notice, or is terminated earlier by the Company in accordance
with Section 5.2), you hereby agree to:"
2. Section 5 is amended by redesignating such section as Section 5.1
entitled "INDEPENDENT CONTRACTOR" and by deleting the second sentence from
such Section 5.1.
3. A new Section 5.2 is hereby added to the Agreement, to read in its
entirety as follows:
5.2 TERMINATION.
-----------
(a) TERMINATION DUE TO RESIGNATION AND TERMINATION WITH CAUSE. Your
engagement under this Agreement and all of your rights to receive the
compensation set forth in Section 3 will cease upon the occurrence of
any of the following events: (i) the effective date of your resignation
(which you may provide at any time upon fourteen (14) days written
notice), or (ii) termination for cause at the discretion of the Company
under the following circumstances: (A) you are guilty of fraud or
dishonesty involving you duties on behalf of the Company; (B) you have
deliberately and intentionally failed or refused to faithfully and
diligently perform significant duties assigned to you pursuant to the
terms of this Agreement, or otherwise to have breached any material term
under this Agreement; (C) you have willfully failed or refused to abide
by the Company's
<PAGE>
policies, rules, procedures or directives; or (D) you are convicted of a
misdemeanor involving moral turpitude or any felony. For the events
described in clauses (ii)(B) and (ii)(C) of the preceding sentence, the
Company shall give you written notice of such event and an opportunity to
cure such circumstance for a period of thirty (30) days; provided, however,
such opportunity to cure shall be given only once for the same or related
events arising from the same factual circumstances.
(b) TERMINATION WITHOUT CAUSE. You and/or the Company may terminate this
Agreement without cause at any time upon the giving of thirty (30) days'
prior written notice to the other party. If the Company terminates
this Agreement under this Section 5.2(b), the Company may direct you to
immediately cease providing services. If the Company terminates this
Agreement under this Section 5.2(b), the Company shall continue to pay
you the compensation provided for pursuant to Section 3 of this
Agreement for the remaining balance of the period of engagement set
forth in Section 2 (without regard to such early termination) or for a
period of one (1) year from the effective termination date, whichever is
greater in length or time. No other compensation or benefits set forth
in Sections 3 and 4 of this Agreement shall be paid, unless otherwise
provided in the terms of the applicable plan or benefit.
(c) DISABILITY. If you become Disabled, the Company may terminate this
Agreement at any time, and any such termination shall be deemed a
termination without cause under Section 5.2(b) above, and in the event
of such termination, you shall be entitled to all of the rights set
forth in Section 5.2(b) above. You shall be deemed Disabled if Employer
determines that you are, by reason of any physical or mental condition,
unable to perform a substantial portion of your essential duties on a
part-time basis pursuant to this Agreement.
(d) EFFECT OF TERMINATION. Upon termination of this Agreement, all rights
and obligations under this Agreement shall cease except for the rights
and obligations under Sections 5.2(b), 5.2(c), 6 through 10, 12 through
13 and 17 through 23 of this Agreement, and all procedural and remedial
provisions of this Agreement. A termination of this Agreement shall
constitute a termination of your engagement with the Company for all
purposes of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
Witness:
/s/ Illegible /s/ Paul G. Shoffeitt
- ------------------ ----------------------
Paul G. Shoffeitt
COMPANY:
Green Spring Health Services, Inc.
Attest: By: /s/ Henry Harbin
-------------------------------
/s/ Illegible Name: Henry Harbin
- ------------------- -----------------------------
Title: President
----------------------------
<PAGE>
Exhibit 2.7
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and
between Paul G. Shoffeitt, a resident of the State of Maryland ("Officer"),
and Magellan Health Services, Inc., a Delaware corporation ("Employer").
WHEREAS, Employer is engaged in the business of developing and providing
managed care health services and products; and
WHEREAS, Employer desires to obtain the services of Officer and Officer
desires to render services to Employer; and
WHEREAS, Employer and Officer desire to set forth the terms and
conditions of Officer's employment with Employer under this Agreement; and
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and agreements contained in this Agreement, the parties
agree as follows:
STATEMENT OF AGREEMENT
----------------------
1. EMPLOYMENT. Employer agrees to employ Officer on a part-time
basis, and Officer accepts such part-time employment, commencing on April 1,
1997, and continuing up to and including April 1, 2000, unless terminated
earlier pursuant to Section 6 below. After the initial three (3) year term
(the "Term") has expired, this Agreement will automatically renew on April
1st each year for a one (1) year term. Either party may terminate the
Agreement during a renewal year by providing the other party with thirty (30)
days written notice of their intent to terminate the Agreement.
2. POSITION AND DUTIES OF OFFICER. Officer will serve as Executive
Vice President of Managed Care reporting to Employer's Chief Executive
Officer. Officer agrees to serve in such position or in such other Senior
Officer level position as Employer determines from time to time, and to
perform the Officer level duties commensurate with Officer's professional
abilities and qualifications on a part-time basis as Employer may assign from
time to time to Officer until the expiration of the term or such time as
Officer's employment with Employer is terminated.
3. TIME DEVOTED AND LOCATION OF OFFICER.
(a) Employer recognizes that, due to a current medical condition,
Officer is unable to perform duties on a full-time basis that would
necessitate extensive business travel. As such, Employer agrees to employ
Officer on a part-time basis. Further, Employer agrees Officer shall not be
required to travel more than one business day per week (a business day is
defined as a full day which could include an overnight stay at the business
destination). Officer agrees that he will diligently endeavor to perform
services contemplated by this Agreement in accordance
<PAGE>
with the policies and directives the Employer's Chief Executive Officer
establishes. Notwithstanding any provisions of this Agreement to the contrary,
this Agreement does not prohibit Officer from providing services to or on
behalf of Green Spring Health Services, Inc., its successors, assigns ("Green
Spring"), or affiliates.
(b) Officer may elect to locate his primary business office either
at Green Spring's Corporate Offices located in Columbia, Maryland, or at
Officer's personal residence.
4. COMPENSATION.
(a) BASE SALARY. Employer shall pay Officer a salary in the
amount of Fifty Thousand Dollars (50,000.00) per year which amount shall be
paid semi-monthly, minus required withholdings for federal, state, and local
taxes, and deductions authorized by Officer. Such salary shall be subject to
review and adjustment by Employer's Chief Executive Officer and Board of
Directors from time to time consistent with past practice and consistent with
other officers at his level.
(b) TIME DEVOTED. Officer's travel and other work assignments
associated with the services he performs on behalf of Green Springs shall be
included in determining the part-time travel and duties he performs under
this Agreement.
5. BENEFITS.
(a) BENEFITS. In addition to the compensation provided for in
Section (4), Officer shall be entitled during the term of this Agreement to
such other benefits of employment with Employer as are now or may later be in
effect for part-time Exempt Employees. Additionally, Officer shall be
entitled to participate in Employer's Executive Benefit Plan except as to any
insurance policies which require full-time status for eligibility.
(b) EXPENSES. During the term of this Agreement, Employer shall
reimburse Officer promptly for all reasonable travel, entertainment, parking,
business meeting and similar expenditures in pursuance and furtherance of
Employer's business upon receipt of reasonably supporting documentation as
required by Employer's policies applicable on its Officers generally. Officer
may elect and be reimbursed for first class air travel due to Officer's
medical condition.
6. TERMINATION.
(a) TERMINATION DUE TO RESIGNATION AND TERMINATION WITH CAUSE.
Officer's employment under this Agreement and all of his rights to receive
the salary and benefits, set forth in Section 4 and 5, will cease upon the
occurrence of any of the following events: (i) The effective date of
Officer's resignation, or (ii) termination for cause at the discretion of
Employer under the following circumstances: (A) Officer shall be guilty of
fraud or dishonesty involving his duties on behalf of Employer; (B) Officer
shall have deliberately and intentionally failed or
2
<PAGE>
refused to faithfully and diligently perform significant duties assigned to
Officer pursuant to the terms of this Agreement, or otherwise to have breached
any material term under this Agreement; (C) Officer shall have willfully
failed or refused to abide by Employer's policies, rules, procedures or
directives; or (D) Officer shall be convicted of a felony or a misdemeanor
involving moral turpitude.
For the events in subsections (B) and (C), Employer shall give Officer
written notice of such event and an opportunity to cure such situation for a
period of thirty (30) days. Provided, however, such opportunity to cure must
only be given once for the same or related events arising from the same
factual circumstances.
(b) Termination without Cause. Employer and/or Officer may
terminate this Agreement without cause at any time upon the giving of thirty
(30) days prior written notice to the other party. If Employer terminates
this Agreement without cause, Employer may direct Officer to immediately
cease from providing services. If Employer terminates this Agreement without
cause, Employer shall continue to pay Officer the base salary and automobile
allowance compensation provided for pursuant to Section 4 of this Agreement
for the remaining balance of the period of employment set forth in Section 1
or for a period of one (1) year, whichever is greater in length of time upon
the effective termination date. No other compensation or benefits set forth
in Sections 4 and 5 of this Agreement, shall be paid, unless otherwise
provided in the terms of the applicable plan or benefit.
(c) Automatic Termination. This Agreement shall automatically
terminate upon death or permanent disability of Officer. Officer shall be
deemed to be "Disabled" or to suffer from a "Disability" within the meaning
of this Agreement if Officer is deemed to be permanently disabled within the
meaning of any disability insurance policy maintained by Employer for Officer
or, in the absence of such policy, if Officer is, by reason of any medically
determinable physical or mental condition, unable to perform a substantial
portion of his essential duties on a part-time basis pursuant to this
Agreement for a period of six (6) consecutive months. The term "essential
duties" is defined as the ability to consistently perform his assigned
part-time duties, including travel requirements, with or without reasonable
accommodation.
(d) Effect of Termination. Upon termination of this
Agreement, all rights and obligations under this Agreement shall cease except
for the rights and obligations under paragraphs 4 and 5 of this Agreement to
the extent Officer has not been compensated for services performed prior to
termination (the amount to be prorated for the portion of the pay period
prior to termination), and the rights and obligations under paragraphs 6(b),
7, 8 and 9 and all procedural and remedial provisions of this Agreement. A
termination of this Agreement shall constitute a termination of Officer's
employment with Employer for all purposes of this Agreement.
(e) Termination Upon a Change of Control. Officer shall be
entitled to terminate his employment upon a change of control and shall be
entitled to all of the salary,
3
<PAGE>
benefits and other rights provided in this Agreement as though the
termination had been initiated by Employer without cause upon the occurrence
of any of the following events: (a) the acquisition after the beginning of
the Term or any renewal term in one or more transactions, of beneficial
ownership (within the meaning of Rule 13d-3(a)(1) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) by any person or
entity (other than Officer or E. Mac Crawford) or any group of person or
entities (other than Officer) who constitute a group (within the meaning of
Section 13d-5 of the Exchange Act) of any securities of Employer such that as
a result of such acquisition such person or entity or group beneficially owns
(within the meaning of Rule 13d-3(a)(1) under the Exchange Act) more than 50%
of Employer's then outstanding voting securities entitled to vote on a
regular basis for a majority of the Board of Directors of Employer; or (b)
the sale of all or substantially all of the assets of Employer (including,
without limitation, by way of merger, consolidation, lease or transfer) in a
transaction (except for a sale-leaseback transaction) where Employer or the
holders of common stock of Employer do not receive (i) voting securities
representing a majority of the voting power entitled to vote on a regular
basis for the Board of Directors of the acquiring entity or of an affiliate
which ocntrols the acquiring entity, or (ii) securities representing a
majority of the equity interest in the acquiring entity or of an affiliate
that controls the acquiring entity, if other than a corporation; provided,
that if Officer becomes entitled to any payments (whether hereunder or
otherwise) by reason of an event described in Internal Revenue Code Section
280G (a "Parachute Event") that would constitute "excess parachute payments"
(as defined in Internal Revenue Code Section 280G) if paid then Officer's
entitlement to such payments shall be reduced by such amount as will cause
none of such payments to constitute excess parachute payments, if, and only
if, the net amount received by Officer by reason of the Parachute Event,
after imposition of all applicable taxes (including taxes under Internal
Revenue Code Section 4099), would be greater after such reduction than if
such reduction were not made. This provision specifically does not apply to
any change in control which may result from the transactions set forth in the
Real Estate Purchase and Sale Agreement, dated January 29, 1997, between
Magellan Health Services, Inc. and Crescent Real Estate Equities Limited
Partnership currently scheduled to close in May 1997.
7. Protection of Confidential Information/Non-Solicitation.
Officer covenants and agrees as follows:
(a) During the period beginning upon the execution of this
Agreement and continuing for a period of two (2) years after the term or
termination for any reason, Officer shall not use or disclose, directly or
indirectly, for any reason whatsoever or in any way, other than at the
direction of Employer during the course of Officer's employment or after
receipt of the prior written consent of Employer, any confidential
information or other information of Employer deemed to be trade secrets of
Employer, including, but not limited to, information with respect to Employer
and its Subsidiaries as follows: the lists of past, current or potential
customers of Employer and it Subsidiaries, all systems, manuals, materials,
processes and other intellectual property of any type used by Employer or its
Subsidiaries in connection with their respective business operations;
financial statements, cost reports and other financial information; contract
4
<PAGE>
proposals and bidding information; rate and fee structures; policies and
procedures developed as part of a confidential business plan; and management
systems and procedures, including manuals and supplements (collectively, the
"Confidential Information"). The obligation not to use or disclose any of the
Confidential Information shall not apply, to: (i) any Confidential
Information known by Officer before commencing employment with Employer; or
(ii) Confidential Information which Officer obtains from a third party,
provided, Officer did not himself provide the third party the Confidential
Information by wrongful or inappropriate means; or (iii) any information that
is or becomes public knowledge, through no fault of Officer, and that may be
utilized by the public without any direct or indirect obligation to Employer,
but the termination of the obligation for non-use or nondisclosure by reason
of such information becoming public shall be only from the date such
information becomes public knowledge; or (iv) as may be required by judicial
process or as a matter of law. The above shall be without prejudice to any
rights or remedies of Employer under any state law protecting trade secrets
or information.
(b) During Employer's employment of Officer and for a period of
one (1) year following the termination of Officer's employment with Employer
for any reason, Officer shall not solicit for employment or employ, directly
or indirectly, any Officer of Employer or any of its Subsidiaries who was
employed with Employer or its Subsidiaries within the one (1) year period
immediately prior to such solicitation or employment.
9. Work Made for Hire. Officer agrees that any written program
materials, protocols, research papers and all other writings (the "Work"),
which Officer develops for Employer's use during the term of this Agreement,
will be considered "work made for hire" within the meaning of the United
States Copyright Act, Title 17, United States Code, which vests all copyright
interest in and to the Work in the Employer. In the event, however, that any
court of competent jurisdiction finally declares that the Work is not or was
not a work made for hire as agreed, Officer agrees to assign, convey, and
transfer to the Employer all right, title and interest Officer may presently
have or may have or be deemed to have in and to any such Work and in the
copyright of such work, including but not limited to, all rights of
reproduction, distribution, publication, public performance, public display
and preparation of derivative works, and all rights of ownership and
possession of the original fixation of the Work and any and all copies.
Additionally, Officer agrees to execute any documents necessary for Employer
to record and/or perfect its ownership of the Work and the applicable
copyright. The foregoing will not apply to any writings Officer develop which
are not for Employer's use or are in each instance specifically excluded in
advance of publication from the coverage of the foregoing by Employer's Board
of Directors.
10. Property of Employer. Officer agrees that, upon the termination of
Officer's employment with Employer, Officer will immediately surrender to
Employer all property, equipment, funds, lists, books, records and other
materials of Employer in the possession of or provided to Officer.
5
<PAGE>
10. Governing Law. This Agreement and all issues relating to the
validity, interpretation and performance shall be governed by and interpreted
under the laws of the State of Georgia.
11. Remedies. With respect to each and every breach, violation or
threatened breach or violation by Officer or any of the covenants set forth
in this Agreement, Employer, in addition to all other remedies available at
law or in equity, including specific performance of the Agreement's
provisions, shall be entitled to enjoin the commencement or continuance of
such conduct and may apply for entry of an immediate restraining order or
injunction, subject to Section 12 of this Agreement. Employer may pursue any
of the remedies described in this paragraph 11 concurrently or consecutively,
in any order, as to any such breach or violation, and the pursuit of one of
such remedies at any time will not be deemed an election of remedies or
waiver of the rights to pursue any of the other such remedies.
12. Arbitration. Except for an action for injunctive relief, any
disputes or controversies arising under this Agreement shall be settled by
arbitration in Atlanta, Georgia, by a panel of three Arbitrators, in
accordance with the rules of the American Arbitration Association relating to
the arbitration of commercial disputes. The determination and findings of
such arbitrators shall be final and binding on all parties and may be
enforced, if necessary, in the courts of the State of Georgia.
13. Notices. Any notice or request required or permitted to be given
to any party shall be given in writing and shall be personally delivered or
sent to such party by United States mail at the address set forth below or at
such other address as such other address as such party may designate by
written communication to the other party to this Agreement:
To Officer: Paul G. Shoffeitt
2640 Jennings Chapel Road
Woodbine, Maryland 21797
To Employer: Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: Chief Executive Officer
With a copy to: Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: Vice President of
Administrative Services
6
<PAGE>
Each notice given in accordance with this paragraph shall be deemed to have
been given, if personally delivered, on the date personally delivered, if
delivered by facsimile transmission, be deemed given when sent and
confirmation of receipt is received, or, if mailed, on the third (3rd) day
following the day on which it is deposited in the United States mail,
certified or registered mail, return receipt requested, with postage prepaid,
to the address last given in accordance with this paragraph.
14. Headings. The headings of the paragraphs of this Agreement have
been inserted for convenience of reference only and shall not be construed or
interpreted to restrict or modify any of the terms or provisions of this
Agreement.
15. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective
during the term of this Agreement, such provision shall be fully severable
and this Agreement and each separate provision shall be construed and enforced
as if such illegal, invalid or unenforceable provision had never comprised a
part of this Agreement, and the remaining provisions of this Agreement shall
remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance from this Agreement.
In addition, in lieu of such illegal, invalid or unenforceable provision,
there shall be added automatically, as a part of this Agreement, a provision
as similar in terms to such illegal, invalid or unenforceable provision as
may be possible and be legal, valid and enforceable, if such reformation is
allowable under applicable law.
16. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of each party and each party's respective successors,
heirs, personal representatives, assigns and legal representatives.
17. Employer Policies, Regulations and Guidelines for Officers.
Employer may issue policies, rules, regulations, guidelines, procedures or
other informational material, whether in the form of handbooks, memoranda, or
otherwise, relating to its Officers. These materials are general guidelines
for Officer's information and shall not be construed to alter, modify or
amend this Agreement for any purpose whatsoever.
18. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties with respect to the subject matter and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter, unless expressly provided otherwise within
this Agreement. No amendment, modification or termination of this Agreement,
unless expressly provided otherwise, shall be valid unless made in writing
and signed by each of the parties whose rights, duties or obligations would
in any way be affected by an amendment, modification or termination. No
representations, inducements or agreements have been made to induce either
Officer or Employer to enter into this Agreement which are not expressly set
forth within this Agreement. This Agreement is the sole source of rights and
duties as between Employer and Officer relating to the subject matter of this
Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 1st day of April, 1997.
PAUL G. SHOFFEITT MAGELLAN HEALTH SERVICES, INC.
"Officer" "Employer"
/s/ Paul G. Shoffeitt /s/ E. Mac Crawford
- ------------------------- ---------------------
E. MAC CRAWFORD
CEO, PRESIDENT, and
CHAIRMAN
<PAGE>
Exhibit 2.8
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is effective
as of December 4, 1997, by and among Magellan Health Services, Inc., a
Delaware corporation ("Employer") and Paul G. Shoffeitt ("Officer").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Employer and Shoffeitt entered into that certain Letter
Agreement dated April 1, 1997 (the "Employment Agreement");
WHEREAS, the parties recognize that due to a current medical condition,
Shoffeitt is unable to fully perform his duties under the Employment
Agreement, and the parties therefore desire to amend the terms of the
Employment Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto, intending to
be legally bound, do hereby covenant and agree as follows:
1. Section 1 of the Employment Agreement is hereby deleted and amended to
read in its entirety as follows:
1. Employment. Employer agrees to employ Officer on a part-time
----------
basis, and Officer accepts such part-time employment, commencing on April 1,
1997, and continuing up to and including December 31, 2001, unless terminated
earlier pursuant to Section 6 below. After the initial term, this Agreement
will automatically renew on January 1 of each year for successive one year
terms (on the same terms and conditions) unless either party gives written
notice to the other at least 30 days prior to the expiration of the then
current term, of its election not to renew this Agreement. If during the term
hereof, Officer's medical condition permits an increase in the time he is
able to devote to his duties hereunder, Officer shall inform Employer of such
increased availability, and subject to Employer's needs, the parties shall
negotiate in good faith with respect to a possible increase in Officer's
duties, and with respect to a possible increase in compensation which may be
appropriate in light of such increase in Officer's duties.
2. Section 3(a) is hereby amended by deleting the third sentence thereof
and replacing it with the following: "Further, Employer agrees Officer shall
only be required to travel to the extent he is reasonably able, estimated to
be one business day every other week."
3. Section 6(c) is hereby amended by deleting such Section in its
entirety and replacing it with the following:
<PAGE>
(c) DISABILITY OF OFFICER. If Officer becomes Disabled, Employer may
----------------------
terminate this Agreement at any time, and any such termination shall be
deemed a termination without cause under Section 6(b) above, and in the
event of such a termination, Officer shall be entitled to all of the
rights set forth in Section 6(b) above. Officer shall be deemed Disabled
if Employer determines that Officer is, by reason of any physical or
mental condition, unable to perform a substantial portion of his
essential duties on a part-time basis pursuant to this Agreement. This
Section 6(c) shall survive the termination of this Agreement.
3. A new Section 8 is hereby added (and each subsequent section renumbered
accordingly), to read in its entirety as follows:
8. COMPETING ACTIVITIES
--------------------
(a) Officer hereby covenants and agrees, that during the period
commencing on the date hereof and ending one year following the
expiration or termination of this Agreement (the "Covenant
Period"), he shall not accept employment or consulting work with,
or advise, assist or be connected in any way, with any person or
entity which is or proposes to be, conducting, carrying on or
engaging in the Business (as defined below) anywhere in the United
States (the "Territory").
(b) Officer hereby covenants and agrees that during the Covenant
Period, he shall refrain from soliciting business from customers
of Employer or its subsidiaries which were customers of Employer
or its subsidiaries on the date hereof or at any time during the
Covenant Period, or from any person sought as a prospective
customer of Employer or its subsidiaries on the date hereof or at
any time during the Covenant Period, for purposes of providing
services within the Territory which are competitive with the
business conducted by Employer and/or its subsidiaries.
(c) For purposes of this Agreement, the term "Business" shall mean the
business of providing specialty managed health care services in
the areas of cardiology, ophthalmology, diabetes, asthma, oncology
and other medical sub-specialty areas, including related case or
care management, administrative services, utilization management,
quality management, certification or pre-admission or
pre-treatment certification, assessment and referral, staff
clinical services, provider network services and
preferred/exclusive provider organization services.
(d) Notwithstanding anything to the contrary contained herein, Officer
shall not be restricted during or after the term of this Agreement
from (i) being an employee or consultant to Green Spring Health
Services, Inc., or (ii) treating clinical patients and practicing
clinical psychology.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
SHOFFEITT:
Witness:
/s/ /s/ Paul G. Shoffeitt
- ------------------------------------ ------------------------------------
Paul G. Shoffeitt
MAGELLAN:
--------
Magellan Health Services, Inc.
Attest: By: /s/ Craig McKnight SEAL
---------------------------------
Name: Craig McKnight
/s/ Title: Executive Vice President &
- ------------------------------------ Financial Officer (CFO)
<PAGE>
Exhibit 2.9
IRREVOCABLE PROXY
CARE MANAGEMENT RESOURCES, INC.
ATLANTA, GEORGIA
THIS IRREVOCABLE PROXY IS SOLICITED BY MAGELLAN HEALTH SERVICES, INC.
WHEN THIS IRREVOCABLE PROXY IS PROPERLY EXECUTED AND RETURNED, MAGELLAN HEALTH
SERVICES, INC. ("MAGELLAN") WILL VOTE AT ANY AND ALL ANNUAL, REGULAR AND SPECIAL
MEETINGS, AND IN ANY ACTIONS BY WRITTEN CONSENT OF THE SHAREHOLDERS, ALL OF THE
SHARES OF CARE MANAGEMENT RESOURCES, INC. OR ITS SUCCESSORS (THE
"CORPORATION"), AS MAGELLAN, IN ITS SOLE DISCRETION, SEES FIT.
The undersigned shareholder of the Corporation hereby appoints
Magellan, with full power of substitution, the proxy of the undersigned
shareholder to vote as Magellan, in its sole discretion, sees fit , on behalf of
the undersigned at each and every annual meeting, regular meeting or special
meeting of the shareholders of the Corporation and/or its successor(s), and at
any adjournment thereof, or in any action by written consent of the shareholders
of the Corporation and/or its successors, provided that such meetings or actions
by written consent are held or executed, as applicable, no later than November
1, 1998 ( the period from the date hereof through November 1, 1998 referred to
herein as the "Term").
THIS PROXY IS IRREVOCABLE DURING THE TERM HEREOF. In accordance with Section
607.0722(5) of the Florida Business Corporation Act, this Proxy is irrevocable
and is coupled with an interest by virtue of the Option Agreement between
Magellan and the undersigned shareholder dated as of the date hereof. This proxy
shall not be assigned by Magellan to any third party other than a subsidiary of
which Magellan has majority control.
IN WITNESS WHEREOF, the undersigned shareholder has caused this Proxy to be
executed on this 4th day of December, 1997.
/s/ Paul G. Shoffeitt
-------------------------------------
Shareholder's name: Paul G. Shoffeitt
<PAGE>
EXHIBIT 5.1
[LETTERHEAD]
404/572-4676 404/572-5147
May 22, 1998
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Re: 35,875 Shares of Common Stock, $.25 par value per share, of
Magellan Health Services, Inc.
---------------------------------------------------------------
Gentlemen:
We have acted as counsel to Magellan Health Services, Inc. (the
"Company"), in connection with the preparation and filing of the Registration
Statement on Form S-3 (the "Registration Statement"), for registration under
the Securities Act of 1933, as amended, of 37,825 shares of Common Stock,
$.25 par value per share, of the Company (the "Common Stock"). The shares of
Common Stock will be issued to Paul G. Shoffeitt pursuant to an Option
Agreement, dated December 4, 1997 (the "Option Agreement").
In rendering the opinions expressed below we have examined the
Registration Statement, as amended, the Option Agreement, and such other
documents as we have deemed necessary to enable us to express the opinions
hereinafter set forth. In addition, we have examined and relied, to the
extent we deemed proper, on certificates of officers of the Company as to
factual matters, on the originals or copies certified or otherwise identified
to our satisfaction of all such corporate records of the Company and such
other instruments and certificates of public officials and other persons as
we have deemed appropriate. In our examination, we have assumed the
authenticity of all documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as copies, and the
genuineness of all signatures on documents reviewed by us and the legal
capacity of natural persons.
Based upon and subject to the foregoing, we are of the opinion that
all legal and corporate proceedings necessary for the authorization and
issuance of the shares of Common Stock have been duly taken and the shares of
Common Stock were duly authorized and validly issued and are fully paid and
nonassessable.
We hereby consent to (a) the filing of the foregoing legal opinion as an
exhibit to the Registration Statment and all further amendments thereto and
(b) all references to our firm in the Registration Statement.
Very truly yours,
/s/ King & Spalding
King & Spalding
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our reports dated November 14, 1997
on the consolidated financial statements and schedules of Magellan Health
Services, Inc. and subsidiaries and Charter Behavioral Health Systems, LLC and
subsidiaries included in Magellan Health Services, Inc.'s Annual Report on Form
10-K for the fiscal year ended September 30, 1997 and to all references to our
Firm included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 18, 1998
<PAGE>
EXHIBIT.23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Magellan Health Services, Inc. on Form S-3, to be filed on or about May 21,
1998, of our report dated November 14, 1997, appearing in the Current Report on
Form 8-K/A of Magellan Health Services, Inc., filed on April 3, 1998. Such
report expresses an unqualified opinion on the consolidated balance sheets of
Merit Behavioral Care Corporation (the "Company") as of September 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1997 and includes an explanatory paragraph relating to the fact that
effective October 1, 1995, the Company changed its method of accounting for
deferred contract start-up costs related to new contracts or expansion of
existing contracts.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
New York, New York
May 21, 1998
<PAGE>
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Human Affairs International, Incorporated
We consent to the incorporation by reference in the registration statement on
Form S-3 of Magellan Health Services, Inc. of our report dated February 7,
1997, except as to note 10 which is as of February 27, 1997, with respect to
the consolidated balance sheets of Human Affairs International, Incorporated
and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholder's equity, and cash flows for
the years then ended, which report appears in the Form 8-K of Magellan Health
Services, Inc. dated December 17, 1997 and to the reference to our firm under
the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Salt Lake City, Utah
May 20, 1998
