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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1998
REGISTRATION NO. 333-53353
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1076937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3414 PEACHTREE ROAD, N.E.,
SUITE 1400
ATLANTA, GEORGIA 30326
(404) 841-9200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
DAVID J. HANSEN, ESQ.,
GENERAL COUNSEL
MAGELLAN HEALTH SERVICES, INC.
3414 PEACHTREE ROAD, N.E.,
SUITE 1400
ATLANTA, GEORGIA 30326
(404) 841-9200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPY TO:
PHILIP A. THEODORE, ESQ.
KING & SPALDING
191 PEACHTREE ROAD
ATLANTA, GEORGIA 30303-1763
(404) 572-4600
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of the Registration Statement.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
62,500 SHARES
MAGELLAN HEALTH SERVICES, INC.
COMMON STOCK
($.25 PAR VALUE)
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The 62,500 shares (the "Shares") of common stock, $.25 par value per share
("Common Stock"), of Magellan Health Services, Inc. ("Magellan" or the
"Company") that are being hereby registered may be offered for sale from time to
time by and for the account of Paul G. Shoffeitt (the "Selling Stockholder").
See "Selling Stockholder." Magellan will not receive any of the proceeds from
the sale of the Shares by the Selling Stockholder. The Selling Stockholder may
acquire the Shares, or a portion thereof, by exercising certain options granted
to him pursuant to an Option Agreement, dated as of December 4, 1997, between
the Company and the Selling Stockholder (the "Option Agreement").
Magellan is registering the Shares as required by the Option Agreement, to
provide the Selling Stockholder with freely tradeable securities. Magellan has
also agreed to pay all fees and expenses incident to such registration, other
than any underwriting discounts or any selling commissions payable in respect of
sales of the Shares, which will be paid by the Selling Stockholder. Magellan
expects to pay fees and expenses of approximately $43,000 in connection with the
preparation and filing of the registration statement of which this Prospectus is
a part (the "Registration Statement"). Magellan has agreed to keep the
Registration Statement effective on a continual basis until December 31, 2001,
subject to certain extensions.
The Common Stock is listed on the New York Stock Exchange under the symbol
"MGL." On October 27, 1998, the last reported sale price of the Common Stock on
the New York Stock Exchange was $8 7/8 per share.
The sale or distribution of all or any portion of the Shares offered hereby
may be effected from time to time by the Selling Stockholder directly,
indirectly through brokers or dealers or in a distribution by one or more
underwriters on a firm commitment or best efforts basis, on the New York Stock
Exchange, in the over-the-counter market, on any national securities exchange on
which shares of the Common Stock are listed or traded, in privately negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. See
"Plan of Distribution." To the extent required, the names of any agent or
broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." The Selling
Stockholder reserves the sole right to accept or reject, in whole or in part,
any proposed purchase of the Shares to be made directly or through agents.
The Selling Stockholder and any agents or broker-dealers that participate
with the Selling Stockholder in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended
(the "1933 Act"), and any profits realized by the Selling Stockholder and the
compensation of any brokers/dealers may be deemed to be underwriting commissions
or discounts under the 1933 Act.
THERE ARE CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE SHARES. FOR A
DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS" BEGINNING ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the 1933 Act covering
the Shares being offered by this Prospectus. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement, certain items of which are contained in
exhibits and schedules to the Registration Statement as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Shares offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, and financial statements and notes
filed as a part thereof. Statements made in this Prospectus concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Copies of such material can be obtained from
the Public Reference Room of the Commission, at Room 1024, Judiciary Plaza, 450
Fifth Street, NW, Washington, D.C. 20549 at prescribed rates. Information about
the operation of the Public Reference Room can be obtained by calling the
Commission at 1-800-SEC-0330. In addition, such reports, proxy statements and
other information can be inspected and copied at the public reference facility
referred to above and at Regional Offices of the Commission located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
also maintains a Web site that contains reports, proxy statements and other
information regarding registrants that file electronically with the SEC. The
address of such site is http://www.sec.gov. The Common Stock is listed for
trading on the New York Stock Exchange and reports, proxy statements and other
information concerning the Company may be inspected at the office of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the Company
(Commission File No. 1-6639) are incorporated by reference into this Prospectus:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, filed on December 23, 1997;
(ii) The Company's Proxy Statement on Schedule 14A, filed on January 9,
1998;
(iii) The Company's Quarterly Report on Form 10-Q/A for the quarterly period
ended December 31, 1997, filed on June 26, 1998;
(iv) The Company's Quarterly Report on Form 10-Q/A for the quarterly period
ended March 31, 1998, filed on July 28, 1998;
(v) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998, filed on August 12, 1998;
(vi) The Company's Current Report on Form 8-K, filed on December 17, 1997,
which includes the audited financial statements of HAI (as defined) and
pro forma information for the Company's acquisition of HAI;
(vii) The Company's Current Report on Form 8-K/A, filed on October 28, 1998,
which includes the audited financial statements of Merit (as defined)
and pro forma financial information for the acquisition of Merit;
(viii) The Company's Current Report on Form 8-K, filed on October 28, 1998,
which includes pro forma financial information for the Crescent
Transactions (as defined), the HAI acquisition, the Allied acquisition
(as defined), and the Transactions (as defined); and
(ix) The description of the Common Stock in the Company's registration
statement on Form 8-A, filed on December 27, 1996.
In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering made pursuant to the Registration
Statement shall be deemed to be incorporated by reference into and to be a part
of this Prospectus from the date of filing of such documents. Any statement
contained in a document so incorporated by reference shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained in this Prospectus, or in any other subsequently filed
document which is also incorporated by reference or deemed to be incorporated by
reference, modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed to constitute a part of this Prospectus except
as so modified or superseded.
The Company will provide, without charge, to each person to whom this
Prospectus is delivered including any beneficial owner of the Common Stock, upon
the written or oral request of any such person, a copy of any or all of the
documents incorporated by reference (not including exhibits to such documents
unless such exhibits are specifically incorporated by reference in such
documents). Requests for copies of such documents should be directed to Mr.
Kevin Helmintoller, Vice President--Investor Relations, Magellan Health
Services, Inc., 6950 Columbia Gateway Drive, Columbia, Maryland 21046, telephone
(410) 953-1218. These documents may also be accessed from the Commission's Web
site which is located at http://www.sec.gov.
No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus or furnished by Magellan upon request pursuant to the preceding
paragraph, and, if given or made, such information or representations should not
be relied upon as having been authorized. This Prospectus also does not
constitute an offer to sell, or
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solicitation of an offer to purchase, the Shares offered hereby, in any
jurisdiction to or from any person to whom or from whom it is unlawful to make
such offer, or solicitation of an offer in such jurisdiction. Neither the
delivery of this Prospectus nor any distribution of securities shall, under any
circumstances, create any implication that there has been no change in the
information set forth or incorporated by reference herein or in the affairs of
Magellan since the date hereof or that the information set forth in this
Prospectus is correct as of any time subsequent to its date.
This Prospectus is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, incorporated
herein by reference. Unless the context otherwise requires, all references
herein to the "Company" refer to Magellan Health Services, Inc. and its
consolidated subsidiaries. All references to fiscal years in this Prospectus
refer to periods of twelve consecutive months ended September 30. Data
incorporated by reference into this Prospectus on a pro forma basis for the
fiscal year ended September 30, 1997 give effect to: (i) the Crescent
Transactions (as defined); (ii) the Company's acquisition (the "Acquisition") of
Merit Behavioral Care Corporation ("Merit"), which was consummated on February
12, 1998; (iii) the Company's acquisition of Human Affairs International,
Incorporated ("HAI"), which was consummated on December 4, 1997; (iv) the
Company's acquisition of Allied Health Group, Inc. and certain of its affiliates
("Allied"), which was consummated on December 5, 1997; (v) Merit's acquisition
of CMG Health, Inc. ("CMG"), which was consummated on September 12, 1997, and
(vi) each of the other Transactions (as defined) Unless otherwise indicated, all
industry data set forth in this Prospectus have been derived from "Managed
Behavioral Health Market Share in the United States 1997-1998" published by Open
Minds, Gettysburg, Pennsylvania (hereinafter referred to as "Open Minds "). The
information provided in this Prospectus without reference to a specific date is
current as of the date of this Prospectus.
FORWARD-LOOKING INFORMATION
This Prospectus contains and incorporates by reference certain
"forward-looking statements." Those statements include, among other things, the
discussions of the Company's business strategy and expectations concerning the
Company's position in the industry, future operations, margins, profitability,
liquidity and capital resources. All these forward-looking statements are based
on estimates and assumptions made by management of the Company that, although
believed to be reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed upon such statements and estimates. No assurance can be
given that any of such estimates or statements will be realized, and it is
likely that actual results may differ materially from those contemplated by such
forward-looking statements. Factors that may cause such differences include, but
are not limited to, those identified in the risk factors discussed below. In
light of these and other uncertainties, the inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company that
the Company's plans and objectives will be achieved.
4
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SUMMARY
THE COMPANY
OVERVIEW
According to enrollment data reported in OPEN MINDS, the Company is the
nation's largest provider of managed behavioral healthcare services, offering a
broad array of cost-effective managed behavioral healthcare products. As of June
30, 1998, the Company had approximately 61.3 million covered lives under managed
behavioral healthcare contracts and managed behavioral healthcare programs for
over 4,000 customers. Through its current network of over 34,000 providers and
2,000 treatment facilities, the Company manages behavioral healthcare programs
for Blue Cross/Blue Shield organizations and other insurance companies, health
maintenance organizations ("HMOs"), employers, federal, state and local
governmental agencies, labor unions and various state Medicaid programs. The
Company believes it has the largest and most comprehensive behavioral healthcare
provider network in the United States. In addition to the Company's managed
behavioral healthcare products, the Company offers specialty managed care
products related to the management of certain chronic medical conditions. The
Company also offers a broad continuum of healthcare and human services to
approximately 3,270 individuals who receive healthcare benefits funded by state
and local governmental agencies through National Mentor, Inc., its wholly-owned
public-sector provider ("Mentor"). Furthermore, the Company franchises the
"CHARTER" System of behavioral healthcare to the acute-care psychiatric
hospitals and other behavioral care facilities operated by Charter Behavioral
Health Systems, LLC ("CBHS"), an entity in which the Company owns a 50% equity
interest. On a pro forma basis, the Company had revenues of $1.6 billion and net
income of $18.5 million in fiscal 1997.
The Company's professional care managers coordinate and manage the delivery
of behavioral healthcare treatment services through the Company's network of
providers, which includes psychiatrists, psychologists, licensed clinical social
workers, marriage and family therapists and licensed clinical professional
counselors. The treatment services provided by the Company's extensive
behavioral provider network include outpatient programs (such as counseling and
therapy), intermediate care programs (such as sub-acute emergency care,
intensive outpatient programs and partial hospitalization services), inpatient
treatment services and alternative care services (such as residential treatment,
home and community-based programs and rehabilitative and support services). The
Company provides these services through: (i) risk-based products, (ii) employee
assistance programs ("EAPs"), (iii) administrative services-only products ("ASO
products") and (iv) products that combine features of some or all of these
products. Under risk-based products, the Company arranges for the provision of a
full range of behavioral healthcare services for beneficiaries of its customers'
healthcare benefit plans through fee arrangements under which the Company
assumes all or a portion of the responsibility for the cost of providing such
services in exchange for a fixed per member per month fee. Under EAPs, the
Company provides assessment services to employees and dependents of its
customers, and if required, referral services to the appropriate behavioral
healthcare service provider. Under ASO products, the Company provides services
such as utilization review, claims administration and provider network
management. The Company does not assume the responsibility for the cost of
providing healthcare services pursuant to its ASO products. The Company is the
industry leader with respect to risk-based, ASO, EAP and integrated products,
according to enrollment data reported in OPEN MINDS. For its fiscal year ended
September 30, 1997, on a pro forma basis, risk-based, ASO, EAP and integrated
products would have accounted for 73%, 12%, 9% and 5%, respectively, of the
Company's managed behavioral healthcare net revenues.
The Company was incorporated in 1969 under the laws of the State of
Delaware. The Company's principal executive offices are located at 3414
Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326, and its telephone
number is (404) 841-9200.
5
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HISTORY
The Company has historically derived the majority of its revenue as a
provider of behavioral healthcare services in an inpatient setting. Payments
from third party payors are the principal source of revenue for most healthcare
providers. In the early 1990's, many third party payors sought to control the
cost of providing care to their patients by instituting managed care programs or
seeking the assistance of managed care companies. Providers participating in
managed care programs agree to provide services to patients for a discount from
established rates, which generally results in pricing concessions by the
providers and lower margins. Additionally, managed care programs generally
encourage alternatives to inpatient treatment settings and the reduced
utilization of inpatient services. As a result, third party payors established
managed care programs or engaged managed care companies in many areas of
healthcare, including behavioral healthcare. The Company, which until June 1997
was the largest operator of psychiatric hospitals in the United States, was
adversely affected by the adoption of managed care programs by third party
payors.
Prior to the first quarter of fiscal 1996, the Company was not a provider of
behavioral managed care services. During the first quarter of fiscal 1996, the
Company acquired a 61% ownership interest in Green Spring Health Services, Inc.,
a managed care company specializing in mental health and substance abuse/
dependence services ("Green Spring"). At that time, the Company intended to
become a fully integrated behavioral healthcare provider by combining the
managed behavioral healthcare products offered by Green Spring with the direct
treatment services offered by the Company's psychiatric hospitals. The Company
believed that an entity that participated in both the managed care and provider
segments of the behavioral healthcare industry could more efficiently provide
and manage behavioral healthcare for insured populations than an entity that was
solely a managed care company. The Company also believed that earnings from its
managed care business would offset, in part, the negative impact on the
financial performance of its psychiatric hospitals caused by managed care. Green
Spring was the Company's first significant involvement in managed behavioral
healthcare. During the second quarter of fiscal 1998, the minority stockholders
of Green Spring converted their interests in Green Spring into an aggregate of
2,831,516 shares of the Company's common stock (the "Green Spring Minority
Stockholder Conversion").
Subsequent to the Company's acquisition of Green Spring, the growth of the
managed behavioral healthcare industry accelerated. Under the Company's majority
ownership, Green Spring increased its base of covered lives from 12.0 million as
of the end of calendar year 1995 to 21.1 million as of the end of calendar year
1997, a compound annual growth rate of over 32%. Green Spring's revenue
increased from $205.0 million in fiscal 1995 to $364.0 million in fiscal 1997, a
compound annual growth rate of over 33%. While growth in the industry was
accelerating, the managed behavioral healthcare industry also began to
consolidate. The Company concluded that consolidation presented an opportunity
for the Company to enhance its stockholder value by increasing its participation
in the managed behavioral healthcare industry, which the Company believed
offered growth and earnings prospects superior to those of the psychiatric
hospital industry. Therefore, the Company decided to sell its domestic
psychiatric facilities to obtain capital for expansion in the managed behavioral
healthcare business.
The Company took a significant step toward implementing this strategy during
the third quarter of fiscal 1997, when it sold substantially all of its domestic
acute care psychiatric hospitals and residential treatment facilities
(collectively, the "Psychiatric Hospital Facilities") to Crescent Real Estate
Equities Limited Partnership ("Crescent") for $417.2 million in cash (before
costs of approximately $16.0 million) and certain other consideration.
Simultaneously with the sale of the Psychiatric Hospital Facilities, the Company
and Crescent Operating, Inc. ("COI"), an affiliate of Crescent, formed CBHS, a
joint venture, to operate the Psychiatric Hospital Facilities and certain other
facilities transferred to CBHS by the Company. The Company retained a 50%
ownership of CBHS; the other 50% of the equity of CBHS is owned by COI.
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In related transactions, (i) Crescent leased the Psychiatric Hospital
Facilities to CBHS and (ii) the Company entered into a master franchise
agreement (the "Master Franchise Agreement") with CBHS and a franchise agreement
with each of the Psychiatric Hospital Facilities and the other facilities
operated by CBHS (collectively, the "Franchise Agreements"). The Company's sale
of the Psychiatric Hospital Facilities and the related transactions described
above are referred to as the "Crescent Transactions." Pursuant to the Franchise
Agreements, the Company franchises the "CHARTER" System of behavioral healthcare
to each of the Psychiatric Hospital Facilities and other facilities operated by
CBHS. In exchange, CBHS agreed to pay the Company, pursuant to the Master
Franchise Agreement, annual franchise fees (the "Franchise Fees") of
approximately $78.3 million. However, CBHS's obligation to pay the Franchise
Fees is subordinate to its obligation to pay rent for the Psychiatric Hospital
Facilities to Crescent.
The sale of the Psychiatric Hospital Facilities provided the Company with
approximately $200 million of net cash proceeds after debt repayment for use in
implementing its business strategy. The Company used the net cash proceeds to
finance the acquisition of additional managed care companies. Specifically, on
December 4, 1997, the Company consummated the purchase of HAI, formerly a unit
of Aetna/U.S. Healthcare ("Aetna"). HAI provides managed care services to
approximately 16.3 million covered lives, primarily through EAPs and other
managed behavioral healthcare plans. In addition, on December 5, 1997, the
Company purchased the assets of Allied. Allied provides specialty risk-based
products and administrative services to a variety of insurance companies and
other customers, including Blue Cross of New Jersey, CIGNA and NYLCare covering
approximately 3.8 million aggregate lives. Allied has over 80 physician networks
across the eastern United States. Allied's networks include physicians
specializing in cardiology, oncology and diabetes. The Company continues to
pursue a strategy of expanding its managed care operations and of reducing the
extent to which its earnings are derived from the psychiatric hospital business.
In this regard, the Company has further implemented its business strategy
through the Acquisition.
RECENT DEVELOPMENTS
THE ACQUISITION. On February 12, 1998, the Company consummated its
acquisition of Merit for cash consideration of approximately $448.9 million plus
the repayment of Merit's debt. Merit manages behavioral healthcare programs for
approximately 800 customers across all segments of the healthcare industry,
including HMOs, Blue Cross/Blue Shield organizations and other insurance
companies, employers and labor unions, federal, state and local governmental
agencies and various state Medicaid programs, and had approximately 21.0 million
covered lives at the time of the Acquisition, including approximately 10.6
million risk-based lives. On September 12, 1997, Merit completed the acquisition
of CMG. CMG is a national managed behavioral healthcare company with over two
million covered lives, including over 1.9 million risk-based lives. Merit paid
approximately $48.7 million in cash and issued approximately 739,000 shares of
Merit common stock as consideration for CMG. The former owners of CMG may be
entitled to additional consideration of up to $23.5 million, depending on CMG's
future performance.
THE TRANSACTIONS. On February 12, 1998, in connection with the consummation
of the Acquisition, the Company consummated certain related transactions
(together with the Acquisition, collectively, the "Transactions"), as follows:
(i) the Company terminated its existing credit agreement (the "Magellan Existing
Credit Agreement"); (ii) the Company repaid all loans outstanding pursuant to
and terminated Merit's existing credit agreement (the "Merit Existing Credit
Agreement") (the Magellan Existing Credit Agreement and the Merit Existing
Credit Agreement are hereinafter referred to as the "Existing Credit
Agreements"); (iii) the Company consummated a tender offer for its 11 1/4%
Series A Senior Subordinated Notes due 2004 (the "Magellan Outstanding Notes");
(iv) Merit consummated a tender offer for its 11 1/2% Senior Subordinated Notes
due 2005 (the "Merit Outstanding Notes") (the Magellan Outstanding Notes and the
Merit Outstanding Notes are hereinafter referred to collectively as the
"Outstanding Notes" and such tender offers are hereinafter referred to
collectively as the "Debt Tender Offers"); (v) the Company
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entered into a new senior secured bank credit agreement (the "New Credit
Agreement") with The Chase Manhattan Bank ("Chase") and a syndicate of financial
institutions, providing for credit facilities of $700 million; and (vi) the
Company issued its 9% Senior Subordinated Notes due 2008 (the "Old Notes")
pursuant to an indenture, dated February 12, 1998, between the Company and
Marine Midland Bank, as Trustee (the "Indenture"). The Company has initiated an
exchange offer, expiring on November 9, 1998, in which it is offering to
exchange its 9% Series A Senior Subordinated Notes (the "New Notes") for the Old
Notes. The Old Notes and the New Notes are collectively referred to hereinafter
as the "Notes."
GREEN SPRING MINORITY STOCKHOLDER CONVERSION. During the second quarter of
fiscal 1998, the minority stockholders of Green Spring converted their interests
in Green Spring into an aggregate of 2,831,516 shares of the Company's common
stock. As a result of the Green Spring Minority Stockholder Conversion, the
Company owns 100% of Green Spring.
PUBLIC SECTOR ACQUISITIONS. During fiscal 1998 and fiscal 1999, the Company
has acquired eight businesses in its public sector segment for an aggregate
purchase price of approximately $59.3 million (collectively, the "Public Sector
Acquisitions"). The Public Sector Acquisitions provide various residential and
day services for individuals with acquired brain injuries and for individuals
with mental retardation and developmental disabilities.
CBHS TRANSACTIONS. On March 3, 1998, the Company and certain of its wholly
owned subsidiaries entered into definitive agreements with COI and CBHS pursuant
to which the Company would have, among other things, sold the Company's
franchise operations, certain domestic provider operations and certain other
assets and operations. On August 19, 1998, the Company announced that it had
terminated discussions with COI for the sale of its interest in CBHS.
Furthermore, the Company exercised, in the fourth quarter of fiscal 1998,
certain rights available to it under the Master Franchise Agreement and assisted
CBHS management in formulating and enacting a plan designed to improve
profitability. See "Risk Factors--Subordination of Franchise Fees." The Company
will continue to seek opportunities to divest its ownership interest in CBHS.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
SHARES.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
As a result of the Transactions, the Company is currently highly leveraged,
with indebtedness that is substantial in relation to its stockholders' equity.
As of June 30, 1998, the Company's aggregate outstanding indebtedness was
approximately $1.2 billion and the Company's stockholders' equity was
approximately $190.8 million as of the same date. The New Credit Agreement and
the Indenture permit the Company to incur or guarantee certain additional
indebtedness, subject to certain limitations.
The Company's high degree of leverage could have important consequences to
owners of Common Stock, including, but not limited to, the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness; (iii) the Company is substantially more leveraged than certain
of its competitors, which might place the Company at a competitive disadvantage;
(iv) the Company may be hindered in its ability to adjust rapidly to changing
market conditions; and (v) the Company's high degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or its
business or in the event of adverse changes in the regulatory environment
applicable to the Company.
The Company's ability to repay or to refinance its indebtedness and to pay
interest on its indebtedness will depend on its financial and operating
performance, which, in turn, is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors, many of which
are beyond the Company's control. These factors could include operating
difficulties, increased operating costs, the actions of competitors, regulatory
developments and delays in implementing strategic projects. The Company's
ability to meet its debt service and other obligations may depend in significant
part on the extent to which the Company can successfully implement its business
strategy. There can be no assurance that the Company will be able to implement
its strategy fully or that the anticipated results of its strategy will be
realized.
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets or seek to obtain additional equity capital or
to restructure its debt. There can be no assurance that the Company's cash flow
and capital resources will be sufficient for payment of principal of and
interest on its indebtedness in the future, or that any such alternative
measures would be successful or would permit the Company to meet its scheduled
debt service obligations. The value of the Common Stock would be adversely
affected if the Company were unable to fund its debt service obligations.
In addition, because the Company's obligations under the New Credit
Agreement bear interest at floating rates, an increase in interest rates could
adversely affect, among other things, the Company's ability to meet its debt
service obligations.
HISTORY OF UNPROFITABLE OPERATIONS
The Company experienced losses from continuing operations before
extraordinary items in each fiscal year from 1993 through 1995. Such losses
amounted to $39.6 million, $47.0 million and $43.0 million for the fiscal years
ended September 30, 1993, 1994 and 1995, respectively. Merit experienced losses
before cumulative effects of accounting changes in fiscal 1996 and 1997 of $16.9
million and $13.9 million, respectively. The Company reported net revenue and
net income of approximately $1.35 billion and $32.4 million, respectively, for
fiscal 1996 and net revenue and income before extraordinary items of
approximately $1.2 billion and $4.8 million, respectively, for fiscal 1997. The
Company's fiscal 1997 net income included a loss on the Crescent Transactions of
$35.9 million, net of taxes. There can be no assurance that the Company's
profitability will continue in future periods.
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RESTRICTIVE FINANCING COVENANTS
The New Credit Agreement and the Indenture contain a number of covenants
that restrict the operations of the Company and its subsidiaries. In addition,
the New Credit Agreement requires the Company to comply with specified financial
ratios and tests, including a minimum interest coverage ratio, a maximum
leverage ratio, a minimum net worth test, a maximum senior debt ratio and a
minimum "EBITDA" (as defined in the New Credit Agreement). There can be no
assurance that the Company will be able to comply with such covenants, ratios
and tests in the future. The Company's ability to comply with such covenants,
ratios and tests may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants, ratios or tests could result in a default under the New Credit
Agreement that would permit the lenders thereunder to declare all amounts
outstanding thereunder to be immediately due and payable, together with accrued
and unpaid interest. The breach of any such covenants, ratios or tests could
result in a default under the Notes that would permit the trustee pursuant to
the Indenture to declare the principal amount of the Notes to be immediately due
and payable, together with accrued and unpaid interest. If the indebtedness
outstanding pursuant to the New Credit Agreement or the Notes were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay such indebtedness and the other indebtedness of the Company.
The value of the Common Stock would be adversely affected if the Company were
unable to repay such indebtedness.
CHANGE OF CONTROL
The occurrence of a change of control with respect to the Company may result
in a default, or otherwise require repayment of indebtedness, under both the
Indenture and the New Credit Agreement. In addition, the New Credit Agreement
prohibits the repayment of the Notes by the Company upon the occurrence of a
change of control, unless and until such time as the indebtedness under the New
Credit Agreement is repaid in full. The Company's failure to make such
repayments in such instances would result in a default under both the Indenture
and the New Credit Agreement. Future indebtedness of the Company may also
contain restrictions or repayment requirements with respect to certain events or
transactions that could constitute a change of control. In the event of a change
of control, there can be no assurance that the Company would have sufficient
assets to satisfy all of its obligations under the Notes or the New Credit
Agreement.
The provisions of the Indenture and the New Credit Agreement imposing
restrictions or repayment requirements with respect to a change of control, as
well as certain provisions of the Delaware General Corporation law and the
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that investors
might be willing to pay in the future for Common Stock which could in turn
adversely affect the ability of the Company to sell additional Common Stock.
RISK-BASED PRODUCTS
As a result of the Acquisition, revenues under risk-based contracts are the
primary source of the Company's revenue from its managed behavioral care
business. On a pro forma basis, such revenues would have accounted for
approximately 50% of the Company's total revenue and 73% of its managed
behavioral healthcare revenue in fiscal 1997. Under a risk-based contract, the
Company assumes all or a portion of the responsibility for the cost of providing
a full or specified range of behavioral healthcare treatment services to a
specified beneficiary population in exchange, generally, for a fixed fee per
member per month. In order for such contracts to be profitable, the Company must
accurately estimate the rate of service utilization by beneficiaries enrolled in
programs managed by the Company and control the unit cost of such services. If
the aggregate cost of behavioral healthcare treatment services provided to a
given beneficiary population in a given period exceeds the aggregate of the per
member per month fees received by the Company with respect to the beneficiary
population in such period, the Company will incur a loss with respect to such
beneficiary population during such period. Furthermore, the Company may be
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required to pay during any period amounts with respect to behavioral healthcare
treatment services provided to a given beneficiary population that exceed per
member per month fees received with respect to such beneficiary population
during such period. Futhermore, the Company may be required to pay during any
period amounts with respect to behavioral healthcare treatment services provided
to given beneficiary population that exceed per member per month fees received
with respect to such beneficiary population during the same period. There can be
no assurance that the Company's assumptions as to service utilization rates and
costs will accurately and adequately reflect actual utilization rates and costs,
nor can there be any assurance that increases in behavioral healthcare costs or
higher-than-anticipated utilization rates, significant aspects of which are
outside the Company's control, will not cause expenses associated with such
contracts to exceed the Company's revenue for such contracts. In addition, there
can be no assurance that adjustments will not be required to the estimates,
particularly those regarding cost of care, made in reporting historical
financial results. The Company is attempting to increase membership in its
risk-based products. If the Company is successful in this regard, the Company's
exposure to potential losses from its risk-based products will also be
increased. Furthermore, certain of such contracts and certain state regulations
limit the profits that may be earned by the Company on risk-based business and
may require refunds if the loss experience is more favorable than that
originally anticipated. Such contracts and regulations may also require the
Company or certain of its subsidiaries to reserve a specified amount of cash as
financial assurance that it can meet its obligations under such contracts. As of
June 30, 1998, the Company had restricted cash reserves of $60.5 million
pursuant to such contracts and regulations. Such amounts will not be available
to the Company for general corporate purposes. Furthermore, certain state
regulations restrict the ability of subsidiaries that offer risk-based products
to pay dividends to the Company. Certain state regulations relating to the
licensing of insurance companies may also adversely affect the Company's
risk-based business. See "--Regulation." Although experiences varies on a
contract-by-contract basis, historically, the Company's and Merit's risk-based
contracts have been profitable. However, the degree of profitability varies
significantly from contract to contract. For example, Medicaid contracts with
governmental entities tend to have direct profit margins that are lower than the
Company's other contracts. The most significant factor affecting the
profitability of risk-based contracts is the ability to control direct service
costs. The Company believes that it will be in a better position to control
direct service costs as a result of HAI, Allied and Merit acquisitions.
RELIANCE ON CUSTOMER CONTRACTS
On a pro forma basis, approximately 69% of the Company's revenue in fiscal
1997 would have been derived from contracts with payors of behavioral healthcare
benefits. The Company's managed care contracts typically have terms of one to
three years, and in certain cases contain renewal provisions providing for
successive terms of between one and two years (unless terminated earlier).
Substantially all of these contracts are immediately terminable with cause and
many, including some of the Company's most significant contracts, are terminable
without cause by the customer upon the provision of requisite notice and the
passage of a specified period of time (typically between 60 and 180 days), or
upon the occurrence of certain other specified events. On a pro forma basis,
following the Company's acquisition of Merit, HAI, and Allied, the Company's ten
largest managed behavioral healthcare customers would have accounted for
approximately 47% of the Company's managed behavioral healthcare revenue for
fiscal 1997. One of such contracts, an agreement between HAI and Aetna,
represents 21% of the Company's pro forma covered lives and would have
represented 5% of its pro forma managed behavioral healthcare revenues for
fiscal 1997. The contract expires on December 3, 2003. There can be no assurance
that such contracts will be extended or successfully renegotiated or that the
terms of any new contracts will be comparable to those of existing contracts.
Loss of all of these contracts or customers would, and loss of any one of these
customers could, have a material adverse effect on the Company. In addition,
price competition in bidding for contracts can significantly affect the
financial terms of any new or renegotiated contract. The Company's customers may
reevaluate their contractual arrangements with the Company as a result of the
consummation of the Transactions.
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DEPENDENCE ON GOVERNMENT SPENDING FOR MANAGED HEALTHCARE; POSSIBLE IMPACT OF
HEALTHCARE REFORM
A significant portion of the Company's managed care revenue is derived,
directly or indirectly, from federal, state and local governmental agencies,
including state Medicaid programs. Reimbursement rates vary from state to state,
are subject to periodic negotiation and may limit the Company's ability to
maintain or increase rates. The Company is unable to predict the impact on the
Company's operations of future regulations or legislation affecting Medicaid or
Medicare programs, or the healthcare industry in general, and there can be no
assurance that future regulations or legislation will not have a material
adverse effect on the Company. Moreover, any reduction in government spending
for such programs could also have a material adverse effect on the Company. In
addition, the Company's contracts with federal, state and local governmental
agencies, under both direct contract and subcontract arrangements, generally are
conditioned upon financial appropriations by one or more governmental agencies,
especially with respect to state Medicaid programs. These contracts generally
can be terminated or modified by the customer if such appropriations are not
made. Finally, some of the Company's contracts with federal, state and local
governmental agencies, under both direct contract and subcontract arrangements,
require the Company to perform additional services if federal, state or local
laws or regulations imposed after the contract is signed so require, in exchange
for additional compensation to be negotiated by the parties in good faith.
Government and other third-party payors are generally seeking to impose lower
reimbursement rates and to renegotiate reduced contract rates with service
providers in a trend toward cost control.
In August 1997, Congress enacted the Balanced Budget Act of 1997 (the
"Budget Act"). The Medicare-related provisions of the Budget Act are designed to
reduce Medicare expenditures over the next five years by $115 billion, compared
to projected Medicare expenditures before adoption of the Budget Act. The
Congressional Budget Office projected in July 1997 that $43.8 billion of the
reductions would come from reduced payments to hospitals, $21.8 billion from
increased enrollment in managed care plans and $11.7 billion from reduced
payments to physicians and ambulatory care providers. The five-year savings in
projected Medicare payments to physicians and hospitals would be achieved under
the Budget Act by reduced fee-for-service reimbursement and by changes in
managed care programs designed to increase enrollment of Medicare beneficiaries
in managed care plans. The increase in Medicare enrollment in managed care plans
would be achieved in part by allowing provider-sponsored organizations and
preferred provider organizations to compete with Medicare HMOs for Medicare
enrollees.
The Medicaid-related provisions of the Budget Act are designed to achieve
net federal Medicaid savings of $14.6 billion over the next five years and $56.4
billion over the next ten years. The Budget Act achieves federal Medicaid
savings in three areas. First, two-thirds of the savings over the next ten years
are attributable to limitations on federal matching payments to states for
reimbursements to "disproportionate share" hospitals. The next largest source of
federal savings is a provision allowing states to shift the cost of Medicaid
deductibles and coinsurance requirements for low-income Medicaid beneficiaries
from their Medicaid programs to physicians and other providers. Most of the
remaining savings derive from the repeal of the "Boren Amendment" and other
minimum payment guarantees for hospitals, nursing homes and community health
centers that serve Medicaid patients. These changes may have an adverse effect
on the Company if they result in reduced payment levels for providers of managed
behavioral healthcare services.
Prior to adoption of the Budget Act, the states were prohibited from
requiring Medicaid recipients to enroll in managed care products that covered
only Medicaid recipients. The Medicaid laws required that the states enroll
Medicaid recipients in products that also covered a specific number of
commercial enrollees. This requirement of the Medicaid laws was intended to
limit the ability of the states to reduce coverage levels for Medicaid
recipients below those offered to commercial enrollees. Under prior law, the
Secretary of the United States Department of Health and Human Services (the
"Department") could waive the prohibition. The Medicaid-related provisions of
the Budget Act give states broad flexibility to require most Medicaid recipients
to enroll in managed care products that only cover Medicaid recipients, without
obtaining a waiver from the Secretary of the Department that was required under
prior law. The Budget Act also allows states to limit the number of managed care
organizations with which the state will
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contract to deliver care to Medicaid beneficiaries. These changes could have a
positive impact on the Company's business, if they result in increased
enrollment of Medicaid beneficiaries in managed care organizations and increased
Medicaid spending on managed care. However, these changes also may have an
adverse effect on the Company if a number of states decide to limit the number
of managed care organizations with which they will contract and to select the
organization solely on the basis of the cost of care, which could result in
increased cost competition for state contracts.
The Company cannot predict the effect of the Budget Act, or other healthcare
reform measures that may be adopted by Congress or state legislatures, on its
managed care operations and no assurance can be given that either the Budget Act
or other healthcare reform measures will not have an adverse effect on the
Company.
REGULATION
The managed healthcare industry and the provision of behavioral healthcare
services are subject to extensive and evolving state and federal regulation. The
Company is subject to certain state laws and regulations, including those
governing: (i) the licensing of insurance companies, HMOs, preferred provider
organizations ("PPOs"), third-party administrators ("TPAs") and companies
engaged in utilization review and (ii) the licensing of healthcare
professionals, including restrictions on business corporations from practicing,
controlling or exercising excessive influence over behavioral healthcare
services through the direct employment of psychiatrists or, in a few states,
psychologists and other behavioral healthcare professionals. In addition, the
Company is subject to certain federal laws as a result of the role the Company
assumes in connection with managing its customers' employee benefit plans. The
Company's managed care operations are also indirectly affected by regulations
applicable to the establishment and operation of behavioral healthcare clinics
and facilities.
In many states, entities that assume risk under contracts with licensed
insurance companies or HMOs have not been considered by state regulators to be
conducting an insurance or HMO business. As a result, the Company has not sought
licensure as either an insurer or HMO in certain states. Regulators in some
states, however, have determined that risk assuming activity by entities that
are not themselves providers of care is an activity that requires some form of
licensure. There can be no assurance that other states in which the Company
operates will not adopt a similar view, thus requiring the Company to obtain
additional licenses. Such additional licensure might require the company to
maintain minimum levels of deposits, net worth, capital, surplus or reserves, or
limit the Company's ability to pay dividends, make investments or repay
indebtedness. The imposition of these additional licensure requirements could
increase the company's cost of doing business or delay the Company's conduct or
expansions of its business.
Regulators may impose operational restrictions on entities granted licenses
to operate as insurance companies or HMOs. For example, the California
Department of Corporations (the "DOC") imposed certain restrictions on the
Company in connection with its issuance of an approval of the Company's
acquisition of HAI, including restrictions on the ability of the California
subsidiary of HAI to fund the Company's operations in other states and on the
ability of the Company to make certain operational changes with respect to HAI's
California subsidiary. The DOC imposed substantially identical restrictions on
the Company in connection with the Company's acquisition of Merit and certain
other acquisitions. The Company does not believe such restrictions will
materially impact its integration plan. See "--Integration of Operations."
In addition, utilization review and TPA activities conducted by the Company
are regulated by many states which impose requirements upon the Company that
increase its business costs. The Company believes that its TPA activities
performed for its self-insured employee benefit plan customers are exempt from
otherwise applicable state licensing or registration requirements based upon
federal preemption under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and has relied on this general principle in determining not
to seek licensure for certain of its activities in many states. Existing case
law is not uniform on the applicability of ERISA preemption with respect to
state regulation
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of utilization review or TPA activities. There can be no assurance that
additional licensure will not be required with respect to utilization review or
TPA activities in certain states.
State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which the Company's operations are subject have
broad discretionary powers. A regulatory agency or a court in a state in which
the Company operates could take a position under existing or future laws or
regulations, or change its interpretation or enforcement practices with respect
thereto, that such laws or regulations apply to the Company differently than the
Company believes such laws and regulations apply or should be enforced. The
resultant compliance with, or revocation of, or failure to obtain, required
licenses and governmental approvals could result in significant alteration to
the Company's business operations, delays in the expansion of the Company's
business and lost business opportunities, any of which, under certain
circumstances, could have a material adverse effect on the Company.
The laws of some states limit the ability of a business corporation to
directly provide, control or exercise excessive influence over behavioral
healthcare services through the direct employment of psychiatrists,
psychologists, or other behavioral healthcare professionals. In addition, the
laws of some states prohibit psychiatrists, psychologists, or other healthcare
professionals from splitting fees with other persons or entities. These laws and
their interpretations vary from state to state and enforcement by the courts and
regulatory authorities may vary from state to state and may change over time.
The Company believes that its operations as currently conducted are in material
compliance with the applicable laws, however there can be no assurance that the
Company's existing operations and its contractual arrangements with
psychiatrists, psychologists and other healthcare professionals will not be
successfully challenged under state laws prohibiting fee splitting or the
practice of a profession by an unlicensed entity, or that the enforceability of
such contractual arrangements will not be limited. The Company believes that it
could, if necessary, restructure its operations to comply with changes in the
interpretation or enforcement of such laws and regulations, and that such
restructuring would not have a material adverse effect on its operations.
Several states in which the Company does business have adopted, or are
expected to adopt, "any willing provider" laws. Such laws typically impose upon
insurance companies, PPOs, HMOs or other types of third-party payors an
obligation to contract with, or pay for the services of, any healthcare provider
willing to meet the terms of the payor's contracts with similar providers.
Compliance with any willing provider laws could increase the Company's costs of
assembling and administering provider networks and could, therefore, have a
material adverse effect on its operations.
The Company's managed care operations are also generally affected by
regulations applicable to the operations of healthcare clinics and facilities.
INTEGRATION OF OPERATIONS
As a result of the Company's acquisition of Merit and HAI, the Company is
the largest provider of managed behavioral healthcare services in the United
States, according to the enrollment data reported in OPEN MINDS. The Company's
ability to operate its acquired managed care businesses successfully depends on
how well and how quickly it integrates the acquired businesses with its existing
operations. The Company expects to achieve approximately $60.0 million of cost
savings on an annual basis within eighteen months following the consummation of
the Acquisition. However, as the Company implements the integration process, it
may need to implement enhanced operational, financial and information systems
and may require additional employees and management, operational and financial
resources. There can be no assurance that the Company will be able to implement
and maintain such operational, financial and information systems successfully or
successfully obtain, integrate and utilize the required employees and
management, operational and financial resources to achieve the successful
integration of the acquired businesses with its existing operations. Failure to
implement such systems successfully and to use such resources effectively could
have a material adverse effect on the Company. Furthermore, implementing such
operational, financial and information systems or obtaining such employees and
management could reduce the cost savings the Company expects to achieve.
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HIGHLY COMPETITIVE INDUSTRY
The industry in which the Company conducts its managed care business is
highly competitive. The Company competes with large insurance companies, HMOs,
PPOs, TPAs, provider groups and other managed care companies. Many of the
Company's competitors are significantly larger and have greater financial,
marketing and other resources than the Company, and some of the Company's
competitors provide a broader range of services. The Company may also encounter
substantial competition in the future from new market entrants. Many of the
Company's customers that are managed care companies may, in the future, seek to
provide managed behavioral healthcare services to their employees or subscribers
directly, rather than contracting with the Company for such services.
RISKS RELATED TO AMORTIZATION OF INTANGIBLE ASSETS
The Company's total assets at June 30, 1998, include intangible assets of
approximately $1.18 billion. At June 30, 1998, net intangible assets were 61.9%
of total assets and 616.9% of total stockholders' equity. Intangible assets
include goodwill of approximately $934.7 million, which is amortized over 25 to
40 years, and other identifiable intangible assets (primarily customer lists,
provider networks and treatment protocols) of approximately $242.4 million that
are amortized over 5 to 25 years. The amortization periods used by the company
may differ from those used by other registrants. In addition, the Company may be
required to shorten the amortization period for intangible assets in future
periods based on the prospects of acquired companies. There can be no assurance
that the value of such assets will ever be realized by the Company. The Company
evaluates, on a regular basis, whether events and circumstances have occurred
that indicate that all or a portion of the carrying value of intangible assets
may no longer be recoverable, in which case a charge to earnings for impairment
losses could become necessary. Any determination requiring the write-off of a
significant portion of unamortized intangible assets would adversely affect the
Company's results of operations. A write-off of intangible assets could become
necessary if the anticipated undiscounted cash flows of an acquired company do
not support the carrying value of long-lived assets, including intangible
assets. At present, no evidence exists that would indicate impairment losses may
be necessary in future periods.
SUBORDINATION OF FRANCHISE FEES
The Company owns a 50% equity interest in CBHS, from which it receives the
Franchise Fees. The Franchise Fees represent a significant portion of the
Company's earnings and cash flows. The Franchise Fees payable to the Company by
CBHS are subordinated in right of payment to the $41.7 million annual base rent,
5% minimum escalator rent and, in certain circumstances, certain additional rent
due to Crescent. The Company is required to provide certain services to CBHS
under the Master Franchise Agreement whether or not CBHS pays the Franchise
Fees. However, the Company has no obligation to contribute additional capital or
make advances to CBHS. If CBHS encounters a decline in earnings or financial
difficulties, such amounts due to Crescent will be paid before any Franchise
Fees are paid. The remainder of CBHS's available cash will then be applied in
such order of priority as CBHS may determine, in the reasonable discretion of
the CBHS governing board or, under certain circumstances, the Company's
representatives on such board, to all other operating expenses of CBHS,
including the current and accumulated Franchise Fees. The Company will be
entitled to pursue all available remedies for breach of the Master Franchise
Agreement, except that the Company does not have the right to take any action
that could reasonably be expected to force CBHS into bankruptcy or receivership.
As a result of the Crescent Transactions, the Company no longer controls the
operations of the Psychiatric Hospital Facilities and other facilities operated
by CBHS. Accordingly, factors that the Company does not control will likely
influence the amount of the equity in the earnings of CBHS and the amount of
Franchise Fees that the Company will realize in the future. For example, CBHS
may pursue acquisitions in markets where it does not currently have a presence
and in markets where it has existing hospital operations. Furthermore, CBHS may
consolidate services in selected markets by closing additional facilities
depending on market conditions and evolving business strategies. If CBHS closes
additional psychiatric hospitals, it could result in charges to income for the
costs attributable to the closure, which
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would result in lower equity in earnings of CBHS for the Company and receipt by
the Company of less than the agreed to amount of Franchise Fees.
Based on operational projections prepared by CBHS management for the quarter
ended September 30, 1998, and for the fiscal year ended September 30, 1999, and
on CBHS' results of operations through June 30, 1998, the Company believes that
CBHS will be unable to pay the full amount of the Franchise Fees it is
contractually obligated to pay the Company during fiscal 1998 and fiscal 1999.
CBHS has paid $30.6 million of Franchise Fees to the Company during the nine
months ended June 30, 1998. As of June 30, 1998, the Company had Franchise Fees
receivable from CBHS, net of equity in loss of CBHS in excess of the Company's
investment in CBHS, of approximately $13.2 million reflected in the consolidated
balance sheet. The Company expects to receive additional Franchise Fee payments
from CBHS of $9.4 million to $14.4 million during the quarter ended September
30, 1998, in the form of cash payments and settlements of other amounts due to
CBHS. The Company also estimates that CBHS will be able to pay $15.0 million to
$25.0 million of Franchise Fees in fiscal 1999. Accordingly, the Company
believes the Franchise Fees receivable from CBHS, net of equity in loss of CBHS
in excess of the Company's investment in CBHS, at June 30, 1998, is fully
collectible. However, the Company may reflect Franchise Fee revenue in its
statements of operations for future periods which is lower in amount than that
specified in the Master Franchise Agreement if CBHS does not generate sufficient
cash flows to allow for payment of future Franchise Fees. Based on the amount of
unpaid Franchise Fees to date, the Company exercised, in the fourth quarter of
fiscal 1998, certain rights available to it under the Master Franchise Agreement
and assisted CBHS management in formulating and enacting a plan designed to
improve profitability.
On August 19, 1998, the Company announced that it had terminated discussions
with COI for the sale of its interests in CBHS. The Company will record a charge
against earnings in the fourth quarter of fiscal 1998 of approximately $3.5
million to $4.0 million for transaction costs incurred in connection with the
proposed sale of the Company's interests in CBHS to COI and related changes in
its franchise operations. In addition, actions taken by CBHS in the fourth
quarter of fiscal 1998 to improve long-term profitability will result in
immediate charges to CBHS income, which will result in additional losses in the
equity in loss of CBHS for the Company in the fourth quarter of fiscal 1998.
PROFESSIONAL LIABILITY; INSURANCE
The management and administration of the delivery of managed behavioral
healthcare services, like other healthcare services, entail significant risks of
liability. The Company is regularly subject to lawsuits alleging malpractice and
related legal theories, some of which involve situations in which participants
in the Company's programs have committed suicide. The Company is also subject to
claims of professional liability for alleged negligence in performing
utilization review activities, as well as for acts and omissions of independent
contractors participating in the Company's third-party provider networks. The
Company is subject to claims for the costs of services denied. There can be no
assurance that the Company's procedures for limiting liability have been or will
be effective, or that one or more lawsuits will not have a material adverse
effect on the Company in the future.
The Company carries professional liability insurance, subject to certain
deductibles. There can be no assurance that such insurance will be sufficient to
cover any judgments, settlements or costs relating to present or future claims,
suits or complaints or that, upon expiration thereof, sufficient insurance will
be available on favorable terms, if at all. If the Company is unable to secure
adequate insurance in the future, or if the insurance carried by the Company is
not sufficient to cover any judgments, settlements or costs relating to any
present or future actions or claims, there can be no assurance that the Company
will not be subject to a liability that could have a material adverse effect on
the Company.
The Company has certain liabilities relating to the self-insurance program
it maintained with respect to its provider business prior to the Crescent
Transactions.
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SHARES ELIGIBLE FOR FUTURE SALE
The Shares are eligible for sale in the open market without restriction. In
January 1996, the Company issued, in a private placement transaction, 4,000,000
shares of Common Stock (the "Rainwater Shares") to Rainwater-Magellan Holdings,
L.P. ("Rainwater-Magellan"), along with warrants ("Warrants") to purchase an
additional 2,000,000 shares of Common Stock (the " Underlying Warrant Shares")
for $26.15 per share. Pursuant to a pro-rata distribution, Rainwater, Inc. and
Richard E. Rainwater received 39,724 and 2,417,554 Rainwater Shares,
respectively, from Rainwater-Magellan. The Rainwater Shares are eligible for
sale in the open market without restriction. The Warrants expire on January 25,
2000. Warrants to purchase 57,004 shares of Common Stock were distributed by
Rainwater-Magellan to three of its limited partners in redemption of their
partnership interests. Any Underlying Warrant Shares issued upon exercise of the
Warrants will be eligible for sale in the open market without restriction. In
connection with the Crescent Transactions in June 1997, the Company issued to
Crescent and COI separate warrants to acquire a total of 2,566,622 shares of
Common Stock for $30.00 per share that expire in installments during the years
2001 through 2009. The shares of Common Stock issued upon the exercise of such
Warrants will be eligible for sale in the open market without restriction. In
connection with the Green Spring Minority Stockholder Conversion, 2,831,516
shares of Common Stock are eligible for sale in the open market without
restriction. As of September 30, 1998, the Company's officers, directors and
employees held options for the purchase of 3,813,912 shares of Common Stock
(2,375,919 of which are vested and 1,437,993 of which are subject to vesting
periods of up to four years in duration). Upon exercise, the shares of Common
Stock underlying such options will be eligible for sale on the open market
without restriction, except that directors and certain officers of the Company
must effect such sales pursuant to Rule 144 under the 1933 Act. Following this
offering, sales and potential sales of shares of Common Stock in the public
market pursuant to Rule 144 or otherwise could adversely affect the prevailing
market prices for the Common Stock and impair the Company's ability to raise
additional equity capital.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes factors such as announcements with respect to
healthcare reform measures, reductions in government healthcare program
projected expenditures, acquisitions and quarter-to-quarter and year-to-year
variations in financial results could cause the market price of the Company's
Common Stock to fluctuate substantially. Any such adverse announcement with
respect to healthcare reform measures or program expenditures, acquisitions or
any shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's Common Stock in any given period. As a result, the market for the
Company's Common Stock may experience price and volume fluctuations unrelated to
the operating performance of the Company. Furthermore, the disposition of a
significant number of shares of the Company's Common Stock in a brief period of
time could have a significant adverse effect on the trading price of the
Company's Common Stock. Consequently, persons who acquire shares of the
Company's Common Stock in connection with acquisitions should be aware that
their sale of such shares of the Company's Common Stock in a brief period of
time could have such a significant adverse effect on the trading price of the
Company's Common Stock.
CBHS RISK FACTORS
In addition to "Risk Factors--Subordination of Franchise Fees", the
following factors are relevant to an understanding of the risks associated with
CBHS's business and the ability of CBHS to pay Franchise Fees to the Company.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS. CBHS is currently highly
leveraged, with indebtedness that is substantial in relation to its operating
performance. As of June 30, 1998, CBHS's aggregate outstanding indebtedness was
approximately $65.0 million.
CBHS's high degree of leverage could adversely impact the ability of CBHS to
pay Franchise Fees to the Company because of the following reasons: (i) CBHS's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or other purposes may be impaired in the future; (ii)
a
17
<PAGE>
substantial portion of CBHS's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness; (iii) CBHS is
substantially more leveraged than certain of its competitors, which might place
CBHS at a competitive disadvantage; (iv) CBHS may be hindered in its ability to
adjust rapidly to changing market conditions; and (v) CBHS's high degree of
leverage could make it more vulnerable in the event of a downturn in general
economic conditions or its business or in the event of adverse change in the
regulatory environment applicable to CBHS.
POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS AND CHANGES IN
HOSPITAL PAYOR MIX. CBHS's hospitals have been adversely affected by factors
influencing the entire psychiatric hospital industry. Such factors include: (i)
the imposition of more stringent length of stay and admission criteria and other
cost containment measures by payors; (ii) the failure of reimbursement rate
increases from certain payors that reimburse on a per diem or other discounted
basis to offset increases in the cost of providing services; (iii) an increase
in the percentage of business that CBHS derives from payors that reimburse on a
per diem or other discounted basis; (iv) a trend toward higher deductibles and
co-insurance for individual patients; (v) a trend toward limiting employee
behavorial health benefits, such as reductions in annual and lifetime limits on
behavioral health coverage; and (vi) pricing pressure related to an increasing
rate of claims denials by third party payors. Any of these factors may result in
reductions in the amounts that CBHS's hospitals can expect to collect per
patient day for services provided or the number of equivalent patient days.
For the fiscal year ended September 30, 1997, CBHS derived approximately 24%
of its gross psychiatric patient service revenue from managed care organizations
(primarily HMOs and PPOs), 22% from other private payors (primarily commercial
insurance and Blue Cross), 27% from Medicare, 18% from Medicaid, 2% from the
Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") and
7% from other government programs. Changes in the mix of CBHS's patients among
the private-pay, Medicare and Medicaid categories, and among different types of
private-pay sources, could significantly affect the profitability of CBHS's
hospital operations. Moreover, there can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs of providing care to patients covered by such programs.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM. In the 1995 and
1996 sessions of the United States Congress, the focus of healthcare legislation
was on budgetary and related funding mechanism issues. Both the Congress and the
Clinton Administration have made proposals to reduce the rate of increase in
projected Medicare and Medicaid expenditures and to change funding mechanisms
and other aspects of both programs. The Budget Act, which was signed into law by
President Clinton in August 1997, reduces federal spending by an estimated $140
billion. The majority of the spending reduction will come from Medicare cuts of
$115.0 billion. The Congressional Budget Office projected in July 1997 that
$43.8 billion of the reductions would come from reduced payments to hospitals,
$21.8 billion from increased enrollment in managed care plans and $11.7 billion
from reduced payments to physicians and ambulatory care providers. The five-year
savings in projected Medicare payments to physicians and hospitals would be
achieved under the Budget Act by reduced fee-for-service reimbursement and by
changes in managed care programs designed to increase enrollment of Medicare
beneficiaries in managed care plans. The increase in Medicare enrollment in
managed care plans would be achieved in part by allowing provider-sponsored
organizations and preferred provider organizations to compete with Medicare HMOs
for Medicare enrollees.
The Medicaid-related provisions of the Budget Act are designed to achieve
net federal Medicaid savings of $14.6 billion over the next five years and $56.4
billion over the next ten years. The Budget Act achieves federal Medicaid
savings in three areas. First, two-thirds of the savings over the next ten years
are attributable to limitations on federal matching payments to states for
reimbursements to "disproportionate share" hospitals. The next largest source of
federal savings is a provision allowing states to shift the cost of Medicaid
deductibles and coinsurance requirements for low-income Medicaid beneficiaries
from their Medicaid programs to physicians and other providers. Most of the
remaining savings derive from the
18
<PAGE>
repeal of the "Boren Amendment" and other minimum payment guarantees for
hospitals, nursing homes and community health centers that service Medicaid
patients.
CBHS management estimates that the Budget Act will reduce the amount of
revenue and earnings that CBHS will receive for the treatment of Medicare and
Medicaid patients. CBHS management estimates that such reductions will
approximate $10.0 million in fiscal 1998, and due to the phase in effects of the
bill, approximately $15.0 million in subsequent fiscal years.
A number of states in which CBHS has operations have either adopted or are
considering the adoption of healthcare reform proposals of general applicability
or Medicaid reform proposals. Where adopted, these state reform laws have often
not yet been fully implemented. The Company cannot predict the effect of these
state healthcare reform proposals on CBHS's operations. The Company cannot
predict the effect of other healthcare reform measures that may be adopted by
Congress on the operations of CBHS and no assurance can be given that other
federal healthcare reform measures will not have an adverse effect on CBHS.
DEPENDENCE ON HEALTHCARE PROFESSIONALS. Physicians traditionally have been
the source of a significant portion of the patients treated at CBHS's hospitals.
Therefore, the success of CBHS's hospitals is dependent in part on the number
and quality of the physicians on the medical staffs of the hospitals and their
admission practices. A small number of physicians account for a significant
portion of patient admissions at some of CBHS's hospitals. There can be no
assurance that CBHS can retain its current physicians on staff or that
additional physician relationships will be developed in the future. Furthermore,
hospital physicians generally are not employees of CBHS and, in general, CBHS
does not have contractual arrangements with hospital physicians restricting the
ability of such physicians to practice elsewhere.
POTENTIAL GENERAL AND PROFESSIONAL LIABILITY. In recent years, physicians,
hospitals, and other healthcare professionals and providers have become subject
to an increasing number of lawsuits alleging medical malpractice and related
legal theories. Many of these lawsuits involve large claims and substantial
defense costs. CBHS maintains a general and hospital professional liability
insurance policy with an unaffiliated insurer. In addition, CBHS' hospitals
require all physicians on each hospital's medical staff to maintain professional
liability coverage. Management believes that its coverage limits are adequate,
however, there can be no assurance that a future claim or claims will not exceed
the limits of these existing insurance policies or that a loss or losses for
which insurance is unavailable will not have a material adverse effect on CBHS.
GOVERNMENT REGULATION. The operation of psychiatric hospitals and other
behavioral healthcare facilities and the provision of behavioral healthcare
services are subject to extensive federal, state and local laws and regulations.
These laws and regulations provide for periodic inspections or other reviews by
state agencies, the Department and CHAMPUS to determine compliance with their
respective standards of medical care, staffing, equipment and cleanliness
necessary for continued licensing or participation in the Medicare, Medicaid or
CHAMPUS programs. The admission and treatment of patients at psychiatric
hospitals is also subject to substantial state regulation relating to
involuntary admissions, confidentiality of patient medical information,
patients' rights and federal regulation relating to confidentiality of medical
records of substance abuse patients. CBHS is also subject to state certificate
of need laws that regulate the construction of new hospitals and the expansion
of existing hospital facilities and services.
CBHS also is subject to federal and state laws that govern financial and
other arrangements between healthcare providers. Such laws include the illegal
remuneration provisions of the Social Security Act, the physician self-referral
provisions of the Omnibus Budget Reconciliation Act of 1993 and state illegal
remuneration and self-referral statutes and regulations that prohibit payments
in exchange for referrals and referrals by physicians or other healthcare
providers to persons or entities with which the physician or other healthcare
provider has a financial relationship.
The Medicare and Medicaid Patient and Program Protection Act of 1987
expanded the authority of the Department to exclude from participation in the
Medicare and Medicaid programs those individuals and entities that engage in
defined prohibited activities. The Department's exclusion authority was recently
19
<PAGE>
expanded under the Health Insurance Portability and Accounting Act of 1996
("HIPAA") and the Budget Act, which added additional grounds for exclusion,
established minimum exclusion periods for certain offenses and expanded the
scope of the exclusion to include all federal healthcare programs. The
Department also has the authority to impose civil monetary penalties for certain
prohibited activities. HIPAA increased the amount of authorized penalties from
$2,000 per item or service claimed to $10,000 per item or service claimed, and
increased the assessment to which a person may be subject in lieu of damages
from two times the amount claimed for each item or service to three times the
amount claimed. Both HIPAA and the Budget Act expanded the Department's
authority to impose civil monetary penalties by adding additional activities for
which civil monetary penalties may be imposed.
Provisions contained in HIPAA and the Budget Act also created new criminal
healthcare fraud offenses that are applicable to both government programs and
private health insurance plans and added new programs and increased funding for
fraud and abuse detection and prevention.
CHAMPUS regulations also authorize the exclusion of providers from the
CHAMPUS program, if the provider has committed fraud or engaged in certain
"abusive practices," which are defined broadly to include, among other things,
the provision of medically unnecessary services, the provision of care of
inferior quality and the failure to maintain adequate medical or financial
records.
State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which CBHS' operations are subject have broad
discretionary powers. A regulatory agency or a court in a state in which CBHS
operates could take a position under existing or future laws or regulations, or
change its interpretation or enforcement practices with respect thereto, that
such laws or regulations apply to CBHS differently than CBHS believes such laws
and regulations apply or should be enforced. The resultant compliance with, or
revocation of, or failure to obtain, required licences and governmental
approvals could result in significant alteration to CBHS' business operations,
delays in the expansion of CBHS' business and lost business opportunities, any
of which, under certain circumstances, could have a material adverse effect on
CBHS.
20
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares. All of the proceeds from the sale of the Shares will be received by the
Selling Stockholder.
21
<PAGE>
SELLING STOCKHOLDER
The following table sets forth certain information with respect to the
ownership of the Shares as of September 30, 1998, and as adjusted to reflect the
sale of the Shares offered hereby, by the Selling Stockholder. The Selling
Stockholder has sole voting and investment power with respect to the Shares
owned by him.
<TABLE>
<CAPTION>
OWNERSHIP OF COMMON OWNERSHIP OF
STOCK BEFORE THE COMMON STOCK AFTER
OFFERING THE OFFERING (1)
----------------------- NUMBER OF -----------------------
NUMBER OF SHARES BEING NUMBER OF
NAME SHARES PERCENT OFFERED SHARES PERCENT
- ------------------------------------------------------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Paul G. Shoffeitt...................................... -- -- -- 0 --
</TABLE>
- ------------------------
(1) Assumes that all Shares being registered are sold.
The Option Agreement provides that, during November 1998, the Selling
Stockholder has the right to cause the Company to purchase 15,000 shares of the
common stock of Care Management Resources, Inc. ("CMR Shares") owned by him in
exchange for the number of shares of Common Stock obtained by dividing $500,000
by the average closing price of a share of Common Stock on the ten trading days
immediately prior to the second trading day preceding the date on which the
Company will issue such stock to the Selling Stockholder (the "1998 Option").
During each of November 1999 and November 2000, the Selling Stockholder has the
right to cause the Company to purchase 7,500 CMR Shares owned by him in exchange
for the number of shares of Common Stock obtained by dividing $250,000 by the
average closing price of a share of Common Stock on the ten trading days
immediately prior to the second trading day preceding the date on which the
Company will issue such stock to the Selling Stockholder (the "1999 Option" and
"2000 Option," respectively, and together with the 1998 Option, the "Put
Options"). Pursuant to the Option Agreement, the Company may elect to pay the
Selling Stockholder cash consideration of $500,000 for the 1998 Option and
$250,000 for each of the 1999 and 2000 Options in lieu of issuing shares of
Common Stock to the Selling Stockholder upon the exercise of such options.
Pursuant to the Option Agreement, the time period during which the Selling
Stockholder may exercise each of the Put Options may be extended under certain
circumstances.
Pursuant to the Option Agreement, for a one year period following the
expiration of each of the Put Options, the Company has the right to purchase
from the Selling Stockholder the CMR Shares subject to the corresponding Put
Options (the "1998 Call Option," "1999 Call Option" and "2000 Call Option,"
respectively, and collectively, the "Call Options"). The consideration to be
paid by the Company upon exercise of the 1998 Call Option is the number of
shares of Common Stock obtained by dividing $500,000 by the average closing
price of a share of Common Stock on the ten trading days immediately prior to
the second trading day preceding the date on which the Company will issue such
shares to the Selling Stockholder. The consideration to be paid to the Selling
Stockholder by the Company upon exercise of each of the 1999 and 2000 Call
Options is the number of shares of Common Stock obtained by dividing $250,000 by
the average closing price of a share of Common Stock on the ten trading days
immediately prior to the second trading day preceding the date on which the
Company will issue such stock to the Selling Stockholder. Pursuant to the Option
Agreement, the time period during which the Company may exercise each of the
Call Options may be extended under certain circumstances.
The Company may elect to pay the Selling Stockholder cash consideration of
$500,000 for the 1998 Call Option or $250,000 for each of the 1999 and 2000 Call
Options in lieu of issuing shares of Common Stock to the Selling Stockholder
upon its exercise of such options. At any time after January 1, 1998, the
Company also may elect to purchase all of the CMR Shares held by the Selling
Stockholder for a total cash purchase price of $1.0 million, plus any additional
amount necessary to offset any adverse tax consequences to the Selling
Stockholder as a result of the Company's election to purchase all of the CMR
22
<PAGE>
Shares in a single transaction prior to the time when the Selling Stockholder
would have been entitled to exercise the Put Options.
The Option Agreement obligates the Company to file the Registration
Statement and to keep the Registration Statement effective until December 31,
2001, subject to certain extensions. The Option Agreement includes certain other
customary provisions, including without limitation, certain restrictions on the
Selling Stockholder's private sale of shares of Common Stock acquired pursuant
to the terms of the Option Agreement and anti-dilution provisions. The Option
Agreement also obligates the Selling Stockholder to not dispose of any of the
CMR Shares owned by him, with certain exceptions.
In connection with the execution of the Option Agreement, the Selling
Stockholder executed an Irrevocable Proxy, dated December 4, 1997, granting the
Company the right to vote the CMR Shares owned by the Selling Stockholder at any
and all annual, regular and special meetings of CMR and in any actions by
written consent of the shareholders of CMR, provided such meetings are held or
actions by written consent are executed by November 1, 1998.
The Selling Stockholder entered into an employment agreement, dated April 1,
1997, as amended (the "Employment Agreement"), with the Company, pursuant to
which the Selling Stockholder agreed to serve as the Executive Vice President of
Managed Care of the Company in a part-time capacity. The term of the Employment
Agreement is from April 1, 1997 until December 31, 2001 and will automatically
renew on January 1 of each year thereafter for successive one year terms until
either party elects not to renew the agreement. The Selling Stockholder is
compensated $40,000 per year for his employment under the Employment Agreement.
In connection with amendments to the Employment Agreement, the Company and
the Selling Stockholder entered into a Stock Option Waiver Agreement whereby the
Selling Stockholder waived his rights to all stock option awards made to him
under the Company's 1994 and 1996 Stock Option Plans.
The Selling Stockholder also entered into a letter agreement, dated February
3, 1994, as amended (the "Letter Agreement"), with Green Spring pursuant to
which the Selling Stockholder agreed to serve as a consultant to Green Spring
under the title of Vice Chairman from the date thereof until April 1, 2000.
Prior to entering into the Letter Agreement, the Selling Stockholder served as
President and Chief Executive Officer of Green Spring and his consulting role
pursuant to the Letter Agreement is to provide assistance to Green Spring with
respect to matters with which he was involved during his employment with Green
Spring and to provide other assistance to facilitate such endeavors. The Selling
Stockholder is compensated $4,167 per month for his consulting services. The
Selling Stockholder also serves as a director of Green Spring.
PLAN OF DISTRIBUTION
The sale or distribution of all or any portion of the Shares may be effected
from time to time by the Selling Stockholder directly, indirectly through
brokers or dealers or in a distribution by one or more underwriters on a firm
commitment or best efforts basis, on the New York Stock Exchange, in the over-
the-counter market, on any national securities exchange on which shares of the
Common Stock are listed or traded, in privately negotiated transactions or
otherwise, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. Certain transfer
restrictions have been placed on the Shares offered hereby pursuant to the
Option Agreement. See "Selling Stockholder."
The methods by which the Shares may be sold or distributed include, without
limitation, (i) a block trade (which may involve crosses) in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction, (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus, (iii) exchange distributions and/or
secondary distributions in accordance with the rules of the New York Stock
Exchange, (iv) ordinary brokerage transactions and transactions in which the
broker
23
<PAGE>
solicits purchasers, and (v) privately negotiated transactions. The Selling
Stockholder may from time to time deliver all or a portion of the Shares to
cover a short sale or sales or upon the exercise, settlement or closing of a
call equivalent position or a put equivalent position. The Shares may be sold
from time to time at varying prices determined at the time of sale or at
negotiated prices.
At the time a particular offer is made, a Prospectus Supplement, if
required, will be distributed that sets forth the name or names of agents,
broker-dealers or underwriters, any commissions and other terms constituting
compensation and any other required information. In effecting sales,
broker-dealers engaged by the Selling Stockholder and/or the purchasers of the
Shares may arrange for other broker-dealers to participate. Broker-dealers will
receive commissions, concessions or discounts from the Selling Stockholder
and/or the purchasers of the Shares in amounts to be negotiated prior to the
sale. Sales will be made only through broker-dealers registered as such in a
subject jurisdiction or in transactions exempt from such registration. As of the
date of this Prospectus, there are no selling arrangements between the Selling
Stockholder and any broker or dealer.
In offering the Shares, the Selling Stockholder and any brokers, dealers or
agents who participate in a sale of the Shares by the Selling Stockholder may be
considered "underwriters" within the meaning of Section 2(11) of the 1933 Act,
and any profits realized by the Selling Stockholder and the compensation of any
broker/dealers may be deemed to be underwriting discounts and commissions.
As required by the Option Agreement, the Company has filed the Registration
Statement, of which this Prospectus forms a part, with respect to the sale of
the Shares. The Company has agreed to keep the Registration Statement effective
on a continuous basis until December 31, 2001, subject to certain extensions.
Shares not sold pursuant to the Registration Statement of which this
Prospectus is a part may be subject to certain restrictions under the 1933 Act
and could be sold, if at all, only pursuant to Rule 144 under the 1933 Act or
another exemption from the registration requirements of the 1933 Act. In
general, under Rule 144, a person (or persons whose Shares are aggregated) who
has satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of Shares which does not exceed the
greater of one percent of the Company's outstanding Common Stock or the average
weekly reported trading volume of the Company's Common Stock during the four
calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of Shares by a person who is not an affiliate of the
Company and who has satisfied a two-year holding period without any volume
limitation. Therefore, both during and after the effectiveness of the
Registration Statement, sales of the Shares may be made by the Selling
Stockholder pursuant to Rule 144.
The Company will not receive any of the proceeds from the sale of the Shares
by the Selling Stockholder. The Company will bear the costs of registering the
Shares under the 1933 Act, including the registration fee under the 1933 Act,
its legal and accounting fees and any printing fees. The Selling Stockholder
will bear the cost of underwriting commissions and/or discounts, if any, and
selling commissions.
Underwriters, brokers, dealers or agents may be entitled, under agreements
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the 1933 Act in connection with
the registration of the Shares.
LEGAL MATTERS
The legality of the Shares is being passed upon for the Selling Stockholder
by King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303.
24
<PAGE>
EXPERTS
The audited consolidated financial statements and schedule of the Company as
of September 30, 1996 and 1997 and for each of the three years in the period
ended September 30, 1997, included in the Company's Annual Report on Form 10-K
for the year ended September 30, 1997 and incorporated by reference in this
Prospectus and elsewhere in this Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said report.
The consolidated financial statements of Merit as of September 30, 1996 and
1997 and for each of the three years in the period ended September 30, 1997,
included in the Company's Current Report on Form 8-K/A, which was filed October
28, 1998 and incorporated by reference in this Prospectus and elsewhere in this
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report with respect thereto which report expresses
an unqualified opinion and includes an explanatory paragraph which refers to the
change in the method of accounting for deferred contract start-up costs related
to new contracts or expansion of existing contracts and are incorporated by
reference herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The audited consolidated financial statements and schedule of CBHS as of
September 30, 1997 and for the 106 days ended September 30, 1997, included in
the Company's Annual Report on Form 10-K for the year ended September 30, 1997
and incorporated by reference in this Prospectus and elsewhere in this
Registration Statement, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
The audited consolidated financial statements of HAI as of December 31, 1995
and 1996 and for each of the years in the two year period ended December 31,
1996, included in the Company's Current Report on Form 8-K, which was filed on
December 17, 1997, have been incorporated by reference herein and in this
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountant, incorporated by reference herein and
upon the authority of said firm as experts in accounting and auditing.
Future consolidated financial statements and schedules of Magellan Health
Services, Inc. and subsidiaries and Charter Behavioral Health Systems, LLC and
the reports thereon of Arthur Andersen LLP also will be incorporated by
reference in this Registration Statement of which this Prospectus is a part in
reliance upon the authority of said firm as experts in giving said reports to
the extent said firm has audited those financial statements and consented to the
use of their reports thereon.
25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY MAGELLAN OR THE SELLING STOCKHOLDER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 3
Forward Looking Information............................................... 4
Summary................................................................... 5
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 21
Selling Stockholder....................................................... 22
Plan of Distribution...................................................... 23
Legal Matters............................................................. 24
Experts................................................................... 25
</TABLE>
62,500 SHARES
MAGELLAN HEALTH
SERVICES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
OCTOBER 28, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................ $ .09
Legal Fees and Expenses........................................................ 10,000.00
Accounting Fees and Expenses................................................... 10,000.00
Printing....................................................................... 18,000.00
Miscellaneous.................................................................. 4,999.91
----------
Total.......................................................................... $43,000.00
----------
----------
</TABLE>
All of the above items, except for the registration fee, are estimates.
Although the Selling Stockholder will not bear any of the expenses set forth
above, the Selling Stockholder will bear the cost of underwriting commissions
and/or discounts, if any, and selling commissions.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Section 145 of the Delaware General
Corporation Law (the "DGCL") provides that a Delaware corporation has the power
to indemnify its officers and directors in certain circumstances.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of his service as director, officer, employee or agent of the
corporation, or his service, at the corporation's request, as a director,
officer, employee or agent of another corporation or enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action, suit
or proceeding provided that such director or officer acted in good faith and in
a manner reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding,
provided that such director or officer had no reasonable cause to believe his
conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit
provided that such director or officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such director or officer shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such director or officer is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) or (b) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; provided
that indemnification
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<PAGE>
provided for by Section 145 or granted pursuant thereto shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him or incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
Article VII of the By-laws of the Company provide in substance that the
Company shall indemnify directors and officers against all liability and related
expenses incurred in connection with the affairs of the Company if: (a), in the
case of action not by or in the right of the Company, the director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and (with respect to a criminal
proceeding) had no reasonable cause to believe his conduct was unlawful; and
(b), in the case of actions by or in the right of the Company, the director or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company, provided that no
indemnification shall be made for a claim as to which the director or officer is
adjudged liable for negligence or misconduct unless (and only to the extent
that) an appropriate court determines that, in view of all the circumstances,
such person is fairly and reasonably entitled to indemnity.
In addition, Section 102(b)(7) of the DGCL permits Delaware corporations to
include a provision in their certificates of incorporation eliminating or
limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provisions shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for unlawful
payment of dividends or other unlawful distributions, or (iv) for any
transactions from which the director derived an improper personal benefit.
Article Twelfth of the Company's Certificate of Incorporation sets forth such a
provision.
The Company maintains directors' and officers' liability insurance with
various providers in the aggregate amount of $80 million.
The foregoing summaries are necessarily subject to the complete text of the
statutes, Certificate of Incorporation, Bylaws, insurance policies and
agreements referred to above and are qualified in their entirety by reference
thereto.
For the undertaking with respect to indemnification, see Item 17.
ITEM 16. EXHIBITS
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<C> <S>
2(a) Stock Purchase Agreement, dated February 6, 1997, between the Company, Care
Management Resources, Inc. and John T. Lincoln.*
2(b) Shareholders Agreement, dated February 6, 1997, between the Company, Care Management
Resources, Inc., Paul G. Shoffeitt and John T. Lincoln.*
2(c) Option Agreement, dated December 4, 1997, between the Company and Paul G. Shoffeitt.*
2(d) Stock Option Waiver Agreement, dated December 4, 1997, between the Company and Paul
G. Shoffeitt.*
2(e) Letter Agreement, dated February 3, 1994, between Green Spring Health Services, Inc.
and Paul G. Shoffeitt.*
2(f) Amendment to Letter Agreement, dated December 4, 1997, between Green Spring Health
Services, Inc. and Paul G. Shoffeitt.*
2(g) Employment Agreement, dated April 1, 1997, between the Company and Paul G.
Shoffeitt.*
</TABLE>
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<C> <S>
2(h) Amendment to Employment Agreement, dated December 4, 1997, between the Company and
Paul G. Shoffeitt.*
2(i) Irrevocable Proxy, dated December 4, 1997, by Paul G. Shoffeitt regarding shares of
Care Management Resources, Inc.*
2(j) Stock Purchase Agreement, dated August 5, 1997, between the Company and Aetna
Insurance Company of Connecticut, which was filed as Exhibit 2(a) to the Company's
Current Report on Form 8-K, which was filed on December 17, 1997, and is incorporated
herein by reference.
2(k) Amendment to Stock Purchase Agreement, dated December 4, 1997, between the Company
and Aetna Insurance Company of Connecticut, which was filed as Exhibit 2(c) to the
Company's Current Report on Form 8-K, which was filed on December 17, 1997, and is
incorporated herein by reference.
2(l) Asset Purchase Agreement, dated October 16, 1997, among the Company; Allied Health
Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida Specialty Network,
LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.;
David Russin, M.D. and Lawrence Schimmel, M.D., which was filed as Exhibit 2(e) to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1997, and is incorporated herein by reference.
2(m) First Amendment to Asset Purchase Agreement, dated December 5, 1997, among the
Company; Allied Health Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida
Specialty Network, LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.;
Jacob Nudel, M.D.; David Russin M.D.; and Lawrence Schimmel, M.D., which was filed as
Exhibit 2(f) to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1997, and is incorporated herein by reference.
2(n) Agreement and Plan of Merger, dated October 24, 1997, among the Company, Merit
Behavioral Care Corporation and MBC Merger Corporation which was filed as Exhibit
2(g) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1997, and is incorporated herein by reference.
2(o) Master Service Agreement, dated August 5, 1997, between the Company, Aetna U.S.
Healthcare, Inc. and Human Affairs International, Incorporated, which was filed as
Exhibit 2(b) to the Company's Current Report on Form 8-K, which was filed on December
17, 1997, and is incorporated herein by reference.
2(p) First Amendment to Master Services Agreement, dated December 4, 1997, between the
Company, Aetna U.S. Healthcare, Inc. and Human Affairs International, Incorporated,
which was filed as Exhibit 2(d) to the Company's Current Report on Form 8-K, which
was filed on December 17, 1997, and is incorporated herein by reference.
2(q) Real Estate Purchase and Sale Agreement, dated January 29, 1997, between the Company
and Crescent Real Estate Equities Limited Partnership, which was filed as Exhibit
2(a) to the Company's Current Report on Form 8-K which was filed on April 23, 1997,
and is incorporated herein by reference.
2(r) Amendment No. 1, dated February 28, 1997, to the Real Estate Purchase and Sale
Agreement, dated January 29, 1997, between the Company and Crescent Real Estate
Equities Limited Partnership, which was filed as Exhibit 2(b) to the Company's
Current Report on Form 8-K filed on April 23, 1997, and is incorporated herein by
reference.
2(s) Amendment No. 2, dated May 29, 1997, to the Real Estate Purchase and Sale Agreement,
dated January 29, 1997, between the Company and Crescent Real Estate Equities Limited
Partnership,
</TABLE>
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which was filed as Exhibit 2(c) to the Company's Current Report on Form 8-K filed on
June 30, 1997, and is incorporated herein by reference.
2(t) Contribution Agreement, dated June 16, 1997, between the Company and Crescent
Operating, Inc., which was filed as Exhibit 2(d) to the Company's Current Report on
Form 8-K which was filed on June 30, 1997, and is incorporated herein by reference.
2(u) Stockholders' Agreement, dated December 13, 1995, among Green Spring Health Services,
Inc., Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service
Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the
Company, which was filed as Exhibit 4(d) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by
reference.
2(v) First Amendment to Stockholders' Agreement, dated February 28, 1997, among Green
Spring Health Services, Inc., Blue Cross and Blue Shield of New Jersey, Inc., Health
Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc.
and the Company, which was filed as Exhibit 10(af) to the Company's Annual Report on
Form 10-K for the year ended September 30, 1997, and is incorporated herein by
reference.
2(w) Exchange Agreement, dated December 13, 1995, among Blue Cross and Blue Shield of New
Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce County
Medical Bureau, Inc. and the Company, which was filed as Exhibit 4(e) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1995, and is incorporated herein by reference.
4(a) Indenture, dated as of February 12, 1998, between the Company and Marine Midland
Bank, as Trustee, relating to the 9% Senior Subordinated Notes due February 15, 2008
of the Company, which was filed as Exhibit 4(a) to the Company's Current Report on
Form 8-K, which was filed April 3, 1998, and is incorporated herein by reference.
4(b) Purchase Agreement, dated February 5, 1998, between the Company and Chase Securities
Inc., which was filed as Exhibit 4(b) to the Company's Current Report on Form 8-K,
which was filed April 3, 1998, and is incorporated herein by reference.
4(c) Exchange and Registration Rights Agreement, dated February 12, 1998 between the
Company and Chase Securities Inc., which was filed as Exhibit 4(c) to the Company's
Current Report on Form 8-K, which was filed April 3, 1998, and is incorporated herein
by reference.
4(d) Credit Agreement, dated as of February 12, 1998, among the Company, certain of the
Company's subsidiaries listed therein and The Chase Manhattan Bank, as administrative
agent, which was filed as Exhibit 4(d) to the Company's Current Report on Form 8-K,
which was filed April 3, 1998, and is incorporated herein by reference.
4(e) Amendment No. 1, dated as of September 30, 1998, to the Credit Agreement, dated as of
February 12, 1998, among the Company, certain of the Company's subsidiaries listed
therein, and The Chase Manhattan Bank, as administrative agent, which was filed as
Exhibit 4(e) of Amendment No. 4 to the Company's Registration Statement on Form S-4
(File No. 333-49335), and is incorporated herein by reference.
5 Opinion of King & Spalding as to the legality of the securities being registered.
23(a) Consent of Arthur Andersen LLP for the Company.
23(b) Consent of Deloitte & Touche LLP.
23(c) Consent of KPMG Peat Marwick LLP.
23(d) Consent of Arthur Andersen LLP for CBHS.
</TABLE>
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23(e) Consent of King & Spalding (included in opinion filed as Exhibit 5).
</TABLE>
- ------------------------
* Previously filed
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made of
securities registered hereby, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3) of the 1933
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that the undertakings set forth in paragraphs (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant pursuant
to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by
reference in this Registration Statement.
That, for the purpose of determining any liability under the 1933 Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the 1933 Act, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
that is incorporated by reference in this Registration Statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the registrant, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling persons of the registrant in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the 1933 Act and will be governed
by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Atlanta, State of Georgia, on October 27, 1998.
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<S> <C> <C>
MAGELLAN HEALTH SERVICES, INC.
By: /s/ CRAIG L. MCKNIGHT
-----------------------------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement has been signed by the following persons on October
27, 1998 in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ HENRY T. HARBIN
- ------------------------------ President, Chief Executive October 26, 1998
Henry T. Harbin Officer and Director
/s/ CRAIG L. MCKNIGHT Executive Vice President
- ------------------------------ and Chief Financial October 27, 1998
Craig L. McKnight Officer
/s/ JEFFREY T. HUDKINS Vice President and
- ------------------------------ Controller October 26, 1998
Jeffrey T. Hudkins (Chief Accounting Officer)
*
- ------------------------------ Director October 27, 1998
Edwin M. Banks
*
- ------------------------------ Director October 27, 1998
G. Fred DiBona, Jr.
*
- ------------------------------ Director October 27, 1998
Andre C. Dimitriadis
*
- ------------------------------ Director October 27, 1998
A.D. Frazier, Jr.
- ------------------------------ Director
Raymond H. Kiefer
</TABLE>
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<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
- ------------------------------ Director
Gerald L. McManis
*
- ------------------------------ Director October 27, 1998
Daniel S. Messina
*
- ------------------------------ Chairman of the October 27, 1998
Robert W. Miller Board of Directors
- ------------------------------ Director
Darla D. Moore
*
- ------------------------------ Director October 27, 1998
Jeffrey A. Sonnenfeld
</TABLE>
* The undersigned Attorney-in-Fact, by signing his name below, does hereby
sign this Amendment No. 1 to the Registration Statement on behalf of the
indicated officers and directors of the Registrant pursuant to a Power of
Attorney executed by such persons and filed, as part of the Registration
Statement, with the Securities and Exchange Commission on May 22, 1998.
<TABLE>
<S><C> <C> <C>
/s/ CRAIG L. MCKNIGHT Date: October 27,
-------------------------------------- 1998
By: Craig L. McKnight
</TABLE>
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<PAGE>
EXHIBIT 5
[LETTERHEAD]
404/572-4676 404/572-5147
October 28, 1998
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Re: 62,500 Shares of Common Stock, $.25 par value per share, of
Magellan Health Services, Inc.
----------------------------------------------------------------
Gentlemen:
We have acted as counsel to Magellan Health Services, Inc. (the 'Company'),
in connection with the preparation and filing of the Registration Statement on
Form S-3 (the 'Registration Statement'), for registration under the Securities
Act of 1933, as amended, of 62,500 shares of Common Stock, $.25 par value per
share, of the Company (the 'Common Stock'). The shares of Common Stock will be
issued to Paul G. Shoffeitt pursuant to an Option Agreement, dated December 4,
1997 (the 'Option Agreement').
In rendering the opinions expressed below we have examined the Registration
Statement, as amended, the Option Agreement, and such other documents as we have
deemed necessary to enable us to express the opinions hereinafter set forth. In
addition, we have examined and relied, to the extent we deemed proper, on
certificates of officers of the Company as to factual matters, on the originals
or copies certified or otherwise identified to our satisfaction of all such
corporate records of the Company and such other instruments and certificates of
public officials and other persons as we have deemed appropriate. In our
examination, we have assumed the authenticity of all documents submitted to us
as originals, the conformity to the original documents of all documents
submitted to us as copies, and the genuineness of all signatures on documents
reviewed by us and the legal capacity of natural persons.
Based upon and subject to the foregoing, we are of the opinion that all
legal and corporate proceedings necessary for the authorization and issuance of
the shares of Common Stock have been duly taken and the shares of Common Stock
were duly authorized and validly issued and are fully paid and nonassessable.
We hereby consent to (a) the filing of the foregoing legal opinion as an
exhibit to the Registration Statement and all further amendments thereto and (b)
all references to our firm in the Registration Statement.
Very truly yours,
/s/ King & Spalding
King & Spalding
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated November 14, 1997
on the consolidated financial statements and schedule of Magellan Health
Services, Inc. and subsidiaries included in Magellan Health Services, Inc.'s
Annual Report on Form 10-K for the fiscal year ended September 30, 1997, and to
all references to our Firm included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 27, 1998
<PAGE>
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Magellan Health Services, Inc. on Form S-3, to be filed on or about October
28, 1998, of our report dated November 14, 1997, appearing in the Current Report
on Form 8-K/A of Magellan Health Services, Inc., filed on October 28, 1998. Such
report expresses an unqualified opinion on the consolidated balance sheets of
Merit Behavioral Care Corporation (the "Company") as of September 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1997 and includes an explanatory paragraph relating to the fact that
effective October 1, 1995, the Company changed its method of accounting for
deferred contract start-up costs related to new contracts or expansion of
existing contracts.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
New York, New York
October 27, 1998
<PAGE>
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Human Affairs International, Incorporated
We consent to the incorporation by reference in the registration statement on
Form S-3 of Magellan Health Services, Inc. of our report dated February 7, 1997,
except as to note 10 which is as of February 27, 1997, with respect to the
consolidated balance sheets of Human Affairs International, Incorporated and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholder's equity, and cash flows for the years then
ended, which report appears in the Form 8-K of Magellan Health Services, Inc.
dated December 17, 1997 and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Salt Lake City, Utah
October 27, 1998
<PAGE>
EXHIBIT 23(d)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated November 14, 1997
on the audited consolidated financial statements and schedule of Charter
Behavioral Health Systems, LLC and subsidiaries included in Magellan Health
Services, Inc.'s Annual Report on Form 10-K for the fiscal year ended September
30, 1997, and to all references to our Firm included in this Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 27, 1998
