<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION NO.
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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)
------------------------------
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)
------------------------------
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 the 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>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO BE OFFERING PRICE AGGREGATE
TO BE REGISTERED (1) REGISTERED PER UNIT (2) OFFERING PRICE (2)
<S> <C> <C> <C>
Common Stock, $.25 par value per share... 2,566,622 $26.09 $66,972,792.81
<CAPTION>
TITLE OF SHARES AMOUNT OF
TO BE REGISTERED (1) REGISTRATION FEE
<S> <C>
Common Stock, $.25 par value per share... $19,756.97
</TABLE>
(1) This Registration Statement also covers an equal number of Common Stock
purchase rights issuable pursuant to Magellan Health Services, Inc. Share
Purchase Rights Plan, which rights will be transferable only with related
shares of Common Stock.
(2) Estimated solely for the purpose of calculating the registration fee. In
accordance with Rule 457(c) under the Securities Act of 1933, as amended,
such amounts are based on the average of the high and low prices per share
of Common Stock of Magellan Health Services, Inc. on April 13, 1998, as
reported on the New York Stock Exchange.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
2,566,622 SHARES
MAGELLAN HEALTH SERVICES, INC.
COMMON STOCK
($.25 PAR VALUE)
------------------
The 2,566,622 shares (the "Warrant 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 Crescent Operating, Inc., a Delaware corporation
("COI"), or Cresent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("Crescent") (COI and Crescent are hereinafter referred to
collectively as the "Selling Stockholders"). See "Selling Stockholders." The
Selling Stockholders obtained the right to purchase the Warrant Shares at $30.00
per share upon the exercise of Stock Purchase Warrants (collectively, the
"Warrants") issued to them pursuant to separate Warrant Purchase Agreements (as
hereinafter defined) in a private placement transaction with the Company.
Magellan will not receive any of the proceeds from the sale of the Warrant
Shares by the Selling Stockholders.
Magellan is registering the Warrant Shares as required by the separate
Warrant Purchase Agreements dated as of June 17, 1997, as amended, between
Magellan and each Selling Stockholder (each a "Warrant Purchase Agreement" and,
collectively, the "Warrant Purchase Agreements"). 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 Warrant Shares, which will be paid by the applicable Selling Stockholder. It
is estimated that the fees and expenses payable by the Company in connection
with the registration of the Warrant Shares will be approximately $70,000.
Magellan has agreed to keep the Registration Statement (as hereinafter defined)
current and effective with respect to the Warrant Shares owned by each Selling
Stockholder, as long as such Selling Stockholder or its permitted transferee
owns a Warrant or Warrant Shares issued upon exercise of any Warrants; provided,
that, the Company shall not be required to maintain the effectiveness of the
Registration Statement after June 17, 2009. See "Plan of Distribution."
The Common Stock is listed on the New York Stock Exchange under the symbol
"MGL." On April 16, 1998, the last reported sale price of the Common Stock on
the New York Stock Exchange was $26.375 per share.
The sale or distribution of all or any portion of the Warrant Shares offered
hereby may be effected from time to time by the Selling Stockholders 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
Stockholders reserve the sole right to accept or reject, in whole or in part,
any proposed purchase of the Warrant Shares to be made directly or through
agents.
Certain transfer restrictions will be placed on the Warrant Shares pursuant
to the Warrant Purchase Agreement. Prior to June 17, 2009, neither Selling
Stockholder may sell or transfer in a privately negotiated transaction to a
single purchaser and its affiliates, or any "group" (as defined in Rule
13d-5(b)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) any combination of Warrants and/or Warrant Shares if the aggregate number
of Warrants and/or shares of Common Stock issuable upon exercise of the Warrants
equals five percent (5%) or more of the Common Stock then outstanding on a
fully-diluted basis. This restriction does not affect the transfer of Warrant
Shares between the Selling Stockholder and its wholly owned subsidiaries.
The Selling Stockholders and any agents or broker-dealers that participate
with the Selling Stockholders in the distribution of the Warrant 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 Warrant Shares may be deemed to be underwriting commissions or
discounts under the 1933 Act. See "Plan of Distribution" herein for
indemnification arrangements among Magellan and the Selling Stockholders.
THERE ARE CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE WARRANT 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 APRIL , 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 Warrant 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 Warrant 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 Company's 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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<PAGE>
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 Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, filed on December 23, 1997;
(ii) The Company's Proxy Statement on Schedule 14A, filed on January 9,
1998;
(iii) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1997, filed on February 17, 1998;
(iv) The Company's Current Report on Form 8-K, filed on December 17, 1997;
(v) The Company's Current Report on Form 8-K/A, filed on April 3, 1998;
(vi) The Company's Current Report on Form 8-K, filed on April 8, 1998;
(vii) 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.
3
<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. ON FEBRUARY 12, 1998, THE COMPANY CONSUMMATED ITS
ACQUISITION (THE "ACQUISITION") OF MERIT BEHAVIORAL CARE CORPORATION ("MERIT").
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." THE INFORMATION PROVIDED IN THIS
PROSPECTUS WITHOUT REFERENCE TO A SPECIFIC DATE IS CURRENT AS OF THE DATE OF
THIS PROSPECTUS.
THE COMPANY
OVERVIEW
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 58.0
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 2,900 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 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
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<PAGE>
Acquisition, based on total covered lives, the Company is the industry leader
with respect to risk-based, ASO, EAP and integrated products. 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.
The Company first entered the behavioral managed care industry during the
first quarter of fiscal 1996 with its acquisition of a 61% ownership interest in
Green Spring Health Services, Inc., a managed care company specializing in
mental health and substance abuse/dependence services ("Green Spring").
Subsequent to the Company's acquisition of Green Spring, the growth of the
managed behavioral healthcare industry accelerated and the industry 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
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<PAGE>
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 Human Affairs
International, Incorporated ("HAI"), formerly a unit of Aetna/U.S. Healthcare
("Aetna"). HAI manages the care of over 16.0 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 Health Group, Inc.
and certain affiliates ("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 3.4
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.
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 had approximately 21.0 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 Health, Inc. ("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
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<PAGE>
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 agreed to sell to CBHS: (i) Charter Advantage, 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 agreement 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.
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, whether or not the CBHS Transactions are consummated, 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
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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
WARRANT 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 December 31, 1997, on a pro forma basis, the Company's aggregate
outstanding indebtedness would have been approximately $1.2 billion and the
Company's stockholders' equity would have been approximately $179.0 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.
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 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.
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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.
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.
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 50% of the Company's total revenue and 73% of its managed
behavioral healthcare revenue in fiscal 1997. On a pro forma basis, after giving
effect to the CBHS Transactions, such revenue would have accounted for
approximately 56% of the Company's total revenue and 73% of its managed
behavioral healthcare revenue in fiscal 1997. 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. 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
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under such contracts. As of December 31, 1997, on a pro forma basis, the Company
would have had cash reserves of $52.1 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.
RELIANCE ON CUSTOMER CONTRACTS
On a pro forma basis, before and after giving effect to the CBHS
Transactions, and following the Company's acquisitions of Merit, HAI and Allied,
approximately 69% and 78%, respectively, 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,
following the Company's acquisitions of Merit, HAI and Allied, both before and
after giving effect to the CBHS Transactions, 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.
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
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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 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.
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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.
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.
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
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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.
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. 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.
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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.
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.
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SHARES ELIGIBLE FOR FUTURE SALE
The Warrant Shares are eligible for sale in the open market without
restriction. In January 1996, the Company issued 4,000,000 shares of Common
Stock to Rainwater-Magellan Holdings, L.P., along with a warrant to purchase an
additional 2,000,000 shares of Common Stock for $26.15 per share that expires on
January 25, 2000, in a private placement transaction (the "Rainwater Shares").
The Rainwater Shares are 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.
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
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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 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
17
<PAGE>
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.
18
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Warrant Shares. All of the proceeds from the sale of the Warrant Shares will be
received by the Selling Stockholders.
19
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
ownership of the Warrants and the Warrant Shares as of March 31, 1998, and as
adjusted to reflect the sale of the Warrant Shares offered hereby, by the
Selling Stockholders. Each Selling Stockholder has sole voting and investment
power with respect to the Warrant Shares owned by it.
<TABLE>
<CAPTION>
OWNERSHIP OF COMMON OWNERSHIP OF
STOCK BEFORE THE COMMON STOCK AFTER
OFFERING(1) THE OFFERING(2)
----------------------- NUMBER OF -----------------------
NUMBER OF SHARES BEING NUMBER OF
NAME SHARES PERCENT OFFERED(3) SHARES PERCENT
- ------------------------------------------------------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Crescent Operating, Inc................................ 1,283,311 3.77 1,283,311 0 --
Crescent Real Estate Equities Limited Partnership...... 1,283,311 3.77 1,283,311 0 --
</TABLE>
- ------------------------
(1) Assumes that all Warrants are exercised.
(2) Assumes that all Warrant Shares being registered are sold.
(3) Prior to June 17, 2009, neither of the Selling Stockholders may sell or
transfer in a privately negotiated transaction to a single purchaser and its
affiliates or any "group" (as defined in Rule 13d-5(b)(1) under the Exchange
Act) any combination of Warrants or Warrant Shares if the aggregate number
of Warrants and/or shares of Common Stock issuable upon exercise of the
Warrants equals five percent (5%) or more of the Common Stock then
outstanding on a fully-diluted basis.
During the third quarter of fiscal 1997, the Company consummated the
Crescent Transactions, pursuant to which, among other things, it sold the
Psychiatric Hospital Facilities to Crescent. Simultaneously with the sale of the
Psychiatric Hospital Facilities, the Company and COI formed CBHS to operate the
Psychiatric Hospital Facilities. COI owns 50% of the equity interests in CBHS;
the Company owns the remaining 50%. A subsidiary of Crescent leases the
Psychiatric Hospital Facilities to CBHS. The Company has entered into certain
agreements with COI in connection with the CBHS Transactions. See
"Summary--Recent Developments."
Crescent is the operating partnership of Crescent Real Estate Equities
("CEI"). Richard F. Rainwater is the Chairman of the Board of Directors of CEI.
The sole general partner of Crescent is Crescent Real Estate Equities ("Crescent
GP"), which is a wholly-owned subsidiary of CEI. Mr. Rainwater owns beneficially
12.5% of Crescent, which interests consist of common stock in CEI (including
common stock of CEI that may be acquired pursuant to the exercise of options)
and units of ownership in Crescent. Mr. Rainwater is an affiliate of Crescent,
Crescent GP, COI and CEI.
Rainwater-Magellan Holdings L.P. ("Rainwater-Magellan") acquired a total of
4,000,000 shares of Common Stock and warrants for an additional 2,000,000 shares
of Common Stock from the Company in a Private Placement pursuant to a Stock and
Warrant Purchase Agreement and certain related agreements (the "Private
Placement Agreements").
On the date of this Prospectus, Rainwater-Magellan owns 3,885,832 shares of
Common Stock and holds a portion of the Rainwater-Magellan Warrant, which gives
Rainwater-Magellan the right to purchase an additional 1,942,996 shares of
Common Stock. Rainwater, Inc. is the sole general partner of Rainwater-Magellan.
Mr. Rainwater is the sole stockholder and a director of Rainwater, Inc. Mr.
Rainwater has sole voting and dispositive power over the shares of Common Stock
owned by Rainwater-Magellan and the shares of Common Stock underlying the
Rainwater-Magellan Warrant. As a result of such relationships, Mr. Rainwater is
deemed to be the beneficial owner of the shares of Common Stock held by
Rainwater-Magellan, including the shares of Common Stock which can be purchased
under the Rainwater-Magellan Warrant.
20
<PAGE>
On the date of this Prospectus, Mr. Rainwater owns beneficially
approximately 62.8% of Rainwater-Magellan. Mr. Rainwater's three children own
beneficially an additional 4.8% of Rainwater-Magellan through a limited
partnership of which Mr. Rainwater is general partner and an additional 1.2%
each through trusts which are managed by an unaffiliated trustee.
The Rainwater-Magellan Warrant entitles the holders to purchase in the
aggregate, at any time prior to its January 25, 2000 expiration date, up to
2,000,000 shares of Common Stock at a purchase price of $26.15 per share. The
Private Placement Agreements provide, among other things, for the adjustment of
the number of shares of Common Stock that can be purchased under the
Rainwater-Magellan Warrant and the purchase price, respectively, for certain
dilutive events, for registration rights for the shares of Common Stock owned by
Rainwater-Magellan, including those underlying the Rainwater-Magellan Warrant
(which registration rights, as mentioned below, have been exercised), and for a
variety of other customary provisions, including, without limitation, certain
restrictions on Rainwater-Magellan's private sale of such shares, certain
preemptive rights of Rainwater-Magellan to acquire additional securities issued
by the Company for cash in a private placement transaction and standstill
covenants restricting the purchase of additional shares of Common Stock by
Rainwater-Magellan and its affiliates in certain circumstances.
Darla D. Moore, a director of the Company, is the spouse of Richard E.
Rainwater. Under the terms of the Private Placement Agreements,
Rainwater-Magellan has the right to designate a nominee acceptable to the
Company for election as a director of the Company for so long as the Rainwater
Group continues to own beneficially a specified minimum number of shares of
Common Stock. Rainwater-Magellan proposed Ms. Moore as its nominee for director,
and Ms. Moore was elected a director by the Board in February 1996. For purposes
of this Prospectus, any reference to the "Rainwater Group" includes Rainwater
Magellan, Rainwater, Inc., Richard E. Rainwater, Darla D. Moore and their
affiliates and associates.
As of November 30, 1997, Rainwater-Magellan beneficially owned 5,835,078
shares of Common Stock (including the 1,942,996 shares which can be purchased
under the Rainwater-Magellan Warrant), which represented in the aggregate 18.8%
of the Common Stock.
Under the terms of the Private Placement Agreements, the Company agreed (i)
to pay a transaction fee of $150,000; (ii) to reimburse certain expenses of
Rainwater, Inc. in connection with the Private Placement; (iii) to pay the
Rainwater Group an annual monitoring fee of $75,000 commencing on March 31,
1996; and (iv) to reimburse the Rainwater Group for reasonable fees and expenses
(up to a maximum of $25,000 annually) incurred in connection with its ownership
of the Common Stock and the Rainwater-Magellan Warrant. The Company also agreed
under the Private Placement Agreements to reimburse the Rainwater Group in the
future for one additional filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, if a filing under such act is required in
connection with an exercise of the Rainwater-Magellan Warrant.
Rainwater-Magellan purchased the Common Stock and the Rainwater-Magellan
Warrant on January 25, 1996. During fiscal 1997, the Company paid an aggregate
of $77,019 for the annual monitoring fee and fees and expenses incurred in
connection with Rainwater-Magellan's ownership of the Common Stock and
Rainwater-Magellan Warrant. Excluded from these amounts are directors' fees and
expense reimbursement paid to Ms. Moore in her capacity as a director of the
Company. The Company has incurred costs to date of approximately $55,000 in
connection with its registration of the shares and approximately $40,000 in
costs to register the shares of Common Stock underlying the Rainwater-Magellan
Warrant.
PLAN OF DISTRIBUTION
The sale or distribution of all or any portion of the Warrant Shares may be
effected from time to time by the Selling Stockholders 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
21
<PAGE>
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 Warrant Shares offered hereby pursuant to
the Warrant Purchase Agreement. See "Selling Stockholders."
The methods by which the Warrant 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 Warrant 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, (v) pro rata distributions
as part of the liquidation and winding up of the affairs of the Selling
Stockholders, and (vi) privately negotiated transactions. The Selling
Stockholders may from time to time deliver all or a portion of the Warrant
Shares to cover a short sale or sales or upon the exercise, settlement or
closing of a call equivalent position or a put equivalent position. The Warrant
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 Stockholders and/or the purchasers of the
Warrant Shares may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions, concessions or discounts from the
Selling Stockholders and/or the purchasers of the Warrant 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 Warrant Shares, the Selling Stockholders and any brokers,
dealers or agents who participate in a sale of the Warrant 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 Warrant Purchase Agreements, Magellan has filed the
Registration Statement, of which this Prospectus forms a part, with respect to
the sale of the Warrant Shares. Magellan has agreed to keep the Registration
Statement current and effective with respect to the Warrant Shares owned by each
Selling Stockholder as long as such Selling Stockholder or its permitted
transferees own a Warrant or Warrant Shares issued upon exercise of any
Warrants; PROVIDED, THAT, the Company shall not be required to maintain the
effectiveness of the Registration Statement after August 14, 2009.
Warrant Shares not sold pursuant to the Registration Statement on Form S-3
of which this Prospectus is a part (the "Registration Statement") 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 Warrant Shares are aggregated) who has satisfied a one-year
holding period may, under certain circumstances, sell within any three-month
period a number of Warrant 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 Warrant 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
22
<PAGE>
after the effectiveness of the Registration Statement, sales of the Warrant
Shares may be made by the Selling Stockholders pursuant to Rule 144.
Magellan will not receive any of the proceeds from the sale of the Warrant
Shares by the Selling Stockholders. Magellan will bear the costs of registering
the Warrant Shares under the 1933 Act, including the registration fee under the
1933 Act, its legal and accounting fees and any printing fees. The Selling
Stockholders will bear the cost of underwriting commissions and/or discounts, if
any, and selling commissions.
Pursuant to the terms of the Warrant Purchase Agreements, Magellan and the
Selling Stockholders have agreed to indemnify each other and certain other
related parties for certain liabilities, including liabilities under the 1933
Act, in connection with the registration of the Warrant Shares. In addition,
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.
LEGAL MATTERS
The legality of the Warrant Shares is being passed upon for the Selling
Stockholders 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 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, 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 authority of said firm as experts in
accouning 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 in this Prospectus and
elsewhere in this Registration Statement in reliance on the report of KPMG Peat
Marwick LLP, certified public accountants with respect thereto and are
incorporated by reference herein in reliance 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.
23
<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 STOCKHOLDERS.
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........................................................... 19
Selling Stockholders...................................................... 20
Plan of Distribution...................................................... 20
Legal Matters............................................................. 21
Experts................................................................... 21
</TABLE>
2,566,622 SHARES
MAGELLAN HEALTH
SERVICES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
APRIL , 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............................ $19,756.97
Legal Fees and Expenses........................................................ 10,000.00
Accounting Fees and Expenses................................................... 15,000.00
Printing....................................................................... 20,000.00
Miscellaneous.................................................................. 5,243.03
----------
Total.......................................................................... $70,000.00
----------
----------
</TABLE>
All of the above items, except for the registration fee, are estimates.
Although the Selling Stockholders will not bear any of the expenses set forth
above, the Selling Stockholders 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
II-1
<PAGE>
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.
Magellan maintains directors' and officers' liability insurance with various
providers in the aggregate amount of $80 million.
The Selling Stockholders have agreed to indemnify the Company, its directors
and officers (who sign the Registration Statement), and certain controlling
persons against certain liabilities, including liabilities under the 1933 Act
subject to such limitations as set forth in the Warrant Purchase Agreements.
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 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.
2.2 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.
2.3 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
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Form 10-Q for the quarterly period ended December 31, 1997, and is incorporated
herein by reference.
2.4 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.
2.5 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.
2.6 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.
2.7 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.
2.8 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.
2.9 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.
2.10 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.
2.11 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.
2.12 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.
2.13 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.
</TABLE>
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<PAGE>
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2.14 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.
2.15 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.
2.16 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.
2.17 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.
4.3 Form of Share Purchase Rights Plan among the Company and First Union National Bank of
North Carolina, N.A., which was filed as Exhibit 2.5 to the Company's Registration
Statement on Form 8-A dated July 8 1992, and is incorporated herein by reference.
4.4 Warrant Purchase Agreement, dated June 16, 1997, between the Company and Crescent
Operating, Inc., which was filed as Exhibit 99(g) to the Company's Current Report on
Form 8-K, which was filed on June 30, 1997, and is incorporated herein by reference.
4.5 Warrant Purchase Agreement, dated January 29, 1997, between the Company and Crescent
Real Estate Equities Limited Partnership, which was filed as Exhibit 4(a) to the
Company's Current Report on Form 8-K, which was filed on April 23, 1997, and is
incorporated herein by reference.
4.7 Amendment No. 1 to Warrant Purchase Agreement, dated June 17, 1997, between the
Company and Crescent Real Estate Equities Limited Partnership, which was filed as
Exhibit 4(b) to the Company's Current Report on Form 8-K, which was filed on June 30,
1997, and is incorporated by reference herein.
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 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney (see signature pages).
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) 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;
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<PAGE>
(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.
(2) 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.
(3) 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.
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 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 April 16, 1998.
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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 of 1933, 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
and Howard A. McClure and each of them, his true and lawful attorneys-in-fact
and agents, 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 attorneys-in-fact and
agents 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 attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ HENRY T. HARBIN
- ------------------------------ President, Chief Executive April 16, 1998
Henry T. Harbin Officer and Director
/s/ CRAIG L. MCKNIGHT Executive Vice President
- ------------------------------ and Chief Financial April 16, 1998
Craig L. McKnight Officer
/s/ HOWARD A. MCLURE Senior Vice President and
- ------------------------------ Controller April 16, 1998
Howard A. McLure (Chief Accounting Officer)
/s/ EDWIN M. BANKS
- ------------------------------ Director April 16, 1998
Edwin M. Banks
/s/ G. FRED DIBONA, JR.
- ------------------------------ Director April 16, 1998
G. Fred DiBona, Jr.
/s/ ANDRE C. DIMITRIADIS
- ------------------------------ Director April 16, 1998
Andre C. Dimitriadis
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<PAGE>
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NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ A.D. FRAZIER, JR.
- ------------------------------ Director April 16, 1998
A.D. Frazier, Jr.
- ------------------------------ Director
Raymond H. Kiefer
- ------------------------------ Director
Gerald L. McManis
/s/ DANIEL S. MESSINA
- ------------------------------ Director April 16, 1998
Daniel S. Messina
/s/ ROBERT W. MILLER
- ------------------------------ Chairman of the April 16, 1998
Robert W. Miller Board of Directors
- ------------------------------ Director
Darla D. Moore
- ------------------------------ Director
Jeffrey A. Sonnenfeld
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<PAGE>
EXHIBIT 5.1
[LETTERHEAD]
404/572-4676 404/572-5147
April 16, 1998
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Re: 2,566,622 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 a Registration
Statement on Form S-3 (the "Registration Statement"), for registration under
the Securities Act of 1933, as amended, of 2,566,622 shares of Common Stock,
$.25 par value per share, of the Company (the "Common Stock"). The shares of
Common Stock are issuable upon the exercise of the Stock Purchase Warrants
(collectively, the "Stock Purchase Warrants") issued by the Company to each
of Crescent Operating, Inc. and Crescent Real Estate Equities Limited
Partnership.
In rendering the opinions expressed below we have examined the
Registration Statement, the Stock Purchase Warrants, 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 to be issued by the Company pursuant to the
Stock Purchase Warrants have been duly taken and the shares of Common Stock,
upon issuance pursuant to the terms of the Stock Purchase Warrants, will be
duly authorized, validly issued, fully paid and nonassessable.
We hereby consent to (a) the filing of the foregoing legal opinion as an
exhibit to the Registration Statement and all 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
April 13, 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 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
April 17, 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
April 16, 1997
