<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
MAGELLAN HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
MAGELLAN HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and date of its filing.
6) Amount Previous Paid:
-----------------------------------------------------------------------
7) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
8) Filing Party:
-----------------------------------------------------------------------
9) Date Filed:
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<PAGE>
[LOGO]
[LOGO]
January 9, 1998
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of Magellan Health Services, Inc. ("Magellan") on February 6,
1998, at 10:00 A.M. The Annual Meeting will be held at 191 Peachtree Street,
50th Floor, Atlanta, Georgia. A Notice of Annual Meeting, Proxy Statement and
Proxy containing information about matters to be acted on at the Annual Meeting
are enclosed.
I encourage you to attend the Annual Meeting.
I look forward to seeing you at the Annual Meeting. REGARDLESS OF WHETHER OR
NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. This will ensure
that sufficient shares are represented and voted at the Annual Meeting.
Returning your completed proxy card will not limit your right to vote in person
if you attend the Annual Meeting.
Very truly yours,
[LOGO]
Mac Crawford
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
[LOGO]
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 6, 1998
------------------------
The Annual Meeting of Stockholders of Magellan Health Services, Inc., a
Delaware corporation (the "Company" or "Magellan"), will be held at 191
Peachtree Street, 50th floor, Atlanta, Georgia, on February 6, 1998, at 10:00
A.M., local time, to consider and act upon the following:
1. A proposal to elect three directors to three-year terms expiring at
the 2001 annual meeting of stockholders or until their successors are duly
elected and qualified;
2. A proposal to approve the Magellan Health Services, Inc. 1998 Stock
Option Plan (the "1998 Plan"); and
3. Such other matters as may properly come before the Annual Meeting.
Stockholders of record at the close of business on December 18, 1997 are
entitled to notice of, and to vote at, the Annual Meeting. A complete list of
stockholders entitled to vote at the Annual Meeting will be available for
inspection at the offices of the Company during normal business hours from
January 15 through February 5, 1998.
Your attention is directed to the accompanying Proxy Statement.
[LOGO]
Linton C. Newlin
SECRETARY
Atlanta, Georgia
January 9, 1998.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN, DATE AND
RETURN PROMPTLY THE ENCLOSED PROXY. THE PROXY IS REVOCABLE AND YOU MAY VOTE YOUR
SHARES IN PERSON IF YOU ATTEND THE ANNUAL MEETING.
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
3414 PEACHTREE ROAD, N.E.
SUITE 1400
ATLANTA, GEORGIA 30326
------------------------
PROXY STATEMENT FOR THE
1998 ANNUAL MEETING OF STOCKHOLDERS
---------------------
THE ANNUAL MEETING
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board from the holders of the Company's Common Stock, $.25 par
value per share (the "Common Stock"), for use at the Annual Meeting to be held
at 10:00 A.M., local time, on February 6, 1998, and any adjournment or
postponement thereof. The Annual Meeting will be held at 191 Peachtree Street,
50th Floor, Atlanta, Georgia. This Proxy Statement and the accompanying form of
proxy are first being sent or given to stockholders on or about January 9, 1998.
At the Annual Meeting, stockholders will be asked to consider and vote upon:
1. A proposal to elect three (3) directors for three-year terms
expiring at the 2001 annual meeting of stockholders or until their
successors are duly elected and qualified;
2. A proposal to approve the 1998 Plan; and
3. Such other matters as may properly come before the Annual Meeting.
The Board is not aware of any other matters that may properly come before
the Annual Meeting. If any such other matters properly come before the Annual
Meeting, it is the intention of the persons named as proxies on the form of
proxy card sent with this Proxy Statement (the "Proxies") to vote in accordance
with their best judgment on such matters.
THE BOARD HAS UNANIMOUSLY APPROVED THE NOMINEES FOR ELECTION AS DIRECTORS
AND THE 1998 PLAN, AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO
ELECT SUCH NOMINEES AND FOR THE 1998 PLAN.
VOTING
The Board has fixed the close of business on December 18, 1997, as the
record date for determining the stockholders entitled to notice of, and to vote
at, the Annual Meeting. On the record date, 28,758,305 shares of Common Stock
were outstanding. Each share is entitled to one vote on each matter presented
for a vote at the Annual Meeting. The presence in person or by proxy of the
holders of a majority of the shares of Common Stock outstanding on the record
date constitutes a quorum for the transaction of business at the Annual Meeting.
A stockholder who has returned a proxy may revoke it at any time before the
Annual Meeting by executing a later-dated proxy, by voting by ballot at the
Annual Meeting or by filing with the inspector of election an instrument of
revocation.
Stockholders should specify their choices on the enclosed proxy card. If no
specific instructions are given with respect to the matters to be acted upon,
the shares represented by a properly signed proxy card will be voted FOR the
proposal to elect the nominees as directors, and FOR the 1998 Plan. If any other
matters properly come before the Annual Meeting, the Proxies will vote on such
matters in their discretion.
1
<PAGE>
Shares held by stockholders present at the Annual Meeting in person who do
not vote and ballots marked "abstain" or "withheld" will be counted as present
at the Annual Meeting for quorum purposes. With respect to the election of
directors, abstentions and broker non-votes will have no effect on the outcome
of the vote. With respect to the 1998 Plan, abstentions will have the effect of
a vote against the 1998 Plan and broker non-votes will have no effect on the
outcome of the vote. There are no rights of appraisal or similar dissenters'
rights with respect to any matter to be acted upon pursuant to this Proxy
Statement.
VOTING BY ESOP PARTICIPANTS
Each participant in the Company's Employee Stock Ownership Plan (the "ESOP")
is being sent a Proxy Statement and an ESOP proxy card to vote the Common Stock
allocated to such participant's ESOP Account (the "Allocated Shares"). The ESOP
proxy card may be used by a participant to give directions to the ESOP Trustee
as to how such participant's Allocated Shares should be voted. In order to give
directions to the ESOP Trustee, a participant must complete, sign and date the
ESOP proxy card and return it to the ESOP Trustee in a timely manner. To be
considered timely, the ESOP Trustee must receive the ESOP proxy card prior to
the Annual Meeting. As of the record date, 31,615 shares of Common Stock were
held by the ESOP Trustee and eligible to be voted at the Annual Meeting.
Under the terms of the ESOP, the ESOP Trustee is required to keep
participant voting instructions confidential and may not divulge such
instructions to any person, including officers and employees of the Company.
Neither the ESOP Trustee nor the Administrative Committee of the ESOP
(consisting of three officers of the Company) will make recommendations to
participants about whether or how to vote.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be paid by the Company. Banks, brokers
and other custodians, nominees and fiduciaries are requested to forward proxy
materials to the beneficial owners of Common Stock and to secure their voting
instructions, if necessary. The Company will reimburse such persons for their
reasonable out-of-pocket expenses in forwarding proxy materials to the
beneficial owners of Common Stock. Certain officers and other employees of the
Company, who will receive no compensation for their services other than their
regular compensation, may solicit proxies by mail, telephone or personal
contact. In addition, the firm of MacKenzie Partners, Inc. has been retained by
the Company to assist in the solicitation of proxies for a fee of approximately
$5,000 plus expenses.
2
<PAGE>
PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets forth certain information as of November 30, 1997
(except as otherwise noted) with respect to any person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP CLASS
- ------------------------------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Rainwater-Magellan Holdings, L.P............................................... 5,835,078(1) 18.8%
777 Main Street
Suite 2700
Ft. Worth, TX 76102
Albert O. Nicholas............................................................. 2,736,000 9.4%
Nicholas Company, Inc.(2)
700 North Water Street
Suite 1010
Milwaukee, WI 53202
Wellington Management Company, LLP(3).......................................... 2,337,300 8.0%
75 State Street
Boston, MA 02109
Lazard Freres & Co., LLC(4).................................................... 2,101,895 7.2%
30 Rockefeller Plaza
New York, NY 10020
First Pacific Advisors, Inc.(5)................................................ 1,592,500 5.5%
11400 West Olympic Blvd.
Suite 1200
Los Angeles, CA 90064
</TABLE>
- ------------------------
(1) Includes 1,942,996 shares of Common Stock that Rainwater-Magellan Holdings,
L.P. ("Rainwater-Magellan") has the right to acquire pursuant to a Warrant,
dated as of January 25, 1996 (the "Rainwater Magellan Warrant"), and 6,250
shares that Darla D. Moore, a director of the Company and spouse of Richard
E. Rainwater, has the right to acquire upon the exercise of options. Under
the rules of the United States Securities and Exchange Commission (the
"SEC"), Rainwater, Inc., the general partner of Rainwater-Magellan and
Richard E. Rainwater, the sole owner and sole director of Rainwater, Inc.,
are also deemed to be beneficial owners of the shares owned by
Rainwater-Magellan. Information concerning beneficial ownership of
securities by Rainwater-Magellan is based on its Form 4, dated April 4,
1997.
(2) Information concerning beneficial ownership of securities by Nicholas
Company, Inc. is based on its Form 13F, dated October 21, 1997.
(3) Information concerning beneficial ownership of securities by Wellington
Management Company, LLP is based on its Form 13F dated November 7, 1997.
(4) Information concerning beneficial ownership of securities by Lazard Freres &
Co., LLC is based on its Form 13F, dated November 12, 1997.
(5) Information concerning beneficial ownership of securities by First Pacific
Advisors, Inc. is based on its Form 13F dated November 13, 1997.
Nicholas Company, Inc. is a registered investment advisor and possesses sole
dispositive power over the 2,736,000 shares of Common Stock owned by it.
Nicholas Fund, Inc. is a registered investment company managed by Nicholas
Company, Inc. and possesses sole voting power over 166,000 shares of the
2,736,000 shares owned by Nicholas Company, Inc. and no voting power over
2,570,000 of such shares.
3
<PAGE>
Albert O. Nicholas may be deemed to be a beneficial owner of the shares held by
Nicholas Company, Inc. under SEC rules because of his control of Nicholas
Company, Inc. Mr. Nicholas is the President, a director and majority stockholder
of Nicholas Company, Inc. and disclaims beneficial ownership of all securities
reported as beneficially owned by Nicholas Company, Inc.
Wellington Management Company, LLP is an institutional investment manager
and possesses sole dispositive power over 2,299,300 shares of Common Stock and
shares dispositive power over 38,000 shares of Common Stock owned by it.
Wellington Management Company, LLP possesses sole voting authority over
1,416,200 shares of Common Stock, shared voting power over 38,000 shares of
Common Stock and no voting power over 883,100 shares of Common Stock.
Lazard Freres & Co., LLC is an institutional money manager and possesses
sole dispositive power over all of the shares of Common Stock owned by it and
possesses sole voting authority over all of the shares of Common Stock owned by
it.
First Pacific Advisors, Inc. is an institutional money manager and possesses
sole dispositive power over 1,200,000 of the shares of Common Stock owned by it
and shares dispositive power over 392,500 of such shares. It possesses no voting
power over 1,200,000 of such shares and shares voting power over 392,500 of such
shares.
ELECTION OF DIRECTORS
Under the Restated Certificate of Incorporation, the number of directors is
currently fixed at twelve. There are now two vacancies on the Board. The
directors are divided into three classes, with the nominees in a single class
being elected each year to serve three-year terms. At the Annual Meeting, the
Board will nominate three individuals to serve as directors for three-year terms
expiring at the 2001 annual meeting of stockholders or until their successors
are duly elected and qualified. Of the current ten directors, four will continue
to serve for terms expiring in 1999 and three will continue to serve for terms
expiring in 2000 (the "Continuing Directors").
G. Fred DiBona, Jr. was elected to the Board on January 22, 1996 pursuant to
the Stockholders Agreement, as amended, among the Company, Independence Blue
Cross and certain other minority stockholders of Green Spring Health Services,
Inc., the Company's majority-owned managed behavioral healthcare company ("Green
Spring"). The terms of the Stock and Warrant Purchase Agreement entered into by
the Company and Rainwater-Magellan in connection with Rainwater-Magellan's
purchase of shares of the Company's Common Stock and the Rainwater-Magellan
Warrant in a private placement (the "Private Placement") provide that
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
Rainwater-Magellan, Rainwater, Inc., Richard E. Rainwater, Darla D. Moore and
their affiliates continue to own beneficially a specified minimum number of
shares of Common Stock. Darla D. Moore was designated by Rainwater-Magellan for
election as director and Ms. Moore was elected a director by the Board on
February 22, 1996. See "Certain Relationships and Related Transactions."
If the nominees listed below are unable to serve (which is not anticipated),
the Board will designate substitute nominees, in which case the Proxies will
vote all valid proxies for the election of such substitute nominees. The Proxies
may not vote proxies for a greater number of nominees than the number named
below.
The table below sets forth the name and certain other information about the
persons nominated for election as directors and the Continuing Directors.
4
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY,
NAME, AGE, AND DATE PRINCIPAL OCCUPATIONS
FIRST BECAME A DURING PAST FIVE YEARS
DIRECTOR TERM EXPIRING AND OTHER DIRECTORSHIPS
- --------------------------- --------------- ----------------------------------------------------------------------
<S> <C> <C>
NOMINEES TO THE BOARD
FOR TERMS EXPIRING IN 2001
Andre C. Dimitriadis 2001 Chairman and Chief Executive Officer of LTC Properties (a healthcare
57 real estate investment trust) (since 1992). Director of Health
July 1992 Management, Inc. and Assisted Living Concepts, Inc.
A.D. Frazier, Jr. 2001 President and Chief Executive Officer, Invesco Inc. (a registered
53 investment advisor) (since 1996); Senior Executive Vice President and
May 1995 Chief Operating Officer for the Atlanta Committee for the Olympic
Games (1991-1996). Director of Invesco PLC and three registered
investment companies of which Invesco PLC is the registered investment
advisor.
G. Fred DiBona, Jr. 2001 Director, President and Chief Executive Officer of Independence Blue
46 Cross (a health insurance company) (since 1990). Director of
January 1996 Pennsylvania Savings Bank and Philadelphia Suburban Water Company.
CONTINUING DIRECTORS
Edwin M. Banks 1999 Securities Analyst, W.R. Huff Asset Management Co., LLC (a registered
35 investment advisor) (since 1988). Director of American Communications
July 1992 Services, Inc. and Del Monte Corporation.
Daniel S. Messina 1999 Chief Financial Officer of Aetna U.S. Healthcare (since January 1998);
42 Vice President--Business Strategy--Aetna U.S. Healthcare (1997);
December 1997 Deputy Chief Financial Officer, Aetna U.S. Healthcare (1997-1996);
Vice President Financial Relations and Chief of Staff to the Vice
Chairman for Strategy, Finance and Administration, Aetna, Inc.
(1996-1995) and Vice President and Controller, Aetna Health Plans
(1995-1991).
Darla D. Moore 1999 Private Investor, Rainwater, Inc. (investments) (since 1994); Managing
43 Director, The Chase Manhattan Bank, N.A. (commercial banking)
February 1996 (1982-1994).
Jeffrey A. Sonnenfeld 1999 President, The Chief Executive Institute (education) (since December
43 1997); Professor of organization and management and director of the
September 1997 Center for Leadership & Career Studies of the Goizueta Business School
at Emory University (1989-1997). Director of Klaster Cruise Limited,
Masely Securities Corporations, Transmedia-CBS, Inc. and U.S.
Franchise Systems.
E. Mac Crawford 2000 Chairman of the Board, President and Chief Executive Officer (since
48 1993); President and Chief Operating Officer (1992-1993); Director of
April 1990 First Union National Bank of Georgia and Integrated Health Services,
Inc.
Raymond H. Kiefer 2000 Retired insurance executive (since 1992); President, Allstate
70 Insurance Company (1989-1992).
July 1992
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY,
NAME, AGE, AND DATE PRINCIPAL OCCUPATIONS
FIRST BECAME A DURING PAST FIVE YEARS
DIRECTOR TERM EXPIRING AND OTHER DIRECTORSHIPS
- --------------------------- --------------- ----------------------------------------------------------------------
<S> <C> <C>
Gerald L. McManis 2000 President of McManis Associates, Inc. ("MAI") (strategy development
61 and management consulting firm for healthcare and healthcare-related
February 1994 companies) (since 1965). Director of MMI Companies, Inc.
</TABLE>
VOTE REQUIRED
Directors will be elected by a plurality of the votes cast at the Annual
Meeting, assuming a quorum is present. Any shares not voted at the Annual
Meeting, whether due to abstention, broker non-votes or otherwise, will have no
impact on the election of directors. Votes will be tabulated by inspectors of
election appointed by the Board.
THE BOARD RECOMMENDS THE NOMINEES FOR ELECTION AS DIRECTORS AND URGES
STOCKHOLDERS TO VOTE "FOR" MESSRS. DIMITRIADIS, FRAZIER AND DIBONA. SHARES
REPRESENTED AT THE ANNUAL MEETING BY PROPERLY SIGNED BUT UNMARKED PROXIES WILL
BE VOTED "FOR" EACH OF THE NOMINEES.
BOARD INFORMATION
During the fiscal year ended September 30, 1997, the Board held 12 meetings.
Each director attended more than 75% of the meetings of the Board and committees
of the Board on which he or she was a member, except Mr. Frazier, who attended
72% of such meetings. During fiscal 1997, Mr. Frazier attended 75% of the
Board's regular meetings and 100% of the meetings of the committees of the Board
on which he was a member.
The Board has standing Audit, Compensation and Finance Committees. There is
no nominating committee of the Board.
AUDIT COMMITTEE. The Audit Committee consists of Messrs. Frazier
(Chairman), DiBona, Kiefer and Sonnenfeld. The Audit Committee held one meeting
during fiscal 1997. The Audit Committee makes recommendations to the Board
regarding the engagement of independent auditors, reviews the scope and results
of audits of the Company, reviews the Company's internal accounting controls and
the activities of the Company's internal audit staff, and reviews the non-audit
professional services furnished to the Company by its independent auditors.
COMPENSATION COMMITTEE. The Compensation Committee consists of Messrs.
Frazier (Chairman), Banks, Dimitriadis and McManis. Mr. Banks was appointed to
the Compensation Committee in January 1997. The Compensation Committee held
three meetings during fiscal 1997. The Compensation Committee's duties are
described under the caption "Compensation Committee Report on Executive
Compensation."
FINANCE COMMITTEE. The Finance Committee consists of Ms. Moore
(Chairperson), and Messrs. Banks, Dimitriadis and Messina. The Finance Committee
reviews the Company's existing equity and debt capital structure and the terms,
interest rates, amortization and maturity schedules, restrictive covenants and
other provisions of agreements and indentures relating to the Company's debt
structure; reviews any significant proposed changes in the equity or debt
capital structure of the Company; reviews the Company's actual and budgeted cash
flows and capital expenditures, the Company's cash management system and any
proposed changes in the cash management system, investment policies relating to
cash and cash equivalents and any proposed material changes in the terms of any
retirement or pension plan of the Company or any subsidiary; and reports and
makes recommendations to the Board concerning the matters
6
<PAGE>
described above. The Finance Committee held no meetings during fiscal 1997,
because the Board of Directors as a whole considered the matters within the
Finance Committee's jurisdiction.
During fiscal 1997, each non-employee director received a monthly retainer
of $2,000, and a fee of $1,000 for each Board meeting and $1,000 for each Board
committee meeting attended. In addition, during fiscal 1997, Mr. Sonnenfeld was
granted an option under the 1996 Directors' Stock Option Plan to purchase 25,000
shares of Common Stock, at an exercise price of $30.8123. Mr. Crawford received
no additional compensation for serving as a director. In accordance with Aetna
U.S. Healthcare's policy, Mr. Messina will not accept any compensation nor any
option grants for serving as a director.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to the
Company's Chief Executive Officer and the Company's four next most highly
compensated executive officers (the "Named Executive Officers"), for the three
fiscal years ended September 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------ COMPENSATION
NAME AND PRINCIPAL FISCAL OTHER ANNUAL ------------- ALL OTHER
POSITIONS YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)(2) COMPENSATION(3)
--------------------- ----------- ---------- ------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford...................... 1997 $ 806,250 $ 2,475,000 $ -- 933,666 $ 166,575
Chairman of the Board, President 1996 712,500 153,500 -- 300,000 181,936
and Chief Executive Officer 1995 600,000 -- 177,236 -- 204,095
Craig L. McKnight(4)................. 1997 378,688 150,000 59,743 65,000 45,158
Executive Vice President and Chief 1996 361,250 50,000 -- 25,000 73,891
Financial Officer 1995 204,167 -- 45,668 100,000 11,218
Steve J. Davis(5).................... 1997 337,500 150,000 -- 167,500 43,750
Executive Vice President-- 1996 256,667 50,000 -- 40,000 50,449
Administrative Services and General 1995 182,083 -- 21,121 -- 91,972
Counsel
Henry T. Harbin M.D.(6).............. 1997 338,069 161,707 -- 125,000 10,750
Executive Vice President and 1996 236,705 167,195 -- 100,000 10,750
President and Chief Executive
Officer of Green Spring Health
Services, Inc.
Danna Mauch Ph.D.(7)................. 1997 304,500 -- -- -- 33,660
Executive Vice President and 1996 125,000 10,000 -- 50,000 23,452
President and Chief Operating
Officer of Magellan Public
Solutions, Inc.
</TABLE>
- ------------------------
(1) Other Annual Compensation for fiscal 1997 includes country club initiation
fees and dues of $42,004 for Mr. McKnight. Other Annual Compensation for
fiscal 1995 includes: (a) reimbursement of relocation expenses of $157,558
and $38,289 for Messrs. Crawford and McKnight, respectively, and (b) a car
allowance of $12,000 for Mr. Davis.
(2) Represents the number of stock options granted under the Company's 1994
Stock Option Plan, 1996 Stock Option Plan and 1997 Stock Option Plan.
7
<PAGE>
(3) All Other Compensation for fiscal 1997 includes: (a) contributions to the
Company's 401(k) Plan of $5,250 for Messrs. Crawford and Davis, $3,000 for
Mr. McKnight and contributions to the Green Spring 401(k) plan of $10,750
for Dr. Harbin; (b) amounts deposited in trust pursuant to the Company's
Executive Benefits Plan ("EBP") of $151,816, $42,158, $38,500 and $33,660
for Messrs. Crawford, McKnight, Davis and Dr. Mauch, respectively, and (c)
premiums paid for disability insurance of $9,509 for Mr. Crawford. All Other
Compensation for fiscal 1996 includes: (a) contributions to the ESOP of
$18,050, $22,795 and $22,795 for Messrs. Crawford, McKnight and Davis,
respectively, which represents the Company's expense (the fair value of the
ESOP shares on the date earned was $699, $883 and $883 for Messrs. Crawford,
McKnight and Davis, respectively); (b) contributions to the Company's 401(k)
Plan of $5,250 for Mr. Crawford and contributions to the Green Spring 401(k)
Plan of $10,750 for Dr. Harbin; (c) amounts deposited in trust pursuant to
the EBP of $137,191, $40,150, $23,375 and $23,452 for Messrs. Crawford,
McKnight and Davis and Dr. Mauch, respectively; (d) premiums paid for life
and disability insurance of $19,840, $10,260 and $3,595 for Messrs.
Crawford, McKnight and Davis, respectively; and (e) term life insurance
premiums of $1,605, $686 and $684 for Messrs. Crawford, McKnight and Davis,
respectively. All Other Compensation for fiscal 1995 includes: (a)
contributions to the ESOP of $20,408 and $18,560 for Messrs. Crawford and
Davis, respectively, which represents the Company's expense (the fair value
of the ESOP shares on the date earned was $465 and $424 for Messrs. Crawford
and Davis, respectively); (b) contributions to the Company's 401(k) Plan of
$5,250 for Mr. Crawford; (c) amounts deposited in trust pursuant to the EBP
of $104,877 and $25,897 for Messrs. Crawford and Davis, respectively; (d)
premiums paid for life and disability insurance of $72,954, $11,010 and
$4,410 for Messrs. Crawford, McKnight and Davis, respectively; (e) term life
insurance premiums of $606, $208 and $685 for Messrs. Crawford, McKnight and
Davis, respectively; and (f) amounts paid to Mr. Davis of $42,420 pursuant
to Mr. Davis achieving performance goals set relating to his employment with
the Company.
(4) Mr. McKnight became an employee of the Company effective March 1, 1995.
(5) In November 1997, Mr. Davis resigned his position with the Company to become
President and Chief Executive Officer of Charter Behavioral Health Systems,
LLC, the Company's 50% owned behavioral care provider company ("CBHS").
(6) Dr. Harbin became an executive officer of the Company effective December 13,
1995.
(7) Dr. Mauch became an employee of the Company effective May 1, 1996.
8
<PAGE>
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information with respect to grants of
options to the Named Executive Officers who were granted options during fiscal
1997 and the potential realizable value of such options on September 30, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS GRANTED EMPLOYEES IN PRICE EXERCISE ----------------------------
NAME (#) FISCAL 1997 PER SHARE EXPIRATION DATE 5% 10%
- ------------------------------- --------------- --------------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford................ 183,666(1) 11.2% $ 20.875 12/17/06 $ 2,411,199 $ 6,110,453
750,000(3) 45.7 24.375 2/28/07 11,496,980 29,135,604
Craig L. McKnight.............. 15,000(1) 0.9 20.875 12/17/06 196,923 499,041
50,000(2) 3.0 23.438 11/30/05 631,648 1,570,244
Steve J. Davis................. 67,500(1) 4.1 20.875 12/17/06 886,152 2,245,683
100,000(2) 6.1 23.438 11/30/05 1,263,296 3,140,488
Henry T. Harbin M.D............ 25,000(1) 1.5 20.875 12/17/06 328,204 831,734
100,000(3) 6.1 30.438 2/28/07 1,796,152 4,492,103
</TABLE>
- ------------------------
(1) Options granted under the 1994 Stock Option Plan which become exercisable
over three years at the rate of 33 1/3% of the total number of options per
year.
(2) Options granted under the 1996 Stock Option Plan which became exercisable on
June 17, 1997.
(3) Options granted under the 1997 Stock Option Plan, which become exercisable
over three years at the rate of 33 1/3% of the total number of options per
year.
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND OPTION VALUES AT SEPTEMBER 30, 1997
The following table sets forth certain information with respect to options
exercised by the Named Executive Officers during fiscal 1997, and the number and
value of options held on September 30, 1997:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF LN-THE-MONEY
SHARES UNEXERCISED OPTIONS OPTIONS AT
ACQUIRED ON VALUE AT SEPTEMBER 30, 1997 SEPTEMBER 30, 1997($)(1)
EXERCISE REALIZED -------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford................. -- $ -- 755,440 933,666 $ 14,791,046 $ 7,528,618
Craig L. McKnight............... -- -- 141,667 48,333 1,648,996 611,054
Steve J. Davis.................. -- -- 157,500 67,500 1,526,563 734,063
Henry T. Harbin M.D............. -- -- 100,000 125,000 1,287,500 403,125
Danna Mauch Ph.D................ -- -- 50,000 -- 437,500 --
</TABLE>
- ------------------------
(1) The closing price for the Common Stock as reported on September 30, 1997 was
$31.75. The value of unexercised in-the-money options is the difference
between the per share option exercise price and $31.75, multiplied by the
number of shares of Common Stock underlying in-the-money options.
9
<PAGE>
COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for establishing policies with
respect to compensation paid by the Company to its executive officers. The
Compensation Committee approves the design of all compensation plans applicable
to executive officers; negotiates, reviews and/or approves terms of employment
agreements with certain of the Company's executive officers; reviews and
approves performance goals; establishes award opportunities; determines
appropriate base salaries; approves incentive award payouts and oversees the
ongoing operation of the various plans as they relate to executive officers. The
Compensation Committee consists of directors who are not employees of the
Company and who are not eligible to participate in any of the plans that the
Compensation Committee administers. A subcommittee of the Compensation
Committee, which is comprised solely of "outside directors" as such term is
defined by Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), administers the Company's stock option plans and other compensation
arrangements that constitute "qualified performance-based compensation," as
defined by Section 162(m) of the Code.
POLICIES.
In 1996, the Compensation Committee retained an independent compensation
consultant to advise it with respect to executive officer compensation,
including base salaries, annual incentive plans, benefits and stock-based and
long-term incentive compensation. The compensation consultant reviewed and
researched executive pay practices in a peer group of specific for profit
healthcare companies, which the Compensation Committee believes reflects the
talent pool from which the Company might draw and provides a useful benchmark
for the competitiveness of compensation of the Company's present executive
officers. With regard to base salary, the consultant reported that the base
salary of the Company's chief executive officer was between the 50th and 75th
percentile of the peer group chief executive officers and that other executive
officer salaries were generally near or slightly above the 75th percentiles of
comparable peer group positions. With regard to annual incentive compensation,
the consultant reported that the percentage of base salary paid by the Company
as a bonus if the annual incentive target were met, when combined with salaries,
would place total annual compensation between the 50th and 75th percentile.
However, if annual incentive targets were not met and no bonus was paid, total
annual compensation would be well below the 50th percentile of the peer group as
previously described.
Based in substantial part on the findings and recommendations of the
independent compensation consultant, the Compensation Committee adopted the
following policies with respect to executive officer compensation for fiscal
1997.
1. BASE SALARY--Executive officer base salaries should be at approximately
the 75th percentile of the peer group developed by the compensation
consultant, subject to increase to a higher percentile for individual
executive officers based on performance.
2. PERFORMANCE-BASED COMPENSATION--A significant portion of executive
officer compensation should be performance-based.
In implementing these policies, the Compensation Committee has, from time to
time received additional advice from outside consultants with respect to stock
option plans and other incentive compensation and recommended that the Company
adopt certain performance-based compensation plans. These plans were adopted by
the Company after receiving necessary approvals from the Board and stockholders.
The plans that are currently in force are described below:
1997 STOCK OPTION PLAN. Under the 1997 Stock Option Plan, key employees of
the Company (including executive officers) may be granted options to purchase up
to 1,500,000 shares of Common Stock.
10
<PAGE>
EXECUTIVE BENEFITS PLAN. The Company adopted the EBP in 1993 on the
recommendation of the compensation consultant. The EBP is funded through a
performance-based component and a fixed component and has been structured to
provide an incentive for executive officers to remain with the Company.
Under the performance-based component, an amount equal to one-third of an
executive officer's annual bonus, if any, is paid by the Company to a trust and
invested in one or more mutual funds. The amount contributed to the trust and
any appreciation or contributions is paid to the executive officer on a date
selected by the executive officer prior to funding (but not earlier than two
years after funding or later than normal retirement date). Payments from the
trust to the executive officer are forfeited if, at the time payment would
otherwise be made, the executive officer is no longer employed by the Company
and is in violation of a non-competition agreement signed prior to funding.
The fixed component of the EBP is an annual amount equal to 19.5% of the
base salary of the chief executive officer and 11% of the base salary of other
executive officers. At the election of each executive officer, the fixed
component may be used to make additional payments to the trust described above
or to purchase life or disability insurance. Amounts deposited in the trust are
subject to forfeiture, as described above.
CHIEF EXECUTIVE OFFICER COMPENSATION. In fiscal 1997, the compensation of
E. Mac Crawford, the Company's Chief Executive Officer, included base
compensation of $806,250, a bonus of $2,475,000 in connection with the closing
of the sale of certain acute-care psychiatric hospital facilities to Crescent
Real Estate Equities Limited Partnership (the "Crescent Transactions") (see
"Certain Relationships and Related Transactions") and benefits under the EBP of
$161,325. Mr. Crawford's base salary was increased to $825,000 effective March
1, 1997 at the time his employment agreement was amended. Mr. Crawford's
employment agreement, as amended, also provided for the bonus described above.
In negotiating the amendment to Mr. Crawford's employment agreement, the
Compensation Committee considered Mr. Crawford's efforts in negotiating the
Crescent Transactions and his ability to utilize funds from such transactions to
expand the Company's presence in its highest growth segments, including managed
care. Accordingly, the Compensation Committee believed that it was in the best
interests of the Company's stockholders to compensate Mr. Crawford with a
special bonus upon consummation of the Crescent Transactions and to extend his
employment agreement to March 1, 2000 to allow adequate time for Mr. Crawford to
oversee the implementation of the Company's long-term strategy.
NON-DEDUCTIBILITY OF CERTAIN COMPENSATION. The Company is party to an
employment agreement with Mr. Crawford. Under the terms of the agreement, the
compensation paid to Mr. Crawford exceeded $1 million in fiscal 1997 and will
exceed $1 million in fiscal 1998. Section 162(m) of the Code generally provides
that, subject to certain exceptions, a publicly-held corporation such as the
Company, may not deduct for federal income tax purposes compensation paid to any
of its Named Executive Officers in excess of $1 million annually. The
Compensation Committee determined that the benefit to the Company of entering
into an extended employment contract with Mr. Crawford offset the potential loss
of a tax deduction.
A.D. Frazier, Jr. (Chairman)
Andre C. Dimitriadis
Edwin M. Banks
Gerald L. McManis
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. McManis, a member of the Compensation Committee, is the President of
MAI, a healthcare development and management consulting firm. During fiscal
1997, MAI provided consulting services to the Company related to the development
of strategic plans and a review of the Company's business
11
<PAGE>
processes. Management believes that the services received from MAI were
negotiated on terms as favorable as could be obtained from an unaffiliated third
party. The Company incurred approximately $825,000 in fees for such services
during fiscal 1997 and reimbursed MAI approximately $60,000 for expenses. Mr.
McManis is not a member of the subcommittee that administers the Company's stock
option plans and other "qualified performance-based compensation."
EMPLOYMENT AGREEMENTS
E. MAC CRAWFORD. The Company has an Employment Agreement with Mr. Crawford
for a three-year term beginning March 1, 1997. The agreement provides for a base
salary of $825,000 and bonus compensation payable on January 2, 1998 (the
"Contract Bonus"), determined as follows: $10 million LESS (i) if none of the
462,990 options (the number of stock options held by Mr. Crawford on October 1,
1995 under the 1992 Stock Option Plan) have been exercised as of January 2,
1998, the result obtained by multiplying 462,990 by the lesser of (a) $18 LESS
$4.36 (the exercise price of the stock options held by Mr. Crawford on October
1, 1995 under the 1992 Stock Option Plan) and (b) the arithmetic average of the
closing sale price per share of the Common Stock for the ten trading days
immediately preceding the date of payment LESS $4.36, or (ii) the sum of the
result obtained by multiplying the number of stock options held by Mr. Crawford
on October 1, 1995 under the 1992 Stock Option Plan that have not been exercised
as of January 2, 1998 by the lesser of (a) or (b) and the result obtained by
multiplying the number of stock options held by Mr. Crawford on October 1, 1995
under the 1992 Stock Option Plan that were exercised prior to January 2, 1998 by
$13.64. The amount of the Contract Bonus computed in accordance with the
foregoing formula was $3,684,816, which was paid to Mr. Crawford on January 2,
1998. In addition, Mr. Crawford will receive other bonuses and benefits that are
provided to the Company's other executive officers. The agreement also provides
for severance payments to Mr. Crawford upon termination by the Company
(including certain constructive termination events, such as a substantial change
in Mr. Crawford's duties, but not including termination for cause), termination
due to death or disability, or upon Mr. Crawford's resignation under certain
circumstances, or after a change of control (as defined in the agreement). Such
severance payments would consist of five years salary at the then current salary
level and the portion(s) of any bonus or other incentive compensation accrued
through the date of termination. In addition, if Mr. Crawford resigns or is
terminated following a change of control, Mr. Crawford will be paid a "gross-up"
payment intended to compensate Mr. Crawford if certain excise taxes would be
imposed under the Code in such cases. Subject to certain exceptions, the Company
will be unable to deduct the compensation and severance payments to Mr. Crawford
to the extent such compensation is in excess of $1 million annually.
CRAIG L. MCKNIGHT. The Company has an Employment Agreement with Mr.
McKnight for a five-term beginning March 1, 1995. The agreement provides for a
base salary of $350,000 and for bonuses and life and disability insurance
benefits that are competitive with similar benefits for comparable positions
within the investor-owned hospital industry. The agreement also provides for
severance payments upon termination without cause, termination due to death or
disability, or resignation after a change of control (as defined in the
agreement). Upon any such termination, Mr. McKnight would receive the greater of
(i) all salary payments that would come due during the term of the agreement
subsequent to termination and (ii) two years' salary at the then current salary
level and a portion of any bonus or other cash incentive compensation accrued
through the date of termination.
HENRY T. HARBIN. Green Spring has an Employment Agreement with Dr. Harbin
for a three-year term beginning February 28, 1996. The agreement provides that
the Company will pay Dr. Harbin a base salary, which will be fixed from time to
time by the Board of Directors of Green Spring, and for fringe benefits
comparable to those offered to all Green Spring employees. The Company has a
Compensation Agreement with Dr. Harbin for a four-year term beginning December
13, 1995. The Compensation Agreement provides that the Company will pay Dr.
Harbin a bonus, one-half of which will be paid on December 13, 1998 and the
remaining one-half on December 13, 1999. The bonus will be: $2.25 million LESS
12
<PAGE>
the aggregate value of all cash and non-cash compensation paid or payable to Dr.
Harbin by the Company during the term of the Compensation Agreement (the
"Excluded Amount") other than Dr. Harbin's base salary as of December 31, 1995
and amounts paid to Dr. Harbin prior to December 13, 1995. The Compensation
Agreement also provides that Dr. Harbin is entitled to receive such bonus if he
is terminated without cause, terminated due to death or disability, or
terminated or resigns after a change of control (as defined in the agreement).
The Excluded Amount also includes the in-the-money portion of any stock options
that Dr. Harbin now holds or may hold in the future. The value of the
in-the-money portion of the stock options is calculated as follows: (i) for
unexercised options, the value is the number of unexercised options multiplied
by the average of the closing prices of the Common Stock on the New York Stock
Exchange for the ten trading days preceding the payment date LESS the aggregate
exercise price payable in connection with the exercise of such options, and (ii)
with respect to exercised options, the value is the greater of (A) the closing
prices of the Common Stock on the date of exercise multiplied by the number of
options exercised in connection with such exercise LESS the aggregate exercise
price payable in connection with such exercises and (B) the value that would
have been ascribed to such options if the options had been valued in accordance
with the provisions for unexercised options described above. The Excluded Amount
does not include any value related to unvested stock options to the extent that
such options will not vest in the ordinary course before the end of the term of
the Compensation Agreement.
DANNA MAUCH PH.D. The Company has an Employment Agreement with Dr. Mauch
for a three-year term beginning May 1, 1996. The agreement provides for a base
salary of $300,000 and for bonuses and life and disability insurance benefits
that are competitive with similar benefits for comparable positions within the
investor-owned hospital industry. The agreement also provides for severance
payments upon termination without cause, termination due to death or disability,
or resignation after a change of control (as defined in the agreement). Upon any
such termination, Dr. Mauch would receive the greater of (i) all salary payments
that would come due during the term of the agreement subsequent to termination
and (ii) one year's salary at the then current salary level and a portion of any
bonus or other cash incentive compensation accrued through the date of
termination.
EXECUTIVE BENEFITS PLAN. The terms of the EBP provide that amounts
deposited in the trust on behalf of executive officers are to be paid to
executive officers, together with any appreciation in such amounts, upon a
change of control of the Company if the change of control occurs prior to the
scheduled date for distribution of amounts held in the trust. The trust
agreement defines a "change of control" as the replacement of 50% or more of the
members of the Board within a 12-month period that is followed by the
termination of employment within a 12-month period of one-third or more of the
employees who participate in the EBP.
13
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return of the Common
Stock, the Standard & Poors ("S&P") 500 Stock Index and the Standard & Poors
Hospital Management Index ("HMI") since September 30, 1992. The graph assumes
$100 was invested in each of the Common Stock, the S&P 500 Stock Index and the
S&P HMI and that dividends received were reinvested on the date paid. The graph
does not take into account trading commissions or taxes.
[GRAPH]
14
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of Common Stock by (i) directors, (ii) the Named Executive Officers
and (iii) directors and executive officers as a group, as of November 30, 1997.
Information with respect to certain significant stockholders of the Company is
set forth in "Principal Holders of Common Stock."
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OWNERSHIP (1)(2) TOTAL OUTSTANDING
- --------------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
E. Mac Crawford............................................................ 817,016 2.7%
Craig L. McKnight.......................................................... 146,704 *
Henry T. Harbin M.D........................................................ 108,333 *
Danna Mauch Ph.D........................................................... 51,000 *
Edwin M. Banks(3) ......................................................... 39,500 *
G. Fred DiBona, Jr.(4)..................................................... 902,065 3.0
Andre C. Dimitriadis ...................................................... 39,000 *
A.D. Frazier, Jr. ......................................................... 28,500 *
Raymond H. Kiefer.......................................................... 40,000 *
Gerald L. McManis.......................................................... 34,000 *
Darla D. Moore(5) ......................................................... 5,835,078 18.8
Jeffrey A. Sonnenfeld Ph.D................................................. -- *
Daniel S. Messina.......................................................... --(6) *
All directors and executive officers as a group (12 persons) .............. 8,041,196(7) 24.2
</TABLE>
- ------------------------
* Less than 1% of total outstanding.
(1) Includes 816,662, 146,667, 108,333 and 50,000 shares that Messrs. Crawford
and McKnight and Drs. Harbin and Mauch, respectively, have the right to
acquire upon the exercise of options and warrants within 60 days of November
30, 1997.
(2) Includes 39,000 shares that each of Messrs. Dimitriadis, Kiefer and Banks
have the right to acquire, 34,000 shares that Mr. McManis has the right to
acquire, 28,500 shares that Mr. Frazier has the right to acquire, 12,500
shares that Mr. DiBona has the right to acquire and 6,250 shares that Ms.
Moore has the right to acquire within 60 days of November 30, 1997.
(3) Does not include shares owned by W.R. Huff Asset Management Co. LLC, a
registered investment advisor ("Huff"), of which Mr. Banks disclaims
beneficial ownership. Mr. Banks is a securities analyst with Huff.
(4) Includes 889,565 shares that Independence Blue Cross, a minority stockholder
in Green Spring, has the right to acquire pursuant to its right to exchange
its minority interest in Green Spring for shares of Common Stock pursuant to
the Exchange Agreement, dated December 13, 1995, among the Company and the
minority stockholders of Green Spring (the "Exchange Agreement"). See
"Certain Relationships and Related Transactions." Mr. DiBona is a director
and the President and Chief Executive Officer of Independence Blue Cross and
disclaims beneficial ownership or all securities attributed to him because
of his positions with Independence Blue Cross.
(5) Includes 3,885,832 shares owned by Rainwater-Magellan and 1,942,996 shares
that Rainwater-Magellan, has the right to acquire pursuant to the
Rainwater-Magellan Warrant. Ms. Moore is the spouse of Richard F. Rainwater,
the sole stockholder and sole director of Rainwater, Inc., which is the sole
general partner of Rainwater-Magellan.
(6) In accordance with Aetna U.S. Healthcare's policy, Mr. Messina will not
accept any option grants for serving as a director.
(7) Includes 1,319,912 shares that the directors and executive officers have the
right to acquire upon the exercise of options and units, 889,565 shares that
Independence Blue Cross has the right to acquire and 1,942,996 shares that
Rainwater-Magellan has the right to acquire upon the exercise of the
Rainwater-Magellan Warrant, all of which are exercisable within 60 days of
November 30, 1997.
15
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gerald L. McManis, a director of the Company, is the President of MAI, a
healthcare development and management consulting firm. During fiscal 1997, MAI
provided consulting services to the Company with respect to the development of
strategic plans and a review of the Company's business processes. The Company
paid approximately $825,000 in fees for such services during fiscal 1997 and
reimbursed MAI approximately $60,000 for expenses.
G. Fred DiBona, Jr., a director of the Company, is a director and the
President and Chief Executive Officer of Independence Blue Cross. As of November
30, 1997, Independence Blue Cross had a 12.25% equity interest in Green Spring.
The Company acquired a 51%-equity interest in Green Spring on December 13,
1995 for approximately $68.9 million in cash, the issuance of Common Stock
valued at approximately $4.3 million and the contribution of Group Practice
Affiliates, Inc., a wholly-owned subsidiary of the Company ("GPA"), to Green
Spring. The Exchange Agreement provides that the minority stockholders of Green
Spring, including Independence Blue Cross, have the option (the "Exchange
Option"), under certain circumstances, to exchange their equity interests in
Green Spring for 2,831,739 shares of Common Stock or $65.1 million in
subordinated notes. In the event of an exchange, the Company may elect to pay
cash in lieu of issuing subordinated notes. The Exchange Option expires on
December 13, 1998. The consideration paid and terms of the Exchange Option were
determined through arm's length negotiations that considered, among other
factors, the historical and projected income of Green Spring and the value of
GPA. The consideration paid by the Company was determined by the Board with the
advice of management and the Company's investment bankers. On December 20, 1995,
the Company acquired an additional 10% equity interest in Green Spring for $16.7
million in cash as a result of the exercise of the Exchange Option by a minority
stockholder of Green Spring. The Company had a 61%-equity interest in Green
Spring as of November 30, 1997.
On December 13, 1995, as part of the Company's initial investment in Green
Spring, Independence Blue Cross sold a 4.42% equity interest in Green Spring, in
which it had a cost basis of $3.2 million, to the Company for $5.4 million in
cash. The Exchange Option gives Independence Blue Cross the right, until
December 13, 1998, to exchange its remaining equity interest in Green Spring for
a maximum of 889,565 shares of Common Stock or $20.5 million in subordinated
notes.
The Company expects Independence Blue Cross to convert its equity interest
in Green Spring into 889,565 shares of Common Stock during fiscal 1998 in
connection with the Company's announced acquisition of Merit Behavioral Care
Corporation ("Merit") and related transactions (collectively the
"Transactions"). The Transactions are more fully described in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1997. See
"Incorporation of Certain Documents by Reference."
Independence Blue Cross and its affiliated entities contract with Green
Spring for provider network, care management and medical review services
pursuant to contractual relationships entered into on July 7, 1994, with terms
of up to five years. During fiscal 1997, Independence Blue Cross and its
affiliated entities paid Green Spring approximately $48.0 million for such
services. As of September 30, 1997, Independence Blue Cross and its affiliated
entities owed Green Spring approximately $13.6 million. Green Spring recorded
revenue of approximately $47.4 million from Independence Blue Cross during
fiscal 1997.
On July 7, 1994, Independence Blue Cross sold a subsidiary to Green Spring
in exchange for a $15.0 million promissory note. As of November 30, 1997, $6.0
million remained outstanding under such promissory note and is due and payable
in equal installments on July 7, 1998 and 1999.
Richard E. Rainwater and certain of his affiliates have a significant
interest in Crescent and the Company. Set forth below is a summary of the
interests of such persons.
On June 17, 1997, the Company sold substantially all of its domestic
acute-care psychiatric hospitals and residential treatment facilities (the
"Psychiatric Hospital Facilities") to Crescent Real Estate Equities
16
<PAGE>
Limited Partnership ("Crescent") for $417.2 million in cash (before costs of
approximately $16 million) and warrants for the purchase of 2.5% of the common
stock of Crescent Operating, Inc., an affiliate of Crescent ("COI").
Simultaneously with the sale of the Psychiatric Hospital Facilities to Crescent,
the Company and COI formed Charter Behavioral Health Systems, LLC ("CBHS") to
conduct the operations of the Psychiatric Hospital Facilities and certain other
facilities transferred to CBHS by the Company. The Company owns a 50% interest
in CBHS, which it obtained by contributing approximately $5 million of certain
net assets to CBHS. 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 pays certain franchise fees to the Company.
The Company is currently in discussions with COI regarding the purchase by COI
of the Company's franchise operations and all or part of the Company's interest
in CBHS. There can be no assurance that any such transaction will occur.
Crescent is the operating partnership of Crescent Real Estate Equities
("CEI"). Mr. 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 and CEI.
A total of 4,000,000 shares of Common Stock and warrants for an additional
2,000,000 shares of Common Stock were acquired by Rainwater-Magellan from the
Company in the Private Placement pursuant to a Stock and Warrant Purchase
Agreement and certain related agreements (the "Private Placement Agreements").
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. Richard E. 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.
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-
17
<PAGE>
Magellan proposed Ms. Moore as its nominee for director, and Ms. Moore was
elected a director by the Board in February 1996.
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 its 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.
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PROPOSED 1998 STOCK OPTION PLAN
The following summary description of the Magellan Health Services, Inc. 1998
Stock Option Plan ("1998 Plan") is qualified in its entirety by reference to the
full text of the 1998 Plan, which is attached hereto as Appendix I.
On December 11, 1997, the Board adopted, subject to stockholder approval at
the Annual Meeting, the 1998 Plan. The purpose of the 1998 Plan is to motivate
and retain officers, other key employees and designated consultants of the
Company and its subsidiaries who have major responsibility for the attainment of
the primary long-term performance goals of the Company. The 1998 Plan will
enable such officers, eligible key employees and consultants of the Company and
its subsidiaries to acquire a proprietary interest in the Company through the
ownership of Common Stock. Mr. Crawford, the Company's Chief Executive Officer,
will not be eligible to receive option grants under the terms of the 1998 Plan.
Under the terms of the 1998 Plan, options can be granted to participants to
purchase, out of authorized but unissued Common Stock or out of shares of Common
Stock held in the Company's treasury, or partly out of each, a total of
1,000,000 shares of Common Stock. Both the number of shares of Common Stock
covered by the 1998 Plan and the per share exercise price of options granted are
subject to adjustment upon certain changes in capitalization of the Company,
such as stock splits or stock dividends.
The 1998 Plan is administered by the Compensation Committee or such
committee as may from time to time be designated by the Board to administer the
1998 Plan (the "Committee"). The Committee is required to be comprised of not
fewer than two members of the Board, each of whom is a "non-employee director"
as that term is defined in Rule 16b-3 under the Exchange Act and is an "outside
director" as that term is defined in Treasury Regulation Section 1.162-27(e)(3).
The Committee administers the 1998 Plan, selects the eligible participants to
whom the options will be awarded, determines the number of shares for which
options are to be awarded to each eligible participant and determines the terms
and conditions of each option, subject to the provisions of the 1998 Plan. The
duties of the Committee in granting options may be delegated to the Company's
Chief Executive Officer with respect to any person except any person who has
been designated a "named executive officer" (as defined by SEC rules) with
respect to the Company's last completed fiscal year, subject to any review,
approval or notification required by the Committee or as otherwise may be
required by law. The Committee may from time to time prescribe, amend and
rescind such rules, regulations, provisions and procedures, consistent with the
terms of the 1998 Plan, as, in its opinion, may be advisable in the
administration of the 1998 Plan. The Committee approves the provisions of the
stock option agreements required by the 1998 Plan. Options granted under the
1998 Plan are non-qualified stock options.
Any officer, employee or consultant of the Company or any of its
subsidiaries who has been selected by the Committee or by the Company's Chief
Executive Officer, as appropriate, is eligible to participate in the 1998 Plan.
The options granted under the 1998 Plan shall have an exercise price equal
to the mean between the high and the low sales prices per share of the Common
Stock on the New York Stock Exchange on the date of grant of the options
("Standard Exercise Price"); provided, that the Committee or the Company's Chief
Executive Officer, as appropriate, may elect to grant options at an exercise
price less than the Standard Exercise Price. More than one grant of an option
may be made to the same person, but no person may be granted options under the
1998 Plan to purchase in the aggregate more than 500,000 shares of Common Stock.
The last reported price of the Common Stock on January 8, 1998 was $22.375 per
share.
Options granted under the 1998 Plan will be exercisable to the extent
vested. An option vests over such period specified in the stock option
agreement, which may include a period of time over which vesting can occur if
certain financial, operating or other designated targets are met (a "Performance
Vesting Period"), if the optionee remains an employee or a consultant of the
Company or of a subsidiary of the
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Company on the vesting dates occurring during such period, and/or on such other
terms and conditions as may be set forth in the stock option agreement. The
Committee or the Chief Executive Officer, as appropriate, shall determine the
Performance Vesting Period and all other vesting conditions, and shall also
determine the designated targets relevant to any Performance Vesting Period.
Options granted pursuant to the 1998 Plan that are vested may be exercised in
whole or in part by the optionee from time to time, but in no event later than
December 31, 2008. All unvested options fully vest and are immediately
exercisable upon any "change of control," defined as the effective date of (i)
the sale, lease, transfer or other disposition in one or more related
transactions of all or substantially all of the Company's assets, to any person
or related group of persons (including a "group" as such term issued in Section
13(d)(3) of the Exchange Act), (ii) the merger or consolidation of the Company
with or into another corporation, the merger of another corporation into the
Company or any transaction with the effect that the stockholders of the Company
immediately prior to such transaction hold less than 50% of the total voting
power or the voting stock of the surviving corporation resulting from such
consolidation or such other transaction, (iii) any person or related group of
persons holding 30% or more of the voting power or voting stock of the Company,
or (iv) the liquidation or dissolution of the Company. The 1998 Plan
specifically excludes from the definition of "change of control" any transaction
involving the Company's ownership interest in CBHS or any transaction occurring
on or after December 1, 1997 that involves either the sale of all or
substantially all of the assets used by the Company or by one or more of its
subsidiaries in the hospital franchise business or the sale of the stock of one
or more of the Company's subsidiaries in such business. The exercise price is
payable upon the exercise of the option in cash.
The 1998 Plan provides that: (i) upon the termination of employment or a
consulting relationship for any reason except death or total disability,
unvested options granted will terminate on the date of termination of employment
or a consulting relationship and vested options on the date of such termination
may be exercised during the six months following thereafter or during such
longer period as set forth in the stock option agreement (but not after
expiration of term of the option); (ii) upon total disability of a participant,
vested options on the date the participant became totally disabled may be
exercised by the participant within 12 months from the date of total disability
of the participant or within such longer period as set forth in the stock option
agreement (but not after expiration of term of the option); and (iii) upon the
death of a participant, the vested options on the date of the participant's
death may be exercised by the legal representative, heir or legatee within 12
months of the date of death of the participant or within such longer period as
set forth in the stock option agreement (but not after expiration of the term of
the option).
Options under the 1998 Plan must be granted on or before December 31, 2001.
No option granted under the 1998 Plan may be assigned or transferred by the
participant except by will or by the laws of descent or distribution.
Subject to certain limitations set forth in the 1998 Plan, the Board may at
any time or from time to time terminate, modify or amend the 1998 Plan. No
amendment may be made without stockholder approval if such approval is required
for continued compliance with Rule 16b-3 of the Exchange Act, by other
applicable law or regulation or by the rules of any stock exchange on which the
Common Stock is listed for trading. The termination or any modification or
amendment of the 1998 Plan or options thereunder may not, without the consent of
the participant, affect such person's rights under an option previously granted.
Under the Code and current regulations, a participant is not subject to any
federal income tax upon the grant of an option under the 1998 Plan and the grant
of an option will not result in an income tax deduction for the Company.
Upon the exercise of an option, the participant will recognize ordinary
income in an amount equal to the excess of the fair market value of the shares
at the time of purchase over the exercise price. At that time the Company will
be entitled to a deduction in an amount equal to the amount taxable to the
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participant as income, provided the Company satisfies applicable federal income
tax reporting requirements. The sale or other taxable disposition of shares of
Common Stock acquired upon exercise of an option generally will result in a
short or long-term capital gain or loss equal to the difference between the
amount realized on the disposition and the fair market value of the shares of
Common Stock when the option was exercised.
VOTE REQUIRED
Approval and adoption of the 1998 Plan by stockholders requires the
affirmative vote of a majority of the shares of Common Stock represented and
entitled to vote at the Annual Meeting. Assuming the existence of a quorum,
abstentions will be treated as a vote against the 1998 Plan and broker non-votes
will be disregarded and will have no effect on the outcome of the vote.
THE BOARD HAS UNANIMOUSLY APPROVED THE 1998 PLAN AND RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE 1998 PLAN. SHARES OF COMMON STOCK REPRESENTED AT THE
ANNUAL MEETING BY SIGNED BUT UNMARKED PROXIES WILL BE VOTED "FOR" THE 1998 PLAN.
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SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, certain officers and persons who own more than 10%
percent of the Common Stock to file reports of ownership and changes in
ownership with the SEC and furnish copies of such reports to the Company. Based
solely on a review of the copies of such forms furnished to the Company, or
written representations that no other reports were required, the Company
believes that all persons who are required to comply with the Section 16(a)
filing requirements with respect to the Common Stock have complied with such
filing requirements on a timely basis, except for the following executive
officers and directors who filed their Form 5s approximately two weeks late:
Edwin M. Banks, John D. Bartlett, E. Mac Crawford, Steve J. Davis, John M.
DeStefanis, G. Fred DiBona, Jr., Andre C. Dimitriadis, A.D. Frazier, Jr., Henry
T. Harbin M.D., Raymond H. Kiefer, Richard M. Mastaler, Danna Mauch Ph.D., Craig
L. McKnight, Howard A. McLure, Gerald L. McManis, Jeffrey A. Sonnenfeld Ph.D.
and Darla D. Moore.
ADDITIONAL INFORMATION
ATTENDANCE
Attendance at the Annual Meeting is limited to stockholders of record or
their proxies, beneficial owners of Common Stock having evidence of such
ownership and guests of the Company.
STOCKHOLDER PROPOSALS
In order to be included in the proxy statement and form of proxy for the
1999 Annual Meeting, a stockholder proposal must be in writing and received by
the Company by the close of business on September 11, 1998. All stockholder
proposals should be submitted by certified mail, return receipt requested, to
the Secretary of the Company, 3414 Peachtree Road, N.E., Suite 1400, Atlanta,
Georgia 30326.
OTHER BUSINESS
Management does not know of any other matters that may properly come before
the Annual Meeting other than those described above. If any other matter
properly comes before the meeting, all properly executed proxies delivered
pursuant to this solicitation will be voted on any such matters in the
discretion of the Proxies.
INDEPENDENT ACCOUNTANTS
The Company expects to retain Arthur Andersen LLP as its independent
accountants for the fiscal year ended September 30, 1998 upon written acceptance
of an engagement letter, which is expected to occur no later than June 30, 1998.
Arthur Andersen LLP served as the Company's independent accountants for the
fiscal year ended September 30, 1997. Representatives of such firm will be
present at the Annual Meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company with
the SEC are incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for fiscal year ended
September 30, 1997;
(ii) The Company's Current Report on Form 8-K, dated December 17, 1997;
and
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(iii) All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since January 9, 1998.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the date on which the Annual
Meeting is held shall be deemed to be incorporated by reference in this Proxy
Statement and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in this Proxy Statement) will be provided without
charge to each person to whom this Proxy Statement is delivered, upon written or
oral request. Copies of this Proxy Statement as amended or supplemented from
time to time, or any other documents (or parts of documents) that constitute
part of this Proxy Statement will be provided without charge to each such
person, upon written or oral request. Requests should be directed to Magellan
Health Services, Inc., Attn: Kevin Helmintoller, Vice President-Investor
Relations, 3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326, (404)
841-9200. These documents may also be accessed from the SEC Internet site, which
is located at www.sec.gov.
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APPENDIX I
PROPOSED 1998 STOCK OPTION PLAN
MAGELLAN HEALTH SERVICES, INC.
1998 STOCK OPTION PLAN
1. Purpose. The purpose of the Magellan Health Services, Inc. 1998 Stock
Option Plan is to motivate and retain officers and other key employees and
designated consultants of Magellan Health Services, Inc. and its Subsidiaries
who have major responsibility for the attainment of the primary long-term
performance goals of Magellan Health Services, Inc.
2. Definitions. The following terms shall have the following meanings:
"Board" means the Board of Directors of the Corporation.
"Change in Control" means the effective date of the occurrence of one or
more of the following events: (i) the sale, lease, transfer or other
disposition, in one or more related transactions, of all or substantially all of
the Corporation's assets to any person or related group of persons, including a
"group" as such term is used in Section 13(d)(3) of the Exchange Act, (ii) the
merger or consolidation of the Corporation with or into another corporation, the
merger of another corporation into the Corporation or any other transaction, to
the extent that the stockholders of the Corporation immediately prior to any
such transaction hold less than 50 percent of the total voting power or of the
voting stock of the surviving corporation resulting from any such transaction,
(iii) any person or related group of persons, including a "group" as such term
is used in Section 13(d)(3) of the Exchange Act, whether such person or group of
persons is a stockholder of the Corporation, holds 30 percent or more of the
voting power or of the voting stock of the Corporation, or (iv) the liquidation
or dissolution of the Corporation. Notwithstanding any provisions hereof to the
contrary, the term Change in Control shall not be construed to apply to any
transaction involving the Corporation's ownership interest in Charter Behavioral
Health Services, LLC or to any transaction occurring on or after December 1,
1997 that involves either the sale of all or substantially all of the assets
used by the Corporation or by one or more of its affiliates in the hospital
franchise business or the sale of the stock of one or more of the Corporation's
affiliates in such business.
"Code" means the Internal Revenue Code of 1986, as amended, and the rules
promulgated thereunder.
"Committee" means a committee of two or more members of the Board
constituted and empowered by the Board to administer the Plan in accordance with
its terms.
"Corporation" means Magellan Health Services, Inc., a Delaware corporation.
"Director" means a member of the Board.
"Disability" means a physical or mental condition under which the
Participant qualifies for (or will qualify for after expiration of a waiting
period) disability benefits under the long-term disability plan of the
Corporation or a Subsidiary that employs such Participant (or would have so
qualified if the Participant had been an employee of the Corporation or a
Subsidiary) .
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means: (1) if the Stock is listed on a national
securities exchange (as such term is defined by the Exchange Act) or is traded
on the Nasdaq National Market System on the date of award or other
determination, the price equal to the mean between the high and low sales prices
of a share of Stock on said national securities exchange or on said Nasdaq
National Market System on that date (or if no shares of the Stock are traded on
that date but there were shares traded on dates within a reasonable
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period both before and after such date, the Fair Market Value shall be the
weighted average of the means between the high and low sales prices of the Stock
on the nearest date before and the nearest date after that date on which shares
of the Stock are traded); (2) if the Stock is traded both on a national
securities exchange and in the over-the-counter market, the Fair Market Value
shall be determined by the prices on the national securities exchange; and (3)
if the Stock is not listed for trading on a national securities exchange and is
not traded on the Nasdaq National Market System or otherwise in the
over-the-counter market, then the Committee shall determine the Fair Market
Value of the Stock from time to time in its sole discretion.
"Option" means an Option granted pursuant to Section 6.
"Participant" means an employee of or a consultant to the Corporation or any
of its Subsidiaries who is selected to participate in the Plan in accordance
with Section 4.
"Performance Vesting Period" means that period of time over which vesting
can occur if certain financial, operating or other designated targets are met.
"Plan" means the Magellan Health Services, Inc. 1998 Stock Option Plan, as
amended.
"Stock" means the common stock, par value $0.25 per share, of the
Corporation.
"Stock Option Agreement" means the written agreement or instrument that sets
forth the terms of an Option granted to a Participant under this Plan.
"Subsidiary" means any corporation, as defined in Section 7701 of the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder, of which the Corporation, at the time, directly or indirectly, owns
50% or more of the outstanding securities having ordinary voting power to elect
directors (other than securities having voting power only by reason of a
contingency).
3. Administration. The Plan shall be administered by the Committee. Subject
to the provisions of the Plan, the Committee, acting in its sole discretion,
shall exercise such powers and take such action as expressly called for under
this Plan and, further, shall have the power to interpret the Plan, to determine
the terms of each Stock Option Agreement (subject to the provisions of the Plan)
and (subject to Section 19 and Rule 16b-3 under the Exchange Act, if applicable)
to take such other action in the administration and operation of this Plan as
the Committee deems equitable under the circumstances. All actions of the
Committee shall be binding on the Corporation, on each affected Participant and
on each other person directly or indirectly affected by such action. No member
of the Board shall serve as a member of the Committee unless such member is a
"non-employee director" within the meaning of Rule 16b-3 under the Exchange Act
and is an "outside director" as such term is defined in Treasury Regulation
Section 1.162-27(e)(3). The Committee shall have the right to delegate to the
chief executive officer of the Corporation the authority to select Participants,
to grant Options and to set the terms of Stock OptionAgreements (except with
respect to any person who, with respect to the last completed fiscal year of the
Corporation, has been designated by the Corporation as a named executive officer
of the Corporation, as that term is defined in Item 402(a)(3) of Regulation S-K,
issued by the Securities and Exchange Commission), subject to any review,
approval or notification required by the Committee or as otherwise may be
required by law.
4. Participation. Participants in the Plan shall be limited to those
officers (other than the Chief Executive Officer of the Corporation) and
employees of or consultants to the Corporation or any of its Subsidiaries who
have been selected to participate in the Plan.
5. Maximum Number of Shares Subject to Options. Subject to the provisions of
Section 9, there shall be 1,000,000 shares of Stock reserved for use under this
Plan, and such shares of Stock shall be reserved to the extent that the
Committee and the Board deems appropriate from authorized but unissued shares of
Stock or from shares of Stock which have been reacquired by the Corporation. Any
shares of Stock subject to any Option which remain unpurchased upon the
cancellation, expiration, exchange or forfeiture of such
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Option shall again become available for use under this Plan. All authorized and
unissued shares issued upon exercise of Options under the Plan shall be fully
paid and nonassessable shares.
6. Grant of Options. The Committee, acting in its sole discretion, shall
have the right to grant Options to Participants under this Plan from time to
time; provided, that the maximum number of shares of Stock issuable upon
exercise of Options shall not exceed 1,000,000, subject to adjustment as
provided in Section 9. No Option shall be granted after December 31, 2001. The
maximum number of shares of Stock that may be covered by Options granted to any
Participant under the Plan shall not exceed 500,000, subject to adjustment as
provided in Section 9.
7. Terms and Conditions of Options. Options granted pursuant to the Plan
shall be evidenced by Stock Option Agreements in such form as the Committee from
time to time shall approve, including any such terms and conditions not
inconsistent with the provisions set forth in the Plan as the Committee may
determine; provided, that such Stock Option Agreements and the Options granted
shall comply with and be subject to the following terms and conditions:
(a) Employment. Each Participant shall agree to remain in the employ of or
to serve as a consultant to and, in either such capacity, to render services to
the Corporation or a Subsidiary thereof for such period as the may be required
in the Stock Option Agreement; provided, that such agreement shall not impose
upon the Corporation or any Subsidiary thereof any obligation to retain the
Participant in its employ or as a consultant for any period.
(b) Number of Shares. Each Stock Option Agreement shall state the total
number of shares of Stock to which it pertains.
(c) Exercise Price. The exercise price per share for Options shall be Fair
Market Value of the Stock on the date of grant, subject to adjustment as
contemplated by Section 9; provided, that the Committee or the chief executive
officer (pursuant to a delegation under Section 3 hereof), acting in its or his
sole discretion, may elect to grant Options with an exercise price per share
below the Fair Market Value of the Stock on the date of grant.
(d) Medium and Time of Payment. The exercise price shall be payable upon the
exercise of the Option, or as provided in Section 7(e) if the Corporation adopts
a broker-directed cashless exercise/resale procedure, in each case in an amount
equal to the number of shares then being purchased times the per share exercise
price. Payment shall be in cash.
In addition to the payment of the purchase price of the shares of Stock then
being purchased, a Participant shall also, pursuant to Section 16, pay to the
Corporation or otherwise provide for payment of an amount equal to the amount,
if any, which the Corporation at the time of exercise is required to withhold
under the income tax withholding provisions of the Code and other applicable
income tax laws.
(e) Method of Exercise. All Options shall be exercised (i) by written notice
directed to the Secretary of the Corporation at its principal place of business,
accompanied by payment of the option exercise price, in accordance with the
foregoing subsection (d), for the number of shares specified in the notice of
exercise and by any documents required by Section 14, or (ii) by complying with
the exercise and other provisions of any broker-directed cashless
exercise/resale procedure adopted by the Corporation and approved by the
Committee, and by delivery of any documents required by Section 14. The
Corporation shall make delivery of such shares within a reasonable period of
time or in accordance with applicable provisions of any such broker-directed
cashless exercise/resale procedure; provided, that if any law or regulation
requires the Corporation to take any action (including but not limited to the
filing of a registration statement under the Securities Act of 1933 and causing
such registration statement to become effective) with respect to the shares
specified in such notice before their issuance, then the date of delivery of
such shares shall be extended for the period necessary to take such action.
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(f) Term of Options. Except as otherwise specifically provided in the Plan,
the terms of all Options shall commence on the date of grant and shall expire
not later than December 31, 2008.
(g) Exercise of Options. Options are exercisable only to the extent they are
vested as provided in the Stock Option Agreement. After Options have vested in
accordance with the terms of the Stock Option Agreement, such Options are
exercisable at any time, in whole or in part during their terms if the
Participant is at the time of exercise employed by or a consultant to the
Company or a Subsidiary. If a Participant's employment or consulting
relationship with the Corporation or any Subsidiary is terminated for any reason
other than death or disability, the vested portion of each Option held by such
Participant on the date of such termination may be exercised (1) for six (6)
months following the date of such termination, or (2) for such longer period of
time as may be set forth in the Stock Option Agreement (but not in either case
after expiration of the term of the Option). In the event of the death or
Disability of a Participant, the vested portion of each Option held by such
Participant on the date of such event may be exercised (1) for 12 months of the
date of such event, or (2) if longer, for such period of time as may be set
forth in the Stock Option Agreement (but not in either case after the expiration
of the term of the Option).
In the event of the death of a Participant, the vested portion of each
Option previously held by such Participant may be exercised within the time set
forth above by the executor, other legal representative or, if none, by the heir
or legatee of such Participant.
(h) Adjustments Upon Changes in Capitalization. Upon a change in
capitalization pursuant to Section 9, the number of shares covered by an Option
and the per share option exercise price shall be adjusted in accordance with the
provisions of Section 9.
(i) Transferability. No Option shall be assignable or transferable by the
Participant except by will or by the laws of descent and distribution. The
designation of a beneficiary shall not constitute a transfer; and, during the
lifetime of a Participant, all Options held by such Participant shall be
exercisable only by him or by his lawful representative in the event of his
incapacity.
(j) Rights as a Stockholder. A Participant shall have no rights as a
stockholder with respect to shares covered by his Option until the date of the
issuance of the shares to him and only after such shares are fully paid. Unless
specified in Section 9, no adjustment will be made for dividends or other rights
for which the record date is prior to the date of such issuance.
(k) Miscellaneous Provisions. The Stock Option Agreements authorized under
the Plan may contain such other provisions not inconsistent with the terms of
this Plan as the Committee shall deem advisable.
8. Vesting. Options granted under this Plan shall be exercisable only to the
extent such Options have become vested pursuant to this Section 8. An Option
shall vest (1) over such period as specified in the Stock Option Agreement,
including provisions for accelerated vesting during a Performance Vesting
Period, if the Participant is an employee of or a consultant to the Company or a
Subsidiary on the vesting dates occurring during such period, and/or (2) on such
other terms and conditions as may be set forth in the Stock Option Agreement.
The Committee or the chief executive officer (pursuant to a delegation under
Section 3 hereof) shall determine the Performance Vesting Period and all other
vesting conditions, and shall also determine the designated targets relevant to
the Performance Vesting Period.
9. Change in Capitalization. If the Stock should, as a result of a stock
split or stock dividend, combination of shares, recapitalization or other change
in the capital structure of the Corporation or exchange of Stock for other
securities by reclassification or otherwise, be increased or decreased or
changed into, or exchanged for, a different number or kind of shares or other
securities of the Corporation, or any other corporation, then the number of
shares covered by Options, the number and kind of shares which thereafter may be
distributed or issued under the Plan and the per share option price of Options
shall be appropriately adjusted consistent with such change in such manner as
the Committee may deem equitable to prevent dilution of or increase in the
rights granted to, or available for, Participants.
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10. Fractional Shares. In the event that any provision of this Plan or a
Stock Option Agreement would create a right to acquire a fractional share of
Stock, such fractional share shall be disregarded.
11. Successor Corporation. If the Corporation is merged or consolidated with
another corporation or other legal entity and the Corporation is not the
surviving corporation or legal entity, or in the event all or substantially all
of the assets or common stock of the Corporation is acquired by another
corporation or legal entity, or in the case of a dissolution, reorganization or
liquidation of the Corporation, the Board, or the board of directors or
governing body of any corporation or other legal entity assuming the obligations
of the Corporation hereunder, shall either: (i) make appropriate provision for
the preservation of Participants' rights under the Plan in any agreement or plan
it may enter into or adopt to effect any of the foregoing transactions; or (ii)
upon written notice to each Participant, provide that all Options, whether or
not vested, may be exercised within thirty days of the date of such notice and
if not so exercised, shall be terminated.
12. Change in Control. Notwithstanding any provisions in the Plan to the
contrary, in the event of a Change in Control, any unvested and outstanding
Options awarded to Participants under the Plan prior to such Change in Control
automatically shall become fully vested and exercisable in accordance with the
terms thereof.
13. Non-Alienation of Benefits. Except insofar as applicable law otherwise
may require, (i) no Options, rights or interest of Participants or Stock
deliverable to any Participant at any time under the Plan shall be subject in
any manner to alienation by anticipation, sale, transfer, assignment,
bankruptcy, pledge, attachment, charge or encumbrance of any kind, and any
attempt to so alienate, sell, transfer, assign, pledge, attach, charge or
otherwise encumber any such amount, whether presently or thereafter payable,
shall be void; and (ii) to the fullest extent permitted by law, the Plan shall
in no manner be liable for, or subject to, claims, liens, attachments or other
like proceedings or the debts, liabilities, contracts, engagements or torts of
any Participant or beneficiary. Nothing in this Section 13 shall prevent a
Participant's rights and interests under the Plan from being transferred by will
or by the laws of descent and distribution; provided, that no transfer by will
or by the laws of descent and distribution shall be effective to bind the
Corporation unless the Committee or its designee shall have been furnished
before or after the death of such Participant with a copy of such will or such
other evidence as the Committee may deem necessary to establish the validity of
the transfer.
14. Listing and Qualification of Shares. The Corporation, in its sole
discretion, may postpone the issuance or delivery of shares of Stock until
completion of any stock exchange listing, or other qualification or registration
of such shares under any state or federal law, rule or regulation, as the
Corporation may consider appropriate, and may require any Participant to make
such representations, including, but not limited to, a written representation
that the shares are to be acquired for investment and not for resale or with a
view to the distribution thereof, and to furnish such information as it may
consider appropriate in connection with the issuance or delivery of the shares
in compliance with applicable law, rules and regulations. The Corporation may
cause a legend or legends to be placed on such certificates to make appropriate
reference to such representation and to restrict transfer in the absence of
compliance with applicable federal or state securities laws.
15. No Claim or Right Under the Plan. No employee of the Corporation or any
Subsidiary shall at any time have the right to be selected as a Participant in
the Plan nor, having been selected as a Participant and granted an Option, to be
granted any additional Option. Neither the action of the Corporation in
establishing the Plan, nor any action taken by it or by the Board or the
Committee thereunder, nor any provision of the Plan, nor participation in the
Plan, shall be construed to give, and does not give, to any person the right to
be retained in the employ of the Corporation or any Subsidiary, or interfere in
any way with the right of the Corporation or any Subsidiary to discharge or
terminate any person at any time without regard to the effect such discharge or
termination may have upon such person's rights, if any, under the Plan.
I-5
<PAGE>
16. Taxes. The Corporation may make such provisions and take such steps as
it may deem necessary or appropriate for the withholding of all federal, state,
local and other taxes required by law to be withheld with respect to Options
under the Plan, including, but not limited to, (i) deducting the amount required
to be withheld from salary or any other amount then or thereafter payable to a
Participant, beneficiary or legal representative, (ii) requiring a Participant,
beneficiary or legal representative to pay to the Corporation the amount
required to be withheld as a condition of releasing the Stock, or (iii)
complying with applicable provisions of any broker-directed cashless
exercise/resale procedure adopted by the Corporation pursuant to Section 7(e).
17. No Liability of Directors. No member of the Board or the Committee shall
be personally liable by reason of any contract or other instrument executed by
such member on his behalf in his capacity as a member of the Board or Committee,
nor for any mistake of judgment made in good faith, and the Corporation shall
indemnify and hold harmless each employee, officer and Director, to whom any
duty or power relating to the administration or interpretation of the Plan may
be allocated or delegated, against any cost or expense (including counsel fees)
or liability (including any sum paid in settlement of a claim with the approval
of the Board) arising out of any act or omission to act in connection with the
Plan to the fullest extent permitted or required by the Corporation's governing
instruments and, in addition, to the fullest extent of any applicable insurance
policy purchased by the Corporation.
18. Other Plans. Nothing contained in the Plan is intended to amend, modify
or rescind any previously approved compensation plans or programs entered into
by the Corporation or its Subsidiaries. The Plan shall be construed to be in
addition to any and all such plans or programs. No award of Options under the
Plan shall be construed as compensation under any other executive compensation
or employee benefit plan of the Corporation or any of its Subsidiaries, except
as specifically provided in any such plan or as otherwise provided by the
Committee. The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power or authority of the Board to adopt such
additional compensation or incentive arrangements as the Board may deem
necessary or desirable.
19. Amendment or Termination. This Plan may be amended by the Board from
time to time to the extent that the Board deems necessary or appropriate;
provided, no such amendment shall be made absent the approval of the
stockholders of the Corporation: (1) if stockholder approval of such amendment
is required for continued compliance with Rule 16b-3 of the Exchange Act, or (2)
if stockholder approval of such amendment is required by any other applicable
laws or regulations or by the rules of any stock exchange as long as the Stock
is listed for trading on such exchange. The Committee also may suspend the
granting of Options under this Plan at any time and may terminate this Plan at
any time; provided, the Corporation shall not have the right to modify, amend or
cancel any Option granted before such suspension or termination unless (1) the
Participant consents in writing to such modification, amendment or cancellation
or (2) there is a dissolution or liquidation of the Corporation or a transaction
described in Section 11 of this Plan.
20. Captions. The captions preceding the sections of the Plan have been
inserted solely as a matter of convenience and shall not, in any manner, define
or limit the scope or intent of any provisions of the Plan.
21. Governing Law. The Plan and all rights thereunder shall be governed by,
and construed in accordance with, the laws of the State of Georgia, without
reference to the principles of conflicts of law thereof.
22. Expenses. All expenses of administering the Plan shall be borne by the
Corporation.
23. Effective Date. The Plan shall be effective as of the date of its
adoption by the Board, subject to approval of this Plan by the stockholders of
the Corporation after the date of its adoption.
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<PAGE>
MAGELLAN HEALTH SERVICES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS
FEBRUARY 6, 1998
The undersigned appoints E. MAC CRAWFORD and CRAIG L. McKNIGHT, or either of
them, as proxies, each with full power of substitution, to represent and to vote
all shares of Common Stock of Magellan Health Services, Inc. held by the
undersigned at the annual meeting of stockholders to be held on February 6,
1998, at 10:00 A.M., local time, at 191 Peachtree Street, 50th Floor, Atlanta,
Georgia, and at any adjournment or postponement (the "Annual Meeting") upon the
matters described in the accompanying Notice of Annual Meeting of Stockholders
and Proxy Statement, receipt of which is acknowledged, and upon any other
business that may properly come before the Annual Meeting. The proxies are
directed to vote on the matters described in the Notice of Annual Meeting of
Stockholders and Proxy Statement as designated below, and in their discretion on
such other business as may properly come before the meeting or any adjournment
thereof.
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS / / FOR All Nominees Listed Below
/ / WITHHOLD AUTHORITY to Vote
For All Nominees Listed
Below:
</TABLE>
ANDRE C. DIMITRIADIS, A. D. FRAZIER, JR., G. FRED DIBONA, JR.
TO WITHHOLD AUTHORITY TO VOTE FOR LESS THAN ALL NOMINEES WRITE THE NAME OF SUCH
NOMINEE(S) ON THE LINE BELOW:
<PAGE>
<TABLE>
<S> <C>
2. PROPOSAL TO APPROVE THE COMPANY'S PROPOSED 1998 STOCK OPTION PLAN: / / FOR
/ / AGAINST
/ / ABSTAIN
</TABLE>
- --------------------------------------------------------------------------------
(CONTINUED ON REVERSE SIDE)
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED "FOR" PROPOSALS 1 AND 2.
DATED _______________________, 1998
___________________________________
___________________________________
Signature of Stockholder
Please sign exactly as your name or names appear hereon. Where more than one
owner is shown, each should sign. Persons signing in a fiduciary or
representative capacity should give full title. If this proxy is submitted by a
corporation, please sign in full corporate name by an authorized officer. If a
partnership, please sign in partnership name by authorized person.
Please mark, sign, date and return this proxy card promptly, using the enclosed
envelope.
