<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1998
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8060 58-1076937
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) 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.
Vice President and
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 Street
Atlanta, Georgia 30303-1763
(404) 572-4600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE
<S> <C> <C> <C>
9% Series A Senior Subordinated Notes due
2008..................................... $625,000,000 $1,000(1) $625,000,000
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
9% Series A Senior Subordinated Notes due
2008..................................... $184,375(2)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Pursuant to Rule 457(f), the registration fee was computed based on the
market value of the $625,000,000 aggregate principal amount of the
Registrant's 9% Senior Subordinated Notes due 2008 for which the Registrant
offers to exchange the securities to be registered.
--------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
MAGELLAN HEALTH SERVICES, INC.
CROSS-REFERENCE SHEET
FOR REGISTRATION STATEMENT ON FORM S-4
AND INFORMATION STATEMENT/PROSPECTUS
<TABLE>
<CAPTION>
ITEM CAPTION IN INFORMATION
NUMBER CAPTION STATEMENT/PROSPECTUS
- --------- -------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................. Facing Page of Registration Statement; Outside Front
Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back Cover Pages of
Prospectus; Available Information.
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information........................... Summary; Risk Factors; Certain Federal Income Tax
Consequences of the Exchange Offer; The Exchange
Offer; Magellan Selected Historical Consolidated
Financial Information; Merit Consolidated
Financial Information; Magellan Unaudited Pro
Forma Financial Information.
4. Terms of the Transaction.......................... Summary; Risk Factors; The Exchange Offer; Certain
Federal Income Tax Consequences of the Exchange
Offer; Description of the New Notes; Plan of
Distribution.
5. Pro Forma Financial Information................... Summary; Capitalization; Magellan Selected
Historical Consolidated Financial Information;
Merit Selected Historical Consolidated Financial
Information; Unaudited Pro Forma Financial
Information.
6. Material Contacts with the Company Being
Acquired........................................ Not Applicable.
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to be
Underwriters.................................... Not Applicable.
8. Interests of Named Experts and Counsel............ Legal Matters; Independent Auditors and Public
Accountants.
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Not Applicable.
10. Information With Respect to S-3 Registrants....... Not Applicable.
11. Incorporation of Certain Information by
Reference....................................... Not Applicable.
12. Information With Respect to S-2 or
S-3 Registrants................................. Not Applicable.
13. Incorporation of Certain Information by
Reference....................................... Not Applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM CAPTION IN INFORMATION
NUMBER CAPTION STATEMENT/PROSPECTUS
- --------- -------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
14. Information With Respect to Registrants Other than
S-3 or S-2 Registrants.......................... Summary; The Company; Risk Factors; The Acquisition;
Capitalization; Magellan Selected Historical
Consolidated Financial Information; Merit Selected
Historical Consolidated Financial Information;
Unaudited Pro Forma Financial Information;
Magellan's Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Merit's Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Executive Compensation;
Security Ownership of Certain Beneficial Owners
and Management; Certain Relationships and Related
Transactions; Index to Financial Statements;
Financial Statements.
15. Information With Respect to S-3 Companies......... Not Applicable.
16. Information With Respect to S-2 or S-3
Companies....................................... Not Applicable.
17. Information With Respect to Companies Other Than
S-2 or S-3 Companies............................ Not Applicable.
18. Information if Proxies, Consents or
Authorizations are to be Solicited.............. Not Applicable.
19. Information if Proxies, Consents or
Authorizations are not to be Solicited, or in an
Exchange Offer.................................. Summary; Management; Security Ownership of Certain
Beneficial Owners and Management.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PROSPECTUS
$625,000,000 [LOGO]
MAGELLAN HEALTH SERVICES, INC.
OFFER TO EXCHANGE ITS
9% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING
9% SENIOR SUBORDINATED NOTES DUE 2008
</TABLE>
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [ ],
1998, UNLESS EXTENDED.
Magellan Health Services, Inc., a Delaware corporation (the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus (this "Prospectus") and the accompanying
Letter of Transmittal (the "Letter of Transmittal"), to exchange $1,000
principal amount of its 9% Series A Senior Subordinated Notes due 2008 (the "New
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which this
Prospectus is a part, for each $1,000 principal amount of its outstanding 9%
Senior Subordinated Notes due 2008 (the "Old Notes"), which have not been
registered under the Securities Act. The aggregate principal amount of the Old
Notes currently outstanding is $625,000,000. The form and terms of the New Notes
are the same as the form and terms of the Old Notes except that (i) the New
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting their transfer, (ii) holders of New Notes will not be
entitled to certain rights under the Registration Rights Agreement (as defined),
which rights will terminate when the Exchange Offer is consummated, and (iii)
the New Notes have been given a series designation to distinguish them from the
Old Notes. The New Notes will evidence the same debt as the Old Notes (which
they will replace) and will be issued under and be entitled to the benefits of
the indenture governing the Old Notes dated as of February 12, 1998 (the
"Indenture"). The Old Notes and the New Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of the
New Notes." The Company will accept for exchange and exchange any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on [ ], 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m. on the Expiration Date. The Exchange Offer is subject to certain
customary conditions. See "The Exchange Offer." Old Notes may be tendered only
in integral multiples of $1,000.
The New Notes will be unsecured and will be subordinated in right of payment
to all existing and future Senior Indebtedness (as defined) of the Company. The
New Notes will rank PARI PASSU with all future Senior Subordinated Indebtedness
(as defined) of the Company and will rank senior to all future Subordinated
Obligations (as defined) of the Company. The Company conducts substantially all
of its operations through its subsidiaries. Therefore, the New Notes will be
effectively subordinated to all liabilities of the Company's subsidiaries. The
Indenture permits the Company and its subsidiaries to incur additional
indebtedness, including Senior Indebtedness, subject to certain restrictions. As
of December 31, 1997, on a pro forma basis after giving effect to the
Transactions (as defined), (i) the aggregate amount of the Company's outstanding
Senior Indebtedness would have been $590.2 million (exclusive of unused
commitments), substantially all of which would have been Secured Indebtedness
(as defined) and would have been guaranteed by substantially all of the
Company's subsidiaries, (ii) the Company would have had no Senior Subordinated
Indebtedness other than the New Notes and no Indebtedness that is subordinate or
junior in right of payment to the New Notes and (iii) the outstanding
indebtedness of the Company's subsidiaries (excluding guarantees of the
Company's indebtedness) would have been $346.0 million, substantially all of
which would have been Secured Indebtedness.
The Company sold the Old Notes on February 12, 1998, in transactions that
were not registered under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act. The initial purchaser of the Old
Notes subsequently resold the Old Notes to "qualified institutional buyers" in
reliance upon Rule 144A under the Securities Act or pursuant to offers and sales
that occurred outside the United States within the meaning of Regulation S under
the Securities Act. Accordingly, the Old Notes may not be reoffered, resold or
otherwise transferred unless so registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. See "The
Exchange Offer--Purpose and Effect of the Exchange Offer." The New Notes are
being offered for exchange hereby to satisfy certain obligations of the Company
under the Exchange and Registration Rights Agreement, dated February 12, 1998,
among the Company and the initial purchaser of the Old Notes (the "Registration
Rights Agreement"). Based on existing interpretations of the staff of the
Division of Corporation Finance (the "Staff") of the Securities and Exchange
Commission (the "Commission") with respect to similar transactions, the Company
believes that New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by holders
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act ) without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged in, have no arrangement with
any person to participate in, and do not intend to engage in any public
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a resale prospectus in connection with any resale of such New Notes. The
Letter of Transmittal which accompanies this Prospectus states that by so
acknowledging and by delivering a resale prospectus, a broker-dealer will not be
deemed to admit to be acting in the capacity of an "underwriter" (within the
meaning of Section 2(11) of the Securities Act). This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
or other trading activities. The Company has agreed that, for a period of 180
days after the date on which the Registration Statement of which this Prospectus
is a part is first declared effective, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 23 FOR A DESCRIPTION OF CERTAIN RISKS
TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
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 [ ], 1998.
<PAGE>
(CONTINUED FROM FRONT COVER)
Holders of Old Notes whose Old Notes are not tendered and accepted in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and preferences and will be subject to the limitations applicable
thereto under the Indenture, and with respect to transfer, under the Securities
Act. The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incurred by it incident to the Exchange Offer. Any Old
Notes not accepted for exchange for any reason will be returned without expense
to the tendering holders thereof as promptly as practicable after the expiration
or termination of the Exchange Offer. See "The Exchange Offer." Prior to the
Exchange Offer, there is no public market for the Old Notes. The New Notes will
not be listed on any securities exchange, but the Old Notes are included in the
Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
Market for trading among "qualified institutional buyers." There can be no
assurance that an active trading market for the New Notes will develop. To the
extent that a market for the New Notes does develop, the market value of the New
Notes will depend on market conditions (such as yields on alternative
investments), general economic conditions, the Company's financial condition and
certain other factors. Such conditions might cause the New Notes, to the extent
that they are traded, to trade at a significant discount from face value. See
"Risk Factors--Absence of Trading Markets."
NEW HAMPSHIRE RESIDENTS ONLY
Neither the fact that a registration statement or an application for a
license has been filed under Chapter 421-B of the New Hampshire Revised Statutes
with the State of New Hampshire nor the fact that a security is effectively
registered or a person is licensed in the State of New Hampshire constitutes a
finding by the Secretary of State that any document filed under Chapter 421-B of
the New Hampshire Revised Statutes is true, complete and not misleading. Neither
any such fact nor the fact that an exemption or exception is available for a
security or a transaction means that the Secretary of State has passed in any
way upon the merits or qualifications of, or recommended or given approval to,
any person, security or transaction. It is unlawful to make, or cause to be
made, to any prospective purchaser, customer or client any representation
inconsistent with the provisions of this paragraph.
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES HEREIN TO THE "COMPANY" REFER TO MAGELLAN HEALTH SERVICES, INC. AND
ITS CONSOLIDATED SUBSIDIARIES. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS
REFER TO YEARS ENDED SEPTEMBER 30. DATA PRESENTED IN THIS PROSPECTUS ON A PRO
FORMA BASIS FOR THE YEAR ENDED SEPTEMBER 30, 1997, AND FOR THE QUARTER ENDED
DECEMBER 31, 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). PRO FORMA STATEMENT OF OPERATIONS DATA GIVE EFFECT TO
THE EVENTS DESCRIBED IN THE PRECEEDING SENTENCE AS IF THEY OCCURRED ON OCTOBER
1, 1996; PRO FORMA BALANCE SHEET DATA GIVE EFFECT TO SUCH EVENTS AS IF THEY
OCCURRED ON DECEMBER 31, 1997. SEE "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION." 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").
ON MARCH 3, 1998, THE COMPANY ENTERED INTO DEFINITIVE AGREEMENTS WITH
CRESCENT OPERATING, INC. ("COI") AND CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
("CBHS") TO, AMONG OTHER THINGS, SELL THE COMPANY'S FRANCHISE OPERATIONS,
CERTAIN DOMESTIC PROVIDER OPERATIONS AND CERTAIN OTHER ASSETS AND OPERATIONS FOR
$280.0 MILLION IN CASH AND THE NUMBER OF SHARES OF COI COMMON STOCK OBTAINED BY
DIVIDING $30.0 MILLION BY THE AVERAGE CLOSING PRICE OF A SHARE OF COI COMMON
STOCK FOR THE TEN TRADING DAYS PRECEDING CONSUMMATION OF THE TRANSACTIONS (THE
"CBHS TRANSACTIONS"). SEE "PENDING SALE OF PROVIDER BUSINESS." UNLESS OTHERWISE
INDICATED, DATA PROVIDED IN THIS OFFERING MEMORANDUM ON A PRO FORMA BASIS DO NOT
GIVE EFFECT TO THE CBHS TRANSACTIONS.
THE COMPANY
OVERVIEW
The Company is the nation's largest provider of managed behavioral
healthcare services, offering a broad array of cost-effective managed behavioral
healthcare products. As a result of the Acquisition, the Company has over 58.0
million covered lives under managed behavioral healthcare contracts and manages
behavioral healthcare programs for over 4,000 customers. Through its current
network of over 34,000 providers and 2,000 treatment facilities, the Company
manages behavioral healthcare programs for Blue Cross/Blue Shield organizations,
health maintenance organizations ("HMOs") and other insurance companies,
corporations, federal, state and local governmental agencies, labor unions and
various state Medicaid programs. The Company believes it has the largest and
most comprehensive behavioral healthcare provider network in the United States
as a result of the Acquisition. In addition to the Company's managed behavioral
healthcare products, the Company offers specialty managed care products related
to the management of certain chronic conditions. The Company also offers a broad
continuum of behavioral healthcare services to approximately 2,900 individuals
who receive healthcare benefits funded by state and local governmental agencies
through National Mentor, Inc., its wholly-owned public-sector provider
("Mentor"). Furthermore, the Company franchises the "CHARTER" System of
behavioral healthcare to the acute-care psychiatric hospitals and other
behavioral care facilities operated by CBHS, an entity in which the Company owns
a 50% equity interest. On a pro forma basis, the Company had revenues of $1.6
billion and Adjusted EBITDA (as defined) of $268.4 million in fiscal 1997. If
the CBHS Transactions are consummated, the Company will no longer have franchise
operations or an ownership interest in CBHS. On a pro forma basis and after
giving effect to the CBHS
3
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Transactions, the Company would have had revenues of $1.4 billion and Adjusted
EBITDA of $204.9 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. As a result of the
Acquisition, based on total covered lives, the Company is the industry leader
with respect to risk-based, ASO, EAP and integrated products. 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.
INDUSTRY OVERVIEW
According to industry sources, in 1994 (the most recent year for which such
information was available), direct behavioral healthcare services treatment
costs amounted to approximately $81.0 billion, or approximately 8% of total
healthcare industry spending. In response to increasing healthcare costs, payors
of behavioral healthcare services have increasingly turned to managed care in an
effort to control costs. As a result, the managed behavioral healthcare industry
has experienced significant growth over the past several years. According to
OPEN MINDS, the total number of Americans enrolled in managed behavioral
healthcare plans increased from approximately 86.0 million in 1993 to
approximately 149.0 million in 1997, a compound annual growth rate of
approximately 15%. In an effort to control costs, payors are increasingly
utilizing risk-based products, and the number of risk-based covered lives has
increased from approximately 13.6 million, or approximately 16% of the total, in
1993 to approximately 38.9 million, or approximately 26% of the total, in 1997,
representing a compound annual growth rate of over 30%. Risk-based products
typically generate higher revenues per member per month than other managed
behavioral healthcare products. According to OPEN MINDS, although only 26% of
total managed behavioral healthcare covered lives were enrolled in risk-based
products in 1997, such products accounted for approximately two-thirds of the
total managed behavioral healthcare premiums during the survey period. In
addition to the trend toward the increased use of risk-based products, the
Company believes that payors are increasingly seeking to contract with larger
managed behavioral healthcare providers that are able to: (i) provide a
consistent quality of service on a nationwide basis, (ii) control costs through
economies of scale in administrative operations, and (iii) enter into
cost-effective provider contracts. As a result, the industry has consolidated,
and the three largest providers (including the Company after the Acquisition)
currently account for approximately 60% of all
4
<PAGE>
covered lives, an increase from 1992 when the top three providers accounted for
approximately 37% of all covered lives.
COMPETITIVE STRENGTHS
The Company believes it benefits from the competitive strengths described
below with respect to its managed behavioral healthcare business, which should
allow it to increase its revenues and cash flow. Furthermore, the Company
believes it can leverage its competitive strengths to expand its service
offerings into other specialty managed care products.
INDUSTRY LEADERSHIP. As a result of the Acquisition, the Company became the
nation's largest provider of managed behavioral healthcare services in the
United States with over 58.0 million covered lives. The Company believes it also
now has the number one market position in each of the major product markets in
which it competes. The Company believes its industry leading position will
enhance its ability to: (i) provide a consistent level of high quality service
on a nationwide basis; (ii) enter into favorable agreements with behavioral
healthcare providers that allow it to effectively control healthcare costs for
its customers; and (iii) effectively market its managed care products to large
corporate, HMO and insurance customers, which, the Company believes,
increasingly prefer to be serviced by a single-source provider on a national
basis.
BROAD PRODUCT OFFERING AND NATIONWIDE PROVIDER NETWORK. The Company offers
a full spectrum of behavioral managed care products that can be designed to meet
specific customer needs, including risk-based and partial risk-based products,
integrated EAPs, stand-alone EAPs and ASO products. The Company's nationwide
provider network encompasses over 34,000 providers and 2,000 treatment
facilities in all 50 states. The combination of broad product offerings and a
nationwide provider network allows the Company to meet virtually any customer
need for managed behavioral healthcare on a nationwide basis, and positions the
Company to capture incremental revenue opportunities resulting from the
continued growth of the managed behavioral healthcare industry and the continued
migration of its customers from ASO and EAP products to higher revenue
risk-based products.
BROAD BASE OF STRONG CUSTOMER RELATIONSHIPS. The Company enjoys strong
customer relationships across all its markets, as evidenced by a contract
renewal rate of over 90% during the last three fiscal years. Management believes
that its strong customer relationships are attributable to the Company's broad
product offering, nationwide provider network, commitment to quality care and
ability to manage behavioral healthcare costs effectively. Following the
Acquisition, the Company's leading customers include: (i) Blue Cross/Blue Shield
organizations; (ii) national HMOs and other large insurers, such as Aetna/US
Healthcare, Humana and Prudential; (iii) large corporations, such as IBM,
Federal Express and AT&T; (iv) state and local governmental agencies through
commercial, Medicaid and other programs; and (v) the federal government through
contracts pursuant to the Civilian Health and Medical Program for the Uniformed
Services ("CHAMPUS") and with the U.S. Postal Service. This broad base of strong
customer relationships provides the Company with stable and diverse sources of
revenue and cash flow and an established base from which to continue to increase
covered lives and revenue.
PROVEN RISK MANAGEMENT EXPERIENCE. As a result of the Acquisition, the
Company has approximately 18.0 million covered lives under risk-based contracts,
making it the nation's industry leader in at-risk managed behavioral healthcare
products. The Company's experience with risk-based products covering a large
number of lives has given it a broad base of data from which to analyze
utilization rates. The Company believes that this broad database permits it to
estimate utilization trends and costs more accurately than many of its
competitors, which allows it to bid effectively. The Company's experience has
also allowed it to develop effective measures for controlling the cost of
providing a unit of care to its covered lives. Among other cost control
measures, the Company has developed or acquired clinical protocols, which permit
the Company to assist its network providers to administer effective treatment in
a cost efficient manner, and claims management technology, which permits the
Company to reduce the cost of processing claims. As the Company integrates the
managed care operations it acquired in the
5
<PAGE>
Acquisition with its pre-existing managed care operations, it will be able to
select from the best practices of its subsidiaries to further enhance its
utilization and cost control methodologies.
BUSINESS STRATEGY
INCREASE ENROLLMENT IN BEHAVIORAL MANAGED CARE PRODUCTS. The Company
believes it has a significant opportunity to increase covered lives in all its
behavioral managed care products. The Company believes its increased market
presence following the Acquisition will further enhance its ability to increase
ASO and EAP covered lives with large corporate, HMO and insurance customers. The
Company further believes that it has a significant opportunity to increase
revenues and cash flow by increasing lives covered by its risk-based products.
As a result of the Acquisition, the Company became the industry's leading
provider of risk-based products and is well positioned to benefit from the
continuing shift to risk-based products. According to OPEN MINDS, industry
enrollment in risk-based products has grown from approximately 13.6 million in
1993 to approximately 38.9 million in 1997, representing a compound annual
growth rate of over 30%. Despite this growth, only approximately 26% of total
managed behavioral healthcare enrollees were in risk-based products in 1997. The
Company believes that the market for risk-based products has grown and will
continue to grow as payors attempt to reduce their cost of providing behavioral
healthcare while ensuring a high quality of care and an appropriate level of
access to care. The Company believes enrollment in its risk-based products will
increase through growth in new covered lives and through the transition of
covered lives in ASO and EAP products to higher revenue risk-based products. On
a pro forma basis for fiscal 1997, risk-based products accounted for 32% of the
Company's covered lives but accounted for 73% of its total managed behavioral
healthcare revenues.
ACHIEVE SIGNIFICANT INTEGRATION EFFICIENCIES. The Company believes that the
Acquisition has created opportunities for the Company to achieve significant
cost savings. Management believes that cost saving opportunities will result
from leveraging fixed overhead over a larger revenue base and an increased
number of covered lives and from reducing duplicative corporate and regional
selling, general and administrative expenses. As a result, 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.
PURSUE ADDITIONAL SPECIALTY MANAGED CARE OPPORTUNITIES. The Company
believes that significant demand exists for specialty managed care products
related to the management of certain chronic conditions. The Company believes
its large number of covered lives, information systems infrastructure and
demonstrated expertise in managing behavioral healthcare programs position the
Company to provide customers with specialty managed care products. As a first
major step in implementing this strategy, the Company acquired Allied, a
provider of specialty managed care products for cardiology, oncology and
diabetes patients, on December 5, 1997. See "--Recent Developments".
HISTORY
The Company has historically derived the majority of its revenue as a
provider of healthcare services in an inpatient setting. Payments from third
party payors are the principal source of revenue for most healthcare providers.
In the early 1990's, many third party payors sought to control the cost of
providing care to their patients by instituting managed care programs or seeking
the assistance of managed care companies. Providers participating in managed
care programs agree to provide services to patients for a discount from
established rates, which generally results in pricing concessions by the
providers and lower margins. Additionally, managed care programs generally
encourage alternatives to inpatient treatment settings and the reduced
utilization of inpatient services. As a result, third party payors established
managed care programs or engaged managed care companies in many areas of
healthcare, including behavioral healthcare. The Company, which until June 1997
was the largest operator of psychiatric hospitals in the United States, was
adversely affected by the adoption of managed care programs by third party
payors.
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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.
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 COI, an affiliate of Crescent, formed CBHS, a joint venture, to operate the
Psychiatric Hospital Facilities and certain other facilities transferred to CBHS
by the Company. The Company retained a 50% ownership of CBHS; the other 50% of
the equity of CBHS is owned by COI.
In related transactions, (i) Crescent leased the Psychiatric Hospital
Facilities to CBHS and (ii) the Company entered into a master franchise
agreement (the "Master Franchise Agreement") with CBHS and a franchise agreement
with each of the Psychiatric Hospital Facilities and the other facilities
operated by CBHS (collectively, the "Franchise Agreements"). The Company's sale
of the Psychiatric Hospital Facilities and the related transactions described
above are referred to as the "Crescent Transactions." Pursuant to the Franchise
Agreements, the Company franchises the "CHARTER" System of behavioral healthcare
to each of the Psychiatric Hospital Facilities and other facilities operated by
CBHS. In exchange, CBHS agreed to pay the Company, pursuant to the Master
Franchise Agreement, annual franchise fees (the "Franchise Fees") of
approximately $78.3 million. However, CBHS's obligation to pay the Franchise
Fees is subordinate to its obligation to pay rent for the Psychiatric Hospital
Facilities to Crescent.
The sale of the Psychiatric Hospital Facilities provided the Company with
approximately $200 million of net cash proceeds after debt repayment for use in
implementing its business strategy. The Company used the net cash proceeds to
finance the acquisition of additional managed care companies, as described
below. See "--Recent Developments." The Company continues to pursue a strategy
of expanding its managed care operations and of reducing the extent to which its
earnings are derived from the psychiatric hospital business. In this regard, the
Company has further implemented its business strategy through the Acquisition.
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On March 3, 1998, the Company entered into definitive agreements with COI
and CBHS to, among other things, sell the Company's franchise operations,
certain domestic provider operations and certain other assets and operations for
$280.0 million in cash, subject to certain adjustments, and the number of shares
of COI common stock obtained by dividing $30.0 million by the average closing
price of a share of COI common stock for the ten trading days preceding
consummation of the CBHS Transactions. If the CBHS Transactions are consummated,
the Company will have completed the divestiture of substantially all of its
domestic provider operations. See "--Recent Developments."
RECENT DEVELOPMENTS
THE ACQUISITION. On February 12, 1998, the Company consummated its
acquisition of Merit for cash consideration of approximately $448.9 million plus
the repayment of Merit's debt. Merit manages behavioral healthcare programs for
approximately 800 customers across all segments of the healthcare industry,
including HMOs, Blue Cross/Blue Shield organizations and other insurance
companies, corporations and labor unions, federal, state and local governmental
agencies and various state Medicaid programs, and had approximately 21.0 million
covered lives at the time of the Acquisition, including approximately 10.6
million risk-based lives. On September 12, 1997, Merit completed the acquisition
of CMG. 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, depending on CMG's future performance. See
"Merit's Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." In fiscal 1997, including CMG
on a pro forma basis, Merit had revenue of $644.0 million.
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED ACQUISITION. On December 4, 1997,
the Company consummated the purchase of HAI, formerly a unit of Aetna/U.S.
Healthcare ("Aetna"), for approximately $122.1 million, which the Company funded
from cash on hand. HAI manages the care of over 16.0 million covered lives,
primarily through EAPs and other managed behavioral healthcare plans. The
Company may be required to make additional contingent payments of up to $60.0
million annually to Aetna over the five year period subsequent to closing. The
amount and timing of the payments will be contingent upon net increases in the
number of HAI's covered lives in specified products. See "Magellan's
Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Pro Forma Liquidity and Capital Resources." For the twelve months
ended September 30, 1997, HAI had revenue of $117.0 million.
ALLIED HEALTH GROUP, INC. ACQUISITION. On December 5, 1997, as part of the
Company's strategy to expand its specialty managed care business, the Company
purchased the assets of Allied. Allied provides specialty risk-based products
and administrative services to a variety of insurance companies and other
customers, including Blue Cross of New Jersey, CIGNA and NYLCare, for its 3.4
million members. Allied has over 80 physician networks across the eastern United
States. Allied's networks include physicians specializing in cardiology,
oncology and diabetes. The Company paid approximately $70.0 million for Allied,
of which $50.0 million was paid to the seller at closing with the remaining
$20.0 million placed in escrow. The escrowed amount is payable in one-third
increments if Allied achieves specified earnings targets during each of the
three years following the closing. Additionally, the purchase price may be
increased during the three year period by up to $40.0 million if Allied's
performance exceeds specified earnings targets. The maximum purchase price
payable is $110.0 million. See "Magellan's Management's Discussion and Analysis
of Financial Condition and Results of Operations-- Pro Forma Liquidity and
Capital Resources." For the twelve months ended September 30, 1997, Allied had
revenue of $144.0 million.
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GREEN SPRING MINORITY SHAREHOLDER CONVERSION. The minority shareholders of
Green Spring have converted their interests in Green Spring into an aggregate of
2,831,516 shares of Company Common Stock. Such conversion is referred to as the
"Green Spring Minority Shareholder Conversion." As a result of the Green Spring
Minority Shareholder Conversion, the Company owns 100% of Green Spring.
CBHS TRANSACTIONS. On March 3, 1998, the Company and certain of its wholly
owned subsidiaries entered into definitive agreements with COI and CBHS pursuant
to which the Company will, among other things, sell the Company's franchise
operations, certain domestic provider operations and certain other assets and
operations. The definitive agreements include: (i) an equity purchase agreement
between the Company and COI (the "Equity Purchase Agreement"); (ii) a purchase
agreement between the Company, certain of its wholly owned subsidiaries and CBHS
(the "Purchase Agreement"); and (iii) a support agreement between the Company
and COI (the "Support Agreement"). Pursuant to the Equity Purchase Agreement,
the Company agreed to sell to COI the Company's common and preferred equity
interest in CBHS. Pursuant to the Purchase Agreement, the Company and certain of
its wholly owned subsidiaries agreed to sell to CBHS: (i) Charter Advantage, the
entity that conducts the Company's franchise operations; (ii) Charter System,
LLC, which owns the intellectual property comprising the "CHARTER" system of
behavioral healthcare; (iii) Group Practice Affiliates, Inc., the Company's
physician practice management business ("GPA"); (iv) certain behavioral staff
model operations; (v) the Company's Puerto Rican provider management business;
(vi) Golden Isle Assurance Company, Ltd., one of the Company's captive insurance
companies ("Golden Isle"); and (vii) Strategic Advantage, Inc., which owns
certain intellectual property used by the Company to monitor clinical results
("Strategic Advantage"). The obligations of CBHS and the Company to consummate
the transactions contemplated by the Purchase Agreement are also subject to,
among other things, the execution of either (i) a Joint Venture Purchase
Agreement pursuant to which the Company will sell to CBHS, for no additional
consideration, its interest in six hospital-based joint ventures that are
managed by CBHS on behalf of the Company (the "Joint Ventures") or (ii)
amendments to the services agreement between the Company and certain
subsidiaries of CBHS relating to the Joint Ventures pursuant to which the
Company will transfer to CBHS all rights to receive certain distributions with
respect to the Joint Ventures and pursuant to which CBHS would assume all
obligations of the Company with respect to the Joint Ventures arising after
consummation of the CBHS Transactions.
Among other things, the Support Agreement obligates COI to provide CBHS
assistance in obtaining financing for its payment obligation under the Purchase
Agreement, including its agreement to: (i) provide assistance in the preparation
of any offering documents required in connection with CBHS's efforts to obtain
financing, (ii) reimburse CBHS for all expenses incurred in connection with
obtaining financing, whether or not the CBHS Transactions are consummated, and
(iii) purchase up to $25.0 million of CBHS securities if necessary to permit
CBHS to obtain the required financing. The Support Agreement also obligates COI,
under certain circumstances, to pay the Company a termination fee equal to $2.5
million in cash and the number of shares of COI common stock obtained by
dividing $2.5 million by the average closing price of a share of COI common
stock for the five trading days prior to the termination of the Purchase
Agreement and for the five trading days after the termination of the Purchase
Agreement (the "Termination Fee"), if the CBHS Transactions are not consummated
as a result of the failure of CBHS to obtain sufficient financing for its
payment obligations under the Purchase Agreement.
Upon consummation of the CBHS Transactions, the Company will receive $280.0
million in cash, pursuant to the Purchase Agreement and, pursuant to the Equity
Purchase Agreement, the number of shares of COI common stock obtained by
dividing $30.0 million by the average closing price of a share of COI common
stock for the ten trading days preceding consummation of the CBHS Transactions.
The Company expects to use the cash proceeds, after transaction costs of
approximately $8.0 million, to repay indebtedness outstanding under the Term
Loan Facility. The CBHS Transactions are expected to
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close in the third quarter of fiscal 1998. There can be no assurance that the
Company will consummate the CBHS Transactions.
The obligations of the Company and CBHS to consummate the transactions
contemplated by the Equity Purchase Agreement and the Support Agreement are
conditioned upon the execution and delivery of a services purchase agreement
(the "Services Purchase Agreement"). It is expected that the Services Purchase
Agreement would obligate the Company to purchase from CBHS a designated minimum
amount of behavioral healthcare services for gate-kept risk-based covered lives
if CBHS meets certain standards required of it pursuant to the Provider Services
Agreement (as defined). If the CBHS Transactions are consummated, the Company
also expects to enter into a provider services agreement (the "Provider Services
Agreement") with CBHS pursuant to which the Company would grant CBHS status as a
national preferred provider of behavioral healthcare services to the Company for
ten years provided that CBHS complies during the term of the Provider Services
Agreement with enhanced clinical, quality assurance, reporting and customer
service standards in addition to the standards currently required of other
providers of such services to the Company. See "Pending Sale of Provider
Business--Description of the Definitive Agreements."
THE TRANSACTIONS
On February 12, 1998, in connection with the consummation of the
Acquisition, the Company consummated certain related transactions (together with
the Acquisition, collectively, the "Transactions"), as follows: (i) the Company
terminated its existing credit agreement (the "Magellan Existing Credit
Agreement"); (ii) the Company repaid all loans outstanding pursuant to and
terminated Merit's existing credit agreement (the "Merit Existing Credit
Agreement") (the Magellan Existing Credit Agreement and the Merit Existing
Credit Agreement are hereinafter referred to as the "Existing Credit
Agreements"); (iii) the Company consummated a tender offer for its 11 1/4%
Series A Senior Subordinated Notes due 2004 (the "Magellan Outstanding Notes");
(iv) Merit consummated a tender offer for its 11 1/2% Senior Subordinated Notes
due 2005 (the "Merit Outstanding Notes") (the Magellan Outstanding Notes and the
Merit Outstanding Notes are hereinafter referred to collectively as the
"Outstanding Notes" and such tender offers are hereinafter referred to
collectively as the "Debt Tender Offers"); (v) the Company entered into a new
senior secured bank credit agreement (the "New Credit Agreement") with The Chase
Manhattan Bank ("Chase"), an affiliate of Chase Securities Inc., the Initial
Purchaser, and a syndicate of financial institutions, providing for credit
facilities of $700 million; and (vi) the Company issued the Old Notes. See "The
Transactions" and "Summary of New Credit Agreement."
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The following table sets forth the sources and uses of funds for the
Transactions (in millions):
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SOURCES:
Cash and cash equivalents......................................... $ 59.3
New Credit Agreement:
Revolving Facility(1)........................................... 20.0
Term Loan Facility(2)........................................... 550.0
The Old Notes..................................................... 625.0
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Total sources................................................. $ 1,254.3
--------
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USES:
Direct Cash Merger Consideration.................................. $ 448.9
Repayment of Merit Existing Credit Agreement(3)................... 196.4
Purchase of Magellan Outstanding Notes(4)......................... 432.1
Purchase of Merit Outstanding Notes(5)............................ 121.6
Transaction costs(6).............................................. 55.3
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Total uses.................................................... $ 1,254.3
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(1) The Revolving Facility provides for borrowings of up to $150.0
million. As of February 12, 1998, the Company had approximately $112.5
million available for borrowing pursuant to the Revolving Facility,
excluding approximately $17.5 million of availability reserved for
certain letters of credit.
(2) If the CBHS Transactions are consummated, the net proceeds of an
estimated $272.0 million will be used to repay a portion of the Term
Loan Facility under the New Credit Agreement. Additionally, upon the
sale of all or a portion of the COI common stock to be received upon
consummation of the CBHS Transactions, the Company is required to use
the net proceeds of such sale to reduce or repay amounts outstanding
under the Term Loan Facility.
(3) Includes principal amount of $193.6 million and accrued interest of
$2.7 million.
(4) Includes principal amount of $375.0 million, tender premium of $43.4
million and accrued interest of $13.7 million.
(5) Includes principal amount of $100.0 million, tender premium of $18.9
million and accrued interest of $2.8 million.
(6) Transaction costs include, among other things, costs paid at closing
associated with the Debt Tender Offers, the Old Notes offering, the
Acquisition and the New Credit Agreement.
All but $105,000 of the $375.0 million of Magellan Outstanding Notes and all
but $35,000 of the $100.0 million of Merit Outstanding Notes were tendered in
response to the Debt Tender Offers. Upon consummation of the Debt Tender Offers,
the Company paid $1,115.69 plus accrued interest per $1,000 principal amount of
Magellan Outstanding Notes tendered and $1,189.14 plus accrued interest per
$1,000 principal amount of Merit Outstanding Notes tendered.
RAINWATER, INC.
During the second quarter of fiscal 1996, Rainwater-Magellan Holding, L.P.,
an affiliate of Richard Rainwater ("Rainwater-Magellan"), purchased four million
shares of the Company's Common Stock and a warrant to purchase an additional two
million shares at an exercise price of $26.15 per share (the "Rainwater-Magellan
Warrant") from the Company for aggregate cash consideration of $69.7 million in
a private placement (the "Private Placement"). Rainwater-Magellan currently
beneficially owns approximately 19% of the Company's Common Stock and has the
right to designate a nominee acceptable to the Company for election as a
director of the Company. See "Management--Certain Relationships and Related
Transactions."
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THE OLD NOTES OFFERING
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The Old Notes................. The Old Notes were sold by the Company on February 12, 1998
in a private placement (the "Offering") to Chase Securities
Inc. (the "Initial Purchaser") pursuant to a Purchase
Agreement dated February 5, 1998 (the "Purchase Agreement").
The Initial Purchaser subsequently resold the Old Notes to
either "qualified institutional buyers" pursuant to Rule
144A under the Securities Act or pursuant to sales that
occurred outside the United States within the meaning of
Regulation S of the Securities Act. As of the date of this
Prospectus, all $625,000,000 outstanding principal amount of
the Old Notes were evidenced by global securities,
registered in the name of CEDE & Co., as nominee for The
Depositary Trust Company ("DTC"), and held by Marine Midland
Bank as securities custodian for CEDE & Co. As indicated
elsewhere in this Prospectus, the Old Notes have been
included in the PORTAL Market for trading among "qualified
institutional buyers" pursuant to Rule 144A under the
Securities Act.
Registration Rights
Agreement................... Pursuant to the Purchase Agreement, the Company and the
Initial Purchaser entered into the Registration Rights
Agreement, which, among other things, grants the holders of
the Old Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange rights,
which rights will terminate upon consummation of the
Exchange Offer. Pursuant to the Registration Rights
Agreement, the Company agreed that, in the event that the
Exchange Offer is not consummated on or prior to September
10, 1998, the Company will be obligated to pay liquidated
damages to each holder of the Old Notes in an amount equal
to $0.192 per week per $1,000 principal amount of the Old
Notes held by such holder until the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and Effect of
the Exchange Offer."
Use of Proceeds............... Simultaneously with the sale of the Old Notes, the Company
entered into the New Credit Agreement. The Company used the
net proceeds from the sale of the Old Notes and the initial
borrowings pursuant to the New Credit Agreement to finance
the Acquisition, repay all loans outstanding pursuant to the
Merit Existing Credit Agreement and purchase the Outstanding
Notes tendered in response to the Debt Tender Offers. See
"Use of Proceeds."
THE EXCHANGE OFFER
Securities Offered............ $625,000,000 aggregate principal amount of 9% Series A
Senior Subordinated Notes due February 15, 2008 that have
been registered pursuant to the Securities Act (the "New
Notes").
The Exchange Offer............ $1,000 principal amount of the New Notes in exchange for
each $1,000 principal amount of 9% Senior Subordinated Notes
due February 15, 2008 that have not been registered pursuant
to the Securities Act (the "Old Notes"). As of the date
hereof, $625,000,000 aggregate principal amount of Old Notes
is
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outstanding. The Company will issue the New Notes to holders
on or promptly after the Expiration Date.
The New Notes are being offered for exchange hereby to
satisfy certain obligations of the Company under the
Registration Rights Agreement. Based on existing
interpretations of the Staff with respect to similar
transactions, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by
holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the
registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such
holders are not engaged in, have no arrangement with any
person to participate in, and do not intend to engage in,
any public distribution of the New Notes. Each broker-dealer
that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a
resale prospectus in connection with any resale of such New
Notes. The Letter of Transmittal which accompanies this
Prospectus states that by so acknowledging and by delivering
a resale prospectus, a broker-dealer will not be deemed to
admit to be acting in the capacity of an "underwriter"
(within the meaning of Section 2(11) of the Securities Act).
This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes
where such Old Notes were acquired by such broker-dealer as
a result of market-making or other trading activities. The
Company has agreed that, for a period of 180 days after the
date on which the Registration Statement of which this
Prospectus is a part is first declared effective it will
make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of
Distribution."
Expiration Date............... 5:00 p.m., New York City time, on [ ], 1998 unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to which
the Exchange Offer is extended.
Accrued Interest on the New
Notes and Old Notes......... Each New Note will bear interest from its date of original
issuance. Holders of Old Notes that are accepted for
exchange and exchanged for New Notes will receive, in cash,
accrued interest thereon to, but not including, the original
issuance date of the New Notes. Such interest will be paid
on the first interest payment date for the New Notes.
Interest on the Old Notes accepted for exchange and
exchanged in the Exchange Offer will cease to accrue on the
date preceding the date of original issuance of the New
Notes.
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to certain customary
conditions,
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which may be waived by the Company. See "The Exchange
Offer-- Conditions."
Procedures for Tendering Old
Notes....................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying Letter
of Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and deliver
such Letter of Transmittal, or such facsimile, together with
any other required documentation to the Exchange Agent (as
defined) at the address set forth herein on or prior to the
Expiration Date. By executing the Letter of Transmittal,
each holder of the Old Notes who wishes to exchange its
Notes for New Notes in the Exchange Offer will make certain
representations to the Company, including that (i) any New
Notes to be received by it will be acquired in the ordinary
course of its business, (ii) it is not participating in,
does not intend to participate in and has no arrangement
with any person to participate in a public distribution
(within the meaning of the Securities Act) of the New Notes,
and (iii) it is not an "affiliate," as defined in Rule 405
of the Securities Act of the Company, or if it is such an
affiliate, that it will comply with the registration and
prospectus delivery requirements of the Securities Act to
the extent applicable to it. In addition, each holder who is
not a broker-dealer will be required to represent that it is
not engaged in, and does not intend to engage in, a public
distribution of the New Notes. Each holder who is a
broker-dealer and who receives New Notes for its own account
in exchange for Old Notes that were acquired by it as a
result of market-making activities or other trading
activities, will be required to acknowledge that it will
deliver a prospectus in connection with any resale by it of
such New Notes. The Company has agreed that, for a period of
180 days after the date on which the Registration Statement
of which this Prospectus is a part is first declared
effective, it will make this Prospectus available to any
broker-dealer for use in connection with any such resales.
For a description of the procedures for certain resales by
broker-dealers, see "Plan of Distribution." See "The
Exchange Offer--Procedures for Tendering."
Untendered Old Notes.......... Following the consummation of the Exchange Offer, holders of
Old Notes eligible to participate and to receive freely
transferrable New Notes (based on existing interpretations
of the staff described elsewhere in this Prospectus) but who
do not tender their Old Notes will not have any further
registration rights and such Old Notes will continue to be
subject to certain restrictions on transfer under the
Securities Act. Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
Shelf Registration
Statement................... Pursuant to the Registration Rights Agreement, if (i)
because of any change in law or applicable interpretations
thereof by the Staff of the Commission, the Company is not
permitted to effect the Exchange Offer as contemplated
hereby, (ii) any Old Notes validly tendered pursuant to the
Exchange Offer are not exchanged for
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New Notes by September 10, 1998, (iii) the Initial Purchaser
so requests with respect to Old Notes not eligible to be
exchanged for New Notes in the Exchange Offer, (iv) any
applicable law or interpretations do not permit any holder
of Old Notes to participate in the Exchange Offer, (v) any
holder of Old Notes that participates in the Exchange Offer
does not receive freely transferable New Notes in exchange
for tendered Old Notes, or (vi) the Company so elects, then
the Company will file with the Commission a shelf
registration statement (the "Shelf Registration Statement")
to cover resales of Transfer Restricted Securities by such
holders who satisfy certain conditions relating to the
provision of information in connection with the Shelf
Registration Statement. For purposes of the foregoing,
"Transfer Restricted Securities" means each Old Note until
(i) the date on which such Old Note has been exchanged for a
freely transferable New Note in the Exchange Offer; (ii) the
date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with
the Shelf Registration Statement or (iii) the date on which
such Old Note is distributed to the public pursuant to Rule
144 under the Securities Act or is saleable pursuant to Rule
144(k) under the Securities Act. The Company will use its
reasonable best efforts to have the Shelf Registration
Statement declared effective by the Commission as promptly
as practicable after the filing thereof and to keep the
Shelf Registration Statement continuously effective until
February 12, 2000. The Company, at its expense, will provide
to each holder of the Old Notes copies of the prospectus
that is a part of the Shelf Registration Statement, notify
each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are
required to permit unrestricted resales of the Old Notes
from time to time. A holder of Old Notes who sells such Old
Notes pursuant to the Shelf Registration Statement generally
will be required to be named as a selling security holder in
the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
Special Procedures for
Beneficial Owners........... Any beneficial owner whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender its Old Notes for
exchange in the Exchange Offer should contact such
registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's
behalf, such owner must, prior to completing and executing
the Letter of Transmittal, either make appropriate
arrangements to register ownership of the Old Notes in such
owner's name or obtain a properly completed bond power from
the
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
registered holder. The transfer of registered ownership may
take considerable time.
Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their Old Notes and
who cannot deliver the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for book-entry
transfer) prior to the Expiration Date must tender their Old
Notes according to the guaranteed delivery procedures set
forth in "The Exchange Offer-- Guaranteed Delivery
Procedures."
Withdrawal Rights............. Tenders may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes....... The Company will accept for exchange and exchange any and
all Old Notes which are properly tendered in the Exchange
Offer and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued pursuant
to the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Terms of the
Exchange Offer."
Federal Income Tax
Consequences................ The exchange pursuant to the Exchange Offer should not be a
taxable event for federal income tax purposes. See "Federal
Income Tax Consequences of the Exchange Offer."
Use of Proceeds............... There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer. See "Use of
Proceeds."
Exchange Agent................ Marine Midland Bank.
</TABLE>
SUMMARY OF TERMS OF THE NEW NOTES
The form and terms of the New Notes are identical to the form and terms of
the Old Notes except that the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof and except for the series designation. The New Notes will evidence the
same debt as the Old Notes and will be entitled to the benefits of the
Indenture. See "Description of the New Notes."
<TABLE>
<S> <C>
Maturity Date................ February 15, 2008
Interest Payment Dates....... February 15 and August 15, commencing August 15, 1998.
Optional Redemption.......... Except as described below, the Company may not redeem the
New Notes prior to February 15, 2003. On or after such date,
the Company may redeem the New Notes, in whole or in part,
at any time at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the
date of redemption. In addition, at any time and from time
to time prior to February 15, 2001, the Company may, subject
to certain requirements, redeem up to 35% of the original
aggregate principal amount of the New Notes with the net
cash proceeds of one or more Equity Offerings (as defined),
at a redemption price equal to 109% of the principal amount
thereof, together with accrued and unpaid interest, if any,
to the date of redemption, provided that at least 65% of the
original aggregate principal amount of the New Notes remains
outstanding immediately
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
after each such redemption. See "Description of the New
Notes-- Optional Redemption."
Change of Control............ Upon the occurrence of a Change of Control, each holder of
the New Notes will have the right to require the Company to
make an offer to repurchase such holder's New Notes at a
price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the
repurchase date. See "Description of the New Notes-- Change
of Control."
Ranking...................... The New Notes will be unsecured and will be subordinated in
right of payment to all existing and future Senior
Indebtedness of the Company. The New Notes will rank PARI
PASSU with all future Senior Subordinated Indebtedness of
the Company and will rank senior to all future Subordinated
Obligations of the Company. The New Notes will be PARI PASSU
in right of payment with all Old Notes that are not
exchanged for New Notes pursuant to the Exchange Offer. As
of December 31, 1997, on a pro forma basis after giving
effect to the Transactions, (i) the aggregate amount of the
Company's outstanding Senior Indebtedness would have been
approximately $590.2 million (exclusive of unused
commitments), substantially all of which would have been
Secured Indebtedness and would have been guaranteed by
substantially all of the Company's subsidiaries, (ii) the
Company would have had no Senior Subordinated Indebtedness
(other than the Notes) and no indebtedness that is
subordinate or junior in right of payment to the Notes and
(iii) the outstanding indebtedness of the Company's
subsidiaries (excluding guarantees of the Company's
indebtedness) would have been approximately $346.0 million,
substantially all of which would have been Secured
Indebtedness. See "Description of the New Notes" and
"Summary of New Credit Agreement."
Restrictive Covenants........ The Indenture governing the Notes limits, among other
things: (i) the incurrence of additional indebtedness by the
Company and its Restricted Subsidiaries (as defined); (ii)
the payment of dividends on, and redemption or repurchase
of, capital stock of the Company and its Restricted
Subsidiaries and the redemption of certain Subordinated
Obligations of the Company; (iii) certain other restricted
payments, including investments; (iv) sales of assets; (v)
certain transactions with affiliates; (vi) the creation of
liens; and (vii) consolidations, mergers and transfers of
all or substantially all the Company's assets. The Indenture
also prohibits certain restrictions on distributions from
Restricted Subsidiaries. However, all these limitations and
prohibitions are subject to a number of important
qualifications and exceptions. See "Description of the New
Notes--Certain Covenants."
Risk Factors................. In evaluating the Exchange Offer, holders of Old Notes
should carefully consider the factors set forth under the
caption "Risk Factors" prior to determining whether to
participate in the Exchange Offer. Holders of the Old Notes
should also consider that such factors are also generally
applicable to the Old Notes.
</TABLE>
17
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following tables set forth: (i) summary consolidated financial data for
Magellan for and as of each of the three fiscal years in the period ended
September 30, 1997, for the three months ended December 31, 1996 and 1997 and as
of December 31, 1997; (ii) summary consolidated financial data for Merit for and
as of the three fiscal years in the period ended September 30, 1997, for the
three months ended December 31, 1996 and 1997 and as of December 31, 1997; and
(iii) summary unaudited pro forma consolidated financial information for the
fiscal year ended September 30, 1997 and for and as of the three months ended
December 31, 1997, giving effect to the Transactions as if they had occurred on
October 1, 1996 in the case of the unaudited pro forma statements of operations
data and on December 31, 1997 in the case of the unaudited pro forma balance
sheet data. The summary unaudited pro forma consolidated financial information
also gives effect to the Crescent Transactions, the HAI acquisition, the Allied
acquisition, Merit's acquisition of CMG and the Green Spring Minority
Shareholder Conversion. Summary unaudited pro forma consolidated financial
information is also presented, in addition to giving effect to the transactions
discussed in the preceeding sentence, after giving effect to the CBHS
Transactions. The summary historical consolidated financial information of
Magellan for each of the three years in the period ended September 30, 1997 has
been derived from the audited historical consolidated financial statements and
the selected historical consolidated financial information of Magellan included
elsewhere herein. The summary historical consolidated financial information of
Merit for each of the three years in the period ended September 30, 1997 has
been derived from the audited historical consolidated financial statements and
the selected historical consolidated financial information of Merit included
elsewhere herein.
The summary historical consolidated financial information for the three
months ended December 31, 1996 and 1997 and as of December 31, 1997 has been
derived from unaudited consolidated financial statements of Magellan and Merit
appearing elsewhere herein and, in the opinion of management, includes all
adjustments (consisting only of normal recurring adjustments) that are necessary
for a fair presentation of the operating results for such interim periods.
Results for the interim periods are not necessarily indicative of the results
for the full year or for any future periods. The summary historical financial
data set forth below should be read in conjunction with the consolidated
financial statements of Magellan and Merit and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Magellan and Merit appearing elsewhere herein.
The summary unaudited pro forma consolidated financial information set forth
herein is provided for informational purposes only and is not necessarily
indicative of actual results or future results that would have been or will be
achieved had the Transactions, the Crescent Transactions, the HAI, Allied and
CMG acquisitions, the CBHS Transactions and the Green Spring Minority
Shareholder Conversion been consummated on the assumed dates. The summary
unaudited pro forma consolidated financial information is derived from the
Unaudited Pro Forma Consolidated Financial Information appearing elsewhere
herein and the Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions appearing in "Pending Sale of Provider Business." The information
set forth below should be read in conjunction with: (i) the audited consolidated
financial statements of Magellan, Merit, CBHS and HAI and notes thereto
appearing elsewhere herein; (ii) the Unaudited Pro Forma Consolidated Financial
Information appearing elsewhere herein and the Unaudited Pro Forma Consolidated
Financial Information-- CBHS Transactions appearing in "Pending Sale of Provider
Business"; and (iii) Management's Discussion and Analysis of Financial Condition
and Results of Operations of Magellan and Merit appearing elsewhere herein.
18
<PAGE>
MAGELLAN HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------
THREE
MONTHS
ENDED
DECEMBER
YEAR ENDED SEPTEMBER 30, 31,
------------------------------------- -----------
1995 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenue............................................................. $ 1,151,736 $ 1,345,279 $ 1,210,696 $ 346,819
Salaries, cost of care and other operating expenses..................... 863,598 1,064,445 978,513 284,123
Bad debt expense........................................................ 92,022 81,470 46,211 20,235
Depreciation and amortization........................................... 38,087 48,924 44,861 13,099
Interest, net........................................................... 55,237 48,017 45,377 13,569
Income (loss) before extraordinary items................................ (42,963) 32,383 4,755 7,141
Net income (loss)....................................................... (42,963) 32,383 (498) 4,191
OTHER FINANCIAL DATA:
EBITDA(1)...............................................................
Adjusted EBITDA(2)......................................................
Cash interest expense(3)................................................
Ratio of Adjusted EBITDA to cash interest expense(3)....................
Ratio of total debt to Adjusted EBITDA(4)...............................
Net cash provided by (used in) operating activities..................... $ 95,620 $ 101,866 $ 73,599 $ (23,389)
Net cash provided by (used in) investing activities..................... (96,981) (102,203) 331,680 6,579
Net cash provided by (used in) financing activities..................... (22,728) 15,768 (153,346) 10,317
Ratio (deficiency) of earnings to fixed charges......................... (53,518) 1.98 1.41
BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficiency)............................................ $ 91,413 $ 63,834 $ 287,662
Total assets............................................................ 983,558 1,140,137 895,620
Total debt and capital lease obligations................................ 541,569 572,058 395,294
Stockholders' equity.................................................... 88,560 121,817 158,250
<CAPTION>
PRO FORMA EXCLUDING THE CBHS
TRANSACTIONS
----------------------------------
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997 1997
----------- ---------------- ----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............................................................. $ 216,097 $ 1,601,606 $ 443,293
Salaries, cost of care and other operating expenses..................... 175,621 1,355,098 382,704
Bad debt expense........................................................ 1,070 3,491 1,070
Depreciation and amortization........................................... 6,969 68,962 17,470
Interest, net........................................................... 7,401 96,389 24,685
Income (loss) before extraordinary items................................ 7,628 21,867 3,115
Net income (loss)....................................................... 7,628 21,867 3,115
OTHER FINANCIAL DATA:
EBITDA(1)............................................................... $ 255,263 $ 62,119
Adjusted EBITDA(2)...................................................... 268,356 68,229
Cash interest expense(3)................................................ 104,389 26,224
Ratio of Adjusted EBITDA to cash interest expense(3).................... 2.6x 2.6x
Ratio of total debt to Adjusted EBITDA(4)............................... 4.5x
Net cash provided by (used in) operating activities..................... $ (31,725)
Net cash provided by (used in) investing activities..................... (160,015)
Net cash provided by (used in) financing activities..................... (10,679)
Ratio (deficiency) of earnings to fixed charges......................... 2.04 1.38 1.27
BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficiency)............................................ $ 111,423 $ 19,010
Total assets............................................................ 897,114 1,857,050
Total debt and capital lease obligations................................ 395,154 1,215,154
Stockholders' equity.................................................... 151,862 179,033
<CAPTION>
PRO FORMA INCLUDING THE CBHS
TRANSACTIONS
----------------------------------
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
---------------- ----------------
STATEMENT OF OPERATIONS DATA:
Net revenue............................................................. $ 1,407,459 $ 394,143
Salaries, cost of care and other operating expenses..................... 1,237,938 353,343
Bad debt expense........................................................ (624) 50
Depreciation and amortization........................................... 64,831 16,394
Interest, net........................................................... 75,399 19,374
Income (loss) before extraordinary items................................ 7,707 3,096
Net income (loss)....................................................... 7,707 3,096
OTHER FINANCIAL DATA:
EBITDA(1)............................................................... $ 182,240 $ 43,335
Adjusted EBITDA(2)...................................................... 204,946 51,191
Cash interest expense(3)................................................ 83,248 20,898
Ratio of Adjusted EBITDA to cash interest expense(3).................... 2.5x 2.5x
Ratio of total debt to Adjusted EBITDA(4)............................... 4.6x
Net cash provided by (used in) operating activities.....................
Net cash provided by (used in) investing activities.....................
Net cash provided by (used in) financing activities.....................
Ratio (deficiency) of earnings to fixed charges......................... 1.26 1.35
BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficiency)............................................ $ (25,604)
Total assets............................................................ 1,701,354
Total debt and capital lease obligations................................ 942,494
Stockholders' equity.................................................... 278,619
</TABLE>
See Notes to Magellan Historical and Pro Forma Financial Data
19
<PAGE>
NOTES TO MAGELLAN HISTORICAL AND PRO FORMA FINANCIAL DATA
(1) The calculation of EBITDA is as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
EXCLUDING THE CBHS
TRANSACTIONS
---------------------
YEAR ENDED
SEPTEMBER 30, 1997
---------------------
<S> <C>
Net income......................................................................................... $ 21,867
Minority interest.................................................................................. 2,267
Provision for income taxes......................................................................... 30,033
Interest, net...................................................................................... 96,389
Depreciation and amortization...................................................................... 68,962
----------
Earnings before interest, taxes, depreciation and amortization................................... 219,518
Interest income.................................................................................... 12,246
Stock option expense (credit)...................................................................... 4,292
Equity in loss of CBHS............................................................................. 20,150
Unusual items...................................................................................... (943)
----------
EBITDA........................................................................................... $ 255,263
----------
----------
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1997
---------------------
<S> <C>
Net income......................................................................................... $ 3,115
Minority interest.................................................................................. 518
Provision for income taxes......................................................................... 6,202
Interest, net...................................................................................... 24,685
Depreciation and amortization...................................................................... 17,470
--------
Earnings before interest, taxes, depreciation and amortization................................... 51,990
Interest income.................................................................................... 2,600
Stock option expense (credit)...................................................................... (3,959)
Equity in loss of CBHS............................................................................. 11,488
Unusual items...................................................................................... 0
--------
EBITDA........................................................................................... $ 62,119
--------
--------
<CAPTION>
PRO FORMA
INCLUDING THE CBHS
TRANSACTIONS
---------------------
YEAR ENDED
SEPTEMBER 30, 1997
---------------------
Net income......................................................................................... $ 7,707
Minority interest.................................................................................. (133)
Provision for income taxes......................................................................... 18,992
Interest, net...................................................................................... 75,399
Depreciation and amortization...................................................................... 64,831
----------
Earnings before interest, taxes, depreciation and amortization................................... 166,796
Interest income.................................................................................... 12,095
Stock option expense (credit)...................................................................... 4,292
Equity in loss of CBHS............................................................................. 0
Unusual items...................................................................................... (943)
----------
EBITDA........................................................................................... $ 182,240
----------
----------
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1997
---------------------
Net income......................................................................................... $ 3,096
Minority interest.................................................................................. 1
Provision for income taxes......................................................................... 5,844
Interest, net...................................................................................... 19,374
Depreciation and amortization...................................................................... 16,394
--------
Earnings before interest, taxes, depreciation and amortization................................... 44,709
Interest income.................................................................................... 2,585
Stock option expense (credit)...................................................................... (3,959)
Equity in loss of CBHS............................................................................. 0
Unusual items...................................................................................... 0
--------
EBITDA........................................................................................... $ 43,335
--------
--------
</TABLE>
Management believes that EBITDA provides additional indications of the
financial performance of the Company and provides useful information
regarding the Company's ability to service debt and meet certain debt
covenants under the Indenture. Accordingly, EBITDA includes interest
income, which can be utilized to service debt, and excludes non-cash
expenses such as depreciation and amortization, stock option expense
(credit) and equity in loss of CBHS. The Company's definition of EBITDA
used in this Prospectus is consistent with the definition of EBITDA in the
New Credit Agreement and the Indenture. EBITDA does not represent cash
flows from operations or investing and financing activities as defined by
generally accepted accounting principles. EBITDA does not measure whether
cash flows will be sufficient to fund all cash flow needs, including
principal and interest payments on debt and capital lease obligations,
capital expenditures or other investing and financing activities. EBITDA
should not be construed as an alternative to the Company's operating
income, net income or cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) and should not
be construed as an indication of the Company's operating performance or as
a measure of the Company's liquidity. In addition, items excluded from
EBITDA, such as depreciation and amortization, provision for income taxes
and equity in loss of CBHS, are significant components in understanding and
assessing the Company's financial performance. EBITDA is not presented for
historical purposes as management does not believe historical EBITDA is
indicative of the Company's prospects after consummation of the
Transactions. The Company's definition of EBITDA may be different from the
definition of EBITDA used by other companies.
20
<PAGE>
(2) Adjusted EBITDA represents EBITDA adjusted as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
EXCLUDING THE CBHS TRANSACTIONS
-------------------------------------------
<S> <C> <C>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997
-------------------- ---------------------
EBITDA...................................................................... $ 255,263 $ 62,119
Elimination of duplicative executive management, finance, human resource and
legal positions and related overhead expenses, including the closure of
Merit's corporate headquarters............................................. 11,800 2,950
Elimination of duplicative regional management positions and related
overhead expenses.......................................................... 8,900 2,225
Elimination of duplicative credentialling, contracting and other
administrative expenses in connection with the consolidation of the
Company's existing and acquired provider networks.......................... 7,500 1,875
Elimination of expenses associated with the closure of field offices located
in overlapping service areas............................................... 7,200 1,800
Elimination of duplicative personnel, development and maintenance expenses
in connection with the consolidation of the Company's existing and acquired
information systems operations............................................. 5,900 1,475
Elimination of duplicative personnel and related administrative expenses in
connection with the consolidation of the Company's existing and acquired
claims processing operations............................................... 4,900 1,225
Elimination of duplicative sales and marketing positions.................... 4,600 1,150
Elimination of revenue from settlements of reimbursement issues related to
provider operations sold as part of the Crescent Transactions. The Company
expects to continue to record such settlements in future periods, but such
amounts are expected to decline significantly from fiscal 1997 levels...... (20,594) (744)
Elimination of EBITDA associated with the Company's six hospital-based joint
ventures. The Company pays a management fee to CBHS that equals the
Company's portion of the joint ventures' net income pursuant to a
management agreement with CBHS............................................. (9,613) (1,746)
Elimination of favorable adjustments to medical malpractice reserves. The
Company does not expect that such adjustments will have a significant
impact on the Company's future operating performance....................... (7,500) (4,100)
-------------------- ----------
Adjusted EBITDA............................................................. $ 268,356 $ 68,229
-------------------- ----------
-------------------- ----------
<CAPTION>
PRO FORMA
INCLUDING THE CBHS TRANSACTIONS
-------------------------------------------
<S> <C> <C>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997
-------------------- ---------------------
EBITDA...................................................................... $ 182,240 $ 43,335
Elimination of duplicative executive management, finance, human resource and
legal positions and related overhead expenses, including the closure of
Merit's corporate headquarters............................................. 11,800 2,950
Elimination of duplicative regional management positions and related
overhead expenses.......................................................... 8,900 2,225
Elimination of duplicative credentialling, contracting and other
administrative expenses in connection with the consolidation of the
Company's existing and acquired provider networks.......................... 7,500 1,875
Elimination of expenses associated with the closure of field offices located
in overlapping service areas............................................... 7,200 1,800
Elimination of duplicative personnel, development and maintenance expenses
in connection with the consolidation of the Company's existing and acquired
information systems operations............................................. 5,900 1,475
Elimination of duplicative personnel and related administrative expenses in
connection with the consolidation of the Company's existing and acquired
claims processing operations............................................... 4,900 1,225
Elimination of duplicative sales and marketing positions.................... 4,600 1,150
Elimination of revenue from settlements of reimbursement issues related to
provider operations sold as part of the Crescent Transactions. The Company
expects to continue to record such settlements in future periods, but such
amounts are expected to decline significantly from fiscal 1997 levels...... (20,594) (744)
Elimination of EBITDA associated with the Company's six hospital-based joint
ventures. The Company pays a management fee to CBHS that equals the
Company's portion of the joint ventures' net income pursuant to a
management agreement with CBHS............................................. 0 0
Elimination of favorable adjustments to medical malpractice reserves. The
Company does not expect that such adjustments will have a significant
impact on the Company's future operating performance....................... (7,500) (4,100)
-------------------- ----------
Adjusted EBITDA............................................................. $ 204,946 $ 51,191
-------------------- ----------
-------------------- ----------
</TABLE>
The foregoing $50.8 and $12.7 million of positive adjustments represent the
full year and the three month impact of cost savings, respectively, that are
expected to be achieved within one year following the consummation of the
Acquisition. The Company expects to achieve a total of approximately $60.0
million of annual cost savings within eighteen months following the
consummation of the Acquisition. Cost savings are measured relative to the
combined budgeted amounts for the Company, Merit and HAI for the current
fiscal year prior to the cost savings initiatives. The Company expects to
spend approximately $26.0 million in the year following the consummation of
the Acquisition in connection with achieving such cost savings. Cost savings
will be effected in all of the Company's existing and acquired managed
behavioral healthcare operations.
(3) Represents the ratio of Adjusted EBITDA to cash interest expense. Cash
interest expense represents total interest expense as reduced for interest
expense related to the amortization of deferred financing costs.
(4) Represents the ratio of total pro forma debt and capital lease obligations
as of December 31, 1997 to Adjusted EBITDA for the year ended September 30,
1997.
21
<PAGE>
MERIT HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 361,549 $ 457,830 $ 555,717 $ 128,625 $ 177,217
Direct service costs............................ 286,001 361,684 449,563 102,932 145,997
----------- ----------- ----------- ----------- -----------
Direct profit................................. 75,548 96,146 106,154 25,693 31,220
Selling, general and administrative expenses.... 49,823 64,523 67,450 16,579 22,091
Amortization of intangibles..................... 21,373 25,869 26,897 6,799 7,231
Restructuring charge............................ -- 2,995 -- -- --
Income from joint ventures...................... -- -- -- -- (1,649)
----------- ----------- ----------- ----------- -----------
Operating income.............................. 4,352 2,759 11,807 2,315 3,547
Other (income)(1)............................... (1,498) (2,838) (3,497) (780) (1,074)
Interest expense................................ -- 23,826 25,063 6,186 7,216
Loss on disposal of subsidiary.................. -- -- 6,925 -- --
Merger costs and special charges................ -- 3,972 1,314 -- 545
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of accounting change...... 5,850 (22,201) (17,998) (3,091) (3,140)
Provision (benefit) for income taxes............ 4,521 (5,332) (4,126) (219) (468)
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change............................. 1,329 (16,869) (13,872) (2,872) (2,672)
Cumulative effect of accounting change.......... -- (1,012) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)............................. $ 1,329 $ (17,881) $ (13,872) $ (2,872) $ (2,672)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
OTHER FINANCIAL DATA:
Capital expenditures............................ $ 31,529 $ 23,808 $ 23,951 $ 5,554 $ 3,073
Depreciation and amortization................... 28,150 36,527 39,400 9,907 11,028
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents, short-term marketable
securities and restricted cash and
investments................................... $ 34,159 $ 53,043 $ 95,206 $ 83,816
Total assets.................................... 305,420 344,801 468,745 451,471
Due to parent (noninterest bearing)............. 70,813 -- -- --
Total debt...................................... -- 254,000 329,500 319,265
Stockholders' equity (deficit)(2)............... 122,333 (29,482) (25,864) (26,917)
</TABLE>
- ------------------------
(1) Represents primarily interest income.
(2) The reduction in stockholders' equity in fiscal 1996 resulted from the
acquisition of Merit's common stock by Merit's management and an investor
group, which was accounted for as a recapitalization. See Note 2 to the
audited historical consolidated financial statements of Merit included
elsewhere herein.
22
<PAGE>
RISK FACTORS
IN EVALUATING THE EXCHANGE OFFER, HOLDERS OF THE OLD NOTES SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS PRIOR TO ACCEPTING THE EXCHANGE OFFER. HOLDERS OF OLD NOTES SHOULD
ALSO CONSIDER THAT SUCH FACTORS ARE ALSO GENERALLY APPLICABLE TO THE OLD NOTES.
THE OLD NOTES AND THE NEW NOTES ARE COLLECTIVELY REFERRED TO HEREIN AS THE
"NOTES."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
As a result of the Transactions, the Company is currently highly leveraged,
with indebtedness that is substantial in relation to its stockholders' equity.
As of December 31, 1997, on a pro forma basis, the Company's aggregate
outstanding indebtedness would have been approximately $1.2 billion and the
Company's stockholders' equity would have been approximately $179.0 million as
of the same date. The New Credit Agreement and the Indenture permit the Company
to incur or guarantee certain additional indebtedness, subject to certain
limitations. See "Unaudited Pro Forma Consolidated Financial Information,"
"Description of the New Notes" and "Summary of New Credit Agreement."
The Company's high degree of leverage could have important consequences to
holders of the Notes, 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. See "Business--Business Strategy."
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 indebtedness outstanding pursuant to the New Credit Agreement matures
prior to the maturity of the Notes. If the Company is unable to refinance the
indebtedness outstanding pursuant to the New Credit Agreement at maturity or
repay such indebtedness with cash on hand, through asset sales, equity sales or
otherwise, its ability to repay the principal and interest on the Notes could be
adversely affected.
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.
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SUBORDINATION
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes is subordinated to the prior payment in
full of all existing and future Senior Indebtedness of the Company, including
all amounts owing under the New Credit Agreement. Consequently, in the event of
a bankruptcy, liquidation, dissolution, reorganization or similar proceeding
with respect to the Company, assets of the Company will be available to pay
obligations on the Notes only after all Senior Indebtedness of the Company has
been paid in full, and there can be no assurance that there will be sufficient
assets to pay amounts due on any or all of the Notes. In addition, the Company
may not pay principal, premium, interest or other amounts on account of the
Notes in the event of a payment default or certain other defaults in respect of
Specified Senior Indebtedness (as defined) unless such indebtedness has been
paid in full or the default has been cured or waived. In addition, in the event
of certain other defaults with respect to Specified Senior Indebtedness, the
Company may not be permitted to make any payment on account of the Notes for a
designated period of time. See "Description of the New Notes-- Subordination."
As of December 31, 1997, on a pro forma basis, the aggregate amount of the
Company's outstanding Senior Indebtedness would have been approximately $590.2
million (exclusive of unused commitments), substantially all of which would have
been Secured Indebtedness and would have been guaranteed by substantially all of
the Company's subsidiaries.
The Notes are unsecured and thus, in effect, rank junior to any Secured
Indebtedness of the Company or its subsidiaries. The indebtedness outstanding
pursuant to the New Credit Agreement (including the guarantees thereof by the
Company's wholly owned domestic subsidiaries) is secured by substantially all of
the assets of the Company and its wholly owned domestic subsidiaries, including
pledges of all or a portion of the capital stock of substantially all of the
Company's operating subsidiaries. See "Summary of New Credit Agreement."
HOLDING COMPANY STRUCTURE
The Company conducts substantially all of its operations through its
subsidiaries. As a result, the Company is required to rely upon payments from
its subsidiaries for the funds necessary to meet its obligations, including the
payment of interest on and principal of the Notes. The ability of the
subsidiaries to make such payments is subject to, among other things, applicable
state laws. Claims of creditors of the Company's subsidiaries generally have
priority as to the assets of such subsidiaries over claims of the Company.
Therefore, the Notes are effectively subordinated to all liabilities of the
Company's subsidiaries, including trade payables of the subsidiaries. In
addition, the payment of dividends to the Company by its subsidiaries is
contingent upon the earnings of those subsidiaries and subject to various
business considerations. The Indenture permits restrictions, in certain
circumstances, on the payment of dividends and distributions and the transfer of
assets to the Company. See "Summary of New Credit Agreement," and "Description
of the New Notes--Certain Covenants--Limitation on Payment Restrictions
Affecting Restricted Subsidiaries."
The indebtedness outstanding pursuant to the New Credit Agreement is fully
guaranteed by substantially all of the Company's direct and indirect domestic
wholly owned subsidiaries on the issue date of the Old Notes and substantially
all future direct and indirect domestic wholly owned subsidiaries (collectively,
the "Subsidiary Guarantors"). The obligations of the Subsidiary Guarantors are
secured by security interests in, or liens on, substantially all tangible and
intangible assets of the Subsidiary Guarantors (excluding real property). The
Notes are not guaranteed by the subsidiaries of the Company. Therefore, the
lenders pursuant to the New Credit Agreement have a direct claim against the
assets of the Subsidiary Guarantors but the holders of the Notes have no such
claims.
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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.
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, and to prevent the Company from paying principal, premium,
interest or other amounts due on any or all of the Notes until the default is
cured or all Senior Indebtedness is paid or satisfied in full. See "Description
of the Notes--Subordination." Furthermore, the commitments of the lenders under
the New Credit Agreement to make further extensions of credit thereunder could
be terminated. If the Company were unable to repay all amounts accelerated, the
lenders could proceed against the Subsidiary Guarantors and the collateral
securing the Company's and the Subsidiary Guarantors' obligations pursuant to
the New Credit Agreement. If the indebtedness outstanding pursuant to the New
Credit Agreement 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, including the Notes. See "Description of the
New Notes" and "Summary of New Credit Agreement."
CHANGE OF CONTROL
The occurrence of a Change of Control 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. See "Description of
the New Notes--Change of Control."
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
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behavioral healthcare revenue in fiscal 1997. On a pro forma basis, after giving
effect to the CBHS Transactions, such revenue would have accounted for
approximately 56% of the Company's total revenue and 73% of its managed
behavioral healthcare revenue in fiscal 1997. In order for such contracts to be
profitable, the Company must accurately estimate the rate of service utilization
by beneficiaries enrolled in programs managed by the Company and control the
unit cost of such services. There can be no assurance that the Company's
assumptions as to service utilization rates and costs will accurately and
adequately reflect actual utilization rates and costs, nor can there be any
assurance that increases in behavioral healthcare costs or
higher-than-anticipated utilization rates, significant aspects of which are
outside the Company's control, will not cause expenses associated with such
contracts to exceed the Company's revenue for such contracts. In addition, there
can be no assurance that adjustments will not be required to the estimates,
particularly those regarding cost of care, made in reporting historical
financial results. See Note 1 to the audited historical consolidated financial
statements of the Company included herein, Note 4 to the audited historical
consolidated financial statements of Merit included herein and Note 1 to the
audited historical consolidated financial statements of HAI included herein. The
Company will attempt to increase membership in its risk-based products following
the Acquisition. If the Company is successful in this regard, the Company's
exposure to potential losses from its risk-based products will also be
increased. Furthermore, certain of such contracts and certain state regulations
limit the profits that may be earned by the Company on risk-based business and
may require refunds if the loss experience is more favorable than that
originally anticipated. Such contracts and regulations may also require the
Company or certain of its subsidiaries to reserve a specified amount of cash as
financial assurance that it can meet its obligations under such contracts. As of
December 31, 1997, on a pro forma basis, the Company would have had cash
reserves of $52.1 million pursuant to such contracts and regulations. Such
amounts will not be available to the Company for general corporate purposes.
Furthermore, certain state regulations restrict the ability of subsidiaries that
offer risk-based products to pay dividends to the Company. See "Business" and
"Merit's Management's Discussion and Analysis of Financial Condition and Results
of Operations."
RELIANCE ON CUSTOMER CONTRACTS
On a pro forma basis, before and after giving effect to the CBHS
Transactions, and following the Company's acquisitions of Merit, HAI and Allied,
approximately 69% and 78%, respectively, of the Company's revenue in fiscal 1997
would have been derived from contracts with payors of behavioral healthcare
benefits. The Company's managed care contracts typically have terms of one to
three years, and in certain cases contain renewal provisions providing for
successive terms of between one and two years (unless terminated earlier).
Substantially all of these contracts are immediately terminable with cause and
many, including some of the Company's most significant contracts, are terminable
without cause by the customer upon the provision of requisite notice and the
passage of a specified period of time (typically between 60 and 180 days), or
upon the occurrence of certain other specified events. See "Business." On a pro
forma basis, following the Company's acquisitions of Merit, HAI and Allied, both
before and after giving effect to the CBHS Transactions, the Company's ten
largest managed behavioral healthcare customers would have accounted for
approximately 47% of the Company's managed behavioral healthcare revenue for
fiscal 1997. One of such contracts, an agreement between HAI and Aetna,
represents 21% of the Company's pro forma covered lives and would have
represented 5% of its pro forma managed behavioral healthcare revenues for
fiscal 1997. The contract expires on December 3, 2003. There can be no assurance
that such contracts will be extended or successfully renegotiated or that the
terms of any new contracts will be comparable to those of existing contracts.
Loss of all of these contracts or customers would, and loss of any one of these
customers could, have a material adverse effect on the Company. In addition,
price competition in bidding for contracts can significantly affect the
financial terms of any new or renegotiated contract. The Company's customers may
reevaluate their contractual arrangements with the Company as a result of the
consummation of the Transactions.
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SERVICES PURCHASE AGREEMENT
The obligations of the Company and CBHS to consummate the transactions
contemplated by the Equity Purchase Agreement and the Support Agreement are
conditioned upon the execution and delivery of the Services Purchase Agreement.
It is expected that the Services Purchase Agreement would obligate the Company
to purchase from CBHS a designated minimum amount of behavioral healthcare
services for gate-kept risk-based covered lives, subject to certain conditions,
and to make certain payments to CBHS if it fails to do so. It is expected that
such payments could equal up to $59.4 million, subject to increases pursuant to
the terms of the Services Purchase Agreement. There can be no assurance that the
Company will not be required to make such payments. See "Pending Sale of
Provider Business--Description of the Definitive Agreements--The Services
Purchase Agreement."
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. See "Industry--Areas of Growth" and
"Business--Business Strategy."
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
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the cost of Medicaid deductibles and coinsurance requirements for low-income
Medicaid beneficiaries from their Medicaid programs to physicians and other
providers. Most of the remaining savings derive from the repeal of the "Boren
Amendment" and other minimum payment guarantees for hospitals, nursing homes and
community health centers that serve Medicaid patients. These changes may have an
adverse effect on the Company if they result in reduced payment levels for
providers of managed behavioral healthcare services.
Prior to adoption of the Budget Act, the states were prohibited from
requiring Medicaid recipients to enroll in managed care products that covered
only Medicaid recipients. The Medicaid laws required that the states enroll
Medicaid recipients in products that also covered a specific number of
commercial enrollees. This requirement of the Medicaid laws was intended to
limit the ability of the states to reduce coverage levels for Medicaid
recipients below those offered to commercial enrollees. Under prior law, the
Secretary of the United States Department of Health and Human Services (the
"Department") could waive the prohibition. The Medicaid-related provisions of
the Budget Act give states broad flexibility to require most Medicaid recipients
to enroll in managed care products that only cover Medicaid recipients, without
obtaining a waiver from the Secretary of the Department that was required under
prior law. The Budget Act also allows states to limit the number of managed care
organizations with which the state will contract to deliver care to Medicaid
beneficiaries. These changes could have a positive impact on the Company's
business, if they result in increased enrollment of Medicaid beneficiaries in
managed care organizations and increased Medicaid spending on managed care.
However, these changes also may have an adverse effect on the Company if a
number of states decide to limit the number of managed care organizations with
which they will contract and to select the organization solely on the basis of
the cost of care, which could result in increased cost competition for state
contracts.
The Company cannot predict the effect of the Budget Act, or other healthcare
reform measures that may be adopted by Congress or state legislatures, on its
managed care operations and no assurance can be given that either the Budget Act
or other healthcare reform measures will not have an adverse effect on the
Company.
REGULATION
The managed healthcare industry and the provision of behavioral healthcare
services are subject to extensive and evolving state and federal regulation. The
Company is subject to certain state laws and regulations, including those
governing: (i) the licensing of insurance companies, HMOs, preferred provider
organizations ("PPOs"), third-party administrators ("TPAs") and companies
engaged in utilization review and (ii) the licensing of healthcare
professionals, including restrictions on business corporations from practicing,
controlling or exercising excessive influence over behavioral healthcare
services through the direct employment of psychiatrists or, in a few states,
psychologists and other behavioral healthcare professionals. In addition, the
Company is subject to certain federal laws as a result of the role the Company
assumes in connection with managing its customers' employee benefit plans. The
Company's managed care operations are also indirectly affected by regulations
applicable to the establishment and operation of behavioral healthcare clinics
and facilities.
The Company believes its operations are structured to comply with applicable
laws and regulations in all material respects and that it has received, or is in
the process of applying for, all licenses and approvals material to the
operation of its business. In many states, entities that assume risk under
contracts with licensed insurance companies or HMOs have not been considered by
state regulators to be conducting an insurance or HMO business. As a result, the
Company has not sought licensure as either an insurer or HMO in certain states.
Regulators in some states, however, have determined that risk assuming activity
by entities that are not themselves providers of care is an activity that
requires some form of licensure. There can be no assurance that other states in
which the Company operates will not adopt a similar view, thus requiring the
Company to obtain additional licenses. Such additional licensure might require
the Company to maintain minimum levels of deposits, net worth, capital, surplus
or
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reserves, or limit the Company's ability to pay dividends, make investments or
repay indebtedness. The imposition of these additional licensure requirements
could increase the Company's cost of doing business or delay the Company's
conduct or expansion of its business.
Regulators may impose operational restrictions on entities granted licenses
to operate as insurance companies or HMOs. For example, the 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 subsidiaries 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 subsidiaries. The DOC imposed substantially
identical restrictions on the Company in connection with the Company's
acquisition of Merit. The Company does not believe such restrictions will
materially impact its integration plan.
In addition, utilization review and TPA activities conducted by the Company
are regulated by many states, which states impose requirements upon the Company
that increase its business costs. The Company believes that its TPA activities
performed for its self-insured employee benefit plan customers are exempt from
otherwise applicable state licensing or registration requirements based upon
federal preemption under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and has relied on this general principle in determining not
to seek licensure for certain of its activities in many states. Existing case
law is not uniform on the applicability of ERISA preemption with respect to
state regulation of utilization review or TPA activities. There can be no
assurance that additional licensure will not be required with respect to
utilization review or TPA activities in certain states. See "Business--
Regulation--Insurance, HMO, and PPO Activities" and "--Utilization Review and
Third-Party Administrator Activities."
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. See
"Business--Regulation--General," "--Licensure," "--Insurance, HMO and PPO
Activities" and "--Utilization Review and Third-Party Administrator Activities."
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.
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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.
See "Charter Advantage--Regulation."
INTEGRATION OF OPERATIONS
As a result of the Company's acquisition of Merit and HAI, the Company is
the largest provider of managed behavioral healthcare services in the United
States. The Company's ability to operate its acquired managed care businesses
successfully depends on how well and how quickly it integrates the acquired
businesses with its existing operations. The Company expects to achieve
approximately $60.0 million of cost savings on an annual basis within eighteen
months following the consummation of the Acquisition. See "Magellan's
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources." 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. See "Business-- Business Strategy."
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. See
"Business-- Competition."
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. See "Charter Advantage -- Franchise Operations -- Franchise
Fees; Subordination." If CBHS encounters a decline in earnings or financial
difficulties, such amounts due to Crescent will be paid before any Franchise
Fees are paid. The remainder of CBHS's available cash will then be applied in
such order of priority as CBHS may determine, in the reasonable discretion of
the CBHS governing board, to all other operating expenses of CBHS, including the
current and accumulated Franchise Fees. The
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Company will be entitled to pursue all available remedies for breach of the
Master Franchise Agreement, except that the Company does not have the right to
take any action that could reasonably be expected to force CBHS into bankruptcy
or receivership.
As a result of the Crescent Transactions, the Company no longer controls the
operations of the Psychiatric Hospital Facilities and other facilities operated
by CBHS. Accordingly, factors that the Company does not control will likely
influence the amount of the equity in the earnings of CBHS and the amount of
Franchise Fees that the Company will realize in the future. For example, CBHS
may pursue acquisitions in markets where it does not currently have a presence
and in markets where it has existing hospital operations. Furthermore, CBHS may
consolidate services in selected markets by closing additional facilities
depending on market conditions and evolving business strategies. If CBHS closes
additional psychiatric hospitals, it could result in charges to income for the
costs attributable to the closure, which would result in lower equity in
earnings of CBHS for the Company and receipt by the Company of less than the
agreed to amount of Franchise Fees.
Based on projections of fiscal 1998 operations prepared by management of
CBHS, the Company believes that CBHS will be unable to pay the full amount of
the Franchise Fees it is contractually obligated to pay the Company during
fiscal 1998. The Company currently estimates that CBHS will be able to pay
approximately $58.0 million to $68.0 million of the Franchise Fees in fiscal
1998, a $10.0 million to $20.0 million shortfall relative to amounts payable
under the Master Franchise Agreement. See "Magellan's Management's Discussion
and Analysis of Financial Condition and Results of Operations-- Results of
Operations--Impact of Crescent Transactions."
The Company's relationship with CBHS and the business of CBHS are described
elsewhere in this Prospectus. Such information is relevant to an understanding
of the factors having a bearing on the Company's continued receipt of Franchise
Fees from CBHS. The Company has signed definitive agreements with COI and CBHS
to, among other things, sell to such entities the Company's franchise
operations, certain domestic provider operations and certain other assets and
operations and the Company's ownership interest in CBHS. If the CBHS
Transactions are consummated, the Company would no longer receive the Franchise
Fees. The cash proceeds received by the Company upon the consummation of the
CBHS Transactions would be used to repay amounts outstanding under the Term Loan
Facility. There can be no assurance that the CBHS Transactions will be
consummated. See "Charter Advantage" and "Pending Sale of Provider Business."
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. See "Business --Legal Proceedings."
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
31
<PAGE>
not be subject to a liability that could have a material adverse effect on the
Company. See "Business-Insurance."
The Company has certain liabilities relating to the self-insurance program
it maintained with respect to its provider business prior to the Crescent
Transactions. See Note 13 to the Company's audited historical consolidated
financial statements included elsewhere herein.
FRAUDULENT TRANSFER CONSIDERATIONS
If, in a bankruptcy or reorganization case or a lawsuit by or on behalf of
unpaid creditors of the Company, a court were to find that, at the time the
Company incurred indebtedness under the Notes, (i) the Company incurred such
indebtedness with the intent of hindering, delaying or defrauding current or
future creditors or (ii) (a) the Company received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and (b)
the Company (1) was insolvent or was rendered insolvent by reason of such
incurrence, (2) was engaged, or about to engage, in a business or transaction
for which its assets constituted unreasonably small capital, (3) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured (as all of the foregoing terms are defined in or
interpreted under the relevant fraudulent transfer or conveyance statutes) or
(4) was a defendant in an action for money damages, or had a judgment for money
damages docketed against it (if, in either case, after final judgment, the
judgment is unsatisfied), then such court could avoid or subordinate the
Company's obligations under the Notes to presently existing and future
indebtedness of the Company and take other actions detrimental to the holders of
the Notes.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, the Company would be considered insolvent
if, at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair saleable value of its assets is less than
the amount required to pay the probable liability on its total existing debts
and liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether the Company was solvent at the relevant time, or whether,
whatever standard was used, the Company's obligations with respect to the Notes
would not be avoided or further subordinated on the grounds set forth above.
Counsel for the Company and counsel for the Initial Purchaser will not express
any opinion as to the applicability of federal or state fraudulent transfer and
conveyance laws.
The Company believes that at the time the Old Notes were issued, the Company
(i) was (a) neither insolvent nor rendered insolvent thereby, (b) in possession
of sufficient capital to run its businesses effectively and (c) incurring debts
within its ability to pay as the same mature or become due and (ii) had
sufficient assets to satisfy any probable money judgment against it in any
pending action. There can be no assurance, however, that a court passing on such
question would reach the same conclusions.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company within 90 days after any payment by the Company with respect to the
Notes or if the Company anticipated becoming insolvent at the time of such
payment or incurrence, all or a portion of such payment could be avoided as a
preferential transfer and the recipient of such payment could be required to
return such payment.
ABSENCE OF TRADING MARKETS
The Old Notes are currently owned by a relatively small number of
institutional investors. The Company believes that none of such holders is an
affiliate (as defined in Rule 405 under the Securities Act) of the Company.
Prior to the Exchange Offer, no public market for the Old Notes will exist,
although the Old Notes are eligible for trading in the PORTAL Market among
"qualified institutional buyers." The New Notes will not be listed on any
securities exchange. There can be no assurance that an active
32
<PAGE>
trading market for the Notes will develop. Future trading prices of the Notes
will depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on prevailing interest rates, the markets for similar
securities and other factors, including the financial condition of the Company,
the Notes may trade at a discount from their principal amount.
RESTRICTIONS ON TRANSFER OF THE NOTES
The Old Notes have not been registered under the Securities Act and will
remain subject to restrictions on transferability to the extent they are not
exchanged for New Notes by holders who are entitled to participate in the
Exchange Offer. The holders of Old Notes who are not eligible to participate in
the Exchange Offer are entitled to certain registration rights, and the Company
is required to file the Shelf Registration Statement with respect to resales
from time to time of any such Old Notes.
EXCHANGE OFFER PROCEDURES
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for New Notes should allow sufficient time to
ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange. Old
Notes that are not tendered or that are tendered but not accepted by the Company
for exchange will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof under the Securities
Act and, upon consummation of the Exchange Offer, certain registration rights
under the Registration Rights Agreement will terminate. In addition, any holder
of Old Notes who tenders in the Exchange Offer for the purpose of participating
in a public distribution of the New Notes may be deemed to be an "underwriter"
(within the meaning of Section 2(11) of the Securities Act) of the New Notes
and, if so, will be required to comply with the registration and prospectus
delivery requirements in the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as result of market-making activities or other trading activities, must
acknowledge in the Letter of Transmittal that accompanies this Prospectus that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected. See "The Exchange Offer."
33
<PAGE>
THE TRANSACTIONS
GENERAL
The Transactions, all of which were consummated on February 12, 1998,
consist of the following: (i) the Acquisition; (ii) the repayment of all amounts
outstanding pursuant to, and the termination of, the Existing Credit Agreements;
(iii) the consummation of the Debt Tender Offers; (iv) the execution and
delivery of, and initial borrowings under, the New Credit Agreement; and (v) the
issuance of the Old Notes. The Transactions are described in more detail below.
THE ACQUISITION
On February 12, 1998, the Company consummated the Acquisition of Merit
pursuant to an Agreement and Plan of Merger, dated October 24, 1997 (the "Merger
Agreement"), between the Company and Merit. Under the Merger Agreement, Merit
became a wholly-owned subsidiary of the Company and the Company paid an amount
of cash equal to approximately $448.9 million at the closing (the "Direct Cash
Merger Consideration"). Upon consumation of the Acquisition, pursuant to the
Merger Agreement, the Company caused Merit to repay all amounts outstanding
under the Merit Existing Credit Agreement and to perform Merit's obligations
under the indenture governing the Merit Outstanding Notes to offer to purchase
the Merit Outstanding Notes following the consummation of the Acquisition.
Pursuant to the Merger Agreement, the Company provided sufficient funds to
permit Merit to take such actions. The Company estimates that the total
consideration it paid to acquire Merit and to retire Merit's outstanding
indebtedness (net of cash) was approximately $750 million, excluding transaction
costs.
Pursuant to the Merger Agreement, Merit made representations and warranties
customary for transactions of this type. None of Merit's representations and
warranties and agreements survived the consummation of the Acquisition.
Therefore, if any of the representations and warranties prove to be inaccurate,
the Company will not be able to recover from Merit's former owners the amount of
any damage resulting from the inaccuracy.
TERMINATION OF EXISTING CREDIT AGREEMENTS
It was a condition to Chase's obligation to advance loans pursuant to the
New Credit Agreement that the Magellan Existing Credit Agreement be terminated.
Furthermore, Magellan agreed, in connection with the Acquisition, to repay all
amounts outstanding pursuant to the Merit Existing Credit Agreement. Such
transactions were consummated simultaneously with the Offering.
DESCRIPTION OF MAGELLAN EXISTING CREDIT AGREEMENT. The Magellan Existing
Credit Agreement was that certain Amended and Restated Credit Agreement, dated
as of June 16, 1997, among the Company, Charter Behavioral Health System of New
Mexico, Inc., the lenders named therein, Chase, as administrative agent, and
First Union National Bank, as syndication agent. Simultaneously with the
consummation of the offering of the Old Notes, the Magellan Existing Credit
Agreement was terminated. The Magellan Existing Credit Agreement provided for a
five-year senior secured revolving credit facility in an aggregate committed
amount of $200 million and also provided for the support of letters of credit
for general corporate purposes. At December 31, 1997, there were no loans
outstanding under the Magellan Existing Credit Agreement other than one letter
of credit issued in the amount of approximately $6.6 million. Loans outstanding
under the Magellan Existing Credit Agreement bore interest (subject to certain
potential adjustments) at a rate per annum equal to one, two, three or six-month
LIBOR plus 1.25% or a specified "alternate base rate", plus 0.25%.
DESCRIPTION OF MERIT EXISTING CREDIT AGREEMENT. The Merit Existing Credit
Agreement was that certain Credit Agreement, dated as of October 6, 1995, among
Merit, the lenders named therein and Chase, as agent. Simultaneously with the
consummation of the Offering, the Merit Existing Credit Agreement was
terminated. The Merit Existing Credit Agreement provided for: (i) a six and
one-half year senior secured revolving credit facility in an aggregate committed
amount of $85 million and also provided for the support of letters of credit for
general corporate purposes; (ii) a six and one-half year
34
<PAGE>
senior term loan facility in the amount of $70.0 million; and (iii) a nine and
one-half year senior term loan facility in the amount of $130.0 million. At
September 30, 1997, $30.0 million of revolving loans and three letters of credit
totaling approximately $8.0 million were outstanding under the revolving credit
faciliity and an aggregate of approximately $200.0 million was outstanding under
the term loan facilities. Loans outstanding under the Merit Existing Credit
Agreement bore interest at floating rates, which were, at Merit's option based
upon (i) the higher of the Federal Funds rate plus 0.5%, or bank prime rates, or
(ii) Eurodollar rates, subject to certain adjustments.
DEBT TENDER OFFERS
The Company agreed, in connection with the Acquisition, to pay on behalf of
Merit an amount sufficient to permit Merit to repurchase the Merit Outstanding
Notes. Furthermore, borrowings pursuant to the New Credit Agreement and the Old
Notes required to effect the Transactions would have resulted in events of
default with respect to the Outstanding Notes. Accordingly, the Company and
Merit conducted tender offers for the Outstanding Notes. All but $105,000 of the
$375.0 million of Magellan Outstanding Notes and all but $35,000 of the $100.0
million of Merit Outstanding Notes were tendered in response to the Debt Tender
Offers. Upon consummation of the Debt Tender Offers, the Company paid $1,115.69
plus accrued interest per $1,000 principal amount of Magellan Outstanding Notes
tendered and $1,189.14 plus accrued interest per $1,000 principal amount of
Merit Outstanding Notes tendered. Outstanding Notes that were not tendered
remain outstanding and are general unsecured obligations of the Company or
Merit, as the case may be.
THE NEW CREDIT AGREEMENT
On February 12, 1998 the Company entered into the New Credit Agreement with
Chase pursuant to which Chase made available to the Company credit facilities of
$700.0 million. See "Summary of New Credit Agreement."
The following table sets forth the sources and uses of funds for the
Transactions (in millions):
<TABLE>
<S> <C>
SOURCES:
Cash and cash equivalents........................................ $ 59.3
New Credit Agreement:
Revolving Facility(1).......................................... 20.0
Term Loan Facility(2).......................................... 550.0
Notes offered hereby............................................. 625.0
--------
Total sources................................................ $ 1,254.3
--------
--------
USES:
Direct Cash Merger Consideration................................. $ 448.9
Repayment of Merit Existing Credit Agreement(3).................. 196.4
Purchase of Magellan Outstanding Notes(4)........................ 432.1
Purchase of Merit Outstanding Notes(5)........................... 121.6
Transaction costs(6)............................................. 55.3
--------
Total uses................................................... $ 1,254.3
--------
--------
</TABLE>
-------------------------------
(1) The Revolving Facility provides for borrowings of up to $150 million.
As of February 12, 1998, the Company had approximately $112.5 million
available for borrowing pursuant to the Revolving Facility, excluding
approximately $17.5 million of availability reserved for certain
letters of credit.
(2) If the CBHS Transactions are consummated, the net proceeds of an
estimated $272.0 million will be used to repay a portion of the Term
Loan Facility under the New Credit Agreement. Additionally, upon the
sale of all or a portion of the COI common stock to be received upon
consummation of the CBHS Transactions, the Company is required to use
the net proceeds of such sale to reduce or repay amounts outstanding
under the Term Loan Facility.
(3) Includes principal amount of $193.6 million and accrued interest of
$2.7 million.
(4) Includes principal amount of $375.0 million, tender premium of $43.4
million and accrued interest of $13.7 million.
(5) Includes principal amount of $100.0 million, tender premium of $18.9
million and accrued interest of $2.8 million.
(6) Transaction costs include, among other things, costs paid at closing
associated with the Debt Tender Offers, the Old Notes offering, the
Acquisition and the New Credit Agreement.
35
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered hereby. In
consideration for issuing the New Notes contemplated in this Prospectus, the
Company will receive in exchange Old Notes in like principal amount, the form
and terms of which are the same as the form and terms of the New Notes, except
as otherwise described herein. The Old Notes surrendered in exchange for New
Notes will be retired and cancelled and cannot be reissued. Accordingly,
issuance of the New Notes will not result in any increase or decrease in the
indebtedness of the Company.
The proceeds from the sale of the Old Notes, net of transaction costs, were
approximately $606.8 million. The net proceeds were used as a portion of the
cash consideration paid by the Company to consummate the other Transactions.
36
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a pro
forma basis at December 31, 1997. The information in this table should be read
in conjunction with "Unaudited Pro Forma Consolidated Financial Information,"
"The Transactions," "Summary of New Credit Agreement," "Magellan's Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
<S> <C>
(DOLLARS IN THOUSANDS)
Cash and cash equivalents(1).................................................... $ 160,609
-----------
-----------
Total debt (including current maturities):
New Credit Agreement:
Revolving Facility(2)....................................................... $ 20,000
Term Loan Facility(3)....................................................... 550,000
Notes offered hereby.......................................................... 625,000
Other(4)...................................................................... 20,154
-----------
Total debt.................................................................. 1,215,154
Stockholders' equity(5)....................................................... 179,033
-----------
Total capitalization........................................................ $ 1,394,187
-----------
-----------
</TABLE>
-------------------------------
(1) Includes restricted cash of $52.1 million. See "Risk Factors--Risk
Based Products" and "Merit's Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(2) The Revolving Facility provides for borrowings of up to $150.0
million. On a pro forma basis as of December 31, 1997, the Company
would have had approximately $112.5 million available under the
Revolving Facility, excluding approximately $17.5 million of
availability reserved for certain letters of credit. The Company
borrowed $20.0 million pursuant to the Revolving Facility upon
consummation of the Transactions.
(3) The Term Loan Facility consists of: (i) a 6 year term loan facility
(the "Tranche A Term Loan"); (ii) a 7 year term loan facility (the
"Tranche B Term Loan"); and (iii) an 8 year term loan facility (the
"Tranche C Term Loan"), each in an aggregate principal amount of
approximately $183.3 million. If the CBHS Transactions are
consummated, the net proceeds of an estimated $272.0 million will be
used to repay approximately $90.7 million of each tranche of the Term
Loan Facility.
(4) Other debt consists primarily of: (i) $7.6 million of mortgages and
other notes payable through 1999, bearing interest at 6.8% to 8.0%;
(ii) $6.1 million of 7.5% Swiss Bonds due 2001, which were redeemed in
March, 1998; and (iii) $6.4 million in 3.95% capital lease obligations
due in 2014.
(5) Represents the pro forma book value of the Company's stockholders'
equity. Pro forma stockholders' equity, after giving effect to the
CBHS Transactions, would be approximately $278.6 million. The
Company's Common Stock is publicly traded on The New York Stock
Exchange. As of March 31, 1998, the market value of the Company's
Common Stock was approximately $818.7 million.
37
<PAGE>
MAGELLAN SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information of the Company for each of the five years in the period ended
September 30, 1997 and for the three months ended December 31, 1996 and 1997. In
1993, the Company restated its consolidated financial statements to reflect the
sale of certain subsidiaries as discontinued operations. The summary of
operations and balance sheet data for the five years ended and as of September
30, 1997, presented below, have been derived from, and should be read in
conjunction with, the Company's audited consolidated financial statements and
the notes thereto. Selected consolidated financial information for the quarters
ended December 31, 1996 and 1997 has been derived from unaudited consolidated
financial statements and, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) that are necessary for a fair
presentation of the operating results for such interim periods. Results for the
interim periods are not necessarily indicative of the results for the full year
or for any future periods. The selected financial data set forth below should be
read in conjunction with the Company's consolidated financial statements and the
notes thereto and "Magellan's Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenue.......................... $ 897,907 $ 904,646 $1,151,736 $1,345,279 $1,210,696 $ 346,819 $ 216,097
Salaries, cost of care and other
operating expenses................. 640,847 661,436 863,598 1,064,445 978,513 284,123 175,621
Bad debt expense..................... 67,300 70,623 92,022 81,470 46,211 20,235 1,070
Depreciation and amortization........ 26,382 28,354 38,087 48,924 44,861 13,099 6,969
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets................ 42,678 31,200 26,000 -- -- --
Interest, net........................ 74,156 39,394 55,237 48,017 45,377 13,569 7,401
ESOP expense......................... 45,874 49,197 73,527 -- -- --
Stock option expense (credit)........ 38,416 10,614 (467) 914 4,292 604 (3,959)
Equity in loss of CBHS............... -- -- -- -- 8,122 -- 11,488
Loss on Crescent Transactions........ -- -- -- -- 59,868 -- --
Unusual items, net................... -- 71,287 57,437 37,271 357 -- --
Income (loss) from continuing
operations before income taxes,
minority interest and extraordinary
items.............................. (37,746) (57,459) (53,705) 64,238 23,095 15,189 17,507
Provision for (benefit from) income
taxes.............................. 1,874 (10,504) (11,082) 25,695 9,238 6,075 7,003
Income (loss) from continuing
operations before minority interest
and extraordinary items............ (39,620) (46,955) (42,623) 38,543 13,857 9,114 10,504
Minority interest.................... -- 48 340 6,160 9,102 1,973 2,876
Income (loss) before discontinued
operations and extraordinary
items.............................. (39,620) (47,003) (42,963) 32,383 4,755 7,141 7,628
Discontinued operations:
Loss from discontinued
operations......................... (14,703) -- -- -- -- -- --
Gain on disposal of discontinued
operations....................... 10,657 -- -- -- -- -- --
Income (loss) before extraordinary
items.............................. (43,666) (47,003) (42,963) 32,383 4,755 7,141 7,628
Extraordinary items-losses on early
extinguishments or discharge of
debt............................... (8,561) (12,616) -- -- (5,253) (2,950) --
Net income (loss).................... $ (52,227) $ (59,619) $ (42,963) $ 32,383 $ (498) $ 4,191 $ 7,628
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INCOME (LOSS) PER COMMON SHARE--
BASIC:
Income (loss) from continuing
operations before extraordinary
items.............................. $ (1.59) $ (1.78) $ (1.54) $ 1.04 $ 0.17 $ 0.25 $ 0.26
Loss from discontinued operations and
disposal of discontinued
operations......................... (0.16) -- -- -- -- -- --
Income (loss) before extraordinary
items.............................. (1.75) (1.78) (1.54) 1.04 0.17 0.25 0.26
Net Income (loss).................... $ (2.10) $ (2.26) $ (1.54) $ 1.04 $ (0.02) $ 0.15 $ 0.26
INCOME (LOSS) PER COMMON SHARE--
DILUTED:
Income (loss) from continuing
operations before extraordinary
items.............................. $ (1.59) $ (1.78) $ (1.54) $ 1.02 $ 0.16 $ 0.25 $ 0.26
Loss from discontinued operations and
disposal of discontinued
operations......................... (0.16) -- -- -- -- -- --
Income (loss) before extraordinary
items.............................. (1.75) (1.78) (1.54) 1.02 0.16 0.25 0.26
Net income (loss).................... $ (2.10) $ (2.26) $ (1.54) $ 1.02 $ (0.02) $ 0.14 $ 0.26
Ratio (deficiency) of earnings to
fixed charges...................... $ (37,746) $ (57,459) $ (53,518) 1.98 1.41 2.04
BALANCE SHEET DATA (END OF PERIOD):
Current assets....................... $ 231,915 $ 324,627 $ 305,575 $ 338,150 $ 507,038 $ 345,116
Current liabilities.................. 272,598 215,048 214,162 274,316 219,376 233,693
Property and equipment, net.......... 444,786 494,345 488,767 495,390 109,214 117,934
Total assets......................... 838,186 961,480 983,558 1,140,137 895,620 897,114
Total debt and capital lease
obligations........................ 421,162 536,129 541,569 572,058 395,294 395,154
Stockholders' equity................. 57,298 56,221 88,560 121,817 158,250 151,862
</TABLE>
39
<PAGE>
MERIT SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical financial data were derived from, and
should be read in conjunction with, the historical consolidated financial
statements of Merit, including the notes thereto. The historical consolidated
financial statements of the Predecessor for the fiscal year ended September 30,
1993 and the period from October 1, 1993 through November 17, 1993 and of Merit
for the period from November 18, 1993 through September 30, 1994 and for the
fiscal years ended September 30, 1995, 1996 and 1997 are audited. The historical
consolidated financial statements for the three months ended December 31, 1996
and 1997 and as of December 31, 1997 are unaudited. In the opinion of
management, all necessary adjustments (consisting only of normal recurring
adjustments) have been made to present fairly the consolidated financial
position and results of operations and cash flows for these periods. The results
of operations for the period ended December 31, 1997 are not necessarily
indicative of the expected results for the year ending September 30, 1998. See
"Merit's Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
PREDECESSOR(6) MERIT
------------------------------ -------------------------------------------------------
FISCAL YEAR NOV. 18, 1993 FISCAL YEAR FISCAL YEAR
ENDED OCT. 1-NOV. TO ENDED ENDED
SEPT. 30, 1993 17, 1993 SEPT. 30, 1994 SEPT. 30, 1995 SEPT. 30, 1996
--------------- ------------- ----------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 197.4 $ 31.0 $ 245.9 $ 361.5 $ 457.8
Operating expenses(1)......... 180.5 29.3 225.4 335.8 426.2
Amortization of intangibles... 1.8 0.3 17.1 21.4 25.8
Restructuring charge.......... 1.7 -- -- -- 3.0
Income from joint ventures.... -- -- -- -- --
------- ------ ------- ------- -------
Operating income(2)........... 13.4 1.4 3.4 4.3 2.8
Other (income) (3)............ (0.6) (0.1) (0.8) (1.5) (2.8)
Interest expense.............. 23.8
Loss on disposal of
subsidiary..................
Merger costs and special
charges..................... 2.4 -- -- -- 4.0
------- ------ ------- ------- -------
Income (loss) before income
taxes and cumulative effect
of accounting change........ 11.6 1.5 4.2 5.8 (22.2)
Provision (benefit) for income
taxes....................... 6.1 0.6 2.1 4.5 (5.3)
------- ------ ------- ------- -------
Income (loss) before
cumulative effect of
accounting change........... 5.5 0.9 2.1 1.3 (16.9)
Cumulative effect of
accounting change(4)........ -- -- -- -- (1.0)
------- ------ ------- ------- -------
Net income (loss)............. $ 5.5 $ 0.9 $ 2.1 $ 1.3 $ (17.9)
------- ------ ------- ------- -------
------- ------ ------- ------- -------
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents,
short-term marketable
securities and restricted
cash and investments(5)..... $ 21.9 $ 32.7 $ 34.1 $ 53.0
Total assets.................. 91.9 259.3 305.4 344.8
Due to parent (non-interest
bearing).................... 5.9 37.9 70.8 --
Total debt.................... -- -- -- 254.0
Stockholders' equity
(deficit)................... 47.0 121.0 122.3 (29.5)
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
FISCAL YEAR
ENDED
SEPT. 30, 1997 1996 1997
----------------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 555.7 $ 128.6 $ 177.2
Operating expenses(1)......... 517.0 119.5 168.1
Amortization of intangibles... 26.9 6.8 7.2
Restructuring charge.......... -- -- --
Income from joint ventures.... -- -- (1.6)
------- --------- ---------
Operating income(2)........... 11.8 2.3 3.5
Other (income) (3)............ (3.5) (0.8) (1.1)
Interest expense.............. 25.1 6.2 7.2
Loss on disposal of
subsidiary.................. 6.9 -- --
Merger costs and special
charges..................... 1.3 -- 0.5
------- --------- ---------
Income (loss) before income
taxes and cumulative effect
of accounting change........ (18.0) (3.1) (3.1)
Provision (benefit) for income
taxes....................... (4.1) (0.2) (0.4)
------- --------- ---------
Income (loss) before
cumulative effect of
accounting change........... (13.9) (2.9) (2.7)
Cumulative effect of
accounting change(4)........ -- -- --
------- --------- ---------
Net income (loss)............. $ (13.9) $ (2.9) $ (2.7)
------- --------- ---------
------- --------- ---------
BALANCE SHEET DATA (END OF PER
Cash and cash equivalents,
short-term marketable
securities and restricted
cash and investments(5)..... $ 95.2 $ 83.8
Total assets.................. 468.7 451.5
Due to parent (non-interest
bearing).................... -- --
Total debt.................... 329.5 319.3
Stockholders' equity
(deficit)................... (25.9) (26.9)
</TABLE>
- ----------------------------------
(1) Represents the sum of direct service costs and selling, general and
administrative expenses.
(2) Operating income equals income before income taxes, the cumulative effect of
accounting changes, interest expense, other income and expense and merger
costs and special charges and loss on disposal of subsidiary.
(3) Represents primarily interest income.
(4) Effective October 1, 1995, Merit changed its method of accounting for
deferred start-up costs related to new contracts or expansion of existing
contracts: (i) to expense costs relating to start-up activities incurred
after commencement of services under the contract, and (ii) to limit the
amortization period for deferred start-up costs to the initial contract
period. Prior to October 1, 1995, Merit capitalized start-up costs related
to the completion of the provider networks and reporting systems beyond
commencement of contracts and, in limited instances, amortized the start-up
costs over a period that included the initial renewal term associated with
the contract. Under the new policy, Merit does not defer contract start-up
costs after contract commencement. The change was made to increase the focus
on controlling costs associated with contract start-ups. Merit recorded a
pre-tax charge of $1.8 million ($1.0 million after taxes) in its fiscal 1996
results of operations as a cumulative
40
<PAGE>
effect of the change in accounting. Had Merit adopted this accounting
principle in the prior year, fiscal 1995 net income would have been $0.3
million. There was no pro forma effect of this change on Merit's fiscal
years prior to 1995.
(5) Includes restricted cash and short-term marketable securities classified as
a long-term asset. See "Merit's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Cash
in Claims Funds and Restricted Cash."
(6) On November 18, 1993, Merck & Co., Inc. acquired all of the outstanding
shares of Medco Containment in a transaction accounted for by the purchase
method. The amounts related to periods prior to November 18, 1993, were
derived from predecessor company financial statements. The historical cost
basis of the predecessor company differs from that of Merit due to the
allocation of a portion of the total purchase price of Medco Containment to
Merit's assets and liabilities.
41
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro Forma Consolidated Financial Information set forth below
is based on the historical presentation of the consolidated financial statements
of Magellan, and the historical operating results of HAI, Allied, Merit and CMG
and the historical financial position of Merit. The Unaudited Pro Forma
Consolidated Statements of Operations for the year ended September 30, 1997 and
the three months ended December 31, 1997 give effect to the Crescent
Transactions, the HAI acquisition, the Allied acquisition, the Green Spring
Minority Shareholder Conversion, Merit's acquisition of CMG and the Transactions
as if they had been consummated on October 1, 1996. The Unaudited Pro Forma
Consolidated Balance Sheet as of December 31, 1997 gives effect to the Green
Spring Minority Shareholder Conversion and the Transactions as if they had been
consummated on December 31, 1997. The Unaudited Pro Forma Consolidated Financial
Information does not give effect to the CBHS Transactions. See "Pending Sale of
Provider Business--Unaudited Pro Forma Financial Information--CBHS
Transactions."
The Unaudited Pro Forma Consolidated Statements of Operations do not give
effect to hospital acquisitions and closures during the year ended September 30,
1997 as such transactions and events are not considered material to the pro
forma presentation. The Unaudited Pro Forma Consolidated Statements of
Operations presentation assumes that the net proceeds from the Crescent
Transactions, after debt repayment of approximately $200 million, were fully
utilized to fund the HAI acquisition and the Allied acquisition. The Unaudited
Pro Forma Consolidated Statement of Operations for the year ended September 30,
1997 excludes the non-recurring losses incurred by the Company as a result of
the Crescent Transactions.
The Unaudited Pro Forma Consolidated Financial Information does not purport
to be indicative of the results that actually would have been obtained if the
operations had been conducted as presented and they are not necessarily
indicative of operating results to be expected in future periods. The business
of CBHS is seasonal in nature with a reduced demand for certain services
generally occurring in the first fiscal quarter around major holidays, such as
Thanksgiving and Christmas, and during the summer months comprising the fourth
fiscal quarter. Accordingly, the Unaudited Pro Forma Statement of Operations for
the three months ended December 31, 1997 is not necessarily indicative of the
pro forma results expected for a full year. The Unaudited Pro Forma Statements
of Operations excludes approximately $60.0 million of cost savings on an annual
basis that the Company expects to achieve within eighteen months following
consummation of the Acquisition. The Unaudited Pro Forma Consolidated Financial
Information and notes thereto should be read in conjunction with the historical
consolidated financial statements and notes thereto of Magellan, Merit, CBHS and
HAI, which appear elsewhere herein, and Management's Discussion and Analysis of
Financial Condition and Results of Operations of Magellan and Merit, which
appear elsewhere herein.
The following is a description of each of the transactions (other than the
Transactions, which are described elsewhere herein) reflected in the pro forma
presentation:
CRESCENT TRANSACTIONS. The Crescent Transactions, which were consummated on
June 17, 1997, resulted in, among other things: (i) the sale of the Psychiatric
Hospital Facilities to Crescent for $417.2 million (before costs of
approximately $16.0 million); (ii) the creation of CBHS, which is 50% owned by
the Company and engages in the behavioral healthcare provider business; (iii)
the Company's entry into the healthcare franchising business; and (iv) the
issuance by Magellan of 2,566,622 warrants to Crescent and COI (1,283,311
warrants each) with an exercise price of $30 per share. CBHS leases the
Psychiatric Hospital Facilities from Crescent under a twelve-year operating
lease (the "Facilities Lease") (subject to renewal) for $41.7 million annually,
subject to adjustment, with a 5% escalator, compounded annually plus certain
additional rent. The warrants issued to Crescent and COI have been valued at
$25.0 million in the Company's balance sheet. See "Charter Advantage." The
Company accounts for its 50% investment in CBHS under the equity method of
accounting, which significantly reduces the
42
<PAGE>
revenues and related operating expenses presented in the Unaudited Pro Forma
Consolidated Statements of Operations. "Divested Operations--Crescent
Transactions" in the Unaudited Pro Forma Consolidated Statement of Operations
represents the results of operations of the businesses that are operated by
CBHS.
The Company incurred a loss before income taxes, minority interest and
extraordinary items of approximately $59.9 million as a result of the Crescent
Transactions, which was recorded during fiscal 1997.
HAI ACQUISITION. On December 4, 1997, the Company consummated the purchase
of HAI, formerly a unit of Aetna, for approximately $122.1 million. HAI manages
the care of over 16.0 million covered lives, primarily through EAPs and other
managed behavioral healthcare plans. The Company funded the acquisition of HAI
with cash on hand and accounted for the acquisition of HAI using the purchase
method of accounting. The Company may be required to make additional contingent
payments of up to $60.0 million annually to Aetna over the five-year period
subsequent to closing. The amount and timing of the payments will be contingent
upon net increases in the number of HAI's covered lives in specified products.
The maximum contingent payments are $300.0 million.
ALLIED ACQUISITION. On December 5, 1997, the Company purchased the assets
of Allied for approximately $70.0 million, of which $50.0 million was paid to
the seller at closing with the remaining $20.0 million placed in escrow. Allied
provides specialty risk-based products and administrative services to a variety
of insurance companies and other customers, including Blue Cross of New Jersey,
CIGNA and NYLCare, for its 3.4 million members. Allied has over 80 physician
networks across the eastern United States. Allied's networks include physicians
specializing in cardiology, oncology and diabetes. The Company funded the Allied
acquisition with cash on hand. The Company accounted for the Allied acquisition
using the purchase method of accounting. The escrowed amount of the purchase
price is payable in one-third increments if Allied achieves specified earnings
targets during each of the three years following the closing. Additionally, the
purchase price may be increased during the three-year period by up to $40.0
million, if Allied's performance exceeds specified earnings targets. The maximum
purchase price payable is $110.0 million.
GREEN SPRING MINORITY SHAREHOLDER CONVERSION. The minority shareholders of
Green Spring converted their interests in Green Spring into an aggregate of
2,831,516 shares of Company Common Stock. As a result of the Green Spring
Minority Shareholder Conversion, the Company owns 100% of Green Spring. The
Company accounted for the Green Spring Minority Shareholder Conversion as a
purchase of minority interest at the fair value of the consideration paid.
MERIT ACQUISITION OF CMG. On September 12, 1997, Merit acquired all of the
outstanding capital stock of CMG for approximately $48.7 million in cash and
approximately 739,000 shares of Merit common stock. In connection with Merit's
acquisition of CMG, the Company may be required to make contingent payments to
the former shareholders of CMG if the financial results of certain contracts
exceed specified base-line amounts. Such contingent payments are subject to an
aggregate maximum of $23.5 million.
43
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
DIVESTED
OPERATIONS--
MAGELLAN CRESCENT PRO FORMA PRO FORMA
AS REPORTED TRANSACTIONS HAI ALLIED ADJUSTMENTS COMBINED MERIT CMG
----------- ------------ -------- -------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............... $1,210,696 $(555,324) $116,736 $143,889 $41,578(1) $957,575 $555,717 $101,356
----------- ------------ -------- -------- ----------- --------- -------- --------
Salaries, cost of care and
other operating
expenses................ 978,513 (426,862) 88,002 137,873 (7,797)(2) 769,729 504,510 99,434
Bad debt expense.......... 46,211 (42,720) 0 0 0 3,491 0 0
Depreciation and
amortization............ 44,861 (20,073) 312 362 6,164(3) 31,626 39,400 1,987
Interest, net............. 45,377 (3,233) (1,604) (725) (6,833)(4) 32,982 21,566 (516)
Stock option expense...... 4,292 0 0 0 0 4,292 0 0
Equity in loss of CBHS.... 8,122 0 0 0 12,028(5) 20,150 0 0
Loss on Crescent
Transactions............ 59,868 0 0 0 (59,868)(6) 0 0 0
Unusual items............. 357 (2,500) 0 0 0 (2,143) 8,239 1,200
----------- ------------ -------- -------- ----------- --------- -------- --------
1,187,601 (495,388) 86,710 137,510 (56,306) 860,127 573,715 102,105
----------- ------------ -------- -------- ----------- --------- -------- --------
Income (loss) before
income taxes and
minority interest....... 23,095 (59,936) 30,026 6,379 97,884 97,448 (17,998) (749)
Provision for (benefit
from) income taxes...... 9,238 (23,974) 11,480 0 41,705(7) 38,449 (4,126) (443)
----------- ------------ -------- -------- ----------- --------- -------- --------
Income (loss) before
minority interest....... 13,857 (35,962) 18,546 6,379 56,179 58,999 (13,872) (306)
Minority interest......... 9,102 0 0 0 0 9,102 0 0
----------- ------------ -------- -------- ----------- --------- -------- --------
Net income (loss)......... $ 4,755 $ (35,962) $ 18,546 $ 6,379 $56,179 $ 49,897 $(13,872) $ (306)
----------- ------------ -------- -------- ----------- --------- -------- --------
----------- ------------ -------- -------- ----------- --------- -------- --------
Average number of common
shares
outstanding--basic...... 28,781 28,781
----------- ---------
----------- ---------
Average number of common
shares
outstanding--diluted.... 29,474 29,474
----------- ---------
----------- ---------
Net income per common
share--basic............ $ 0.17 $ 1.73
----------- ---------
----------- ---------
Net income per common
share--diluted.......... $ 0.16 $ 1.69
----------- ---------
----------- ---------
Ratio of earnings to fixed
charges................. 1.41
-----------
-----------
<CAPTION>
THE
MERIT/CMG MERIT/CMG TRANSACTIONS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenue............... $(13,042)(8) $644,031 $ 0 $1,601,606
----------- ---------- ------------ ------------
Salaries, cost of care and
other operating
expenses................ (18,075)(9) 585,869 (500)(14) 1,355,098
Bad debt expense.......... 0 0 0 3,491
Depreciation and
amortization............ 2,365(10) 43,752 (6,416)(15) 68,962
Interest, net............. 4,390(11) 25,440 37,967(16) 96,389
Stock option expense...... 0 0 0 4,292
Equity in loss of CBHS.... 0 0 0 20,150
Loss on Crescent
Transactions............ 0 0 0 0
Unusual items............. (6,925)(12) 2,514 (1,314)(17) (943)
----------- ---------- ------------ ------------
(18,245) 657,575 29,737 1,547,439
----------- ---------- ------------ ------------
Income (loss) before
income taxes and
minority interest....... 5,203 (13,544) (29,737) $ 54,167
Provision for (benefit
from) income taxes...... 2,095(13) (2,474) (5,942)(18) 30,033
----------- ---------- ------------ ------------
Income (loss) before
minority interest....... 3,108 (11,070) (23,795) 24,134
Minority interest......... 0 0 (6,835)(19) 2,267
----------- ---------- ------------ ------------
Net income (loss)......... $ 3,108 $(11,070) $(16,960) $ 21,867
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Average number of common
shares
outstanding--basic...... 2,832(19) 31,613
------------ ------------
------------ ------------
Average number of common
shares
outstanding--diluted.... 2,832(19) 32,306
------------ ------------
------------ ------------
Net income per common
share--basic............ $ 0.69
------------
------------
Net income per common
share--diluted.......... $ 0.68
------------
------------
Ratio of earnings to fixed
charges................. 1.38
------------
------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations
44
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
MAGELLAN PRO FORMA
AS REPORTED HAI ALLIED ADJUSTMENTS
----------- ------- ------- -----------
<S> <C> <C> <C> <C>
Net revenue................................................. $216,097 $19,528 $30,945 $(2,143)(1)
----------- ------- ------- -----------
Salaries, cost of care and other operating expenses......... 175,621 15,031 31,068 (1,392)(2)
Bad debt expense............................................ 1,070 0 0 0
Depreciation and amortization............................... 6,969 34 100 1,075(3)
Interest, net............................................... 7,401 (256) (92) 1,816(4)
Stock option expense........................................ (3,959) 0 0 0
Equity in loss of CBHS...................................... 11,488 0 0 0
Unusual items............................................... 0 0 0 0
----------- ------- ------- -----------
198,590 14,809 31,076 1,499
----------- ------- ------- -----------
Income (loss) before income taxes and minority interest..... 17,507 4,719 (131) (3,642)
Provision for (benefit from) income taxes................... 7,003 1,879 0 (1,509)(7)
----------- ------- ------- -----------
Income (loss) before minority interest...................... 10,504 2,840 (131) (2,133)
Minority interest........................................... 2,876 0 0 0
----------- ------- ------- -----------
Net income (loss)........................................... $ 7,628 $ 2,840 $ (131) $(2,133)
----------- ------- ------- -----------
----------- ------- ------- -----------
Average number of common shares outstanding--basic.......... 28,969
-----------
-----------
Average number of common shares outstanding--diluted........ 29,784
-----------
-----------
Net income per common share--basic.......................... $ 0.26
-----------
-----------
Net income per common share--diluted........................ $ 0.26
-----------
-----------
Ratio of earnings to fixed charges.......................... 2.04
-----------
-----------
<CAPTION>
THE TRANSACTIONS
PRO FORMA PRO FORMA PRO FORMA
COMBINED MERIT ADJUSTMENTS CONSOLIDATED
--------- -------- ---------------- ------------
<S> <C> <C> <C> <C>
Net revenue................................................. $264,427 $178,866 $ 0 $443,293
--------- -------- ------- ------------
Salaries, cost of care and other operating expenses......... 220,328 164,291 (1,915)(14) 382,704
Bad debt expense............................................ 1,070 0 0 1,070
Depreciation and amortization............................... 8,178 11,028 (1,736)(15) 17,470
Interest, net............................................... 8,869 6,142 9,674(16) 24,685
Stock option expense........................................ (3,959) 0 0 (3,959)
Equity in loss of CBHS...................................... 11,488 0 0 11,488
Unusual items............................................... 0 545 (545)(17) 0
--------- -------- ------- ------------
245,974 182,006 5,478 433,458
--------- -------- ------- ------------
Income (loss) before income taxes and minority interest..... 18,453 (3,140) (5,478) 9,835
Provision for (benefit from) income taxes................... 7,373 (468) (703)(18) 6,202
--------- -------- ------- ------------
Income (loss) before minority interest...................... 11,080 (2,672) (4,775) 3,633
Minority interest........................................... 2,876 0 (2,358)(19) 518
--------- -------- ------- ------------
Net income (loss)........................................... $ 8,204 $ (2,672) $(2,417) $ 3,115
--------- -------- ------- ------------
--------- -------- ------- ------------
Average number of common shares outstanding--basic.......... 28,969 2,832(19) 31,801
--------- ------- ------------
--------- ------- ------------
Average number of common shares outstanding--diluted........ 29,784 2,832(19) 32,616
--------- ------- ------------
--------- ------- ------------
Net income per common share--basic.......................... $ 0.28 $ 0.10
--------- ------------
--------- ------------
Net income per common share--diluted........................ $ 0.28 $ 0.10
--------- ------------
--------- ------------
Ratio of earnings to fixed charges.......................... 1.27
------------
------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations
45
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Adjustments to net revenue for the year ended September 30, 1997 represent
Franchise Fees of $55.5 million for the 259 days ended June 16, 1997 (prior
to consummation of the Crescent Transactions) less a $13.9 million decrease
in HAI revenue resulting from renegotiated contractual rates with Aetna as a
direct result of the acquisition of HAI by the Company. Adjustment to net
revenue for the three months ended December 31, 1997 represents the effect
of renegotiated contractual rates with Aetna for the two months prior to
consummation of the HAI acquisition.
The pro forma presentation assumes that all Franchise Fees due from CBHS
were paid when due. Based on projections of fiscal 1998 operations prepared
by management of CBHS, the Company believes that CBHS will be unable to pay
the full amount of the Franchise Fees it is contractually obligated to pay
during fiscal 1998. The Company currently estimates that CBHS will be able
to pay approximately $58.0 million to $68.0 million of the Franchise Fees in
fiscal 1998, a $10.0 million to $20.0 million shortfall relative to amounts
payable under the Master Franchise Agreement. The Company may be required to
record bad debt expense related to Franchise Fees receivable from CBHS, if
any, in fiscal 1998 or future periods if CBHS's operating performance does
not improve to levels achieved prior to the consummation of the Crescent
Transactions. If CBHS defaults in payment of the Franchise Fees, the Company
will pursue all remedies available to it under the Master Franchise
Agreement. See "Charter Advantage--Franchise Operations."
(2) Adjustments to salaries, cost of care and other operating expenses represent
the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
TRANSACTION DESCRIPTION 1997 1997
- ----------- ------------------------------------ -------------------- ---------------------
<S> <C> <C> <C>
Crescent Fees payable to CBHS by the Company
for the management of less than
wholly-owned hospital-based joint
ventures controlled by the Company
for the 259 days ended June 16,
1997................................ $ 7,564 $ --
Crescent Reduction of corporate overhead that
was transferred to CBHS for the 259
days ended June 16, 1997............ (2,845) --
HAI Elimination of Aetna overhead
allocations......................... (17,162) (2,044)
HAI Bonus expense previously reflected
in Aetna's financial statements..... 1,138 200
HAI Costs absorbed by HAI previously
incurred by Aetna including
information technology, human
resources and legal................. 5,110 852
Allied Reduction of shareholders'/
executives' compensation to revised
contractual level pursuant to the
Allied purchase agreement........... (648) (197)
Allied Reduction of certain consulting
agreement costs to revised
contractual level pursuant to the
Allied purchase agreement........... (954) (203)
---------- --------
$ (7,797) $ (1,392)
---------- --------
---------- --------
</TABLE>
46
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(3) Adjustments to depreciation and amortization represent the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
TRANSACTION DESCRIPTION 1997 1997
- ------------- ------------------------------------ -------------------- ---------------------
<S> <C> <C> <C>
Crescent Elimination of amortization related
to impaired intangible assets....... $ (177) $ --
HAI Purchase price allocation (i)....... 3,948 676
Allied Purchase price allocation (ii)...... 2,393 399
------- -------
$ 6,164 $ 1,075
------- -------
------- -------
</TABLE>
---------------------------------
(i) Represents $4.0 million estimated fair value of property and
equipment depreciated over an estimated useful life of 5 years, $83.3
million of goodwill amortized over an estimated useful life of 40
years and $20.7 million estimated fair value of other intangible
assets (primarily client lists) amortized over an estimated useful
life of 15 years less historical depreciation and amortization.
(ii) Represents $50.7 million of goodwill amortized over an estimated
useful life of 40 years and $16.9 million estimated fair value of
other intangible assets (primarily client lists and treatment
protocols) amortized over an estimated useful life of 15 years.
The allocation of the HAI and Allied purchase prices to equipment, goodwill
and identifiable intangible assets and estimated useful lives are based on
the Company's preliminary valuations, which are subject to change upon
receiving independent appraisals for such assets.
Subsequent to the consummation of the HAI acquisition, the Company may be
required to make additional contingent payments of up to $60 million
annually during the five years following the consummation of the HAI
acquisition to Aetna for aggregate potential contingent payments of $300
million. These contingent payments, if any, would be recorded as goodwill
and identifiable intangible assets, which would result in estimated
additional annual amortization of $11 million to $13 million in future
periods if all the contingent payments are made.
The Company may also be required to make contingent payments to the former
owners of Allied of up to $60 million during the three years subsequent to
consummation of the Allied acquisition, of which $20 million is in escrow.
These contingent payments, if any, would be recorded as goodwill, which
would result in estimated additional annual amortization of $1.5 million.
(4) Adjustments to interest, net, represent reductions in interest expense as a
result of the repayment of outstanding borrowings under the Magellan
Existing Credit Agreement with the proceeds from the Crescent Transactions
offset by forgone interest income as a result of using cash on hand to fund
the HAI and Allied acquisitions.
(5) Adjustment to equity in loss of CBHS represents the Company's 50% interest
in CBHS' pro forma loss for the 259 day period ended June 16, 1997. The
Company's investment in CBHS is accounted for under the equity method of
accounting. The Condensed Pro Forma Statement of Operations of CBHS for the
year ended September 30, 1997 is as follows (in thousands):
47
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
CBHS
OPERATIONS--
DIVESTED 106 DAYS ENDED PRO FORMA PRO FORMA
OPERATIONS SEPTEMBER 30, 1997 ADJUSTMENTS CONSOLIDATED
----------- -------------------- ------------ -------------
<S> <C> <C> <C> <C>
Net revenue.............. $ 555,324 $ 213,730 $ 2,565(i) $ 771,619
----------- ---------- ------------ -------------
Salaries, supplies and
other operating
expenses............... 426,862 210,277 103,723 (ii 740,862
Bad debt expense......... 42,720 17,437 0 60,157
Depreciation and
amortization........... 20,073 668 (17,333) ii) 3,408
Interest, net............ 3,233 1,592 167 (iv 4,992
Unusual items............ 2,500 0 0 2,500
----------- ---------- ------------ -------------
495,388 229,974 86,557 811,919
----------- ---------- ------------ -------------
Income (loss) before
income taxes........... 59,936 (16,244) (83,992) (40,300)
Provision for income
taxes.................. 23,974 0 (23,974)(v) 0
----------- ---------- ------------ -------------
Net income (loss)...... $ 35,962 $ (16,244) $ (60,018) $ (40,300)
----------- ---------- ------------ -------------
----------- ---------- ------------ -------------
</TABLE>
----------------------------------------
(i) Fees from the Company for the management of less than
wholly-owned hospital-based joint ventures controlled by the
Company (see note 2) less non-recurring accounts receivable
collection fees receivable from the Company (see note 6) of
approximately $5.0 million during the 106 days ended September
30, 1997.
(ii) Adjustments to salaries, supplies and other operating
expenses represent the following (in thousands):
<TABLE>
<CAPTION>
259 DAYS
ENDED
JUNE 16, 1997
--------------
<S> <C>
Franchise Fees (see note 1)................................................ $ 55,463
Rent expense under the Facilities Lease.................................... 44,665
Additional corporate overhead.............................................. 3,595
--------------
$ 103,723
--------------
--------------
</TABLE>
(iii) Adjustment to depreciation and amortization represents the
decrease in depreciation expense as a result of the sale of
property and equipment to Crescent by the Company and the
elimination of amortization expense related to impaired
intangible assets.
(iv) Adjustment to interest, net, represents the following (in
thousands):
<TABLE>
<CAPTION>
259 DAYS
ENDED
JUNE 16, 1997
--------------
<S> <C>
Interest expense on debt repaid by the Company............................. $ (3,233)
Interest expense for the 259 days ended June 16, 1997 for estimated average
borrowings of $60 million at an assumed interest rate of 8% per annum...... 3,400
--------------
$ 167
--------------
--------------
</TABLE>
(v) CBHS is a limited liability company. Accordingly, provision
for income taxes is eliminated as the tax consequences of CBHS
ownership will pass through to the Company and COI.
48
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(6) Adjustment to loss on Crescent Transactions represents the elimination of
the non-recurring losses incurred by the Company as a result of the Crescent
Transactions as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable collection fees(i).................................... $ 21,400
Impairment losses on intangible assets(ii)................................ 14,408
Exit costs and construction obligation(iii)............................... 12,549
Loss on the sale of property and equipment................................ 11,511
---------
$ 59,868
---------
---------
</TABLE>
----------------------------------------
(i) Accounts receivable collection fees represent the reduction
in the net realizable value of accounts receivable for
estimated collection fees on hospital-based receivables
retained by the Company. The Company paid CBHS a fee equal to
5% of collections for the first 120 days after consummation of
the Crescent Transactions and estimated bad debt agency fees of
40% for receivables collected subsequent to 120 days after the
consummation of the Crescent Transaction.
(ii) The impairment loss on intangible assets resulted from
reducing the book value of the Company's investment in CBHS to
its approximate fair value at the consummation date of the
Crescent Transactions. The impairment losses represent the
reductions in the carrying amount of goodwill and other
intangible assets related to the divested or contributed CBHS
operations.
(iii) Represents approximately $5.0 million of incremental costs
to perform finance and accounting functions transferred to CBHS
and approximately $7.5 million for the Company's obligation to
replace CBHS' Philadelphia hospital.
(7) Adjustments to provision for income taxes represent the tax expense related
to the pro forma adjustments at the Company's historic effective tax rate of
40% and the imputed income tax expense on the operating results of Allied,
which was an S-corporation for income tax purposes and historically did not
provide for income taxes.
(8) Adjustment to net revenue represents the elimination of the fiscal 1997
revenues of Choate Health Management, Inc. ("Choate"), which was sold by
Merit in fiscal 1997.
(9) Adjustment to salaries, cost of care and other operating expenses represents
the elimination of salaries, benefits and other costs of $5.5 million for
duplicate CMG personnel and facilities that were eliminated as a direct
result of Merit's acquisition of CMG and the elimination of fiscal 1997
expenses of $12.6 million for Choate, which was sold by Merit in fiscal
1997.
(10) Adjustment to depreciation and amortization represents the effect of
Merit's purchase price allocation related to the CMG acquisition.
(11) Adjustment to interest, net, represents the effect of increased borrowing
by Merit related to the CMG acquisition.
(12) Adjustments to unusual items, net, represents the elimination of
non-recurring losses on Merit's sale of Choate.
(13) Adjustment to provision for income taxes represents the tax effect of the
Merit/CMG pro forma adjustments.
(14) Adjustment to salaries, cost of care and other operating expenses
represents the elimination of fees paid by Merit to its former owner and the
elimination of salaries, benefits and other costs of $1.7 million for the
three months ended December 31, 1997 for duplicate CMG personnel and
facilities that have been announced as a direct result of Merit's
acquisition of CMG. The adjustment excludes approximately $60.0 million of
cost savings on an annual basis that the Company expects to achieve within
eighteen months following consummation of the Merit acquisition.
49
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(15) Adjustments to depreciation and amortization represent the effect of the
Merit purchase price allocation and the Green Spring Minority Shareholder
Conversion as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
-------------- --------------
<S> <C> <C>
Estimated fair value of property and equipment of $52.4
million depreciated over an estimated useful life of 5
years....................................................... $ 10,485 $ 2,622
Estimated goodwill of $599.5 million amortized over an
estimated useful life of 40 years........................... 14,989 3,746
Estimated fair value of other intangible assets (primarily
client lists and provider networks) of $121.3 million
amortized over an estimated useful life of 15 years......... 8,084 2,021
-------------- --------------
Total estimated depreciation and amortization................. 33,558 8,389
Elimination of Merit and CMG historical and pro forma
depreciation and amortization (i)........................... (40,655) (10,296)
Effect of Green Spring Minority Shareholder Conversion........ 681 171
-------------- --------------
$ (6,416) $ (1,736)
-------------- --------------
-------------- --------------
</TABLE>
----------------------------------------
(i) Excludes amortization of deferred start-up costs of
approximately $3.1 million and $0.7 million for the year ended
September 31, 1997 and the three moths ended December 31, 1997,
respectively, which will be a continuing cost of the Company
after the Merit acquisition.
The allocation of the Merit purchase price to property and equipment,
goodwill and identifiable intangible assets and estimated useful lives was
based on the Company's preliminary valuations, which are subject to change
upon receiving independent appraisals for such assets.
(16) Adjustments to interest, net, represent the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 1997 1997
- --------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Elimination of Merit and CMG historical and pro
forma interest expense........................... $ (29,959) $ (7,216)
Elimination of historical interest expense for the
Magellan Outstanding Notes....................... (42,188) (10,547)
Elimination of the Company's historical deferred
financing cost amortization...................... (1,214) (610)
Tranche A Term Loan interest expense (i)........... 14,393 3,667
Tranche B Term Loan interest expense (i)........... 14,850 3,781
Tranche C Term Loan interest expense (i)........... 15,308 3,896
Revolving Facility interest expense (i)............ 1,570 400
Foregone interest income--cash proceeds utilized in
the Merit acquisition at 5.5% per annum.......... 4,712 1,178
The Notes at an interest rate of 9.0%.............. 56,250 14,063
Amortization of deferred financing costs of $34.2
million over a weighted average life of
approximately 8.1 years.......................... 4,245 1,062
---------- ----------
$ 37,967 $ 9,674
---------- ----------
---------- ----------
</TABLE>
----------------------------------------
(i) Assumes borrowings are one-month LIBOR-based, which is
consistent with the Company's past borrowing practices. Average
one-month LIBOR was approximately 5.60% and 5.75%
50
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
during the year ended September 30, 1997 and the three months
ended December 31, 1997, respectively. Each tranche of the Term
Loan Facility is approximately $183.3 million and the Revolving
Facility borrowing is $20.0 million. Interest rates utilized to
compute pro forma adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
----------------------- ---------------------
<S> <C> <C>
Tranche A Term Loan and Revolving Facility
(LIBOR plus 2.25%)...................... 7.85% 8.00%
Tranche B Term Loan (LIBOR plus 2.50%).... 8.10% 8.25%
Tranche C Term Loan (LIBOR plus 2.75%).... 8.35% 8.50%
</TABLE>
(17) Adjustments to unusual items represent the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DESCRIPTION SEPTEMBER 30, 1997 DECEMBER 31, 1997
- --------------------------------------------------- -------------------- ---------------------
<S> <C> <C>
Elimination of Merit's transaction costs related to
Merit's attempt to acquire HAI................... $ (733) $ --
Elimination of non-recurring employee benefit costs
related to stock options which were eliminated
upon the consummation of the Acquisition......... (581) (57)
Elimination of Merit's transaction costs related
primarily to the Transactions.................... -- (488)
-------- ------
$ (1,314) $ (545)
-------- ------
-------- ------
</TABLE>
(18) Adjustment to provision for income taxes represents the tax benefit related
to the pro forma adjustments, excluding annual non-deductible goodwill
amortization of $14.9 million related to the Acquisition and the Green
Spring Minority Shareholder Conversion, at the Company's historic effective
tax rate of 40%.
(19) Adjustments to minority interest and average number of common shares
outstanding (primary and fully diluted) represents the effect of the Green
Spring Minority Shareholder Conversion.
51
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE
TRANSACTIONS
MAGELLAN PRO FORMA PRO FORMA
ASSETS AS REPORTED MERIT ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 170,459 $ 75,827 $ (85,677)(1) $ 160,609
Accounts receivable, net............................ 140,219 49,917 0 190,136
Deferred income taxes............................... 0 6,616 0 6,616
Other current assets................................ 34,438 11,409 0 45,847
------------ ----------- ------------- -------------
Total current assets.............................. 345,116 143,769 (85,677) 403,208
Assets restricted for settlement of unpaid claims and
other long-term liabilities......................... 73,020 0 0 73,020
Property and equipment:
Land................................................ 11,687 0 0 11,687
Buildings and improvements.......................... 72,102 3,596 0 75,698
Equipment........................................... 74,319 117,151 (68,320)(2) 123,150
------------ ----------- ------------- -------------
158,108 120,747 (68,320) 210,535
Accumulated depreciation............................ (41,169) (38,320) 38,320(2) (41,169)
------------ ----------- ------------- -------------
116,939 82,427 (30,000) 169,366
Construction in progress............................ 995 0 0 995
------------ ----------- ------------- -------------
Total property and equipment...................... 117,934 82,427 (30,000) 170,361
Other long-term assets................................ 42,932 27,432 (8,624)(3) 61,740
Deferred income taxes................................. 2,178 0 69,351(4) 71,529
Investments in CBHS................................... 5,390 0 0 5,390
Goodwill, net......................................... 242,968 141,787 462,227(5) 846,982
Other intangible assets, net.......................... 67,576 56,056 101,188(5) 224,820
------------ ----------- ------------- -------------
$ 897,114 $ 451,471 $ 508,465 $ 1,857,050
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 37,663 $ 7,217 $ 0 $ 44,880
Accrued liabilities................................. 192,426 133,347 9,941(6) 335,714
Current maturities of long-term debt and capital
lease obligations................................. 3,604 1,263 (1,263)(7) 3,604
------------ ----------- ------------- -------------
Total current liabilities....................... 233,693 141,827 8,678 384,198
Long-term debt and capital lease obligations.......... 391,550 318,002 501,998(7) 1,211,550
Reserve for unpaid claims............................. 40,201 0 0 40,201
Deferred tax liabilities.............................. 0 13,525 (13,525)(4) 0
Deferred credits and other long-term liabilities...... 15,023 5,034 (3,262)(8) 16,795
Minority interest..................................... 64,785 0 (39,512)(8) 25,273
Commitments and contingencies
Stockholders' equity:
Common stock........................................ 8,387 294 414(9) 9,095
Additional paid-in capital.......................... 338,961 3,768 56,412(9) 399,141
Retained earnings (accumulated deficit)............. (122,327) (30,979) (2,738)(9) (156,044)
Warrants outstanding................................ 25,050 0 0 25,050
Common stock in treasury............................ (95,187) 0 0 (95,187)
Cumulative foreign currency adjustments............. (3,022) 0 0 (3,022)
------------ ----------- ------------- -------------
Total stockholders' equity........................ 151,862 (26,917) 54,088 179,033
------------ ----------- ------------- -------------
$ 897,114 $ 451,471 $ 508,465 $ 1,857,050
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
52
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(1) Adjustments to cash and cash equivalents represent the following (in
thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
Term Loan Facility borrowings................................................... $ 550,000
Revolving Facility borrowings................................................... 20,000
Proceeds from the Notes......................................................... 625,000
Repayment of Existing Merit Credit Agreement.................................... (219,265)
Repayment of Merit Outstanding Notes............................................ (100,000)
Repayment of Magellan Outstanding Notes......................................... (375,000)
Cash paid to Merit shareholders................................................. (448,867)
Transaction costs and accrued interest payments................................. (137,545)
------------
$ (85,677)
------------
------------
</TABLE>
(2) Adjustments to equipment and accumulated depreciation accounts represent the
changes necessary to adjust Merit's property and equipment to fair value.
See note 15 to Unaudited Pro Forma Consolidated Statement of Operations.
(3) Adjustment to other long-term assets represents the reclassification of
deferred start-up costs to identifiable intangible assets.
(4) Adjustments to deferred income tax assets and liabilities represent the tax
consequences of the Transactions related primarily to basis differences and
recognition of net operating loss carry forwards.
(5) Adjustments to goodwill and other intangible assets represent the following
(in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
Merit purchase price allocation.................................................. $ 457,715
Green Spring Minority Shareholder Conversion..................................... 4,512
-----------
Goodwill pro forma adjustment................................................ $ 462,227
-----------
-----------
Merit purchase price allocation.................................................. $ 75,455
Write-off of Merit deferred financing costs...................................... (10,246)
Write-off of the Company's deferred financing costs.............................. (11,811)
Deferred financing costs related to the Transactions............................. 34,188
Green Spring Minority Shareholder Conversion..................................... 13,602
-----------
Other intangible asset pro forma adjustment.................................. $ 101,188
-----------
-----------
</TABLE>
See note 15 to the Unaudited Pro Forma Consolidated Statements of
Operations.
(6) Adjustments to accrued liabilities represent the following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
Payment of Merit accrued interest................................................ $ (2,338)
Payment of the Company's accrued interest........................................ (8,721)
Accrued severance and related costs (i).......................................... 21,000
-----------
$ 9,941
-----------
-----------
- ------------------------
</TABLE>
(i) Includes the initial estimates of costs of severance, lease
terminations, relocation and other related costs for the integration
of Merit into the Company's existing managed care operations. This
amount is subject to change based on finalization of the Company's
integration plan.
53
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
(7) Adjustments to long-term debt and capital lease obligations (including the
current portion) represent the following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
Term Loan Facility borrowings.................................................... $ 550,000
Revolving Facility borrowings.................................................... 20,000
The Notes........................................................................ 625,000
Repayment of Existing Merit Credit Agreement..................................... (219,265)
Repayment of Merit Outstanding Notes............................................. (100,000)
Repayment of Magellan Outstanding Notes.......................................... (375,000)
-----------
$ 500,735
-----------
-----------
</TABLE>
(8) Adjustments to deferred credits and other long-term liabilities and minority
interest represent the effect of the Green Spring Minority Shareholder
Conversion.
(9) Adjustments to the stockholders' equity accounts represent the elimination
of Merit's historical stockholders' equity accounts, the increase in
accumulated deficit related to the $33.7 million extraordinary loss on the
early extinguishment of the Magellan Existing Credit Agreement and the
Magellan Outstanding Notes and the effect of issuing 2,831,516 shares of
Company Common Stock in the Green Spring Minority Shareholder Conversion,
which was valued using the closing price of Company Common Stock on December
31, 1997, of $21.50.
54
<PAGE>
MAGELLAN'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to the historical consolidated results of
operations and financial condition of the Company and should be read in
conjunction with the consolidated financial statements of the Company included
elsewhere in this Prospectus.
OVERVIEW
The Company has historically derived the majority of its revenue from
providing 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 reduce utilization of inpatient services. As a
result, third party payors established managed care programs or engaged managed
care companies in many areas of healthcare, including behavioral healthcare. The
Company, which until June 1997 was the largest operator of psychiatric hospitals
in the United States, was adversely affected by the adoption of managed care
programs by third-party payors.
Prior to the first quarter of fiscal 1996, the Company was not a provider of
behavioral managed care services. During the first quarter of fiscal 1996, the
Company acquired a 61% ownership interest in Green Spring. At that time, the
Company intended to become a fully integrated behavioral healthcare provider by
combining the managed behavioral healthcare products offered by Green Spring
with the direct treatment services offered by the Company's psychiatric
hospitals. The Company believed that an entity that participated in both the
managed care and provider segments of the behavioral healthcare industry could
more efficiently provide and manage behavioral healthcare for insured
populations than an entity that was 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.
Subsequent to the Company's acquisition of Green Spring, the growth of the
managed behavioral healthcare industry accelerated. Under the Company's majority
ownership, Green Spring increased its base of covered lives from 12.0 million as
of the end of calendar year 1995 to 21.1 million as of the end of calendar year
1997, a compound annual growth rate of over 32%. While growth in the industry
was accelerating, the managed behavioral healthcare industry also began to
consolidate. The Company concluded that consolidation presented an opportunity
for the Company to enhance its stockholder value by increasing its participation
in the managed behavioral healthcare industry, which the Company believed
offered growth and earnings prospects superior to those of the psychiatric
hospital industry. Therefore, the Company decided to sell its domestic
psychiatric facilities to obtain capital for expansion in the managed behavioral
healthcare business.
During the third quarter of fiscal 1997, the Company sold the Psychiatric
Hospital Facilities, which comprised substantially all of its domestic acute
care psychiatric hospitals and residential treatment facilities, to Crescent for
$417.2 million in cash (before costs of approximately $16.0 million) and certain
other consideration. The sale of the Psychiatric Hospital Facilities provided
the Company with approximately $200.0 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 acquisitions of HAI and Allied in December
1997.
The Company further implemented its business strategy through the
Acquisition, which increased the Company's revenue attributable to managed care
operations to 78% of the Company's total fiscal 1997 revenue on a pro forma
basis. The following table sets forth, on a pro forma basis for the year
55
<PAGE>
ended September 30, 1997, the Company's net revenue and EBITDA from its business
segments (in thousands):
<TABLE>
<CAPTION>
NET % OF % OF
REVENUE CONSOLIDATED EBITDA(3) CONSOLIDATED
------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Existing managed care business (1)..................... $ 610,623 38.1% $ 73,258 28.7%
Merit managed care business............................ 644,031 40.2 58,662 23.0
------------- ----- ----------- -----
Total managed care business.......................... 1,254,654 78.3 131,920 51.7
Public sector business................................. 94,422 5.9 7,839 3.1
Healthcare franchising business........................ 78,300 4.9 66,148 25.9
Provider business (2).................................. 174,230 10.9 50,385 19.7
Corporate overhead..................................... -- -- (13,275) (5.2)
Interest income........................................ -- -- 12,246 4.8
------------- ----- ----------- -----
Consolidated......................................... $ 1,601,606 100.0% $ 255,263 100.0%
------------- ----- ----------- -----
------------- ----- ----------- -----
</TABLE>
- --------------------------
(1) Includes HAI and Allied pro forma results.
(2) The provider business segment includes the Company's joint venture hospital
operations, three European psychiatric hospitals, a general hospital that
was closed in January 1997 and certain other operations. EBITDA includes
revenue associated with settlements of reimbursement issues and reductions
of operating expenses associated with medical malpractice adjustments. Pro
Forma Adjusted EBITDA as presented in "Summary-- Summary Historical and
Unaudited Pro Forma Financial Data--Magellan Historical and Pro Forma
Financial Data" excludes EBITDA associated with the joint venture
operations, settlements of reimbursement issues and reductions of operating
expenses associated with medical malpractice adjustments.
(3) EBITDA is defined under the caption "Summary--Summary Historical and
Unaudited Pro Forma Financial Data--Magellan Historical and Pro Forma
Financial Data."
For further information regarding pro forma operating results, see "Unaudited
Pro Forma Consolidated Financial Information" appearing elsewhere herein.
On March 3, 1998, the Company entered into definitive agreements with COI
and CBHS to, among other things, sell the Company's franchise operations,
certain domestic provider operations and certain other assets and operations for
$280.0 million, subject to certain adjustments, in cash and $30.0 million in COI
common stock.
The following table sets forth, on a pro forma basis after giving effect to
the CBHS Transactions for the year ended September 30, 1997, the Company's net
revenue and EBITDA from its business segments (in thousands):
<TABLE>
<CAPTION>
% OF % OF
NET REVENUE CONSOLIDATED EBITDA(3) CONSOLIDATED
------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Existing managed care business (1)..................... $ 594,156 42.2% $ 72,221 39.6%
Merit managed care business............................ 644,031 45.8 58,662 32.2
------------- ----- ----------- -----
Total managed care business.......................... 1,238,187 88.0 130,883 71.8
Public sector business................................. 94,422 6.7 7,839 4.3
Healthcare franchising business........................ -- -- -- --
Provider business (2) 74,850 5.3 44,698 24.5
Corporate overhead..................................... -- -- (13,275) (7.3)
Interest income........................................ -- -- 12,095 6.7%
------------- ----- ----------- -----
Consolidated......................................... $ 1,407,459 100.0% $ 182,240 100.0%
------------- ----- ----------- -----
------------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Includes HAI and Allied pro forma results.
(2) The provider business segment includes the Company's three European
psychiatric hospitals, a general hospital that was closed in January 1997
and certain other operations. EBITDA includes revenue associated with
settlements of reimbursement issues and reductions of operating expenses
associated with medical malpractice adjustments. Pro Forma Adjusted EBITDA
as presented in "Summary--Summary Historical and
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
56
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
Unaudited Pro Forma Financial Data--Magellan Historical and Pro Forma
Financial Data" excludes EBITDA associated with the settlements of
reimbursement issues and reductions of operating expenses associated with
medical malpractice adjustments.
(3) EBITDA is defined under the caption "Summary--Summary Historical and
Unaudited Pro Forma Financial Data--Magellan Historical and Pro Forma
Financial Data."
For further information regarding pro forma operating results, see "Unaudited
Pro Forma Consolidated Financial Information" and "Pending Sale of Provider
Business--Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions" appearing elsewhere herein.
The Company generates a significant portion of its revenue and earnings from
its managed care business. A significant portion of the Company's managed care
revenue and earnings are generated from risk-based products, and such portion
will increase following the Acquisition. The Company believes enrollment in
risk-based products will continue to grow through new covered lives and the
transition of covered lives in ASO and EAP products to higher revenue risk-based
products. Risk-based products typically generate significantly higher amounts of
revenue than other managed behavioral healthcare products. Because the Company
is responsible for the cost of care, risk-based products typically have lower
margins than non-risk-based products.
RESULTS OF OPERATIONS
GENERAL
For fiscal years prior to 1996, the Company did not have any material
operations other than the provider business. The following table summarizes, for
the periods indicated, operating results by business segment (in thousands):
<TABLE>
<CAPTION>
MANAGED PUBLIC HEALTHCARE
CARE SECTOR FRANCHISING PROVIDER CORPORATE
1996 BUSINESS BUSINESS BUSINESS BUSINESS OVERHEAD CONSOLIDATED
- ------------------------------- ----------- --------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue.................... $ 229,859 $ 70,709 $ -- $ 1,044,711 $ -- $ 1,345,279
----------- --------- ------------ ------------- ---------- -------------
Salaries, cost of care and
other operating expenses..... 202,690 60,840 -- 766,129 34,786 1,064,445
Bad debt expense............... 1,192 347 -- 79,931 -- 81,470
Depreciation and
amortization................. 9,111 2,580 -- 34,201 3,032 48,924
Stock option expense........... -- -- -- -- 914 914
Unusual items (1).............. -- -- -- 36,050 1,221 37,271
----------- --------- ------------ ------------- ---------- -------------
212,993 63,767 -- 916,311 39,953 1,233,024
----------- --------- ------------ ------------- ---------- -------------
Operating profit........... $ 16,866 $ 6,942 $ -- $ 128,400 $ (39,953) $ 112,255
----------- --------- ------------ ------------- ---------- -------------
----------- --------- ------------ ------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
1997
- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue.................... $ 363,883 $ 94,422 $ 22,739 $ 729,652 $ -- $ 1,210,696
----------- --------- ------------ ------------- ---------- -------------
Salaries, cost of care and
other operating expenses..... 323,814 86,709 3,652 538,760 25,578 978,513
Bad debt expense............... 192 (126) -- 46,145 -- 46,211
Depreciation and
amortization................. 13,016 2,904 160 24,528 4,253 44,861
Stock option expense........... -- -- -- -- 4,292 4,292
Unusual items (1).............. -- -- -- 5,745 -- 5,745
----------- --------- ------------ ------------- ---------- -------------
337,022 89,487 3,812 615,178 34,123 1,079,622
----------- --------- ------------ ------------- ---------- -------------
Operating profit........... $ 26,861 $ 4,935 $ 18,927 $ 114,474 $ (34,123) $ 131,074
----------- --------- ------------ ------------- ---------- -------------
----------- --------- ------------ ------------- ---------- -------------
</TABLE>
- ------------------------
(1) Includes charges for insurance settlements, facility closures, asset
impairments and other amounts.
57
<PAGE>
QUARTER ENDED DECEMBER 31, 1996 COMPARED TO THE QUARTER ENDED DECEMBER 31, 1997.
REVENUE. Managed care revenue increased 61.8% to $134.1 million for the
quarter ended December 31, 1997 from $82.9 million in the same period in fiscal
1997. The increase resulted primarily from the acquisition of HAI and Allied in
December 1997 and continued revenue growth at Green Spring. HAI and Allied
revenues were approximately $9.2 million and $18.5 million, respectively, for
the quarter ended December 31, 1997. Green Spring revenues were positively
impacted by the award of several new contracts and acquisitions since December
31, 1996, resulting in a 54% increase in covered lives to 21.1 million as of
December 31, 1997 as compared to December 31, 1996.
Public sector revenue increased 36.1% to $29.3 million for the quarter ended
December 31, 1997 from $21.5 million in the same period in fiscal 1997. The
increase was primarily attributable to a 26% increase in placements in Mentor
homes and $1.7 million in additional revenues from correctional contracts.
Healthcare franchising revenue was $19.6 million for the quarter ended
December 31, 1997. The healthcare franchising revenue consisted of Franchise
Fees payable by CBHS pursuant to the master franchising agreement entered into
as part of the Crescent Transactions.
Provider business revenue decreased 86.3% to $33.1 million for the quarter
ended December 31, 1997 from $242.4 million in the same period in fiscal 1997.
The decrease resulted primarily from the effect of the consummation of the
Crescent Transactions on June 17, 1997, following which revenue from the
Psychiatric Hospital Facilities and other facilities transferred to CBHS was no
longer recorded as part of the Company's revenue. During the quarters ended
December 31, 1996 and 1997, the Company recorded revenue of $11.0 million and
$0.7 million, respectively, for settlements and adjustments related to
reimbursement issues with respect to psychiatric hospitals owned or formerly
owned by the Company. During fiscal 1997, the Company recorded $27.4 million for
such settlements. Management anticipates that revenue related to such
settlements will decline significantly for fiscal 1998.
SALARIES, COST OF CARE AND OTHER OPERATING EXPENSES. Salaries, cost of care
and other operating expenses attributable to the managed care business increased
61.7% to $119.6 million for the quarter ended December 31, 1997 from $73.9
million in the same period in fiscal 1997. The increase resulted primarily from
the acquisition of HAI and Allied, which had expenses of $6.8 million and $17.6
million, respectively, for the quarter ended December 31, 1997, and from
continued growth at Green Spring.
Public sector salaries, cost of care and other operating expenses increased
39.0% to $27.4 million for the quarter ended December 31, 1997 from $19.7
million in the same period in fiscal 1997. The increase was due primarily to
internal growth and increases in costs related to expansion and new product
development.
Healthcare franchising operating expenses were $2.2 million for the quarter
ended December 31, 1997. The Company recorded no expenses with respect to the
healthcare franchising business during the quarter ended December 31, 1996
because the Crescent Transactions were not consummated until the third quarter
of fiscal 1997.
Salaries, cost of care and other operating expenses attributable to the
provider business decreased 88.0% to $22.1 million for the quarter ended
December 31, 1997 from $184.7 million in the same period in fiscal 1997. The
decrease resulted primarily from the effect of the consummation of the Crescent
Transactions, following which operating expenses of the Psychiatric Hospital
Facilities and other facilities transferred to CBHS were no longer accounted for
as part of the Company's operating expenses. During the quarter ended December
31, 1997, the Company recorded reductions of expenses of approximately $4.1
million as a result of updated actuarial estimates related to malpractice claim
reserves. These reductions resulted primarily from updates to actuarial
assumptions regarding the Company's expected losses for more recent policy
years. These revisions are based on changes in expected values of ultimate
losses resulting from the Company's claim experience, and increased
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reliance on such claim experience. While management and its actuaries believe
that the present reserve is reasonable, ultimate settlement of losses may vary
from the amount recorded and result in additional fluctuations in income in
future periods.
BAD DEBT EXPENSE. Bad debt expense, which is primarily attributable to the
provider business, decreased 94.7%, or $19.2 million, for the quarter ended
December 31, 1997 compared to the same period in fiscal 1997. The decrease was
primarily attributable to the effect of the consummation of the Crescent
Transactions, following which the bad debt expense incurred by the Psychiatric
Hospital Facilities and other facilities transferred to CBHS was no longer
accounted for as part of the Company's bad debt expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
46.8%, or $6.1 million, for the quarter ended December 31, 1997 compared to the
same period in fiscal 1997. The decrease was primarily attributable to the
effect of the consummation of the Crescent Transactions, whereby the Psychiatric
Hospital Facilities were sold to Crescent, offset by increases in depreciation
and amortization resulting from the HAI and Allied acquisitions.
INTEREST, NET. Interest expense, net, decreased 45.5%, or $6.2 million, for
the quarter ended December 31, 1997 compared to the same period in fiscal 1997.
The decrease was primarily the result of lower interest expense due to lower
average borrowings and higher interest income due to temporary investments of
the cash received in the Crescent Transactions.
OTHER ITEMS. Stock option expense (credit) for the quarter ended December
31, 1997 decreased $4.6 million from the quarter ended December 31, 1996
primarily due to fluctuations in the market price of the Company's common stock.
The Company recorded equity in the loss of CBHS of $11.5 million for the
quarter ended December 31, 1997, representing the Company's proportionate (50%)
loss in CBHS for the quarter ended December 31, 1997.
Minority interest increased $0.9 million during the quarter ended December
31, 1997 compared to the same period in fiscal 1997. The increase was primarily
due to Green Spring's net income growth in fiscal 1998.
The Company recorded an extraordinary loss on early extinguishment of debt,
net of tax, of $3.0 million during the quarter ended December 31, 1996 related
to the termination of its then existing credit agreement.
FISCAL 1996 COMPARED TO FISCAL 1997.
REVENUE. Managed care business revenue increased 58.3%, or $134.0 million,
in fiscal 1997 compared to fiscal 1996. The increase resulted primarily from the
inclusion of a full year of Green Spring operations in fiscal 1997 results.
Managed care business revenue was also positively impacted by the award of
several new contracts to Green Spring in the fourth quarter of fiscal 1996 and
in fiscal 1997, resulting in a 22% increase in covered lives on September 30,
1997 as compared to September 30, 1996.
Public sector business revenue increased 33.5%, or $23.7 million, in fiscal
1997 compared to fiscal 1996. The increase was primarily attributable to a 23%
increase in placements in Mentor homes and $5.2 million in additional revenues
from correctional contracts awarded in fiscal 1996 and fiscal 1997.
Healthcare franchising business revenue was $22.7 million for fiscal 1997.
The healthcare franchising business revenue consisted of Franchise Fees paid by
CBHS pursuant to the Master Franchise Agreement since the consummation of the
Crescent Transactions.
Provider business revenue decreased 30.2%, or $315.1 million, in fiscal 1997
compared to fiscal 1996. The decrease resulted primarily from: (i) the effect of
the consummation of the Crescent Transactions on June 17, 1997, following which
revenue from the Psychiatric Hospital Facilities and other
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facilities transferred to CBHS was no longer recorded as part of the Company's
revenue; (ii) the closure of hospitals in fiscal 1996 and 1997; and (iii)
reduced equivalent patient days at the Company's operating hospitals as a result
of reduced average length of stay. During fiscal 1996 and 1997, the Company
recorded revenue of $28.3 million and $27.4 million, respectively, for
settlements and adjustments related to reimbursement issues with respect to
psychiatric hospital facilities owned by the Company. The settlements and
adjustments related primarily to certain reimbursement issues associated with
the Company's financial reorganization in fiscal 1992 and early extinguishment
of long-term debt in fiscal 1994. Management anticipates that revenue related to
such settlements will decline significantly for fiscal 1998.
SALARIES, COST OF CARE AND OTHER OPERATING EXPENSES. Salaries, cost of care
and other operating expenses attributable to the managed care business increased
59.8%, or $121.1 million, in fiscal 1997 compared to fiscal 1996 as a result of
the acquisition of Green Spring and its growth during the period.
With respect to the public sector business, salaries, cost of care and other
operating expenses increased 42.5%, or $25.9 million, in fiscal 1997 compared to
fiscal 1996 due to internal growth, increases in costs related to expansion and
approximately $1.2 million of expenditures related to new product development.
The Company recorded no expenses with respect to the healthcare franchising
business during fiscal 1996 because the Crescent Transactions were not
consummated until the third quarter of fiscal 1997.
Salaries, cost of care and other operating expenses attributable to the
provider business decreased 29.7%, or $227.4 million, in fiscal 1997 compared to
fiscal 1996. The decrease resulted primarily from: (i) the effect of the
consummation of the Crescent Transactions, following which operating expenses of
the Psychiatric Hospital Facilities and other facilities transferred to CBHS
were no longer accounted for as part of the Company's operating expenses and
(ii) the closure of hospitals during fiscal 1996 and 1997. During fiscal 1996
and 1997, the Company recorded reductions of expenses of approximately $15.3
million and $7.5 million, respectively, as a result of updated actuarial
estimates related to malpractice claim reserves. These reductions resulted
primarily from updates to actuarial assumptions regarding the Company's expected
losses for more recent policy years. These revisions are based on changes in
expected values of ultimate losses resulting from the Company's claim
experience, and increased reliance on such claim experience. While management
and its actuaries believe that the present reserve is reasonable, ultimate
settlement of losses may vary from the amount recorded and result in additional
fluctuations in income in future periods.
Salaries and other operating expenses attributable to the Company's
headquarters decreased 26.5%, or $9.2 million, due primarily to the transfer of
personnel and overhead to CBHS and the healthcare franchising business as a
result of the Crescent Transactions.
BAD DEBT EXPENSE. Bad debt expense, which is primarily attributable to the
provider business, decreased 43.3%, or $35.3 million, in fiscal 1997 compared to
fiscal 1996. The decrease was primarily attributable to: (i) the effect of the
consummation of the Crescent Transactions, following which the bad debt expense
of the Psychiatric Hospital Facilities and other facilities transferred to CBHS
was no longer accounted for as part of the Company's bad debt expense; (ii)
improved accounts receivable aging and turnover compared to prior periods; and
(iii) a shift towards governmental and managed care payors, which reduced the
Company's credit risk associated with individual patients.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
8.3%, or $4.1 million, in fiscal 1997 compared to fiscal 1996. The decrease was
primarily attributable to the effect of the consummation of the Crescent
Transactions, whereby the Psychiatric Hospital Facilities were sold to Crescent,
offset by increases in depreciation and amortization resulting from the Green
Spring acquisition.
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INTEREST, NET. Interest, net, decreased 5.5%, or $2.6 million, in fiscal
1997 compared to fiscal 1996. The decrease was primarily the result of lower
interest expense due to lower average borrowings and higher interest income due
to temporary investments of the cash received in the Crescent Transactions.
Fiscal 1996 included approximately $5.0 million of interest income related to
income tax refunds from the State of California for the Company's income tax
returns for fiscal 1982 through 1989.
OTHER ITEMS. Stock option expense for fiscal 1997 increased $3.4 million
from fiscal 1996 primarily due to fluctuations in the market price of the
Company's Common Stock.
The Company recorded equity in the loss of CBHS of $8.1 million in fiscal
1997, representing the Company's proportionate (50%) loss in CBHS for the 106
days ended September 30, 1997.
The Company recorded a loss on the Crescent Transactions of approximately
$59.9 million during fiscal 1997.
The Company recorded unusual items, net, of $0.4 million during fiscal 1997,
which consisted of: (i) a $5.4 million net pre-tax gain on the sales of
previously closed psychiatric hospitals; (ii) a $4.2 million charge for the
closure of three psychiatric hospitals and one general hospital; and (iii) a
$1.6 million charge related to the termination of an agreement to sell the
Company's European hospitals.
Minority interest increased $2.9 million during fiscal 1997 compared to
fiscal 1996. The increase was primarily due to: (i) the Company acquiring a
controlling interest in Green Spring in December 1995; (ii) Green Spring's
internal growth subsequent to the acquisition date; and (iii) increased net
income from hospital-based joint ventures.
The Company recorded extraordinary losses on early extinguishment of debt,
net of tax, of $5.3 million during fiscal 1997.
The fourth quarter of fiscal 1997 included increases to income before income
taxes and minority interest of approximately $6.4 million for revenue and bad
debt adjustments related to accounts receivable retained by the Company that
were generated by the hospitals operated by CBHS. Such adjustments reflect a
change in estimates of contractual allowances and allowance for doubtful
accounts of such receivables based on the collection activity subsequent to the
completion of the Crescent Transactions.
FISCAL 1995 COMPARED TO FISCAL 1996.
REVENUE. The Company's net revenue for fiscal 1996 increased 16.8%, or
$193.5 million, compared to fiscal 1995. The increase resulted primarily from
the acquisitions of Green Spring and Mentor offset in part by: (i) the effect of
hospitals closed during fiscal 1995 and 1996 and (ii) the decrease in revenue
per equivalent patient day in fiscal 1996. Net revenue per equivalent patient
day at the Company's psychiatric hospitals decreased in 1996 by 4.5% compared to
fiscal 1995. The decreases were primarily due to: (i) continued shift in payor
mix from private payor sources to managed care payors and governmental payors;
(ii) pricing pressure from certain payors, primarily related to the denial of
claims payable to the hospitals; (iii) lower settlements of reimbursement
issues; (iv) shifts in program mix to residential treatment settings from acute
care settings; and (v) the elimination of ESOP expense in fiscal 1996, which
resulted in lower Medicare reimbursement levels.
Managed care business revenue was $229.9 million in 1996, as a result of the
acquisition of Green Spring during the first quarter of fiscal 1996.
Public sector business revenue increased from $44.8 million in fiscal 1995
to $70.7 million in fiscal 1996 as a result of the inclusion of a full year of
operations of Mentor, which was acquired in January 1995.
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During fiscal 1995 and 1996, the Company recorded revenue of $35.6 million
and $28.3 million, respectively, for settlements and adjustments related to
reimbursement issues with respect to psychiatric hospital facilities owned by
the Company. The settlements in fiscal 1995 and 1996 related primarily to
certain reimbursable costs associated with the Company's financial
reorganization in fiscal 1992 and costs related to the early extinguishment of
long-term debt in fiscal 1994.
SALARIES, COST OF CARE AND OTHER OPERATING EXPENSES. The Company's
salaries, cost of care and other operating expenses increased 23.3%, or $200.8
million, in fiscal 1996 compared to fiscal 1995. The increase resulted primarily
from the acquisitions of Green Spring and Mentor, offset in part by: (i) the
effect of hospitals closed in fiscal 1995 and 1996 and (ii) adjustments, as a
result of updated actuarial estimates to malpractice claim reserves, which
resulted in a reduction of expenses of approximately $15.3 million during fiscal
1996.
Managed care business salaries, cost of care and other operating expenses
were $202.7 million during fiscal 1996 as a result of the Green Spring
acquisition.
Public sector business salaries, cost of care and other operating expenses
increased from $38.1 million in fiscal 1995 to $60.8 million during fiscal 1996
as a result of the Mentor acquisition.
BAD DEBT EXPENSE. The Company's bad debt expense decreased 11.5%, or $10.6
million, during fiscal 1996 compared to fiscal 1995. The decrease was primarily
due to: (i) the shift in the provider business to managed care payors, which
reduces the Company's credit risk associated with individual patients, and (ii)
the number of reduced days of net revenue in its hospital receivables at
September 30, 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
28.5%, or $10.8 million, during fiscal 1996 compared to fiscal 1995. The
increase resulted primarily from depreciation and amortization related to the
acquisition of Green Spring.
Reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Value") and ESOP expense were not recorded in fiscal 1996 as a
result of the completion of the amortization of Reorganization Value in fiscal
1995 and the Company's decision to allocate all existing shares held by the ESOP
to the participants as of September 30, 1995.
INTEREST, NET. Interest, net, decreased 13.1%, or $7.2 million, during
fiscal 1996 compared to fiscal 1995. The decrease resulted primarily from
approximately $5.0 million of interest income recorded during fiscal 1996
related to income tax refunds due from the State of California for the Company's
income tax returns for fiscal 1982 through 1989.
OTHER ITEMS. Stock option expense for fiscal 1996 increased $1.4 million
from the previous year due to fluctuations in the market price of the Company's
Common Stock.
During fiscal 1996, the Company recorded unusual items of $37.3 million.
Included in the unusual charges was the resolution of a billing dispute in
August 1996 between the Company and a group of insurance carriers that arose in
fiscal 1996 related to matters originating in the 1980's. As part of the
settlement of these claims, certain related payor matters and associated legal
fees, the Company recorded a charge of approximately $30.0 million. The Company
is paying the insurance settlement in twelve installments over a three-year
period. The Company's obligation to make the settlement payments is supported by
a cash collateralized letter of credit. Other unusual items included: (i)
charges of approximately $4.1 million during fiscal 1996 related to the closure
of psychiatric hospitals; (ii) a charge of approximately $1.2 million related to
impairment losses; and (iii) charges of approximately $2.0 million related to
severance costs for personnel reductions.
During fiscal 1995, the Company recorded unusual items of $57.4 million. The
unusual charges include the resolution in March 1995 of disputes between the
Company and a group of insurance carriers that arose in fiscal 1995 related to
claims paid predominantly in the 1980's. As part of the
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resolution, the Company agreed to pay the insurance carriers approximately $29.8
million in five installments over a three-year period. Other unusual items
included: (i) a charge of approximately $3.6 million related to the closure of
five psychiatric hospitals; (ii) a charge of approximately $27.0 million related
to the adoption and implementation of Statement of Financial Accounting
Standards No. 121; and (iii) a gain of approximately $3.0 million on the sale of
three psychiatric hospitals.
In fiscal 1995, the Company recorded an income tax benefit because it had a
net operating loss during the period. The Company's effective tax rate was 40.0%
during fiscal 1996. The change in the effective tax rate was primarily
attributable to: (i) the elimination of non-deductible amortization of
Reorganization Value in fiscal 1996 and (ii) the reduction in the Company's
effective tax rate as a result of the favorable resolution of the Company's
California income tax returns for fiscal 1982 through 1989, partially offset by
the increase in non-deductible intangible amortization in fiscal 1996 as a
result of the acquisitions of Mentor and Green Spring.
Minority interest increased $5.8 million during fiscal 1996 compared to
fiscal 1995. The increase was primarily due to the Company acquiring a
controlling interest in Green Spring in December 1995 and obtaining a
controlling interest in other businesses during fiscal 1995 and 1996.
IMPACT OF CRESCENT TRANSACTIONS.
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 following is a discussion of certain
matters related to the Company's ownership of CBHS that may have a bearing on
the Company's future results of operations.
CBHS may consolidate services in selected markets by closing facilities
depending on market conditions and evolving business strategies. For example,
during fiscal 1995 and 1996, the Company consolidated, closed or sold 15 and 9
psychiatric hospitals, respectively. During fiscal 1997, the Company
consolidated or closed three psychiatric hospitals, prior to the Crescent
Transactions. If CBHS closes additional psychiatric hospitals, it could result
in charges to income for the costs attributable to the closures, which would
result in lower equity in earnings of CBHS for the Company.
The Company's joint venture hospitals and CBHS' hospitals continue to
experience a shift in payor mix to managed care payors from other payors, which
contributed to a reduction in revenue per equivalent patient day in fiscal 1996
and a decline in average length of stay in fiscal 1995, 1996 and 1997.
Management anticipates a continued shift in hospital payor mix towards managed
care payors as a result of changes in the healthcare marketplace. Future shifts
in hospital payor mix to managed care payors could result in lower revenue per
equivalent patient day and lower average length of stay in future periods for
the Company's joint venture hospitals and CBHS' hospitals, which could result in
lower equity in earnings from CBHS for the Company and cash flows to pay the
Franchise Fees. The hospitals currently managed or operated by CBHS, including
hospitals closed or sold in 1997, reported a 10% reduction in equivalent patient
days, a 7% reduction in average length of stay and a 4% decrease in admissions
as compared to the same period in 1996.
The Budget Act, which was enacted in August 1997, includes provisions that
eliminated the TEFRA bonus payment and reduced reimbursement of certain costs
previously paid by Medicare and eliminated the Medicaid "disproportionate share"
program. These provisions, along with other provisions in the Budget Act, will
reduce the amount of revenue and earnings that CBHS hospitals will receive for
the treatment of Medicare patients. CBHS management estimates that such
reductions will approximate $10 million in fiscal 1998, and due to the phase-in
effects of the Budget Act, approximately $15 million annually in subsequent
fiscal years.
Based on projections of fiscal 1998 operations prepared by management of
CBHS, the Company believes that CBHS will be unable to pay the full amount of
the Franchise Fees it is contractually obligated to pay the Company during
fiscal 1998. The Company currently estimates that CBHS will be
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able to pay approximately $58.0 to $68.0 million of the Franchise Fees in fiscal
1998, a $10.0 to $20.0 million shortfall relative to amounts payable under the
Master Franchise Agreement. The Company may be required to record bad debt
expense related to Franchise Fees receivable from CBHS, if any, in fiscal 1998
or future periods if CBHS's operating performance does not improve to levels
achieved prior to the consummation of the Crescent Transactions. If CBHS
defaults in payment of the Franchise Fees, the Company will pursue all remedies
available to it under the Master Franchise Agreement. See "Charter
Advantage--Franchise Operations."
IMPACT OF THE ACQUISITION.
As a result of the Acquisition, the Company has over 58.0 million covered
lives under managed behavioral healthcare contracts and manages behavioral
healthcare programs for over 4,000 customers. The Company believes it also now
has the number one market position in each of the major product markets in which
it competes. The Company believes its industry leading position will enhance its
ability to: (i) provide a consistent level of high quality service on a
nationwide basis; (ii) enter into favorable agreements with behavioral
healthcare providers that allow it to effectively control healthcare costs for
its customers; and (iii) effectively market its managed care products to large
corporate, HMO and insurance customers, which, the Company believes,
increasingly prefer to be serviced by a single-source provider on a national
basis.
The Company believes that the Acquisition has created opportunities for the
Company to achieve significant cost savings in its managed behavioral healthcare
business. Management believes that cost savings opportunities will result from
leveraging fixed overhead over a larger revenue base and an increased number of
covered lives and from reducing duplicative corporate and regional selling,
general and administrative expenses. As a result, the Company expects to achieve
approximately $60.0 million of cost savings in its managed behavioral healthcare
business on an annual basis within eighteen months following the consummation of
the Acquisition. The Company expects to spend approximately $26.0 million during
the eighteen months following the consummation of the Acquisition in connection
with achieving such costs.
The Company expects to finalize its plans for the integration of the
businesses of Green Spring, HAI and Merit by March 31, 1998. The Company expects
to record charges to operations during the quarter ended March 31, 1998 to the
extent the integration plan results in the elimination of personnel and facility
closures at HAI and Green Spring and for integration plan costs incurred that
benefit future periods.
The full implementation of the integration plan is expected to take eighteen
months. The Acquisition and related transactions are expected to be dilutive to
earnings during the remaining quarters of fiscal 1998.
The Company expects to record an extraordinary loss of approximately $30.0
million to $35.0 million, net of tax benefits, in connection with the
termination of its Credit Agreement and extinguishing the Magellan Outstanding
Notes as part of the Transactions.
IMPACT OF THE CBHS TRANSACTIONS.
If the CBHS Transactions are consummated, the Company will no longer conduct
its franchising operations. Accordingly, the Company will no longer receive
Franchise Fees or incur expenses related to the Franchise Fees. In addition, if
the CBHS Transactions are consummated, the Company will sell substantially all
of its domestic provider operations. The net proceeds from the CBHS Transactions
will be used to reduce debt. The CBHS Transactions, if consummated, would reduce
the Company's future earnings as the earnings of the Company attributable to the
franchise operations and the domestic provider operations which would be sold in
the CBHS Transactions would exceed the decrease in interest expense as a result
of reduced debt.
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HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company's net cash provided by operating
activities was $101.9 million and $73.6 million for fiscal 1996 and fiscal 1997,
respectively. The decrease in net cash provided by operating activities in
fiscal 1997 compared to fiscal 1996 was primarily the result of: (i) higher
income tax payments ($9.3 million and $18.4 million in fiscal 1996 and fiscal
1997, respectively); (ii) $5.0 million of interest income related to income tax
refunds from the State of California in fiscal 1996; (iii) higher insurance
settlement payments ($24.6 million in fiscal 1996 and $28.5 million in fiscal
1997); and (iv) reduced cash flows from the provider business, net of franchise
fees received.
The Company's net cash used in operating activities was approximately $23.4
million and $31.7 million for the quarters ended December 31, 1996 and 1997,
respectively. The Company typically had negative operating cash flows in the
December quarter each year due to the interest payment previously due in October
each year for the Magellan Outstanding Notes and annual employee incentive
payments. Operating cash flows for the quarter ended December 31, 1997 were also
adversely affected by the change in due to/from CBHS, primarily due to working
capital advances, of $11.3 million, the prepayment of CHARTER call center
management fees to CBHS of $5.9 million and insurance settlement payments of
$6.8 million.
INVESTING ACTIVITIES. The Company acquired a 61% ownership interest in
Green Spring during the first quarter of fiscal 1996. The consideration paid for
Green Spring and related acquisition costs resulted in the use of cash of
approximately $87.2 million compared to approximately $50.9 million for
acquisitions and investments in businesses, including CBHS, during fiscal 1997.
The Crescent Transactions resulted in net proceeds of $380.4 million, during
fiscal 1997, consisting of $393.7 million related to the sale of property and
equipment to Crescent and CBHS, less $13.3 million in costs and construction
obligations incurred to date.
The Company made $20.0 million of cash capital contributions to CBHS during
fiscal 1997. The Company has no present intention of making any additional
capital contributions to CBHS.
The Company utilized $165.5 million in funds, net of cash acquired, for
acquisitions and investments in businesses, including Allied and HAI, during the
quarter ended December 31, 1997. In addition, the Company paid approximately
$4.3 million for Crescent Transaction costs during the quarter ended December
31, 1997. The Company expects to fund an additional $6.6 million in transaction
costs and construction costs during the remainder of fiscal 1998 related to the
Crescent Transactions.
FINANCING ACTIVITIES. The Company borrowed approximately $104.8 million and
$203.6 million during fiscal 1996 and 1997, respectively. The fiscal 1996
borrowings primarily funded the Green Spring acquisition and $35.0 million of
treasury stock purchases. The fiscal 1997 borrowings primarily funded the
repayment of variable rate secured notes and other long-term debt (including the
refinancing of a previous revolving credit agreement), acquisitions and working
capital needs.
The Company repaid approximately $85.8 million and $390.3 million of debt
and capital lease obligations during fiscal 1996 and 1997, respectively. The
fiscal 1997 repayments related primarily to a previous revolving credit
agreement and repaying other indebtedness as a result of the Crescent
Transactions.
On January 25, 1996, the Company sold 4.0 million shares of Common Stock
along with the Rainwater-Magellan Warrant pursuant to the Private Placement. The
Rainwater-Magellan Warrant, which expires in January, 2000, entitles the holder
to purchase 2.0 million shares of Common Stock at a per share price of $26.15,
subject to adjustment for certain dilutive events, and provides registration
rights for the shares of Common Stock underlying the warrant. The warrant became
exercisable on January 25, 1997. The Company received proceeds of approximately
$68.6 million, net of issuance costs, from the Private Placement. Approximately
$68.0 million of the proceeds were used to repay outstanding borrowings related
to the Green Spring acquisition.
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The Company issued approximately 2.6 million warrants to Crescent and COI
for $25.0 million in cash as part of the Crescent Transactions during fiscal
1997.
On September 27, 1996, the Company repurchased approximately 4.0 million
shares of its Common Stock for approximately $73.5 million, including
transaction costs, pursuant to a "Dutch Auction" self-tender offer to its
stockholders. On November 1, 1996, the Company announced that its board of
directors approved the repurchase of an additional 3.0 million shares of its
Common Stock from time to time subject to the terms of the Magellan Existing
Credit Agreement.
The Company borrowed approximately $126.8 million, net of issuance costs, in
the first quarter of fiscal 1997, primarily to refinance its then existing
credit agreement. The Company repurchased approximately 545,000 shares of its
common stock for approximately $12.5 million during the quarter ended December
31, 1997.
As of February 12, 1998, the Company had approximately $112.5 million of
availability under the Revolving Facility of the Credit Agreement. The Company
was in compliance with all debt covenants as of February 12, 1998.
OUTLOOK--LIQUIDITY AND CAPITAL RESOURCES
Following the consummation of the Transactions, interest payments on the
Notes and interest and principal payments on indebtedness outstanding pursuant
to the New Credit Agreement represent significant liquidity requirements for the
Company. Borrowings under the New Credit Agreement bear interest at floating
rates and require interest payments on varying dates depending on the interest
rate option selected by the Company. Borrowings pursuant to the New Credit
Agreement include $550 million in term loans and up to $150 million under the
Revolving Facility. Commencing in the second quarter of fiscal 1999, the Company
will be required to make principal payments with respect to the term loans.
The Company is in the process of finalizing its plans for the integration of
the businesses of Green Spring, HAI and Merit. 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. Such cost savings are
measured relative to the combined budgeted amounts of the Company, Merit and HAI
for the current fiscal year prior to the cost savings initiatives. The Company
expects to spend approximately $26.0 million during the eighteen months
following the consummation of the Acquisition in connection with achieving such
cost savings, including expenses related to reducing duplicative personnel in
its managed care organizations, contractual terminations for eliminating excess
real estate (primarily locations under operating leases) and other related costs
in connection with the integration plan. Certain of such costs will be capital
expenditures.
During December 1997, the Company purchased HAI and Allied for approximately
$122.1 million and $70.0 million, respectively, excluding transaction costs. In
addition, the Company incurred the obligation to make contingent payments to the
former owners of HAI and Allied. With respect to HAI, the Company may be
required to make additional contingent payments of up to $60.0 million annually
to Aetna over the five-year period subsequent to closing. The Company is
obligated to make contingent payments under two separate calculations. Under the
first calculation, the amount and timing of the contingent payments will be
based on growth in the number of lives covered by certain HAI products during
the next five years. The Company may be required to make contingent payments of
up to $25.0 million per year for each of the five years following the HAI
acquisition depending on the net annual growth in the number of lives covered by
such HAI products. Aetna will receive a specified amount per net incremental
life covered by such products. The amount to be paid per incremental covered
life decreases during the five-year term of the Company's contingent payment
obligation. Under the second calculation, the Company may be required to make
contingent payments of up to $35.0 million per year for each of five years based
on the net cumulative growth in the number of lives covered by certain other HAI
products. Aetna will receive a specified amount per net incremental life covered
by such products.
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The amount to be paid per incremental covered life increases with the number of
incremental covered lives.
The Company may be required to pay up to $40.0 million during the three
years following the closing of the Allied acquisition based on Allied's
performance relative to certain earnings targets. In connection with Merit's
acquisition of CMG, the Company, by acquiring Merit, may be required to make
certain future contingent cash payments over the next two years to the former
shareholders of CMG based upon the performance of certain CMG customer
contracts. Such contingent payments are subject to an aggregate maximum of $23.5
million.
The Company believes that the cash flow generated from its operations
together with amounts available for borrowing under the New Credit Agreement,
should be sufficient to fund its debt service requirements, anticipated capital
expenditures, contingent payments, if any, with respect to HAI, Allied and CMG
and other investing and financing activities. The CBHS Transactions, if
consummated, would result in an estimated annual reduction in cash flows from
operations of $25.0 million to $35.0 million. The Company currently estimates
that it will spend approximately $50.0 million to $60.0 million for capital
expenditures in fiscal 1998. On a combined basis, the Company (excluding its
provider business), Merit and HAI spent approximately $40 million for capital
expenditures during fiscal 1997. The majority of the Company's budgeted capital
expenditures relate to management information systems and related equipment. The
Revolving Facility will provide the Company with revolving loans and letters of
credit in an aggregate principal amount at any time not to exceed $150.0
million. Immediately after the consummation of the Transactions, approximately
$112.5 million was available to the Company for borrowing pursuant to the
Revolving Facility. The Company's future operating performance and ability to
service or refinance the Notes or to extend or refinance the indebtedness
outstanding pursuant to the New Credit Agreement will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control.
The New Credit Agreement imposes restrictions on the Company's ability to
make capital expenditures and both the New Credit Agreement and the Indenture
governing the Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged financial
condition of the Company subsequent to the Transactions, limit the Company's
ability to respond to market opportunities. The covenants contained in the New
Credit Agreement also, among other things, restrict the ability of the Company
to dispose of assets, repay other indebtedness, amend other debt instruments
(including the Indenture), pay dividends, create liens on assets, enter into
sale and leaseback transactions, make investments, loans or advances, redeem or
repurchase common stock and make acquisitions. See "Risk Factors--Substantial
Leverage and Debt Service Obligations," "Description of the New Notes" and
"Summary of New Credit Agreement."
MODIFICATION OF COMPUTER SOFTWARE FOR THE YEAR 2000
The Company and its subsidiaries have internally developed computer software
systems that process transactions based on storing two digits for the year of a
transaction (i.e., "97 " for 1997) rather than four digits, which will be
required for year 2000 transaction processing. CBHS expects to spend $1.0
million in the aggregate during fiscal 1998 and fiscal 1999 to modify internal
use software. The Company expects to spend approximately $1.6 million in the
aggregate during fiscal 1998 and fiscal 1999 to modify internal use software.
The Company does not anticipate incurring any other significant costs for year
2000 software modification. The cost of modifying internal use software for the
year 2000 is charged to expense as incurred.
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MERIT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING IS AN EXCERPT FROM MERIT'S ANNUAL REPORT ON FORM 10-K FOR ITS
FISCAL YEAR ENDED SEPTEMBER 30, 1997. THE EXCERPT IS PRESENTED TO ASSIST HOLDERS
OF THE OLD NOTES IN EVALUATING THE EXCHANGE OFFER. THE EXCERPT HAS BEEN REVISED
TO PERMIT CONSISTENT USE OF TERMS DEFINED ELSEWHERE IN THIS PROSPECTUS.
FURTHERMORE, THE COMPANY ADDED THE TEXT THAT APPEARS IN ITALICS AND PARENTHESIS
TO PROVIDE AN EXPLANATION OF CERTAIN TERMS THAT ARE DEFINED ELSEWHERE IN MERIT'S
ANNUAL REPORT ON FORM 10-K. THE FOLLOWING ALSO INCLUDES DISCUSSION AND ANALYSIS
OF MERIT'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
AND 1997.
OVERVIEW
REVENUE
Typically, Merit charges each of its HMO, Blue Cross/Blue Shield
organization, insurance company, corporate, union, governmental and other
customers a flat monthly capitation fee for each beneficiary enrolled in such
customer's behavioral health managed care plan or EAP. This capitation fee is
generally paid to Merit in the current month. Contract revenue billed in advance
of performing related services is deferred and recognized ratably over the
period to which it applies. For a number of Merit's behavioral health managed
care programs, the capitation fee is divided into outpatient and inpatient fees,
which are recognized separately. Outpatient revenue is recognized monthly as it
is received; inpatient revenue is recognized monthly and in most cases is (i)
paid to Merit monthly (in cases where Merit is responsible for the payment of
inpatient claims) or in certain cases (ii) retained by the customer for payment
of inpatient claims. When the customer retains the inpatient revenue, actual
inpatient costs are periodically reconciled to amounts retained and Merit
receives the excess of the amounts retained over the cost of services, or
reimburses the customer if the cost of services exceeds the amounts retained. In
certain instances, such excess or deficiency is shared between Merit and the
customer.
DIRECT SERVICE COSTS AND MARGINS
Direct service costs are comprised principally of expenses associated with
managing, supervising and providing Merit's services, including third-party
network provider charges, various charges associated with Merit's staff offices,
inpatient facility charges, costs associated with members of management
principally engaged in Merit's clinical operations and their support staff, and
rent for certain offices maintained by Merit in connection with the delivery of
services. Direct service costs are recognized in the month in which services are
expected to be rendered. Network provider and facility charges for authorized
services that have not been reported and billed to Merit (known as incurred but
not reported expenses, or "IBNR") are estimated and accrued based on historical
experience, current enrollment statistics, patient census data, adjudication
decisions, and other information.
Merit has experienced an increase in direct service costs as a percentage of
revenue (which have been offset to varying degrees by various initiatives
described below) primarily as a result of changing product mix and pricing
pressure associated with both the competitive bid process for new contracts and
negotiations to extend existing contracts. The portion of Merit's revenue
attributable to capitated managed care programs has continuously been
increasing. Because capitated managed care programs require Merit to incur
greater direct service costs than EAP and ASO managed care programs, the direct
profit margins attributable to such programs are lower than the direct profit
margins attributable to Merit's EAP and ASO programs. Merit is continuing to
focus on reducing direct service costs. Efforts intended to reduce these costs
include: (i) negotiating better rates and/or different compensation arrangements
(such as retainer arrangements, volume discounts, case rates and capitation of
fees) with third-party network providers and treatment facilities; (ii)
contracting with treatment facilities that provide a broader spectrum of
treatment programs in an effort to expand beneficiary access to a broader
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continuum of care, thereby achieving more cost-effective treatment; (iii)
focusing management and clinical care techniques on patients requiring more
intensive treatment services to assure that such patients receive the
appropriate level of care in a cost-efficient and effective manner; (iv)
implementing a new information system intended to enable Merit to improve the
productivity and efficiency of its operations; and (v) increasing the overall
efficiency of Merit's staff provider system by closing or consolidating less
efficient staff offices, streamlining operations and increasing the efficiency
of remaining staff offices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses are comprised principally of
corporate and regional overhead expenses, such as marketing and sales, legal,
finance, information systems and administrative expenses, as well as
professional and consulting fees, and the compensation of members of the Merit's
senior management. Merit expects selling, general and administrative expenses to
grow over the near term, primarily due to growth in information systems expenses
related to the implementation of AMISYS-Registered Trademark- (A CENTRALIZED
INFORMATION SYSTEM THAT IS MERIT'S PRIMARY SYSTEM) as well as increases in
regional administration and sales and marketing operations necessary to support
the growth of Merit's business; however, Merit expects selling, general and
administrative expenses to grow at a rate less than that of anticipated revenue
growth in the future. There can be no assurance, however, that anticipated
revenue growth will occur or that any such revenue growth will occur at a rate
greater than the rate of growth in selling, general and administrative expenses.
AMORTIZATION OF INTANGIBLES
As a result of Merck's (MERCK & CO., INC.) acquisition of Medco Containment
Services, Inc. (MERIT'S PREVIOUS OWNER) in November 1993, Merit's financial
statements include an allocation by Merck of the excess of its cost over fair
market value of the net assets acquired. Accordingly, goodwill and other
acquisition-related intangibles in the amount of $160.0 million were recorded on
Merit's balance sheet as of November 1993 and are being amortized over various
periods. A noncurrent deferred tax liability of $47.8 million was established to
reflect the tax consequences of the difference between the financial and tax
reporting bases of the identified intangibles. Merit's total goodwill also
includes goodwill associated with Merit's acquisitions of Group Plan Clinic,
Inc., and of BenesYs, Inc. (collectively, "BenesYs"), a Houston-based behavioral
health managed care organization, and CMG. In addition, the payment made to
Empire (EMPIRE BLUE CROSS AND BLUE SHIELD ("EMPIRE")) in connection with the
Empire Joint Venture (MERIT'S JOINT VENTURE WITH EMPIRE IN SEPTEMBER 1995 (THE
"EMPIRE JOINT VENTURE")), the acquisition of ProPsych, Inc. ("ProPsych") in
December 1995, and various contingent consideration payments, together with the
goodwill recognized from the BenesYs and CMG transactions, resulted in the
incurrence of additional goodwill of approximately $117.8 million. Amortization
of acquisition-related intangibles was $20.1 million in fiscal 1995, $23.0
million in fiscal 1996, and $23.8 million in fiscal 1997.
Merit also capitalizes certain start-up expenses related to new contracts
and amortizes these amounts over the life of the contracts. When Merit enters
into a new contract or significantly expands services for an existing customer,
Merit typically incurs up-front start-up costs that historically have ranged
from $50,000 to $2.5 million per program. These start-up costs include, among
other things, the costs of recruiting, interviewing and training providers and
support staff, establishing offices and other facilities, acquiring furniture,
computers and other equipment, and implementing information systems. As of
September 30, 1997, Merit's balance sheet reflected $9.0 million of deferred
start-up costs, net of amortization, categorized under long-term assets.
LIQUIDITY
Merit's liquidity is affected by the one-to-four-month lag between the time
Merit receives cash from capitation payments under new contracts and the time
when Merit pays the claims for services rendered
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by third-party network providers and treatment facilities relating to such
capitation payments. During the first few months of a new contract, Merit builds
cash balances as capitation payments are received and also builds a payables
balance as direct service costs are accrued based on expected levels of service.
After the first several months of a contract, monthly claims payments typically
increase to normal levels and the contract generates cash commensurate with the
expected profit margin for that contract. When a contract is terminated, monthly
capitation payments cease on contract termination, but claims for services
rendered prior to termination continue to be received and paid for several
months. This post contract termination period is often referred to as the
"run-off" period. To date, contract terminations have not had a material impact
on Merit's liquidity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which will
be effective for Merit beginning October 1, 1998. SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. Merit has not
yet completed its analysis with respect to which operating segments of its
business it will provide such information.
RESULTS OF OPERATIONS
SELECTED OPERATING RESULTS
The following table sets forth certain statement of operations items of
Merit expressed as a percentage of revenue:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, THREE MONTHS ENDED
DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
Revenue................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Direct service costs................................... 79.1 79.0 80.9 80.0 82.4
--------- --------- --------- --------- ---------
Direct profit margin................................. 20.9 21.0 19.1 20.0 17.6
Selling, general and administrative expenses........... 13.8 14.1 12.2 12.9 12.4
Amortization of intangibles............................ 5.9 5.7 4.8 5.3 4.1
Restructuring charge................................... -- 0.6 -- -- --
Income from joint ventures............................. -- -- -- -- (0.9)
--------- --------- --------- --------- ---------
Operating Income..................................... 1.2 0.6 2.1 1.8 2.0
Other income........................................... 0.4 0.6 0.6 0.6 0.6
Interest expense....................................... -- (5.2) (4.5) (4.8) (4.1)
Loss on disposal of subsidiary......................... -- -- (1.2) -- --
Merger costs and special charges....................... -- (0.8) (0.2) -- (0.3)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative effect
of accounting change................................. 1.6 (4.8) (3.2) (2.4) (1.8)
Provision (benefit) for income taxes................... 1.2 (1.1) (0.7) (0.2) (0.3)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of accounting
change............................................... 0.4% (3.7% (2.5% 2.2% 1.5%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Adjusted EBITDA margin................................. 9.4% 9.9% 9.8% 10.1% 9.8%
</TABLE>
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THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
REVENUE. Revenue increased by $48.6 million, or 37.8%, to $177.2 million
for the three months ended December 31, 1997 from $128.6 million for the three
months ended December 31, 1996. Of this increase, $30.4 million was attributable
to the inclusion of revenue from certain contracts that commenced during the
prior fiscal year as well as additional revenue from existing customers
generated by an increase in both the number of programs managed by Merit on
behalf of such customers and an increase in the number of beneficiaries enrolled
in such customers' programs; and $0.5 million was attributable to new customers
commencing service in the current quarter. Also, Merit's acquisition of CMG on
September 12, 1997 contributed an additional $32.6 million in revenue for the
fiscal 1998 period. These revenue increases were partially offset by an $11.2
million decrease in revenue as a result of the termination of certain contracts,
$11.0 million of which was due to terminations that occurred in various periods
of the prior fiscal year. Also, Merit's disposition of Choate Health Management,
Inc. and certain related companies (collectively "Choate") in September 1997
resulted in a revenue decrease of $3.7 million for the fiscal 1998 period.
Contract price increases were not a material factor in the increase in revenue.
DIRECT SERVICE COSTS. Direct service costs increased by $43.1 million, or
41.9% , to $146.0 million for the three months ended December 31, 1997 from
$102.9 million for the three months ended December 31, 1996. As a percentage of
revenue, direct service costs increased from 80.0% in the prior year period to
82.4% in the current year period. The increase in cost as a percentage of
revenue was due primarily to the lower than average direct profit margins earned
on contracts for the State of Montana and for the Delaware County Medicaid
programs. In general, Merit's Medicaid contracts with governmental entities tend
to have significant revenue levels, with direct profit margins which are lower
than Merit's other contracts. The State of Montana contract was obtained through
the CMG acquisition in September 1997. The Delaware County contract started in
February 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $5.5 million, or 33.1%, to $22.1 million
for the three months ended December 31, 1997 from $16.6 million for the three
months ended December 31, 1996. The increase in total selling, general and
administrative expenses was primarily attributable to (i) growth in marketing
and sales administrative staff, corporate and regional management and support
systems associated with the higher sales volume; (ii) inclusion of CMG's results
of operation since the acquisition date; and (iii) expenses related to the
planned deployment of Merit's new information systems. As a percentage of
revenue, selling, general and administrative expenses decreased from 12.9% in
the prior year period to 12.5% in the current year period. This decline is due
to Merit's efforts to contain such expenses as well as an allocation of such
expenses over a larger revenue base.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $0.4
million, or 6.4%, to $7.2 million for the three months ended December 31, 1997
from $6.8 million for the three months ended December 31, 1996. The increase was
primarily due to an increase in amortization of goodwill and other intangibles
recognized in connection with the acquisition of CMG.
INCOME FROM JOINT VENTURES. For the three months ended December 31, 1997,
Merit had income from joint ventures of $1.6 million. The majority of such
income is from Merit's 50% interest in the CHOICE Behavioral Health Partnership,
which Merit obtained in connection with the CMG acquisition.
OTHER INCOME (EXPENSE). For the three months ended December 31, 1997, other
income and expense consisted of (i) interest expense of $7.2 million related to
debt incurred as a result of the merger of Merit and an affiliate of Kohlberg
Kravis Roberts & Co. ("KKR") in October 1995 (the "1995 Merger"), and debt
incurred in connection with the acquisition of CMG; (ii) interest and other
income of $1.1 million relating primarily to investment earnings on Merit's
short-term investments and restricted cash balances; and (iii) merger costs and
special charges of $0.5 million relating primarily to expenses incurred for the
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Transactions. The year over year increase in interest expense of $1.0 million
was primarily attributable to the interest expense incurred on the additional
debt issued in September 1997 in order to finance the acquisition of CMG. The
year over year increase in interest income of $0.3 million was primarily
attributable to both an increase in average invested cash balances as compared
to the prior year period and interest earned on advances to certain joint
ventures.
INCOME TAXES. Merit recorded a benefit for income taxes during the three
months ended December 31, 1996 and 1997 based upon Merit's pre-tax loss for such
periods.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUE. Revenue increased by $97.9 million, or 21.4%, to $555.7 million
for fiscal 1997 from $457.8 million for fiscal 1996. Of this increase, $71.3
million was attributable to the inclusion of revenue from certain contracts that
commenced during the prior fiscal year as well as additional revenue from
existing customers generated by an increase in both the number of programs
managed by Merit on behalf of such customers and an increase in the number of
beneficiaries enrolled in such customers' programs; and $65.8 million was
attributable to new customers commencing service in the current year, a
significant portion of which was derived from Merit's contract relating to
CHAMPUS Regions 7 and 8, under which services commenced on April 1, 1997. In
addition, Merit's acquisition of CMG on September 12, 1997 contributed an
additional $7.0 million in revenue for fiscal 1997. These revenue increases were
partially offset by a $46.2 million decrease in revenue as a result of the
termination of certain contracts, $29.1 million of which was due to contract
terminations that occurred in various periods of the prior fiscal year. Contract
price increases were not a material factor in the increase in revenue.
DIRECT SERVICE COSTS. Direct service costs increased by $87.9 million, or
24.3%, to $449.6 million for fiscal 1997 from $361.7 million for fiscal 1996. As
a percentage of revenue, direct service costs increased from 79.0% in the prior
year period to 80.9% in the current year period. The increase in cost as a
percentage of revenue was due primarily to the lower than average direct profit
margin earned on the TennCare Partners and the Delaware County Medicaid
programs, partially offset by a year over year decline in healthcare treatment
services utilization in Merit's overall business. In addition, the Delaware
County carve-out program replaced a program under which beneficiaries previously
received their mental health benefit through membership in various HMOs
servicing this area. Direct profit margins under contracts that Merit held with
certain of these HMOs, which terminated or membership in which decreased
substantially as a result of the Delaware County program, were higher than the
direct profit margins for the Delaware County program and Merit's overall
average direct profit margins. Excluding the effect of the TennCare Partners and
the Delaware County contracts, however, Merit experienced a decline in the
direct service cost percentage as a result of overall lower healthcare
utilization in the current year period as compared to the prior year period, due
to Merit's continued development and deployment of alternative treatment
programs designed to achieve more cost-effective treatment and Merit's increased
focus on clinical care techniques directed at patients requiring more intensive
treatment services. Also positively impacting the direct cost percentage were
the effect of (i) a nationwide recontracting program with providers which began
in the second quarter of fiscal 1996, and (ii) the closing of certain
underperforming staff offices pursuant to a plan implemented by Merit in the
fourth quarter of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.9 million, or 4.5%, to $67.4 million for
fiscal 1997 from $64.5 million for fiscal 1996. The increase in total selling,
general and administrative expenses was primarily attributable to (i) growth in
marketing and sales administrative staff, corporate and regional management and
support systems associated with the higher sales volume, (ii) expenses
associated with the expansion of both Merit's National Service Center located in
St. Louis, Missouri and Merit's headquarters located in Park Ridge, New Jersey,
(iii) expenses related to the planned deployment of Merit's new information
systems, and
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(iv) inclusion of CMG's results of operations since the acquisition date. As a
percentage of revenue, selling, general and administrative expenses decreased
from 14.1% in the prior year period to 12.2% in the current year period
primarily as a result of these expenses being allocated over a larger revenue
base. Contributing significantly to this decrease were the TennCare Partners and
the Delaware County programs, which are large, self-contained programs requiring
minimal selling, general and administrative expenses or Merit operational
support, thereby mitigating, in large part, the effects of their lower than
average direct service cost margins described above.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased by $1.0
million, or 4.0%, to $26.9 million for fiscal 1997 from $25.9 million for fiscal
1996. The increase was primarily due to an increase in amortization of goodwill
recognized in connection with the acquisitions of ProPsych and CMG as well as to
increases in the amortization of deferred contract start-up costs related to new
contracts.
OTHER INCOME (EXPENSE). For fiscal 1997, other income and expense consisted
of (i) interest expense of $25.1 million related to debt incurred as a result of
the 1995 Merger (OF MERIT AND AN AFFILIATE OF KOHLBERG KRAVIS ROBERTS & CO.
("KKR")) in October 1995 (THE "1995 MERGER"), (ii) interest and other income of
$3.5 million relating primarily to investment earnings on Merit's short-term
marketable securities and restricted cash and investment balances, (iii) a loss
of $6.9 million recognized in September 1997 on the disposal of Choate (CHOATE
HEALTH MANAGEMENT, INC. AND CERTAIN RELATED COMPANIES (COLLECTIVELY, "CHOATE")),
(iv) $0.7 million of expenses associated with uncompleted acquisition
transactions, and (v) $0.6 million of nonrecurring employee benefit costs
associated with the exercise of stock options by employees of Merit under plans
administered by Merck. The year over year increase in interest expense of $1.2
million was primarily attributable to (i) the full period impact of the
indebtedness incurred in October 6, 1995 by Merit in connection with the 1995
Merger; (ii) the full period impact of (THE MERIT OUTSTANDING) Notes, which bore
interest at a higher rate than the bridge financing facility that the (MERIT
OUTSTANDING) Notes replaced, and (iii) the increase in the senior credit
facility as a result of the acquisition of CMG. The year over year increase in
interest income of $0.7 million was primarily attributable to both an increase
in average invested cash balances as compared to the prior year period and
interest earned on advances to certain joint ventures.
INCOME TAXES. Merit recorded a benefit for income taxes during fiscal 1997,
based upon Merit's pre-tax loss in such period.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUE. Revenue increased by $96.3 million, or 26.6%, to $457.8 million
for fiscal 1996 from $361.5 million for fiscal 1995. Of this increase, $87.7
million was attributable to the inclusion of revenue for the entire period from
certain contracts that commenced during the prior fiscal year as well as
additional revenue from existing customers generated by an increase in both the
number of programs managed by Merit on behalf of such customers and an increase
in the number of beneficiaries enrolled in such customers' programs; and $26.4
million was attributable to new customers commencing service in the current
year, the majority of which was derived from two contracts totaling $20.9
million. In addition, Merit's acquisitions of Choate and ProPsych contributed an
additional $18.4 million in revenue for fiscal 1996. These revenue increases
were partially offset by a $36.2 million decrease in revenue as a result of the
termination of certain contracts, five of which accounted for $21.1 million of
such decrease. Certain of these contracts had terminated in various periods of
the prior fiscal year. Contract price increases were not a material factor in
the increase in revenue.
DIRECT SERVICE COSTS. Direct service costs increased by $75.7 million, or
26.5%, to $361.7 million for fiscal 1996 from $286.0 million for fiscal 1995. As
a percentage of revenue, direct service costs decreased from 79.1% for fiscal
1995 to 79.0% for fiscal 1996. This net decrease in the direct service cost
percentage was due to a variety of largely offsetting factors. The direct
service cost percentage was
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positively impacted by lower inpatient utilization in fiscal 1996 as compared to
the prior year related to a significant contract with an HMO focused on the
Medicaid beneficiary population. Such decrease resulted from the implementation
of changes in program management and modification of the clinical treatment
protocols applicable to such contract. In addition, Merit started to realize the
benefits in fiscal 1996 of a nationwide recontracting program with providers
which began in the second quarter of such year. Merit is continuing its efforts
to reduce direct service costs to mitigate the effects of pricing pressure,
which is expected to continue in fiscal 1997, associated with the competitive
bid process for new contracts and negotiations to extend existing contracts. The
direct service cost percentage was adversely impacted by the loss in the fourth
quarter of fiscal 1995 of two contracts with higher than average direct profit
margins and a renewal of a significant contract on lower pricing terms. In
addition, Merit earned a lower than average direct profit margin on a
significant state Medicaid program which was not in effect for the entire twelve
month period in the prior year. Furthermore, in the fourth quarter of fiscal
1996, Merit commenced providing services under the TennCare Partners program.
Due to the unusual structure of the TennCare Partners program, the direct profit
margin under such contract was lower than Merit's average direct profit margin
for fiscal 1996 and is expected to continue to be lower in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $14.7 million, or 29.5%, to $64.5 million
for fiscal 1996 from $49.8 million for fiscal 1995. The increase in total
selling, general and administrative expenses was primarily attributable to (i)
growth in marketing and sales administrative staff, corporate and regional
management and support systems associated with the higher sales volume, (ii)
expenses associated with the expansion of the National Service Center, which
will allow for growth beyond Merit's current needs, and (iii) expenses related
to the planned deployment of Merit's new information systems. As a percentage of
revenue, selling, general and administrative expenses increased to 14.1% for
fiscal 1996 from 13.8% for fiscal 1995. The increase in such expenses, coupled
with unanticipated delays in the planned start dates of significant new
contracts (including the TennCare Partners program) secured by Merit,
contributed to the increase in selling, general and administrative expenses as a
percentage of revenue.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased by $4.5
million, or 21.0%, to $25.9 million for fiscal 1996 from $21.4 million for
fiscal 1995. The increase was primarily due to an increase in amortization of
goodwill recognized in connection with the acquisitions of Choate and ProPsych
and the Empire Joint Venture, as well as to increases in the amortization of
deferred contract start-up costs related to new contracts.
RESTRUCTURING CHARGE. Merit recorded a pre-tax restructuring charge of $3.0
million related to a plan, adopted and approved in the fourth quarter of 1996,
to restructure its staff offices by exiting certain geographic markets and
streamlining the field and administrative management organization of Continuum
Behavioral Healthcare Corporation, a subsidiary of Merit. This decision was in
response to the results of underperforming locations affected by the lack of
sufficient patient flow in the geographic areas serviced by these offices and
Merit's ability to purchase healthcare services at lower rates from its provider
network. In addition, it was determined that Merit would be able to expand
beneficiary access to specialists and other providers thereby achieving more
cost-effective treatment and to favorably shift a portion of the economic risk,
in some cases, of providing outpatient healthcare to the provider through the
use of case rates and other alternative reimbursement methods. The restructuring
charge was comprised primarily of accruals for employee severance, real property
lease terminations and write-off of certain assets in geographic markets which
were being exited. The restructuring plan was substantially completed during
fiscal 1997.
OTHER INCOME (EXPENSE). For fiscal 1996, other income and expense consisted
of (i) interest expense of $23.8 million incurred as a result of the increase in
long-term debt resulting from the 1995 Merger; (ii) merger expenses of $4.0
million consisting primarily of professional and advisory fees; and
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(iii) interest and other income of $2.8 million relating primarily from
investment earnings on Merit's short-term investments and restricted cash
balances.
INCOME TAXES. Merit recorded a benefit for income taxes during fiscal 1996
based upon Merit's pre-tax loss in such period. The resulting income tax benefit
has been partially offset by the nondeductible nature of certain merger costs.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective October 1, 1995, Merit changed its method of accounting for
deferred start-up costs related to new contracts or expansion of existing
contracts (i) to expense costs relating to start-up activities incurred after
commencement of services under the contract, and (ii) to limit the amortization
period for deferred start-up costs incurred prior to the commencement of
services to the initial contract period. Prior to October 1, 1995, Merit
capitalized start-up costs related to the completion of the provider networks
and reporting systems beyond commencement of contracts and, in limited
instances, amortized the start-up costs over a period that included the initial
renewal term associated with the contract. Under the new policy, Merit does not
defer contract start-up costs after contract commencement or include the initial
renewal term in the amortization period. The change was made to increase the
focus on controlling costs associated with contract start-ups.
Merit recorded a pre-tax charge of $1.8 million ($1.0 million after taxes)
in the first quarter of fiscal 1996 as a cumulative effect of a change in
accounting. The pro forma impact of this change for the year ended September 30,
1995 would be to increase costs and expenses by $1.8 million ($1.0 after taxes).
There was no pro forma effect on periods prior to fiscal 1995. The effect of the
change on fiscal 1996 cannot be reasonably estimated.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. For fiscal 1997, operating activities provided cash of $26.9
million, investing activities used cash of $62.1 million and financing
activities provided cash of $75.2 million, resulting in a net increase in cash
and cash equivalents of $40.0 million. Investing activities in fiscal 1997
consisted principally of (i) capital expenditures of $24.0 million related
primarily to the continued development of Merit's new information systems and
expansion of the National Service Center, (ii) payments totaling $35.2 million
(net of cash acquired) for the acquisition of CMG, (iii) payments totaling $2.6
million for funding under joint venture agreements, primarily with Empire
Community Delivery Systems, LLC and Community Sector Systems, Inc., and (iv)
expenditures of $4.1 million for the purchase of short-term investments made to
satisfy obligations under contracts held by Merit.
ACQUISITION (OF CMG). On September 12, 1997, Merit acquired all of the
outstanding capital stock of CMG for $48.7 million in cash and 739,358 shares of
Merit's common stock valued at $5.5 million. In addition, Merit agreed to absorb
certain expenses and other obligations of CMG totaling up to $5.4 million. CMG
is a Maryland-based national managed care company serving over 30 customers
through a network consisting of approximately 7,600 providers in 34 states. CMG
currently provides behavioral health managed care services to 2.5 million people
under full risk capitation, ASO and other funding arrangements. The clients
include state and local governments, Blue Cross /Blue Shield organizations, HMOs
and insurance companies. As additional consideration for the acquisition, Merit
may be required to make certain future contingent cash and stock payments over
the next two years to the former shareholders of CMG based upon the performance
of certain CMG customer contracts. Such contingent cash payments are subject to
an aggregate maximum of $23.5 million. The acquisition was accounted for using
the purchase method. Accordingly, the purchase price was allocated to assets
acquired based on their estimated fair values. This treatment resulted in
approximately $64.7 million of cost in excess of net tangible assets acquired as
of September 30, 1997. Such excess is being amortized on a straight line
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basis over periods ranging up to 40 years. The inclusion of CMG from the date of
acquisition did not have a significant impact on Merit's results of operations.
SENIOR INDEBTEDNESS. As of September 30, 1997, $30.0 million of revolving
loans and $8.3 million of letters of credit were outstanding under the revolving
credit facility of the (MERIT EXISTING) Credit Agreement with The Chase
Manhattan Bank, N.A. (the "(MERIT) Senior Credit Facility"), and approximately
$46.7 million was available for future borrowing.
ADJUSTED EBITDA. Adjusted EBITDA, a financial measure used in the (MERIT)
Senior Credit Facility and the indenture (FOR THE MERIT OUTSTANDING NOTES),
increased by $9.6 million, or 21.3%, to $54.7 million for fiscal 1997 from $45.1
million for 1996.
CASH IN CLAIMS FUNDS AND RESTRICTED CASH. As of September 30, 1997, Merit
had total cash, cash equivalents and investment balances of $95.2 million, of
which $51.3 million was restricted under certain contractual, fiduciary and
regulatory requirements; moreover, of such amount, $3.7 million was classified
as a long-term asset on Merit's balance sheet. Under certain contracts, Merit is
required to establish segregated claims funds into which a portion of its
capitation fee is held until a reconciliation date (which reconciliation
typically occurs annually). Until that time, cash funded under these
arrangements is unavailable to Merit for purposes other than the payment of
claims. In addition, California and Illinois state regulatory requirements
restrict access to cash held by Merit's subsidiaries in such states. As of
September 30, 1997, Merit also held surplus cash balances, classified as cash
and cash equivalents and short-term marketable securities, as required by the
contracts held by Merit relating to Medicaid programs for the States of Iowa and
Montana and the TennCare Partners and Delaware County Medicaid programs
described above.
AVAILABILITY OF CASH. Prior to the 1995 Merger, Merit funded its operations
primarily with cash generated from operations and through the funding of certain
acquisitions, investments and other transactions by its former parent, Merck.
Merit currently and in the future expects to finance its capital requirements
through existing cash balances, cash generated from operations and borrowings
under the revolving credit facility of the (MERIT) Senior Credit Facility. Based
upon the current level of cash flow from operations and anticipated growth,
Merit believes that available cash, together with available borrowings under the
revolving credit facility and other sources of liquidity, will be adequate to
meet Merit's anticipated future requirements for working capital, capital
expenditures and scheduled payments of principal and interest on its
indebtedness for the foreseeable future.
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INDUSTRY
OVERVIEW
Behavioral healthcare costs have increased significantly in the United
States in recent years. According to industry sources, direct medical costs of
behavioral health problems, combined with the indirect costs, such as lost
productivity due to mental illness and alcohol and drug abuse, were estimated at
more than $300.0 billion in 1990, the latest year for which statistics are
available. In addition, according to industry sources, in 1994 (the most recent
year for which such information was available), direct behavioral healthcare
services treatment costs amounted to approximately $81.0 billion, or
approximately 8% of total healthcare industry spending. These direct costs have
grown, in part, as society has begun to recognize and address behavioral health
concerns and employers have realized that rehabilitation of employees suffering
from substance abuse and relatively mild mental health problems can reduce
losses due to absenteeism and decreased productivity.
In response to these escalating costs, managed behavioral healthcare
companies such as Green Spring, HAI and Merit have been formed. These companies
focus on care management techniques with the goal of arranging for the provision
of an appropriate level of care in a cost-efficient and effective manner by
improving early access to care and assuring an effective match between the
patient and the behavioral healthcare provider's specialty. As the growth of
managed behavioral healthcare has increased, there has been a significant
decrease in occupancy rates and average lengths of stay for inpatient
psychiatric facilities and an increase in outpatient treatment and alternative
care services.
According to OPEN MINDS, as of January 1997, approximately 149.0 million
beneficiaries were covered by some form of specialty managed behavioral
healthcare plan and an additional 19.5 million beneficiaries were enrolled in
internally-managed behavioral healthcare programs within HMOs. The number of
covered beneficiaries has grown from approximately 86.0 million beneficiaries in
1993 to approximately 149.0 million in 1997, representing an approximate 15%
compound annual growth rate since 1993. In addition, according to OPEN MINDS,
beneficiaries covered under risk-based programs are growing even more rapidly,
from approximately 13.6 million as of January 1993 to approximately 38.9 million
as of January 1997, representing a compound annual growth rate of over 30%. OPEN
MINDS estimates that the revenues of managed behavioral healthcare companies
totaled approximately $3.5 billion in 1996.
SEGMENTATION
OPEN MINDS divides the managed behavioral healthcare industry as of January
1997 into the following categories of care, based on services provided, extent
of care management and level of risk assumption:
<TABLE>
<CAPTION>
BENEFICIARIES PERCENT
CATEGORY OF CARE (IN MILLIONS) OF TOTAL
- ----------------------------------------------------------------------------------------- --------------- -----------
<S> <C> <C>
Utilization Review/Care Management Programs.............................................. 39.2 26.3%
Risk-Based Network Products.............................................................. 38.9 26.1
Non-Risk-Based Network Products.......................................................... 31.9 21.4
EAPs..................................................................................... 28.3 19.0
Integrated Programs...................................................................... 10.7 7.2
----- -----
Total............................................................................ 149.0 100.0%
----- -----
----- -----
</TABLE>
Management believes the current trends in the behavioral healthcare industry
include increased utilization of risk-based network managed care products and
the integration of EAPs with such managed care products. Management believes
that these trends have developed in response to the attempt by payors to reduce
rapidly escalating behavioral healthcare costs and to limit their risk
associated with
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such costs while continuing to provide access to high quality care. According to
OPEN MINDS, risk-based network products, integrated programs and EAPs are the
most rapidly growing segments of the managed behavioral healthcare industry.
UTILIZATION REVIEW/CARE MANAGEMENT PRODUCTS. Under utilization review/care
management products, a managed behavioral healthcare company manages and often
arranges for treatment, but does not maintain a network of providers or assume
any of the responsibility for the cost of providing treatment services. The
Company categorizes its products within this segment of the managed behavioral
healthcare industry (as it is defined by OPEN MINDS) as ASO products. The
Company does not expect this segment of the industry to experience significant
growth, given the growth of risk-based products.
NON-RISK-BASED NETWORK PRODUCTS. Under non-risk-based network products, the
managed behavioral healthcare company provides a full array of managed care
services, including selecting, credentialing and managing a network of providers
(such as psychiatrists, psychologists, social workers and hospitals), and
performs utilization review, claims administration and care management
functions. The third-party payor remains responsible for the cost of providing
the treatment services rendered. The Company categorizes its products within
this segment of the managed behavioral healthcare industry (as it is defined by
OPEN MINDS) as ASO products.
RISK-BASED NETWORK PRODUCTS. Under risk-based network products, the managed
behavioral healthcare company assumes all or a portion of the responsibility for
the cost of providing a full or specified range of behavioral healthcare
treatment services. Most of these programs have payment arrangements in which
the managed care company agrees to provide services in exchange for a fixed fee
per member per month that varies depending on the profile of the beneficiary
population or otherwise shares the responsibility for providing all or some
portion of the treatment services at a specific cost per person. Under these
products, the managed behavioral healthcare company not only approves and
monitors a course of treatment, but also arranges and pays for the provision of
patient care (either through its third-party network providers or staff
providers or some combination of network and staff providers). Therefore, the
managed behavioral healthcare company must be proficient in contracting with,
credentialing and managing a network of specialized providers and facilities
that covers the complete continuum of care. The managed behavioral healthcare
company must also ensure that the appropriate level of care is delivered in the
appropriate setting. Given the ability of payors of behavioral healthcare
benefits to reduce their risk with respect to the cost of treatment services
through risk-based network products while continuing to provide access to high
quality care, this market segment has grown rapidly in recent years. In addition
to the expected growth in total beneficiaries covered under managed behavioral
healthcare products, this shift of beneficiaries into risk-based network
products should further contribute to revenue growth for the managed behavioral
healthcare industry because such contracts generate significantly higher revenue
than ASO contracts. The higher revenue is intended to compensate the managed
behavioral healthcare company for bearing the financial responsibility for the
cost of delivering care. The Company's risk-based products are risk-based
network products as defined by OPEN MINDS.
EMPLOYEE ASSISTANCE PROGRAMS. An EAP is a worksite-based program designed
to assist in the early identification and resolution of productivity problems
associated with behavioral conditions or other personal concerns of employees.
Under an EAP, staff or network providers or other affiliated clinicians provide
assessment and referral services to employee beneficiaries. These services
consist of evaluating a patient's needs and, if indicated, providing limited
counseling and/or identifying an appropriate provider, treatment facility or
other resource for more intensive treatment services. The EAP industry developed
largely out of employers' efforts to combat alcoholism and substance abuse
problems afflicting workers. A 1990 industry survey estimated the total costs of
this dependency at approximately $98.6 billion per year. Many businesses have
implemented alcoholism and drug abuse
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treatment programs in the workplace, and in some cases have expanded those
services to cover a wider spectrum of personal problems experienced by workers
and their families. As a result, EAP products now typically include consultation
services, evaluation and referral services, employee education and outreach
services. The Company believes that federal and state "drug-free workplace"
measures and Federal Occupational Health and Safety Act requirements, taken
together with the growing public perception of increased violence in the
workplace, have prompted many companies to implement EAPs. Although EAPs
originated as a support tool to assist managers in dealing with troubled
employees, payors increasingly regard EAPs as an important component in the
continuum of behavioral healthcare services.
INTEGRATED EAP/MANAGED BEHAVIORAL HEALTHCARE PRODUCTS. EAPs are utilized in
a preventive role and in facilitating early intervention and brief treatment of
behavioral healthcare problems before more extensive treatment is required.
Consequently, EAPs often are marketed and sold in tandem with managed behavioral
healthcare programs through "integrated" product offerings. Integrated products
offer employers comprehensive management and treatment of all aspects of
behavioral healthcare. In an effort to both reduce costs and increase
accessibility and ease of treatment, employers are increasingly attempting to
consolidate EAP and managed behavioral healthcare services into a single
product. Although integrated EAP/managed behavioral healthcare products are
currently only a small component of the overall industry, the Company expects
this market segment to grow.
AREAS OF GROWTH
Management believes that the growth of the managed behavioral healthcare
industry will continue, as payors of behavioral healthcare benefits attempt to
reduce the costs of behavioral healthcare while maintaining high quality care.
Management also believes that a number of opportunities exist in the managed
behavioral healthcare industry for continued growth, primarily for risk-based
products. The following paragraphs discuss factors contributing to the growth of
risk-based products and the increase in the number of covered lives in certain
markets.
RISK-BASED PRODUCTS. According to OPEN MINDS, industry enrollment in
risk-based products has grown from approximately 13.6 million covered lives in
1993 to approximately 38.9 million covered lives in 1997, a compound annual
growth rate of over 30%. Despite this growth, only approximately 26% of total
managed behavioral healthcare covered lives were enrolled in risk-based products
in 1997. The Company believes that the market for risk-based products has grown
and will continue to grow as payors attempt to reduce their responsibility for
the cost of providing behavioral healthcare while ensuring an appropriate level
of access to care. Risk-based products can generate significantly greater
revenue per covered life than other non-risk product types. According to the
OPEN MINDS survey, risk-based products account for approximately two-thirds of
total managed behavioral healthcare industry premiums, but, as stated above,
accounted for only approximately 26% of total covered lives in 1997.
MEDICAID. Medicaid is a joint state and federal program to provide
healthcare benefits to approximately 33.0 million low income individuals,
including welfare recipients. According to the Health Care Financing
Administration of the United States Department of Health and Human Services
("HCFA"), federal and state Medicaid spending increased from $69.0 billion in
1990 to an estimated $160.0 billion in 1996, at an average annual rate almost
twice as fast as the annual increase in overall healthcare spending.
Furthermore, according to HCFA, from 1991 to 1996 the number of Medicaid
beneficiaries covered under full managed contracts grew at a compound annual
rate of approximately 40% per year. The Company expects that the Budget Act will
slow the growth of Medicaid spending by accelerating the trend of state Medicaid
programs toward shifting beneficiaries into managed care programs in order to
control rising costs.
Despite the recent increase in managed care enrollment of Medicaid
beneficiaries, Medicaid managed care enrollment as a percentage of all Medicaid
beneficiaries remains small. As of June 1996,
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according to the National Institute for Health Care Management, only
approximately 35% of all Medicaid beneficiaries were enrolled in some form of
managed care program, and less than 7% were enrolled in risk-based programs. The
Company expects the number of Medicaid recipients enrolled in managed behavioral
healthcare programs to increase through two avenues: (i) subcontracts with HMOs
and (ii) direct contracts with state agencies. As HMOs increase their
penetration of the Medicaid market, the Company expects that many HMOs will
continue to (or begin to) subcontract with managed behavioral healthcare
companies to provide services for Medicaid beneficiaries. State agencies have
also begun to contract directly with managed behavioral healthcare companies to
provide behavioral healthcare services to their Medicaid beneficiaries. Iowa,
Massachusetts, Nebraska, Maryland, Tennessee and Montana have decided to "carve
out" behavioral healthcare from their overall Medicaid managed care programs and
have contracted or are expected to contract directly with managed behavioral
healthcare companies to provide such services. The Company expects that the
Budget Act will accelerate the trend of states contracting directly with managed
behavioral healthcare companies. See "Risk Factors-- Dependence on Government
Spending for Managed Healthcare; Possible Impact of Healthcare Reform" and
"Business--Regulation--Budget Act."
MEDICARE. Medicare is a federally funded healthcare program for the
elderly. Medicare has experienced an increase in its beneficiary population over
the past several years, as well as rapidly escalating healthcare costs.
According to HCFA, as of January 1, 1997, only approximately 4.9 million, or
13%, of the approximately 38.0 million eligible Medicare beneficiaries were
enrolled in managed care programs. Although enrollment has increased from
approximately 7% of the eligible Medicare beneficiaries in 1993, it is still
considerably below that of the commercial population. The Budget Act contains
provisions designed to increase enrollment of Medicare beneficiaries in managed
care plans as a means of achieving projected savings in Medicare expenditures.
Management believes that in response to increased healthcare costs and the
Budget Act, the Medicare market will shift into managed care programs in the
future, representing an opportunity for growth among managed behavioral
healthcare companies. See "Business--Regulation--Budget Act."
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BUSINESS
OVERVIEW
The Company is the nation's largest provider of managed behavioral
healthcare services, offering a broad array of cost-effective managed behavioral
healthcare products. As a result of the Acquisition, the Company has over 58.0
million covered lives under managed behavioral healthcare contracts and manages
behavioral healthcare programs for over 4,000 customers. Through its current
network of over 34,000 providers and 2,000 treatment facilities, the Company
manages behavioral healthcare programs for Blue Cross/Blue Shield organizations,
HMOs and other insurance companies, corporations, federal, state and local
governmental agencies, labor unions and various state Medicaid programs. The
Company believes it has the largest and most comprehensive behavioral healthcare
provider network in the United States as a result of the Acquisition. In
addition to the Company's managed behavioral healthcare products, the Company
offers specialty managed care products related to the management of certain
chronic conditions. The Company also offers a broad continuum of behavioral
healthcare services to approximately 2,900 individuals who receive healthcare
benefits funded by state and local governmental agencies through Mentor, its
wholly-owned public-sector provider. Furthermore, the Company franchises the
"CHARTER" System of behavioral healthcare to the Psychiatric Hospital Facilities
and other facilities operated by CBHS, an entity in which the Company owns a 50%
equity interest. If the CBHS Transactions are consummated, the Company will no
longer have franchise operations or an ownership interest in CBHS.
The Company's professional care managers coordinate and manage the delivery
of behavioral healthcare treatment services through the Company's network of
providers, which includes psychiatrists, psychologists, licensed clinical social
workers, marriage and family therapists and licensed clinical professional
counselors. The treatment services provided by the Company's extensive
behavioral provider network include outpatient programs (such as counseling and
therapy), intermediate care programs (such as sub-acute emergency care,
intensive outpatient programs and partial hospitalization services), inpatient
treatment services and alternative care services (such as residential treatment,
home and community-based programs and rehabilitative and support services). The
Company provides these services through: (i) risk-based products, (ii) EAPs,
(iii) ASO products and (iv) products that combine features of some or all of
these products. Under risk-based products, the Company arranges for the
provision of a full range of behavioral healthcare services for beneficiaries of
its customers' healthcare benefit plans through fee arrangements under which the
Company assumes all or a portion of the responsibility for the cost of providing
such services in exchange for a fixed per member per month fee. Under EAPs, the
Company provides assessment services to employees and dependents of its
customers, and if required, referral services to the appropriate behavioral
healthcare service provider. Under ASO products, the Company provides services
such as utilization review, claims administration and provider network
management. The Company does not assume the responsibility for the cost of
providing healthcare services pursuant to its ASO products. As a result of the
Acquisition, based on total covered lives, the Company is the industry leader
with respect to risk-based, ASO, EAP and integrated products. 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 conducts operations in four segments: managed care operations,
public sector operations, franchise operations and provider operations. The
following describes the Company's business segments:
MANAGED CARE OPERATIONS. The managed care segment is the Company's primary
operating segment. The Company's managed care subsidiaries are Green Spring,
HAI, Allied and Merit. On a pro forma basis for fiscal 1997, revenue of the
Company's managed care operations would have been $1.25 billion.
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Green Spring is one of the largest companies in the managed behavioral
healthcare industry and is the largest managed behavioral healthcare provider to
the Blue Cross/Blue Shield networks. It currently covers over 21.0 million lives
(30% of them pursuant to risk-based products) through a network of more than
34,000 providers. Green Spring's client base includes 25 Blue Cross/Blue Shield
plans, major HMOs and PPOs, state employee programs, Fortune 1000 corporations,
labor unions and a growing number of state Medicaid programs.
Merit is one of the leading managed behavioral healthcare providers in the
nation, arranging for the provision of managed behavioral healthcare services to
more than 21.0 million people, including approximately 10.6 million risk-based
lives. Merit manages behavioral healthcare programs for approximately 800
clients across all segments of the healthcare industry, with particularly strong
positions in the corporate and HMO segment. Merit is also a leading provider to
Blue Cross/Blue Shield organizations and other insurance companies, corporations
and labor unions, federal, state and local governmental agencies and various
state Medicaid programs.
HAI was one of the first and is one of the largest providers of EAP
products. It currently provides managed behavioral healthcare services to over
16.0 million lives. HAI has providers in all 50 states, operating through nine
regional service centers. It serves many of the nation's largest companies,
including Aetna, Avis, Exxon, JP Morgan, MCI, Northwest Airlines and Sears.
The Company recently acquired Allied to establish its presence in the
management of specialty healthcare services. Allied provides specialty
risk-based products and administrative services to a variety of insurance
companies and other customers, including Blue Cross of New Jersey, CIGNA and
NYLCare, for its 3.4 million members. Allied has over 80 physician networks
across the eastern United States. Allied's networks include physicians
specializing in cardiology, oncology and diabetes.
The Company's managed care operations also include certain physician
practice management businesses and certain behavioral staff model operations.
The Company's managed care operations are operated through two wholly owned
subsidiaries of the Company: Magellan Behavioral Healthcare Organization, Inc.
("Magellan BHO") and Magellan Specialty Medical Care Holdings, Inc. ("Magellan
Specialty Medical"). Magellan BHO is organized around three customer segments to
manage the products offered by Green Spring, Merit, HAI and Magellan Public
Solutions, as follows: (i) the HMO/Insurance Division, focusing on the needs of
health insurance plans and their members; (ii) the Corporate Employer/Union
Division, focusing on self-insured employers and unions and their employees and
dependents; and (iii) the Public Sector Division, focusing on the needs of
public purchasers of behavioral healthcare services and their constituents.
Magellan Specialty Medical focuses on the needs of health plans to manage their
specialty care networks and disease management programs in areas such as
diabetes, asthma, oncology and cardiology. Magellan Specialty Medical manages
the products offered by Allied and Care Management Resources, Inc.
PUBLIC SECTOR OPERATIONS. The Company's public sector business provides
specialty home-based behavioral healthcare services through Mentor to over 2,900
individuals in 84 programs in 20 states from 58 branches as of December 31,
1997. Mentor was founded in 1983 and was acquired by the Company in January
1995. Mentor's services include specialty home-based behavioral healthcare
services, which feature individualized home and community-based health and human
services delivered in highly structured and professionally monitored family
environments or "mentor" homes. The mentor homes serve clients with chronic
behavioral disorders and disabilities requiring long-term care, including
children and adolescents with behavioral problems, individuals with mental
retardation or developmental disabilities, and individuals with neurological
impairment or other medical and behavioral frailties. Public sector operations
include correctional behavioral healthcare services, which feature the
management and provisions of behavioral healthcare to the prison population of
government-run correctional facilities in Ohio and New Jersey. For fiscal 1997,
public sector revenue was $94.4 million.
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FRANCHISE OPERATIONS. The Company's wholly-owned subsidiary Charter
Advantage, LLC ("Charter Advantage") franchises the "CHARTER" System of
behavioral healthcare to the Psychiatric Hospital Facilities and other
facilities operated by CBHS. See "Charter Advantage." For fiscal 1997, Charter
Advantage had revenues of $22.7 million. The Company has entered a definitive
agreement to sell Charter Advantage to CBHS. See "Pending Sale of Provider
Business."
PROVIDER OPERATIONS. The Company's provider operations include the
ownership and operation of two psychiatric hospitals in London, England (a
45-bed hospital and a 78-bed hospital) and a 69-bed psychiatric hospital in
Nyon, Switzerland. Revenue for the Company's foreign psychiatric hospitals was
$29.2 million in fiscal 1997. The Company's provider operations also include its
interest in the Joint Ventures and the 50% ownership of CBHS. The Company's
Joint Venture partner in four of the Joint Ventures is Columbia/HCA Healthcare
Corporation. Although the Company is the managing member of each Joint Venture,
it has delegated its management responsibilities to CBHS. The Company pays CBHS
a fee for managing the Joint Ventures equal to the Company's share of the
earnings of the Joint Ventures. The Company's provider operations also include a
Puerto Rican provider management business. The Company has entered into
definitive agreements to sell its ownership interest in CBHS to COI and its
Puerto Rican provider management business to CBHS. The Company has also entered
into a definitive agreement to either sell its interest in the Joint Ventures or
transfer its rights and obligations with respect to the Joint Ventures to CBHS.
See "Pending Sale of Provider Business."
COMPETITIVE STRENGTHS
The Company believes it benefits from the competitive strengths described
below with respect to its managed behavioral healthcare business, which should
allow it to increase its revenues and cash flow. Furthermore, the Company
believes it can leverage its competitive strengths to expand its service
offerings into other specialty managed care products.
INDUSTRY LEADERSHIP. As a result of the Acquisition, the Company became the
nation's largest provider of managed behavioral healthcare services in the
United States with over 58.0 million covered lives. The Company believes it also
now has the number one market position in each of the major product markets in
which it competes. The Company believes its industry leading position will
enhance its ability to: (i) provide a consistent level of high quality service
on a nationwide basis; (ii) enter into favorable agreements with behavioral
healthcare providers that allow it to effectively control healthcare costs for
its customers; and (iii) effectively market its managed-care products to large
corporate, HMO and insurance customers, which, the Company believes,
increasingly prefer to be serviced by a single-source provider on a national
basis.
BROAD PRODUCT OFFERING AND NATIONWIDE PROVIDER NETWORK. The Company offers
a full spectrum of behavioral managed care products that can be designed to meet
specific customer needs, including risk-based and partial risk-based products,
integrated EAPs, stand-alone EAPs and ASO products. The Company's nationwide
provider network encompasses over 34,000 providers and 2,000 treatment
facilities in all 50 states. The combination of broad product offerings and a
nationwide provider network allows the Company to meet virtually any customer
need for managed behavioral healthcare on a nationwide basis, and positions the
Company to capture incremental revenue opportunities resulting from the
continued growth of the managed behavioral healthcare industry and the continued
migration of its customers from ASO and EAP products to higher revenue
risk-based products.
BROAD BASE OF STRONG CUSTOMER RELATIONSHIPS. The Company enjoys strong
customer relationships across all its markets, as evidenced by a contract
renewal rate of over 90% during the last three fiscal years. Management believes
that its strong customer relationships are attributable to the Company's broad
product offering, nationwide provider network, commitment to quality care and
ability to manage behavioral healthcare costs effectively. Following the
Acquisition, the Company's leading customers include: (i) Blue Cross/Blue Shield
organizations; (ii) national HMOs and other large insurers, such as Aetna/US
Healthcare, Humana and Prudential; (iii) large corporations, such as IBM,
Federal Express and AT&T; (iv) state and local governmental agencies through
commercial, Medicaid and other
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programs; and (v) the federal government through contracts pursuant to CHAMPUS
and with the U.S. Postal Service. This broad base of strong customer
relationships provides the Company with stable and diverse sources of revenue
and cash flow and an established base from which to continue to increase covered
lives and revenue.
PROVEN RISK MANAGEMENT EXPERIENCE. As a result of the Acquisition, the
Company has approximately 18.0 million covered lives under risk-based contracts,
making it the nation's industry leader in at-risk managed behavioral healthcare
products. The Company's experience with risk-based products covering a large
number of lives has given it a broad base of data from which to analyze
utilization rates. The Company believes that this broad database permits it to
estimate utilization trends and costs more accurately than many of its
competitors, which allows it to bid effectively. The Company's experience has
also allowed it to develop effective measures for controlling the cost of
providing a unit of care to its covered lives. Among other cost control
measures, the Company has developed or acquired clinical protocols, which permit
the Company to assist its network providers to administer effective treatment in
a cost efficient manner, and claims management technology, which permits the
Company to reduce the cost of processing claims. As the Company integrates the
managed care operations it acquired in the Acquisition with its pre-existing
managed care operations, it will be able to select from the best practices of
its subsidiaries to further enhance its utilization and cost control
methodologies.
BUSINESS STRATEGY
INCREASE ENROLLMENT IN BEHAVIORAL MANAGED CARE PRODUCTS. The Company
believes it has a significant opportunity to increase covered lives in all its
behavioral managed care products. The Company believes its increased market
presence following the Acquisition will further enhance its ability to increase
ASO and EAP covered lives with large corporate, HMO and insurance customers. The
Company further believes that it has a significant opportunity to increase
revenues and cash flow by increasing lives covered by its risk-based products.
As a result of the Acquisition, the Company became the industry's leading
provider of risk-based products and is well positioned to benefit from the
continuing shift to risk-based products. According to OPEN MINDS, industry
enrollment in risk-based products has grown from approximately 13.6 million in
1993 to approximately 38.9 million in 1997, representing a compound annual
growth rate of over 30%. Despite this growth, only approximately 26% of total
managed behavioral healthcare enrollees were in risk-based products in 1997. The
Company believes that the market for risk-based products has grown and will
continue to grow as payors attempt to reduce their cost of providing behavioral
healthcare while ensuring a high quality of care and an appropriate level of
access to care. The Company believes enrollment in its risk-based products will
increase through growth in new covered lives and through the transition of
covered lives in ASO and EAP products to higher revenue risk-based products. On
a pro forma basis for fiscal 1997, risk-based products accounted for 32% of the
Company's covered lives but accounted for 73% of its total managed behavioral
healthcare revenues.
ACHIEVE SIGNIFICANT INTEGRATION EFFICIENCIES. The Company believes that the
Acquisition has created opportunities for the Company to achieve significant
cost savings. Management believes that cost saving opportunities will result
from leveraging fixed overhead over a larger revenue base and an increased
number of covered lives and from reducing duplicative corporate and regional
selling, general and administrative expenses. As a result, the Company expects
to achieve approximately $60.0 million of costs savings on an annual basis
within eighteen months following the consummation of the Acquisition.
PURSUE ADDITIONAL SPECIALTY MANAGED CARE OPPORTUNITIES. The Company
believes that significant demand exists for specialty managed care products
related to the management of certain chronic conditions. The Company believes
its large number of covered lives, information systems infrastructure and
demonstrated expertise in managing behavioral healthcare programs position the
Company to provide customers with specialty managed care products. As a first
major step in implementing this strategy, the Company acquired Allied, a
provider of specialty managed care products for cardiology,
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oncology and diabetes patients, on December 5, 1997. For the twelve months ended
September 30, 1997, Allied had revenue of $144.0 million. See "Summary--Recent
Developments."
MANAGED BEHAVIORAL HEALTHCARE PRODUCTS AND SERVICES
GENERAL. The following table sets forth on a pro forma basis the
approximate number of covered lives as of December 31, 1997 and revenue for
fiscal 1997 for each type of managed behavioral healthcare program offered by
the Company:
<TABLE>
<CAPTION>
PROGRAMS COVERED LIVES PERCENT REVENUE PERCENT
- ----------------------------------------------------------------- ----------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PERCENTAGES)
Risk-Based Products.............................................. 18.0 30.7% $ 808.1 72.8%
EAPs............................................................. 10.5 18.0 99.7 9.0
Integrated Products.............................................. 3.1 5.3 54.2 4.9
ASO Products..................................................... 23.4 40.1 134.6 12.1
Other............................................................ 3.3 5.9 14.2 1.2
--- ----- ---------- -----
Total........................................................ 58.3 100.0% $ 1,110.8 100.0%
--- ----- ---------- -----
--- ----- ---------- -----
</TABLE>
The number of the Company's covered lives fluctuates based on the number of the
Company's customer contracts and as employee, HMO and insurance company
subscriber and government program enrollee populations change from time to time.
On a pro forma basis, the number of lives covered by the Company's managed
behavorial healthcare products at September 30, 1995, 1996 and 1997 would have
been 43.7 million, 46.5 million, and 52.8 million, respectively. On November 8,
1997, the Company announced that Green Spring had been selected by Blue
Cross/Blue Shield of Michigan to manage behavioral healthcare services for over
2.3 million covered lives. This contract, which became effective as of December
1, 1997, primarily relates to utilization review services.
If the CBHS Transactions are consummated, the Company's total number of
covered lives would decrease by approximately 1.1 million due to the sale of GPA
and the Company's pro forma managed care revenue for fiscal 1997 would decrease
by $16.5 million. See "Pending Sale of Provider Business."
RISK-BASED PRODUCTS. Under the Company's risk-based products, the Company
typically arranges for the provision of a full range of outpatient, intermediate
and inpatient treatment services to beneficiaries of its customers' healthcare
benefit plans, primarily through arrangements in which the Company assumes all
or a portion of the responsibility for the cost of providing such services in
exchange for a per member per month fee. The Company's experience with
risk-based contracts (including the experience of Green Spring, HAI and Merit)
covering a large number of lives has given it a broad base of data from which to
analyze utilization rates. The Company believes that this broad database permits
it to estimate utilization trends and costs more accurately than many of its
competitors, which allows it to bid effectively. The Company's experience has
also allowed it to develop effective measures for controlling the cost of
providing a unit of care to its covered lives. Among other cost control
measures, the Company has developed or acquired clinical protocols, which permit
the Company to assist its network providers to administer effective treatment in
a cost efficient manner, and claims management technology, which permits the
Company to reduce the cost of processing claims. The Company's care managers are
an essential element in its provision of cost-effective care. Except in
emergencies, treatment is required to be authorized by a Company care manager.
Care managers, in consultation with treating professionals, and using the
Company's clinical protocols, authorize an appropriate level and intensity of
services that can be delivered in a cost-efficient manner. See
"Industry--Segmentation--Risk-Based Network Products."
EMPLOYEE ASSISTANCE PROGRAMS. The Company's EAP products typically provide
assessment and referral services to employees and dependents of the Company's
customers in an effort to assist in the early identification and resolution of
productivity problems associated with the employees who are impaired by
behavioral conditions or other personal concerns. For many EAP customers, the
Company also provides limited outpatient therapy (typically limited to eight or
fewer sessions) to patients requiring
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such services. For these services, the Company typically is paid a fixed fee per
member per month; however, the Company is usually not responsible for the cost
of providing care beyond these services. If further services are necessary
beyond limited outpatient therapy, the Company will refer the beneficiary to an
appropriate provider or treatment facility.
INTEGRATED PRODUCTS. Under its integrated products, the Company typically
establishes an EAP to function as the "front end" of a managed care program that
provides a full range of services, including more intensive treatment services
not covered by the EAP. The Company typically manages the EAP and accepts all or
some of the responsibility for the cost of any additional treatment required
upon referral out of the EAP, thus integrating the two products and using both
the Company's care management and clinical care techniques to manage the
provision of care. See "Industry--Segmentation--Integrated EAP/Managed
Behavioral Healthcare Products."
ASO PRODUCTS. Under its ASO products, the Company provides services ranging
from utilization review and claims administration to the arrangement for and
management of a full range of patient treatment services, but does not assume
any of the responsibility for the cost of providing treatment services. Services
include member assistance, management reporting and claims processing in
addition to utilization review and care management. See
"Industry--Segmentation--Utilization Review/Care Management Products" and
"--Non-Risk-Based Network Products."
MANAGED BEHAVIORAL HEALTHCARE CUSTOMERS
GENERAL. The following table sets forth on a pro forma basis the
approximate number of covered lives as of December 31, 1997 and revenue for
fiscal 1997 in each of the Company's market segments described below:
<TABLE>
<CAPTION>
MARKET COVERED LIVES PERCENT REVENUE PERCENT
- ----------------------------------------------------------------- ----------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PERCENTAGES)
Corporations and Labor Unions.................................... 20.7 35.6% $ 197.7 17.8%
HMOs............................................................. 7.6 13.1 226.4 20.3
Blue Cross/Blue Shield and Insurance Companies................... 19.4 33.2 323.0 29.2
Medicaid Programs................................................ 2.5 4.3 265.4 23.9
Governmental Agencies (including CHAMPUS)........................ 4.7 8.0 84.7 7.6
Other............................................................ 3.4 5.8 13.6 1.2
--- ----- ---------- -----
Total........................................................ 58.3 100.0% $ 1,110.8 100.0%
--- ----- ---------- -----
--- ----- ---------- -----
</TABLE>
If the CBHS Transactions are consummated, the Company's total number of
covered lives would decrease by approximately 1.1 million due to the sale of GPA
and the Company's pro forma managed care revenue for fiscal 1997 would decrease
by $16.5 million. See "Pending Sale of Provider Business."
CORPORATIONS AND LABOR UNIONS. Corporations and, to a lesser extent, labor
unions, account for a large number of the Company's contracts to provide managed
behavioral healthcare services and, in particular, EAP and integrated
EAP/managed care services. The Company has structured a variety of fee
arrangements with corporate customers to cover all or a portion of the
responsibility of the cost of providing treatment services. In addition, the
Company operates a number of programs for corporate customers on an ASO basis.
Management believes the corporate market is an area of potential growth for the
Company, as corporations are anticipated to increase their utilization of
managed behavioral healthcare services. In an effort to increase penetration of
the corporate market, the Company intends to build upon Merit's experience in
managing programs for large corporate customers (such as IBM, Federal Express
and AT&T) and to market integrated programs to Merit's existing EAP customers
and other prospective corporate clients.
HMOS. The Company is a leader in the HMO market, providing managed
behavioral healthcare services to HMO beneficiaries. HMO contracts are full,
limited or shared risk contracts in which the Company accepts a fixed fee per
member per month from the HMO in exchange for providing a full or
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specified range of behavioral healthcare services for a specific portion of the
HMO's beneficiaries. Although certain large HMOs provide their own managed
behavioral healthcare services, many HMOs "carve out" behavioral healthcare from
their general healthcare services and subcontract such services to managed
behavioral healthcare companies such as the Company. The Company anticipates
that its business with HMOs will continue to grow.
BLUE CROSS/BLUE SHIELD ORGANIZATIONS AND INSURANCE COMPANIES. The Company
is the nation's leading provider of managed behavioral healthcare services to
Blue Cross/Blue Shield organizations. Green Spring derived approximately $194.0
million, or 53%, of its revenue in fiscal 1997 from contracts with Blue
Cross/Blue Shield organizations. The Company recently expanded its Blue
Cross/Blue Shield relationships by entering into a contract with Blue Cross/Blue
Shield of Michigan relating to 2.3 million covered lives.
HAI has contracts with its former owner, Aetna, pursuant to which HAI
provides managed behavioral healthcare products to Aetna, including focused
psychiatric review (a type of utilization review product), risk-based HMO
products, administrative services for Aetna's "Managed Choice" product and
provider network management services. For the twelve months ended September 30,
1997, HAI would have derived approximately $58.9 million of revenue, or
approximately 58% of its total revenue, from its contracts with Aetna, on a pro
forma basis. Approximately 71% of HAI's covered lives are attributable to its
contracts with Aetna.
MEDICAID PROGRAMS. The Company provides managed behavioral healthcare
services to Medicaid recipients through both direct contracts with state and
local governmental agencies and through subcontracts with HMOs focused on
Medicaid beneficiary populations. In addition to the Medicaid population, other
public entitlement programs, such as Medicare and state insurance programs for
the uninsured, offer the Company areas of potential future growth. The Company
expects that governmental agencies will continue to implement a significant
number of managed care Medicaid programs through contracts with HMOs and that
many HMOs will subcontract with managed behavioral healthcare organizations,
such as the Company, for behavioral healthcare services. The Company also
expects that other states will continue the trend of "carving-out" behavioral
healthcare services from their general healthcare benefit plans and contracting
directly with managed behavioral healthcare companies such as the Company. See
"Industry--Areas of Growth," "Risk Factors--Dependence on Government Spending
for Managed Healthcare; Possible Impact of Healthcare Reform" and
"--Regulation--Other Proposed Legislation."
GOVERNMENTAL AGENCIES. The Company provides EAPs and other managed care
products for employees and their dependents who are beneficiaries of federal,
state and local governmental agencies' healthcare benefit plans. Governmental
agencies' healthcare benefit plans have historically contracted for managed
behavioral healthcare services as part of their general healthcare contracts
with HMOs or indemnity insurers. In turn, HMOs or indemnity insurers have either
provided managed behavioral healthcare services directly or subcontracted such
services to managed behavioral healthcare companies such as the Company. The
Company currently provides services to a number of government employees either
directly pursuant to a contract with the government agency or as a subcontractor
to HMOs. More recently, governmental agencies have begun to contract directly
with managed behavioral healthcare companies to provide these services. In
addition, the Company currently manages contracts for CHAMPUS beneficiaries and
is actively pursuing new contracts and subcontracts under the CHAMPUS program.
In this market, the Company often bids for such contracts together with HMOs to
provide the behavioral healthcare services portion of the overall CHAMPUS
healthcare contract.
MANAGED BEHAVIORAL HEALTHCARE CONTRACTS
Green Spring's contracts with customers typically have terms of one to three
years, and in certain cases contain renewal provisions (at the customer's
option) for successive terms of between one and
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two years (unless terminated earlier). Substantially all of these contracts are
immediately terminable with cause and many are terminable without cause by the
customer or Green Spring either upon the giving of requisite notice and the
passage of a specified period of time (typically between 60 and 180 days) or
upon the occurrence of other specified events. In addition, Green Spring's
contracts with federal, state and local governmental agencies, under both direct
contract and subcontract arrangements with HMOs, generally are conditioned on
legislative appropriations. These contracts, notwithstanding terms to the
contrary, generally can be terminated or modified by the customer if such
appropriations are not made. See "Risk Factors--Risk Based Programs" and
"--Reliance on Customer Contracts." Merit's and HAI's customer contracts have
substantially similar terms to those described above.
MANAGED BEHAVIORAL HEALTHCARE NETWORK
The Company's managed behavioral healthcare and EAP treatment services are
provided by a network of third-party providers. The number and type of providers
in a particular area depend upon customer preference, site, geographic
concentration and demographic make-up of the beneficiary population in that
area. Network providers include a variety of specialized behavioral healthcare
personnel, such as psychiatrists, psychologists, licensed clinical social
workers, substance abuse counselors and other professionals.
As of December 31, 1997, the Company had contractual arrangements covering
over 34,000 individual third-party network providers. The Company's network
providers are independent contractors located throughout the local areas in
which the Company's customer's beneficiary population resides. Network providers
work out of their own offices, although the Company's personnel are available to
assist them with consultation and other needs. Network providers include both
individual practitioners, as well as individuals who are members of group
practices or other licensed centers or programs. Network providers typically
execute standard contracts with the Company for which they are typically paid by
the Company on a fee-for-service basis. In some cases, network providers are
paid on a "case rate" basis, whereby the provider is paid a set rate for an
entire course of treatment, or through other risk sharing arrangements. A
network provider's contract with the Company typically has a one-year term, with
automatic renewal at the Company's option for successive one-year terms, and
generally may be terminated without cause by the Company or the provider upon 30
to 90 days notice.
As of December 31, 1997, the Company's managed behavorial healthcare network
included contractual arrangements with approximately 2,000 third-party treatment
facilities, including inpatient psychiatric and substance abuse hospitals,
intensive outpatient facilities, partial hospitalization facilities, community
health centers and other community-based facilities, rehabilitative and support
facilities, and other intermediate care and alternative care facilities or
programs. This variety of facilities enables the Company to offer patients a
full continuum of care and to refer patients to the most appropriate facility or
program within that continuum. Typically, the Company contracts with facilities
on a per diem or fee-for-service basis and, in some cases, on a "case rate" or
capitated basis. The contracts between the Company and inpatient and other
facilities typically are for one year terms and, in some cases, are
automatically renewable at the Company's option. Facility contracts are usually
terminable by the Company or the facility owner upon 30 to 120 days notice. The
Psychiatric Hospital Facilities and other facilities operated by CBHS are
members of the Company's hospital provider network on the same terms as are
generally applicable to unaffiliated third-party treatment facilities.
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COMPETITION
Each segment of the Company's business is highly competitive. With respect
to its managed care business, the Company competes with large insurance
companies, HMOs, PPOs, TPAs, IPAs, multi-disciplinary medical 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 and
EAP services to their employees or subscribers directly, rather than by
contracting with the Company for such services. Because of competition, the
Company does not expect to be able to rely on price increases to achieve revenue
growth and expects to continue experiencing pressure on direct operating
margins. See "Risk Factors--Highly Competitive Industry."
The Company's public sector operations compete with various for profit and
not-for-profit entities, including, but not limited to: (i) managed behavioral
healthcare companies that have started managing human services for governmental
agencies; (ii) home health care organizations; (iii) proprietary nursing home
companies; and (iv) proprietary corrections companies. The Company believes that
the most significant factors in a customer's selection of services include price
and quality of services and outcomes. The pricing aspect of such services is
especially important to attract public sector agencies looking to outsource
public services to the private sector as demand for quality services escalates
while budgeted dollars for healthcare services are reduced. The Company's
management believes that it competes effectively with respect to these factors.
The competitive environment affecting the Company's franchise and provider
operations are discussed elsewhere. See "Charter Advantage--Competition."
INSURANCE
The Company maintains a general and professional liability insurance policy
with an unaffiliated insurer. The policy is written on a "claims made or
circumstances reported" basis, subject to a $500,000 deductible per occurrence
and an aggregate deductible of $1.5 million.
PROPERTIES
MAGELLAN. The Company's principal executive offices are located in Atlanta,
Georgia; the lease for the Company's headquarters expires in 1999. Green Spring
leases its 83 offices with terms expiring between 1997 and 2020. Green Spring's
headquarters are leased and are located in Columbia, Maryland with lease terms
expiring between 1998 and 2002. Mentor and Public Solutions lease their 68
offices with terms expiring between 1998 and 2002. Mentor and Public Solutions'
headquarters are leased and are located in Boston, Massachusetts with a lease
term expiring in 2002. The Company owns two behavioral healthcare facilities in
the United Kingdom, one of which is subject to a land-lease that expires in
2069, and a behavorial healthcare facility in Nyon, Switzerland. The Company has
a controlling interest in six hospital-based Joint Ventures that operate or
manage 10 behavioral healthcare facilities ("JV Hospitals"). The Joint Ventures
own six of the JV Hospitals and lease two of the JV Hospitals from the
respective Joint Venture owners. The remaining two JV Hospitals are owned by the
respective Joint Venture owners.
MERIT. Merit's principal executive offices are located in Park Ridge, New
Jersey; the lease for Merit's headquarters expires in 2006. Merit leases a
facility that comprises its National Service Center in St. Louis, Missouri,
under three leases expiring between 2001 and 2003. In addition, Merit leases
significant amounts of office space in New York City and San Francisco,
California pursuant to leases that expire in 2008 and 2003, respectively. Merit
also maintained at September 30, 1997, approximately 150 other offices in 32
states under leases that have terms of up to 10 years.
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HAI. HAI's principal executive offices are located in Sandy, Utah; the
lease expires in 2005. HAI maintains 29 other offices in 17 states under leases
that have terms of up to 4 years.
INTELLECTUAL PROPERTY
The Company has developed and is marketing applications and systems for
managing the delivery of care and measuring the outcome of treatment, including
an integrated suite of applications that includes a "Speciality Care Management"
component and an "Advanced Call Center" component. The Speciality Care
Management component includes a suite of proprietary clinical protocols called
"Specifications for Acceptable Care."
These protocols were developed and are supported by recognized physician
experts in the relevant specialities. Clinical protocols are detailed treatment
plans for specific medical conditions. The Advanced Call Center component
includes a nurse advice line application, which permits nurses to answer calls
from managed care beneficiaries and to provide health information and care
decision counseling. It also includes an application that initiates calls to
managed care beneficiaries requiring information on care of chronic conditions,
other information or screening. Finally, the Advanced Call Center component
includes an application that facilitates precertification of beneficiaries,
program referral or enrollment and after-hours back-up of the Speciality Care
Management component. The Advanced Call Center assists the Company and other
users to control costs by reducing unnecessary emergency room visits and by
assisting network providers to monitor compliance with treatment plans. Green
Spring, HAI and Merit have also developed or licensed clinical protocols and
proprietary software applications for use in providing managed behavorial
healthcare products.
EMPLOYEES
At September 30, 1997, the Company had approximately 5,000 full-time and
part-time employees. The Company believes it has satisfactory relations with its
employees.
MANAGEMENT INFORMATION SYSTEMS
In March 1997, the Company hired a Chief Information Officer and established
the Corporate Information Technology Department (the "IT Department"). The Chief
Information Officer reports to the Chief Executive Officer of the Company. Each
operating unit of the Company also has a chief information officer who reports
to the chief executive officer of the operating unit. The IT Department provides
strategic technical direction, consultation and implementation coordination to
each of the operating units.
Currently, each of the Company's operating units maintains its own
information systems. The systems maintained and the applications software used
varies depending on the business processes performed by the operating unit.
Green Spring processes all claims on a centralized system using its proprietary
"Claims Adjudication and Tracking System" software and two Compaq Proliant
servers. Green Spring conducts utilization review functions on a decentralized
client/server system, using proprietary "Care Utilization and Review Expediter"
software. Each regional Green Spring office maintains its own complement of data
base servers. Green Spring's information systems are relatively new and
management believes that they have sufficient remaining capacity to accommodate
Green Spring's foreseeable needs.
The Company's information technology strategy is to establish and implement
a common company-wide infrastructure in an attempt to facilitate the integration
of future acquisitions, reduce information technology costs and enhance the
Company's ability to share information internally and with its customers and
business partners. The Company will also attempt to standardize software,
equipment, training and support. An enterprise architecture standards working
group has been formed to implement the strategy. The working group is currently
developing the architecture and migration approach toward a Microsoft Windows NT
environment and standards and implementation plans for hardware and software
platforms and a wide-area network. Management believes that it could achieve
significant cost
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savings by implementing common system architectures, shared applications systems
and common business operating procedures throughout the Company, by
consolidating back-office functions and by minimizing redundant systems.
The Company's integration plan for the Acquisition includes an IT Department
working group consisting of senior information technology executives from the
Company, Green Spring, Merit and HAI. The Company's strategy for integrating the
Company, Green Spring, Merit and HAI is being coordinated with the Company's
ongoing efforts to establish and implement a common company-wide information
technology infrastructure.
The Company expects to be able to implement its company-wide information
technology infrastructure, including the integration of Merit, by the end of
calendar year 1999, without incurring material expenditures in excess of
historical capital requirements.
LEGAL PROCEEDINGS
The management and administration of the delivery of managed behavioral
healthcare services, and the direct provision of behavioral health treatment
services, entail significant risks of liability. In recent years, the Company,
Merit, HAI and Allied and their respective network providers have been subject
to a number of actions and claims alleging malpractice, professional negligence
and other related legal theories. Many of these actions and claims seek
substantial damages and therefore require the defendant to incur significant
fees and costs related to their defense.
From time to time, the Company, Merit, HAI and Allied are subject to various
actions and claims arising from the acts or omissions of their respective
employees, network providers or other parties. In the normal course of business,
the Company, Merit, HAI and Allied receive reports relating to suicides and
other serious incidents involving patients enrolled in their respective
programs. Such incidents may give rise to malpractice, professional negligence
and other related actions and claims against the Company, Merit, HAI or Allied
or their respective employees and network providers. As the number of lives
covered by the Company and such other entities grows, the number of providers
under contract with them increases and the nature and scope of services provided
by them in their respective managed care and EAP businesses expands, actions and
claims against such entities (and, in turn, possible legal liability) predicated
on malpractice, professional negligence or other related legal theories can be
expected to increase. See "Risk Factors--Professional Liability; Insurance."
To the extent customers of the Company, HAI, Allied or Merit are entitled to
indemnification under their contracts with the relevant entity relating to
liabilities they incur arising from the operation of the relevant entity's
programs, such indemnification may not be covered under the relevant entity's
insurance policies. In addition, to the extent that certain actions and claims
seek punitive and compensatory damages arising from alleged intentional
misconduct by the Company, HAI, Allied or Merit such damages, if awarded, may
not be covered, in whole or in part, by the relevant entity's insurance
policies. In the ordinary course of business, such entities are also subject to
actions and claims with respect to their respective employees, network providers
and suppliers of services. The Company does not believe that any pending action
against the Company, Merit, HAI or Allied will have a material adverse effect on
the Company. To date, claims and actions against the Company, Merit, HAI or
Allied alleging professional negligence have not resulted in material
liabilities to the Company, Merit, HAI or Allied; however, there can be no
assurance that pending or future actions or claims for professional liability
(including any judgments, settlements or costs associated therewith) will not
have a material adverse effect on the Company. See "--Insurance" and "Risk
Factors--Professional Liability; Insurance."
From time to time, the Company, HAI, Allied and Merit receive notifications
from and engage in discussions with various governmental agencies concerning
their respective businesses and operations. As a result of these contacts with
regulators, the relevant entity in many instances implements changes to its
operations, revises its filings with such agencies and/or seeks additional
licenses to conduct its business. In recent years, in response to governmental
agency inquiries or discussions with
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regulators, Merit has determined to seek licensure as a single service HMO, TPA
or utilization review agent in one or more jurisdictions.
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists, psychologists and clinical social workers
brought an action under the federal antitrust laws in the United States District
Court for the Southern District of New York against nine behavioral health
managed care organizations, including Merit, CMG, Green Spring and HAI
(collectively, the "Defendants"), entitled Edward M. Stephens, Jose A.
Yaryura-Tobias, Judith Green, Ph.D., Fugen Neziroglu Ph.D., Ona Robinson, Ph.D.,
Laurie A. Baum, C.S.W., Agnes Wohl, C.S.W., and The On-Step Institute For Mental
Health Research Inc., individually and on behalf of all others similarly
situated v. CMG Health, FHC Options, Inc., Foundation Health PsychCare Services,
Inc., Green Spring Health Services, Inc., Human Affairs International, Inc.,
Merit Behavioral Care Corp., MCC Behavioral Care Inc., United Behavioral
Systems, Inc., and Value Behavioral Health, Inc., 96 Civ. 7798 (KMW). The
complaint alleges that the Defendants violated Section 1 of the Sherman Act by
engaging in a conspiracy to fix the prices at which the Defendants purchase
services from mental healthcare providers such as the plaintiffs. The complaint
further alleges that the Defendants engaged in a group boycott to exclude mental
healthcare providers from the Defendants' networks in order to further the goals
of the alleged conspiracy. The complaint also challenges the propriety of the
Defendants' capitation arrangements with their respective customers, although it
is unclear from the complaint whether the plaintiffs allege that the Defendants
unlawfully conspired to enter into capitation arrangements with their respective
customers. The complaint seeks treble damages against the Defendants in an
unspecified amount and a permanent injunction prohibiting the Defendants from
engaging in the alleged conduct which forms the basis of the complaint, plus
costs and attorneys' fees. In January 1997, the Defendants filed a motion to
dismiss the complaint. On July 21, 1997, a court-appointed magistrate judge
issued a report and recommendation to the District Court recommending that the
Defendants' motion to dismiss the complaint with prejudice be granted. On August
5, 1997, the plaintiffs filed objections to the magistrate judge's report and
recommendation; such objections have not yet been heard. The Defendants intend
to vigorously defend themselves in this litigation. However, there can be no
assurance that the outcome of this litigation will be favorable to the
Defendants. An unfavorable outcome could have a material adverse effect on the
Company.
REGULATION
GENERAL. The managed behavioral 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, PPOs, 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. These laws and regulations vary considerably among states and the
Company may be subject to different types of laws and regulations depending on
the specific regulatory approach adopted by each state to regulate the managed
care business and the provision of behavioral healthcare treatment services. 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 regulatory scheme generally applicable to the Company's managed care
operations is described in this section. The Company's managed care operations
are also indirectly affected by regulations applicable to the operations of
behavioral healthcare clinics and facilities. See "Charter
Advantage--Regulation."
The Company believes its operations are structured to comply with applicable
laws and regulations in all material respects and that it has received, or is in
the process of applying for, all licenses and approvals that are material to the
operation of its business. However, regulation of the managed healthcare
industry is evolving, with new legislative enactments and regulatory initiatives
at the state and federal levels being implemented on a regular basis.
Consequently, it is possible that a court or
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regulatory agency may take a position under existing or future laws or
regulations, or as a result of a change in the interpretation thereof, that such
laws or regulations apply to the Company in a different manner than the Company
believes such laws or regulations apply. Moreover, any such position may require
significant alterations to the Company's business operations in order to comply
with such laws or regulations, or interpretations thereof. Expansion of the
Company's business to cover additional geographic areas, to serve different
types of customers, to provide new services or to commence new operations could
also subject the Company to additional licensure requirements and/or regulation.
LICENSURE. Certain regulatory agencies having jurisdiction over the Company
possess discretionary powers when issuing or renewing licenses or granting
approval of proposed actions such as mergers, a change in ownership, transfer or
assignment of licenses and certain intracorporate transactions. One or multiple
agencies may require as a condition of such licensure or approval that the
Company cease or modify certain of its operations in order to comply with
applicable regulatory requirements or policies. In addition, the time necessary
to obtain licensure or approval varies from state to state, and difficulties in
obtaining a necessary license or approval may result in delays in the Company's
plans to expand operations in a particular state and, in some cases, lost
business opportunities. Compliance activities, mandated changes in the Company's
operations, delays in the expansion of the Company's business or lost business
opportunities as a result of regulatory requirements or policies could have a
material adverse effect on the Company.
INSURANCE, HMO AND PPO ACTIVITIES. To the extent that the Company operates
or is deemed to operate in one or more states as an insurance company, HMO, PPO
or similar entity, it may be required to comply with certain laws and
regulations that, among other things, may require the Company to maintain
certain types of assets and minimum levels of deposits, capital, surplus,
reserves or net worth. 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.
The National Association of Insurance Commissioners (the "NAIC") has undertaken
a comprehensive review of the regulatory status of entities arranging for the
provision of healthcare services through a network of providers that, like the
Company, may assume risk for the cost and quality of healthcare services, but
that are not currently licensed as an HMO or similar entity. As a result of this
review, the NAIC developed a "health organizations risk-based capital" formula,
designed specifically for managed care organizations, that establishes a minimum
amount of capital necessary for a managed care organization to support its
overall operations, allowing consideration for the organization's size and risk
profile. The NAIC initiative also may result in the adoption of a model NAIC
regulation in the area of health plan standards, which could be adopted by
individual states in whole or in part, and could result in the Company being
required to meet additional or new standards in connection with its existing
operations. Individual states have also recently adopted their own regulatory
initiatives that subject entities such as the Company to regulation under state
insurance laws. This includes, but is not limited to, requiring licensure as an
insurance company or HMO and requiring adherence to specific financial solvency
standards. State insurance laws and regulations may limit the ability of the
Company to pay dividends, make certain investments and repay certain
indebtedness. Licensure as an insurance company, HMO or similar entity could
also subject the Company to regulations governing reporting and disclosure,
mandated benefits, and other traditional insurance regulatory requirements. PPO
regulations to which the Company may be subject may require the Company to
register with a state authority and provide information concerning its
operations, particularly relating to provider and payor contracting. Based on
the information presently available to it, the Company does not believe that the
imposition of requirements related to maintaining certain types of assets,
prescribed levels of deposits, capital, surplus, reserves or net worth, or
complying with other regulatory requirements applicable to its insurance
company, HMO, PPO or similar operations, would have a material adverse effect on
the Company. Notwithstanding the foregoing, the imposition of such requirements
could increase the Company's cost of doing business and could delay the
Company's conduct or expansion of its business in some areas.
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The licensure process under state insurance laws can be lengthy and, unless the
applicable state regulatory agency allows the Company to continue to operate
while the licensure process is ongoing, the Company could experience a material
adverse effect on its operating results and financial condition while its
licensure application is pending. In addition, failure by the Company to obtain
and maintain required licenses typically also constitutes an event of default
under the Company's contracts with its customers. The loss of business from one
or more of the Company's major customers as a result of such an event of default
or otherwise could have a material adverse effect on the Company.
UTILIZATION REVIEW AND THIRD-PARTY ADMINISTRATOR ACTIVITIES. Numerous
states in which the Company does business have adopted, or are expected to
adopt, regulations governing entities engaging in utilization review and TPA
activities. Utilization review regulations typically impose requirements with
respect to the qualifications of personnel reviewing proposed treatment,
timeliness and notice of the review of proposed treatment, and other matters.
TPA regulations typically impose requirements regarding claims processing and
payments and the handling of customer funds. Utilization review and TPA
regulations may increase the Company's cost of doing business in the event that
compliance requires the Company to retain additional personnel to meet the
regulatory requirements and to take other required actions and make necessary
filings. Although compliance with utilization review regulations has not had a
material adverse effect on the Company, there can be no assurance that specific
regulations adopted in the future would not have such a result, particularly
since the nature, scope and specific requirements of such provisions vary
considerably among states that have adopted regulations of this type.
There is a trend among states to require licensure or certification of
entities performing utilization review or TPA activities; however, certain
federal courts have held that such licensure requirements are preempted by
ERISA. ERISA preempts state laws that mandate employee benefit structures or
their administration, as well as those that provide alternative enforcement
mechanisms. 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 ERISA and has relied on this general principle in determining
not to seek licensure for certain of its activities in many states. Existing
case law is not uniform on the applicability of ERISA preemption with respect to
state regulation of utilization review or TPA activities. There can be no
assurance that additional licensure will not be required with respect to
utilization review or TPA activities in certain states.
"ANY WILLING PROVIDER" LAWS. 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.
LICENSING OF HEALTHCARE PROFESSIONALS. The provision of behavioral
healthcare treatment services by psychiatrists, psychologists and other
providers is subject to state regulation with respect to the licensing of
healthcare professionals. The Company believes that the healthcare professionals
who provide behavioral healthcare treatment on behalf of or under contracts with
the Company are in compliance with the applicable state licensing requirements
and current interpretations thereof; however, there can be no assurance that
changes in such state licensing requirements or interpretations thereof will not
adversely affect the Company's existing operations or limit expansion. With
respect to the Company's crisis intervention program, additional licensure of
clinicians who provide telephonic assessment or stabilization services to
individuals who are calling from out-of-state may be required if such assessment
or stabilization services are deemed by regulatory agencies to be treatment
provided in the state of such individual's residence. The Company believes that
any such additional licensure could be
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obtained; however, there can be no assurance that such licensing requirements
will not adversely affect the Company's existing operations or limit expansion.
PROHIBITION ON FEE SPLITTING AND CORPORATE PRACTICE OF PROFESSIONS. 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.
DIRECT CONTRACTING WITH LICENSED INSURERS. Regulators in several states in
which the Company does business have adopted policies that require HMOs or, in
some instances, insurance companies, to contract directly with licensed
healthcare providers, entities or provider groups, such as IPAs, for the
provision of treatment services, rather than with unlicensed intermediary
companies. In such states, the Company's customary model of contracting directly
with its customers may need to be modified so that, for example, the IPAs
(rather than the Company) contract directly with the HMO or insurance company,
as appropriate, for the provision of treatment services. The Company intends to
work with a number of these HMO customers to restructure existing contractual
arrangements, upon contract renewal or in renegotiations, so that the entity
which contracts with the HMO directly is an IPA. The Company does not expect
this method of contracting to have a material adverse effect on its operations.
OTHER REGULATION OF HEALTHCARE PROVIDERS. The Company's business is
affected indirectly by regulations imposed upon healthcare providers.
Regulations imposed upon healthcare providers include provisions relating to the
conduct of, and ethical considerations involved in, the practice of psychiatry,
psychology, social work and related behavioral healthcare professions and, in
certain cases, the common law duty to warn others of danger or to prevent
patient self-injury. Confidentiality and patient privacy requirements are
particularly strict in the field of behavioral healthcare services, and
additional legislative initiatives relating to confidentiality are expected. The
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") included a
provision that prohibits the wrongful disclosure of certain "individually
identifiable health information." HIPAA requires the Secretary of the Department
to adopt standards relating to the transmission of such health information by
healthcare providers and healthcare plans. Although the Company believes that
such regulations do not at present materially impair the Company's operations,
there can be no assurance that such indirect regulation will not have a material
adverse effect on the Company in the future.
REGULATION OF CUSTOMERS. Regulations imposed upon the Company's customers
include, among other things, benefits mandated by statute, exclusions from
coverages prohibited by statute, procedures governing the payment and processing
of claims, record keeping and reporting requirements, requirements for and
payment rates applicable to coverage of Medicaid and Medicare beneficiaries,
provider contracting and enrollee rights, and confidentiality requirements.
Although the Company believes that such regulations do not at present materially
impair the Company's operations, there can be no assurance that such indirect
regulation will not have a material adverse effect on the Company in the future.
ERISA. Certain of the Company's services are subject to the provisions of
ERISA. ERISA governs certain aspects of the relationship between
employer-sponsored healthcare benefit plans and certain
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providers of services to such plans through a series of complex laws and
regulations that are subject to periodic interpretation by the Internal Revenue
Service and the Department of Labor. In some circumstances, and under certain
customer contracts, the Company may be expressly named as a "fiduciary" under
ERISA, or be deemed to have assumed duties that make it an ERISA fiduciary, and
thus be required to carry out its operations in a manner that complies with
ERISA requirements in all material respects. Although the Company believes that
it is in material compliance with the applicable ERISA requirements and that
such compliance does not currently have a material adverse effect on the
Company's operations, there can be no assurance that continuing ERISA compliance
efforts or any future changes to the applicable ERISA requirements will not have
a material adverse effect on the Company.
THE BUDGET ACT. In August 1997, Congress enacted 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 health maintenance organizations for
Medicare enrollees.
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 states to reduce coverage levels for Medicaid recipients
below those offered to commercial enrollees. Under prior law, the Secretary of
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. The Budget Act also
allows states to limit the number of managed care organizations with which the
state will contract to deliver care to Medicaid beneficiaries. These changes
could have a positive impact on the Company's business, if they result in
increased enrollment of Medicaid beneficiaries in managed care organizations and
increased Medicaid spending on managed care. However, these changes also may
have an adverse effect on the Company if a number of states decide to limit the
number of managed care organizations with which they will contract and to select
the organization solely on the basis of the cost of care, which could result in
increased cost competition for state contracts.
The Company cannot predict the effect of the Budget Act, or other healthcare
reform measures that may be adopted by Congress or state legislatures, on its
managed care operations and no assurance can be given that either the Budget Act
or other healthcare reform measures will not have an adverse effect on the
Company.
OTHER PROPOSED LEGISLATION. In the last five years, legislation has
periodically been introduced at the state and federal level providing for new
regulatory programs and materially revising existing regulatory programs. Any
such legislation, if enacted, could materially adversely affect the Company's
business, financial condition or results of operations. Such legislation could
include both federal and state bills affecting the Medicaid programs which may
be pending in or recently passed by state legislatures and which are not yet
available for review and analysis. Such legislation could also include proposals
for national health insurance and other forms of federal regulation of health
insurance and healthcare delivery. It is not possible at this time to predict
whether any such legislation will be adopted at the federal or state level, or
the nature, scope or applicability to the Company's business of any such
legislation, or when any particular legislation might be implemented. No
assurance can be given that any such federal or state legislation will not have
a material adverse effect on the Company.
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CHARTER ADVANTAGE
OVERVIEW
On June 17, 1997, the Company consummated the Crescent Transactions,
pursuant to which, among other things, it sold the Psychiatric Hospital
Facilities to Crescent. In addition, the Company and COI, an affiliate of
Crescent, formed a joint venture known as CBHS to operate the Psychiatric
Hospital Facilities and certain other facilities transferred by the Company to
CBHS. The Company and COI each own 50% of the equity interest of CBHS. The
Company obtained its equity interest by contributing approximately $5 million of
net assets, including five leased psychiatric hospitals, to CBHS. In fiscal
1997, subsequent to the initial capitalization of CBHS, the Company and COI each
contributed an additional $17.5 million to the capital of CBHS. The Company has
no obligation to make additional contributions to the capital of CBHS. The
Company accounts for its 50% investment in CBHS under the equity method of
accounting. In connection with the Crescent Transactions, the Company received
approximately $417.2 million in cash (before costs of approximately $16.0
million) and warrants for the purchase of 2.5% of COI's common stock,
exercisable over 12 years. The Company also issued 1,283,311 warrants to
purchase shares of the Company's Common Stock to each of Crescent and COI at an
exercise price of $30 per share. In related agreements, Crescent and CBHS
entered into the facilities lease described below and the Company, CBHS and the
Psychiatric Hospital Facilities and other facilities transferred by the Company
to CBHS entered into the franchise agreements described below. Following the
consummation of the Crescent Transactions, the Company formed a new business
unit, "Charter Advantage," to franchise the "CHARTER" system of behavioral
healthcare to operators of behavioral healthcare facilities. Currently, its sole
customer is CBHS.
On March 3, 1998, the Company and certain of its wholly owned subsidiaries
entered into definitive agreements with COI and CBHS pursuant to which it will,
among other things, sell the Company's franchise operations. See "Pending Sale
of Provider Business."
The following discussion of Charter Advantage's operations, CBHS's
facilities and the psychiatric hospital industry in general is relevant to an
assessment of the factors having a bearing on CBHS's ability to pay Franchise
Fees to the Company, the value of the Company's interest in the equity of CBHS
and the future business prospects of CBHS. If the CBHS Transactions are
consumated, the Master Franchise Agreement will be canceled and the Company will
no longer receive the Franchise Fees. Furthermore, the future business prospects
of CBHS will no longer be relevant to the Company's future financial
performance.
FRANCHISE OPERATIONS
FRANCHISE AGREEMENTS. Charter Advantage franchises the "CHARTER" System of
behavioral healthcare to the Psychiatric Hospital Facilities and other
facilities operated by CBHS. See "-- CBHS." Each facility has entered into a
separate Franchise Agreement with Charter Advantage. Each franchisee is granted
the right to engage in the business of providing behavioral healthcare utilizing
the "CHARTER" System in a defined territory. Each franchisee is authorized to
conduct a "Hospital/RTC Based Behavioral Healthcare Business," which is defined
as the business of the operation of an acute care psychiatric hospital, part of
an acute care general hospital operating an acute care psychiatric unit, a
behavioral healthcare residential treatment center, a part of a facility
operating a behavioral healthcare residential treatment center, or other similar
facility providing 24-hour behavioral healthcare and the delivery of behavioral
healthcare from such facility or other affiliated facilities; such behavioral
healthcare to include inpatient hospitalization, partial hospitalization
programs, outpatient therapy, intensive outpatient therapy, residential
treatment, ambulatory detoxification, behavioral modification programs and
related services. The "CHARTER" System is a system for the operation of
Hospital/RTC Based Behavioral Healthcare Businesses under the "CHARTER" names
and marks, and includes the right to use
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computer software, treatment programs and procedures, quality standards, quality
assessment methods, performance improvement and monitoring programs, as well as
advertising and marketing assistance, promotional materials, consultation and
other matters relating to the operation of Hospital/RTC Based Behavioral
Healthcare Businesses.
The rights granted under each franchise agreement relate solely to a defined
territory. The rights are non-exclusive except that Charter Advantage may not
grant a franchise for, or itself operate, a facility located within a
franchisee's territory using the "CHARTER" System. Charter Advantage, however,
may grant franchises or licenses to individual physicians, psychologists or
other mental healthcare professionals, to operate businesses for the delivery of
behavioral healthcare utilizing the "CHARTER" System at facilities in the
franchisee's territory other than at an in-patient facility. Charter Advantage
also reserves the right to grant franchises to others to operate behavioral
healthcare businesses utilizing the "CHARTER" System other than in the
franchisee's territory and to otherwise use and grant to others the right to use
the "CHARTER" name or any other name for other businesses. In addition, Charter
Advantage reserves the right to: (i) provide behavioral healthcare services
incidental to the managed behavioral healthcare businesses or any other business
the principal purpose of which is not the operation of a Hospital/RTC Based
Behavioral Healthcare Business and (ii) pursuant to contracts with federal,
state and local governmental agencies, provide health and human services,
including behavioral healthcare services, to the mentally retarded, the
developmental disabled, the elderly, persons under the control or supervision of
criminal/juvenile systems and other designated populations.
During the term of each franchise agreement, Charter Advantage provides
franchisees with: (i) advertising and marketing assistance, including
consultation, access to media buying programs and access to broadcast and other
advertising materials produced by Charter Advantage; (ii) risk management
services, including risk financial planning, loss control and claims management;
(iii) outcomes monitoring; (iv) national and regional contracting services; and
(v) consultation by telephone or at Charter Advantage's offices with respect to
matters relating to the franchisee's business in which Charter Advantage has
expertise, including reimbursement, government relations, clinical strategies,
regulatory matters, strategic planning and business development.
FRANCHISE FEES; SUBORDINATION. The Company and CBHS are parties to a Master
Franchise Agreement pursuant to which CBHS pays the Company annual Franchise
Fees for granting the right to utilize the "CHARTER" System to the facilities
operated by CBHS. CBHS is required by the Master Franchise Agreement to pay
annual Franchise Fees equal to the greater of (i) $78.3 million, subject to
increases for inflation, and (ii) $78.3 million, plus 3% of CBHS's gross
revenues over $1 billion and not in excess of $1.2 billion and 5% of CBHS' gross
revenues over $1.2 billion. The Company, CBHS and Crescent have entered into a
Subordination Agreement pursuant to which the Franchise Fees are subordinated to
base rent, minimum escalator rent and the first $10.0 million of additional rent
under the Facilities Lease between Crescent and CBHS with respect to the
facilities operated by CBHS. If CBHS (with the consent of the Company) informs
Crescent that capital expenditures in excess of $10.0 million are required and
Crescent funds or makes an irrevocable commitment to fund capital expenditures
in excess of $10.0 million, then Franchise Fees are also subordinated to such
expenditures or commitments in excess of $10.0 million.
Based on projections of fiscal 1998 operations prepared by management of
CBHS, the Company believes that CBHS will be unable to pay the full amount of
the Franchise Fees it is contractually obligated to pay the Company during
fiscal 1998. The Company currently estimates that CBHS will be able to pay
approximately $58.0 million to $68.0 million of the Franchise Fees in fiscal
1998, a $10.0 million to $20.0 million shortfall relative to amounts payable
under the Master Franchise Agreement. If CBHS defaults in payment of the
Franchise Fees, the Company has the following remedies available to it under the
Master Franchise Agreement. If the amount of Franchise Fees not paid exceeds
$6.0 million, but is less than $18.0 million, the Company will have the right to
prohibit CBHS from paying any incentive compensation to CBHS's management and
may prohibit the vesting of any equity in CBHS to which
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management of CBHS may be entitled during the period when Franchise Fees remain
unpaid. If the amount of Franchise Fees not paid exceeds $18.0 million, but is
less than $24.0 million, the Company will have the right to prohibit any salary
increases for key personnel of CBHS, to prohibit any additional hiring by CBHS
and to prohibit CBHS from making any hospital acquisitions or entering into any
hospital joint ventures directly or indirectly during such period. If the amount
of Franchise Fees not paid exceeds $24.0 million, the Company may require CBHS
to reduce by 5% the expenses approved in its current budget, to seek approval of
expenditures, including capital and operating expenditures, on a monthly basis,
and to transfer control and management of CBHS and the Psychiatric Hospital
Facilities to the Company. Notwithstanding the foregoing, the Company does not
have the right to take any action, in connection with the exercise of remedies
against CBHS, that could reasonably be expected to force CBHS into bankruptcy or
receivership, or similar proceedings, with respect to any dispute that may arise
among the parties with respect to payment or nonpayment of the Franchise Fees.
The initial term of the Facilities Lease is twelve years. CBHS has the right
to renew the lease for four additional terms of five years each. The base rent
for the first year of the initial term is $41.7 million, which increases each
year during the initial term by five percent compounded annually. CBHS is
required by the Facilities Lease to pay Crescent in each lease year additional
rent in the amount of $20.0 million. Crescent is obligated to use at least $10.0
million of the additional rent to pay for capital expenditures with respect to
the Psychiatric Hospital Facilities in the time and manner directed by CBHS.
Furthermore, CBHS has the right to require Crescent to use up to $10.0 million
of additional rent to pay property taxes, insurance premiums and Franchise Fees.
CBHS's failure to pay additional rent pursuant to the Facilities Lease is not a
default with respect to the Facilities Lease, except to the extent that Crescent
has made capital expenditures or advanced sums to pay taxes, insurance premiums,
assessments or Franchise Fees that have not been reimbursed by additional rent
payments.
Notwithstanding the foregoing, if the accrued and unpaid Franchise Fees,
including interest thereon, if any, equal or exceed $15.0 million, then CBHS's
available cash would thereafter first be applied to base rent and minimum
escalator rent, but not to additional rent, under the Facilities Lease. The
remainder of CBHS's available cash would then be applied in such order of
priority as CBHS may determine, in the reasonable discretion of its Board of
Directors (half the members of which are appointed by the Company), to all other
operating expenses of CBHS, including, without limitation, the current and
accumulated Franchise Fees, additional rent due under the Facilities Lease and
any other operating expenses. If CBHS (with the consent of the Company) informs
Crescent that capital expenditures are required and Crescent funds or makes an
irrevocable commitment to fund such capital expenditures, then CBHS's available
cash will first be applied to base rent, minimum escalator rent and the amount
of additional rent necessary to fund such capital expenditures; provided that
Crescent will have no obligation to refund any amounts paid by CBHS as
additional rent.
CBHS
OVERVIEW. CBHS is the nation's largest operator of acute-care psychiatric
hospitals and other behavioral care treatment facilities. CBHS's psychiatric
hospitals are located in well-populated urban and suburban locations in 32
states. Seven of CBHS's hospitals are affiliated with medical schools for
residency and other post-graduate teaching programs. Most of CBHS's hospitals
offer a full continuum of behavioral care in their service area. The continuum
includes inpatient hospitalization, partial hospitalization, intensive
outpatient services and, in some markets, residential treatment services.
CBHS's hospitals provide structured and intensive treatment programs for
mental health and alcohol and drug dependency disorders in children, adolescents
and adults. The specialization of programs enables the clinical staff to provide
care that is specific to the patient's needs and facilitates monitoring of the
patient's progress. A typical treatment program at a CBHS facility integrates
physicians and other patient-care professionals with structured activities,
providing patients with testing, adjunctive therapies (occupational,
recreational and other), group therapy, individual therapy and educational
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programs. A treatment program includes one or more of the types of treatment
settings provided by CBHS's continuum of care. For those patients who do not
have a personal psychiatrist or other specialist, the hospital refers the
patient to a member of its medical staff.
A significant portion of hospital admissions are provided by referrals from
former patients, local marketplace advertising, managed care organizations and
physicians. Professional relationships are an important aspect of the ongoing
business of a behavioral care facility. Management believes the quality of
CBHS's treatment programs, staff employees and physical facilities are important
factors in maintaining good professional relationships.
CBHS's hospitals work closely with mental health professionals,
non-psychiatric physicians, emergency rooms and community agencies that come in
contact with individuals who may need treatment for mental illness or substance
abuse. A portion of the Company's marketing efforts is directed at increasing
general awareness of mental health and addictive disease and the services
offered by the Company's franchisees.
INDUSTRY TRENDS. 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
per diem or other discounted basis; (iv) a trend toward higher deductibles and
co-insurance for individual patients; (v) a trend toward limited employee
behavioral 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. In response to these conditions,
the Company believes that CBHS will (i) strengthen controls to minimize costs
and capital expenditures; (ii) review its portfolio of hospitals and sell, close
or lease hospitals or consolidate operations in certain locations; (iii) develop
strategies to increase outpatient services and partial hospitalization programs
to meet the demands of the marketplace; (iv) implement programs to contest third
party denials relating to valid pre-certified treatment and admissions; and (v)
renegotiate contracts with managed care organizations at increased rates.
SOURCES OF REVENUE. Payments are made to CBHS by patients, by insurance
companies and self-insured employers, by the federal and state governments under
Medicare, Medicaid, CHAMPUS and other programs and by HMOs, PPOs and other
managed care programs. Amounts received from most payors are less than the
hospital's established charges. The approximate percentages of gross patient
revenue (which is revenue before deducting contractual allowances and discounts
from established charges) derived by CBHS and the Company from various payment
sources for the last three fiscal years were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF HOSPITAL GROSS
PATIENT
REVENUE FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Medicare........................................................................... 26% 28% 27%
Medicaid........................................................................... 17 17 18
--- --- ---
43 45 45
HMOs and PPOs...................................................................... 17 21 24
CHAMPUS............................................................................ 4 3 2
Other Government Programs.......................................................... 6 6 7
Other (primarily Blue Cross and other commercial insurance)........................ 30 25 22
--- --- ---
Total............................................................................ 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
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Most private insurance carriers reimburse their policyholders or make direct
payments to the hospitals for charges at rates specified in their policies. The
patient remains responsible to the hospital for any difference between the
insurance proceeds and the total charges. Certain Blue Cross programs have
negotiated reimbursement rates with certain of CBHS's hospitals which are less
than the hospital's established charges.
Most of CBHS's facilities have entered into contracts with HMOs, PPOs,
certain self-insured employers and other managed care plans which provide for
reimbursement at rates less than the hospital's normal charges. In addition to
contracts entered into by individual hospitals with such managed care plans,
CBHS has entered into regional and national contracts with HMOs, PPOs,
self-insured employers and other managed care plans that apply to all of such
franchisees in the geographic areas covered by a contract. CBHS is seeking to
obtain additional regional and national contracts. The Company expects the
percentage of revenue obtained by CBHS from these payor sources to increase in
the future.
Under the Medicare provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), costs per Medicare case are determined for each of the
Company's franchisees. A target cost per case is established for each year (the
"Target Rate"). If a hospital's costs per case are less than the Target Rate,
the hospital receives a bonus of 50% of the difference between its actual costs
per case and the Target Rate (limited to 5% of the Target Rate). Hospitals with
costs which exceed the Target Rate are paid an additional amount equal to 50% of
the excess, up to 10% of the Target Rate. These limits apply only to operating
costs and do not apply to capital costs, including lease expense, depreciation
and interest associated with capital expenditures. The Target Rate for each
hospital is increased annually by the application of an "update factor." The
Budget Act establishes caps on a hospital's Target Rate for cost reporting
periods beginning on or after October 1, 1997 and before October 1, 2002 equal
to no more than the 75th percentile of the Target Rate of such hospital for cost
reporting periods ending during fiscal year 1996, subject to certain subsequent
updates.
Most of CBHS's hospitals participate in state-operated Medicaid programs.
Current federal law prohibits Medicaid funding for inpatient services in
freestanding psychiatric hospitals for patients between the ages of 21 and 64.
Each state is responsible for establishing the Medicaid eligibility and coverage
criteria, payment methodology and funding mechanisms which apply in that state,
subject to federal guidelines. Accordingly, the level of Medicaid payments
received by CBHS's hospitals varies from state to state. In addition to the
basic payment level for patient care, several state programs include a financial
benefit for hospitals which treat a disproportionately large volume of Medicaid
patients as a percentage of the total patient population. The Company received
approximately $11.0 million, $9.0 million and $5.0 million in Medicaid
disproportionate share payments in fiscal 1994, 1995 and 1996, respectively,
when it owned the facilities now operated by CBHS. The Company and CBHS received
approximately $3.0 million in such payments in fiscal 1997. Disproportionate
share payments will not apply to services rendered in fiscal 1998 and
thereafter. See "--Risk Factors--Governmental Budgetary Constraints and
Healthcare Reform."
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Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings and interpretations
which may affect payments made under either or both of such programs. In
addition, federal or state governments could reduce the future funds available
under such programs or adopt additional restrictions on admissions and more
stringent requirements for utilization of services. These types of measures
could adversely affect CBHS's operations. Final determination of amounts payable
under Medicare and certain Medicaid programs are subject to review and audit.
Most of CBHS's hospitals receive revenues from the CHAMPUS program. Under
various CHAMPUS programs, payments can either be based on contractually agreed
upon rates or rates determined by regulatory formulas. CHAMPUS patients are
subject to annual limits on the number of psychiatric days covered by CHAMPUS.
Covered inpatient services are generally limited to 30 days for adult acute
patients, 45 days for child and adolescent acute patients, and 150 days for
residential treatment center patients.
MEDICAL STAFFS. At September 30, 1997, approximately 1,300 licensed
physicians were active members of the medical staffs of CBHS's hospitals. Many
of these physicians also serve on the medical staffs of other hospitals. A
number of physicians are independent contractors who have private practices in
addition to their duties for CBHS, while certain of these physicians are
employees of CBHS. The medical and professional affairs of each hospital are
supervised by the medical staff of the hospital, under the control of its board
of trustees. CBHS recruits physicians to serve in administrative capacities at
its hospitals and to engage in private practice in communities where CBHS's
hospitals are located. Registered nurses and certain other hospital employees
are required to be licensed under the professional licensing laws of most
states. CBHS's hospital subsidiaries require such employees to maintain such
professional licenses as a condition of employment.
COMPETITION
Each of CBHS's hospitals competes with other hospitals, some of which are
larger and have greater financial resources. Some competing hospitals are owned
and operated by governmental agencies, others by nonprofit organizations
supported by endowments and charitable contributions and others by proprietary
hospital corporations. The hospitals frequently draw patients from areas outside
their immediate locale and, therefore, CBHS's hospitals may, in certain markets,
compete with both local and distant hospitals. In addition, CBHS's hospitals
compete not only with other psychiatric hospitals, but also with psychiatric
units in general hospitals, and outpatient services provided by CBHS compete
with private practicing mental health professionals, publicly funded mental
health centers and partial hospitalization and other intensive outpatient
services programs and facilities. The competitive position of a hospital is, to
a significant degree, dependent upon the number and quality of physicians who
practice at the hospital and who are members of its medical staff. The Company
believes that CBHS competes effectively with respect to the aforementioned
factors. However, there can be no assurance that CBHS will be able to compete
successfully in the provider business in the future.
Competition among hospitals and other healthcare providers for patients has
intensified in recent years. During this period, hospital occupancy rates for
inpatient behavioral care patients in the United States have declined as a
result of cost containment pressures, changing technology, changes in
reimbursement, changes in practice patterns from inpatient to outpatient
treatment and other factors. In recent years, the competitive position of
hospitals has been affected by the ability of such hospitals to obtain contracts
with PPO's, HMO's and other managed care programs to provide inpatient and other
services. Such contracts normally involve a discount from the hospital's
established charges, but provide a base of patient referrals. These contracts
also frequently provide for pre-admission certification and for concurrent
length of stay reviews. The importance of obtaining contracts with HMO's, PPO's
and other managed care companies varies from market to market, depending on the
individual market strength of the managed care companies. In certain states,
certificate of need laws place limitations on
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CBHS's and its competitors' ability to build new hospitals and to expand
existing hospitals and services. As of September 30, 1997, the Company had joint
ventures, which are managed by CBHS, that operated three hospitals in two states
(Louisiana and New Mexico) and CBHS operated 34 hospitals in ten states
(Arizona, Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada,
Texas and Utah) that do not have certificate of need laws applicable to
hospitals.
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. Although CBHS believes that its facilities are currently in compliance
with these federal, state, and local requirements, there can be no assurance
that all facilities will continuously be operated in full compliance with the
applicable requirements. The failure to obtain or renew any required regulatory
approvals, the failure to satisfy the requirements for continued participation
in the Medicare, Medicaid or CHAMPUS programs, or the failure to satisfy other
state and federal regulatory requirements relating to the operation of
psychiatric hospitals and other behavioral healthcare facilities and the
provision of behavioral healthcare services could have a material adverse effect
on the operations of CBHS.
A number of states have adopted hospital rate review legislation, which
generally provides for state regulation of rates charged for various hospital
services. Such laws are in effect in the State of Florida, in which CBHS
operates seven hospitals. In Florida, the Health Care Board approves a budget
for each hospital, which establishes a permitted level of revenues per
discharge. If this level of permitted revenues per discharge is exceeded by a
hospital in a particular year by more than a specified amount, certain
penalties, including cash penalties, can be imposed. Although the Company
believes that CBHS's facilities in Florida currently are in compliance with the
state hospital rate review laws, there can be no assurance that such facilities
will not be subject to penalties under the hospital rate review laws in the
future.
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. These laws require that the approval of a state agency be obtained
prior to the construction of a new hospital or the expansion of the facilities
or services of an existing hospital. Such approvals may require a finding of
community need for the additional hospital facilities and services. In recent
years, many states have repealed certificate of need laws or limited the scope
of the facilities and services to which such certificate of need laws apply.
There can be no assurance that state certificate of need laws will not limit
CBHS's future expansion, or that increased competition as a result of the repeal
or limitation in scope of existing certificate of need laws will not have a
materially adverse effect on the existing operations of CBHS.
Federal law contains numerous provisions designed to insure that services
rendered by hospitals to Medicare and Medicaid patients are medically necessary
and are of a quality that meets professionally recognized standards, and to
insure that claims for reimbursement under the Medicare and Medicaid programs
are properly filed. Among other things, services provided at CBHS's psychiatric
hospitals are subject to periodic review by Peer Review Organizations ("PROs").
All hospitals which participate in the Medicare program are subject to review by
PROs. PRO activities include review of certain admissions and services to
determine medical necessity and to determine whether quality of care meets
professionally recognized standards. PROs have the authority to recommend to the
Department that a provider
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who is in substantial noncompliance with the medical necessity and quality of
care standards of a PRO or who has grossly and flagrantly violated an obligation
to render care be excluded from participation in the Medicare program or be
required to reimburse the federal government for certain payments previously
made to the provider under the Medicare program. The Company believes that
CBHS's facilities are in material compliance with the applicable medical
necessity and quality of care standards for Medicare and Medicaid patients,
however, there can be no assurance that all CBHS facilities will continuously
remain in material compliance with such standards.
CBHS 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 "Anti-Kickback Statute")
and the physician self-referral provisions of the Omnibus Budget Reconciliation
Act of 1993 ("Stark II").
The Anti-Kickback Statute prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration, in exchange for or which is
intended to induce the referral of patients for services that will be paid for
in whole or in part under any federal healthcare program, including Medicare and
Medicaid. A violation of the Anti-Kickback Statute is a felony, punishable by a
fine of up to $25,000, a term of imprisonment for up to five years, or both. In
addition, an individual or entity convicted of a violation of the Anti-Kickback
Statute may be subject to civil monetary penalties in an amount equal to $50,000
for each prohibited act, plus damages up to three times the total amount of
remuneration offered, paid, solicited or received, and may be subject to
exclusion from participation in any federal healthcare program.
In order to provide guidance with respect to the Anti-Kickback Statute,
Congress required the Department to issue regulations outlining business
arrangements that would not be subject to prosecution under the Anti-Kickback
Statute. These regulations include "safe harbors" for certain investment
interests, leases of space and equipment, personal service arrangements,
employment arrangements, personal services and management contracts, sale of
physician practices, discounts, and waiver of beneficiary copayments and
deductibles. Certain transactions and agreements of CBHS do not satisfy all of
the applicable criteria contained in the safe harbor regulations that relate to
such transactions and agreements. The Company believes that such transactions
and agreements do not violate the Anti-Kickback Statute; however, there can be
no assurance that (i) government enforcement agencies will not assert that
certain of these arrangements are in violation of the Anti-Kickback Statute, or
(ii) the Anti-Kickback Statute and safe harbor regulations will not ultimately
be interpreted by the courts in a manner inconsistent with CBHS's business
practices.
In 1989, Congress passed legislation, commonly referred to as the "Stark
Law," which prohibits physicians who have a financial relationship with entities
that furnish clinical laboratory services from referring patients to such
entities for Medicare-reimbursed clinical laboratory services and which
prohibits the entities for billing for services provided pursuant to such
prohibited referrals. The Stark Law, which contains a number of exceptions to
its general referral prohibition, became effective January 1, 1992. Proposed
regulations implementing the Stark Law were first issued in March 1992, however,
the final Stark regulations were issued on August 14, 1995.
In 1993, Congress passed legislation commonly referred to as "Stark II,"
which expanded the prohibitions of the Stark Law to include referrals from
physicians for a wide variety of designated health services, including
inpatient/outpatient hospital services, and extended the referral prohibition to
include services reimbursed under Medicaid. The limitations on referrals
outlined in Stark II became effective January 1, 1995. A violation of Stark II
may result in the imposition of civil monetary penalties of up to $15,000 for
each service billed in violation of the statute and exclusion from participation
in any federal healthcare program. Although the regulations implementing Stark
II have not been issued it is anticipated that they will be similar to the
original Stark regulations. The Company believes that the financial
relationships between CBHS's hospitals and physicians do not violate the Stark
Law and regulations.
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There can be no assurance however that (i) government enforcement agencies will
not contend that certain of these financial relationships are in violation of
the Stark legislation; (ii) that the Stark legislation will not ultimately be
interpreted by the courts in a manner inconsistent with CBHS's practices; or
(iii) regulations will be issued in the future that will result in an
interpretation of the Stark Law or Stark II that is inconsistent with CBHS's
practices.
CBHS is also subject to 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 healthcare provider has a financial relationship.
These state statutes generally apply to services reimbursed under both
government programs and private health insurance plans. Violations of these laws
may result in payment not being made for the items or services rendered, loss of
the healthcare provider's license, fines, or criminal penalties. These statutes
and regulations vary widely from state to state, are often vague and, in many
states, have not been interpreted by courts or regulatory agencies. Although the
Company has no reason to believe that CBHS is in violation of any such state
statutes, there can be no assurance that CBHS's existing business arrangements
will not be subject to challenge under these types of laws in one or more
states.
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 is required under this Act to
exclude from participation in the Medicare and Medicaid programs any individual
or entity that has been convicted of a criminal offense relating to the delivery
of services under Medicare and Medicaid or to the neglect or abuse of patients.
In addition, the Department may exclude from participation in the Medicare and
Medicaid programs individuals and entities under certain other circumstances.
These include engaging in illegal remuneration arrangements with physicians and
other healthcare providers, license revocation, exclusion from other government
programs (such as CHAMPUS), filing claims for excessive charges or for
unnecessary services, failure to comply with the Medicare conditions of
participation and failure to disclose certain required information or to grant
proper access to hospital books and records.
The Department's exclusion authority was recently expanded under 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 exclusion for all other federal and state healthcare
programs, other than the Federal Employees Health Benefit Program.
The Department also has the authority to impose civil monetary penalties for
certain listed prohibited activities, including filing claims that are false or
fraudulent or are for services that were not rendered as claimed. 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 also expanded the Department's authority to impose civil
monetary penalties. Among other things, the new legislation prohibits the
knowing submission of a claim for reimbursement that will result in a greater
payment than is applicable to the item or service actually provided, and
prohibits submitting claims to Medicare or Medicaid for a pattern of medical or
other items or services that a person knows or should know are not medically
necessary. The legislation also prohibits offering any inducements to
beneficiaries in order to influence them to order or receive Medicare or
Medicaid covered items or services from a particular provider or practitioner.
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 enforcement activities. The new offenses created
by HIPAA and the Budget Act, as well as the greater spending on healthcare fraud
and abuse enforcement which will result from this legislation, may significantly
increase the likelihood that any particular healthcare company will be
scrutinized by federal, state and/or local law
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enforcement officials. In addition, the increased penalties will strengthen the
ability of enforcement agencies to effect more numerous and larger monetary
settlements with healthcare providers and businesses than was previously the
case. Although the Company believes that CBHS's billing practices are consistent
with the applicable Medicare and Medicaid requirements, those requirements are
often vague and subject to interpretation. The Company also believes that CBHS
is in compliance with the applicable federal laws described above, however,
there can be no assurance that aggressive anti-fraud enforcement activities will
not adversely affect the business of CBHS.
Finally, CHAMPUS regulations authorize CHAMPUS to exclude from the CHAMPUS
program any provider that has committed fraud or engaged in abusive practices.
The regulations permit CHAMPUS to make its own determination of abusive
practices without reliance on any actions of the Department. The term "abusive
practices" is 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. Although the
Company believes that CBHS is in compliance with the applicable CHAMPUS
regulations, exclusion from the CHAMPUS program could have a material adverse
effect on the operations and financial condition of CBHS.
GENERAL AND PROFESSIONAL LIABILITY
CBHS maintains a general and hospital professional liability insurance
policy with an unaffiliated insurer. The policy is written on a "claims made or
circumstances reported" basis, subject to a $1.5 million retention limit per
occurrence and an aggregate retention limit of $8.8 million. The amount of
expense relating to CBHS's malpractice insurance is based on estimated ultimate
losses incurred during the year and may materially increase or decrease from
year to year depending, among other things, on the nature and number of new
reported claims against CBHS and amounts of settlements of previously reported
claims. To date, CBHS has not experienced a loss in excess of policy limits.
Management believes that its coverage limits are adequate. However, losses in
excess of the limits described above or for which insurance is otherwise
unavailable could have a material adverse effect upon the Company.
RISK FACTORS
The following factors are relevant to an understanding of the risks
associated with CBHS's business and the ability of CBHS to pay Franchise Fees to
the Company.
POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS AND CHANGES IN
HOSPITAL PAYOR MIX. CBHS's hospitals have been adversely affected by factors
influencing the entire psychiatric hospital industry. Such factors include: (i)
the imposition of more stringent length of stay and admission criteria and other
cost containment measures by payors; (ii) the failure of reimbursement rate
increases from certain payors that reimburse on a per diem or other discounted
basis to offset increases in the cost of providing services; (iii) an increase
in the percentage of business that CBHS derives from payors that reimburse on a
per diem or other discounted basis; (iv) a trend toward higher deductibles and
co-insurance for individual patients; (v) a trend toward limiting employee
behavorial health benefits, such as reductions in annual and lifetime limits on
behavioral health coverage; and (vi) pricing pressure related to an increasing
rate of claims denials by third party payors. Any of these factors may result in
reductions in the amounts that CBHS's hospitals can expect to collect per
patient day for services provided or the number of equivalent patient days.
For the fiscal year ended September 30, 1997, CBHS derived approximately 24%
of its gross psychiatric patient service revenue from managed care organizations
(primarily HMOs and PPOs), 22% from other private payors (primarily commercial
insurance and Blue Cross), 27% from Medicare, 18% from Medicaid, 2% from 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
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of private-pay sources, could significantly affect the profitability of CBHS's
hospital operations. Moreover, there can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs of providing care to patients covered by such programs.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM. In the 1995 and
1996 sessions of the United States Congress, the focus of healthcare legislation
was on budgetary and related funding mechanism issues. Both the Congress and the
Clinton Administration have made proposals to reduce the rate of increase in
projected Medicare and Medicaid expenditures and to change funding mechanisms
and other aspects of both programs. The Budget Act, which was signed into law by
President Clinton in August 1997, reduces federal spending by an estimated $140
billion. The majority of the spending reduction will come from Medicare cuts of
$115.0 billion. The Congressional Budget Office projected in July 1997 that
$43.8 billion of the reductions would come from reduced payments to hospitals,
$21.8 billion from increased enrollment in managed care plans and $11.7 billion
from reduced payments to physicians and ambulatory care providers. The five-year
savings in projected Medicare payments to physicians and hospitals would be
achieved under the Budget Act by reduced fee-for-service reimbursement and by
changes in managed care programs designed to increase enrollment of Medicare
beneficiaries in managed care plans. The increase in Medicare enrollment in
managed care plans would be achieved in part by allowing provider-sponsored
organizations and preferred provider organizations to compete with Medicare HMOs
for Medicare enrollees.
The Medicaid-related provisions of the Budget Act are designed to achieve
net federal Medicaid savings of $14.6 billion over the next five years and $56.4
billion over the next ten years. The Budget Act achieves Federal Medicaid
savings in three areas. First, two-thirds of the savings over the next ten years
are attributable to limitations on federal matching payments to states for
reimbursements to "disproportionate share" hospitals. The next largest source of
federal savings is a provision allowing states to shift the cost of Medicaid
deductibles and coinsurance requirements for low-income Medicaid beneficiaries
from their Medicaid programs to physicians and other providers. Most of the
remaining savings derive from the repeal of the "Boren Amendment" and other
minimum payment guarantees for hospitals, nursing homes and community health
centers that service Medicaid patients.
CBHS management estimates that the Budget Act will reduce the amount of
revenue and earnings that CBHS will receive for the treatment of Medicare and
Medicaid patients. CBHS management estimates that such reductions will
approximate $10.0 million in fiscal 1998, and due to the phase in effects of the
bill, approximately $15.0 million in subsequent fiscal years.
A number of states in which CBHS has operations have either adopted or are
considering the adoption of healthcare reform proposals of general applicability
or Medicaid reform proposals. Where adopted, these state reform laws have often
not yet been fully implemented. The Company cannot predict the effect of these
state healthcare reform proposals on CBHS's operations. The Company cannot
predict the effect of other healthcare reform measures that may be adopted by
Congress on the operations of CBHS and no assurance can be given that other
federal healthcare reform measures will not have an adverse effect on CBHS.
DEPENDENCE ON HEALTHCARE PROFESSIONALS. Physicians traditionally have been
the source of a significant portion of the patients treated at CBHS's hospitals.
Therefore, the success of CBHS's hospitals is dependent in part on the number
and quality of the physicians on the medical staffs of the hospitals and their
admission practices. A small number of physicians account for a significant
portion of patient admissions at some of CBHS's hospitals. There can be no
assurance that CBHS can retain its current 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.
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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
Anti-Kickback Statute, Stark II and state illegal remuneration and self-referral
statutes and regulations that prohibit payments in exchange for referrals and
referrals by physicians or other healthcare providers to persons or entities
with which the physician or other healthcare provider has a financial
relationship.
The Medicare and Medicaid Patient and Program Protection Act of 1987
expanded the authority of the Department to exclude from participation in the
Medicare and Medicaid programs those individuals and entities that engage in
defined prohibited activities. The Department's exclusion authority was recently
expanded under 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 health care 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
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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. See "--Regulation."
INTELLECTUAL PROPERTY
The Company owns certain intellectual property which is important to its
franchise operation. The Company has registered as trademarks both the "CHARTER"
name and "800-CHARTER." The Company also owns the "Charter System," which is a
system for the operation of businesses specializing in the delivery of
behavioral healthcare under the "CHARTER" names and marks. The Charter System
includes treatment programs and procedures, quality standards, quality
assessment methods, performance improvement and monitoring programs, advertising
and marketing assistance, promotional materials, consultation and other matters
related to the operation of businesses specializing in the delivery of
behavioral healthcare.
109
<PAGE>
PENDING SALE OF PROVIDER BUSINESS
OVERVIEW
On March 3, 1998, the Company entered into the Equity Purchase Agreement,
pursuant to which it agreed to sell to COI the Company's common and preferred
equity interest in CBHS. In addition, the Company and certain of its
wholly-owned subsidiaries entered into the Purchase Agreement, pursuant to which
the Company and such subsidiaries agreed to sell to CBHS: (i) Charter Advantage,
the entity that conducts the Company's franchise operations; (ii) Charter
System, LLC, which owns the intellectual property comprising the "CHARTER"
system of behavioral healthcare; (iii) GPA, the Company's physician practice
management business; (iv) certain behavioral staff model operations; (v) the
Company's Puerto Rican provider management business; (vi) Golden Isle, one of
the Company's captive insurance companies; and (vii) Strategic Advantage, which
owns certain intellectual property used by the Company to monitor clinical
results. The Company and COI also entered into the Support Agreement which,
among other things, obligates COI to provide CBHS assistance to obtain financing
for its payment obligation under the Purchase Agreement. The following summary
of certain provisions of the Equity Purchase Agreement, the Purchase Agreement
and the Support Agreement does not purport to be complete and is qualified in
its entirety by reference to the copies of such documents filed as exhibits to
the Registration Statement of which this Prospectus is a part. The obligations
of CBHS and the Company to consummate the transactions contemplated by the
Purchase Agreement are also subject to, among other things, the execution of
either (i) a Joint Venture Purchase Agreement pursuant to which the Company will
sell to CBHS, for no additional consideration, its interest in the Joint
Ventures or (ii) amendments to the services agreement between the Company and
certain subsidiaries of CBHS relating to the Joint Ventures pursuant to which
the Company will transfer to CBHS all rights to receive certain distributions
with respect to the Joint Ventures and pursuant to which CBHS would assume all
obligations of the Company with respect to the Joint Ventures arising after
consummation of the CBHS Transactions.
Upon consummation of the CBHS Transactions, the Company will receive $280.0
million in cash, pursuant to the Purchase Agreement and, pursuant to the Equity
Purchase Agreement, the number of shares of COI Common Stock obtained by
dividing $30.0 million by the average closing price of a share of COI Common
Stock for the ten trading days preceding consummation of the CBHS Transactions.
The Company expects to use the cash proceeds, after transaction costs of
approximately $8.0 million, to repay indebtedness outstanding under the Term
Loan Facility. The CBHS Transactions are expected to close in the third quarter
of fiscal 1998. There can be no assurance that the Company will consummate the
CBHS Transactions.
The obligations of the Company and CBHS to consummate the transactions
contemplated by the Equity Purchase Agreement and the Support Agreement are
conditioned upon the execution and delivery of the Services Purchase Agreement.
It is expected that the Services Purchase Agreement would obligate the Company
to purchase from CBHS a designated minimum amount of behavioral healthcare
services for gate-kept risk-based covered lives if it meets certain standards
required of it pursuant to the Provider Services Agreement. If the CBHS
Transactions are consummated, the Company also expects to enter into the
Provider Services Agreement with CBHS, pursuant to which the Company would grant
CBHS status as a national preferred provider of behavioral healthcare services
to the Company for ten years provided that CBHS complies during the term of the
Provider Services Agreement with enhanced clinical, quality assurance, reporting
and customer service standards in addition to the standards currently required
of other providers of such services to the Company. See "-- Description of the
Definitive Agreements."
110
<PAGE>
DESCRIPTION OF THE DEFINITIVE AGREEMENTS
THE EQUITY PURCHASE AGREEMENT. The Company has agreed, pursuant to the
Equity Purchase Agreement, to sell to COI the Company's common and preferred
equity interest in CBHS for the number of shares of COI common stock obtained by
dividing $30.0 million by the average closing price of a share of COI common
stock for the ten trading days preceding consummation of the CBHS Transactions.
The obligation of COI to consummate the transactions contemplated by the Equity
Purchase Agreement is conditioned, among other things, upon the consummation of
the transactions contemplated by the Purchase Agreement. The obligations of COI
and the Company to consummate the transactions contemplated by the Equity
Purchase Agreement are also subject to, among other things, the interim final
rule relating to the existing statutory shared risk safe harbor of the
Anti-Kickback Statute shall have become effective (the "Final Rule"). If the
Final Rule becomes effective in the form proposed on the date of execution of
the Equity Purchase Agreement, the obligations of COI and the Company to
consummate the transactions contemplated by the Equity Purchase Agreement are
also subject to execution and delivery of the Services Purchase Agreement
substantially in the form agreed to by the parties. If the Final Rule does not
become effective in the form proposed on the date of execution of the Equity
Purchase Agreement, it is a condition of the obligation of COI and the Company
to consummate the transactions contemplated by the Equity Purchase Agreement
that the Company and CBHS shall have executed the Services Purchase Agreement in
a form that complies with the Final Rule without any material loss of the
proposed benefits to be provided to the parties under the Services Purchase
Agreement.
THE PURCHASE AGREEMENT. The Company and certain of its wholly-owned
subsidiaries have agreed, pursuant to a Purchase Agreement, to sell to CBHS: (i)
Charter Advantage; (ii) Charter System, LLC; (iii) GPA; (iv) certain behavioral
staff model operations; (v) the Company's Puerto Rican provider management
business; (vi) Golden Isle and (vii) Strategic Advantage. The Purchase Agreement
also grants CBHS the right to purchase any or all of certain staff model
operations of Merit for no additional consideration. The obligation of CBHS to
consummate the transactions contemplated by the Purchase Agreement is
conditioned, among other things, upon the occurrence of the following: (i)
consummation of the transactions contemplated by the Equity Purchase Agreement
and (ii) consummation by CBHS of financing arrangements sufficient to permit it
to consummate the transactions contemplated by the Purchase Agreement. The
obligations of CBHS and the Company to consummate the transactions contemplated
by the Purchase Agreement are also subject to, among other things, the execution
of either (i) a Joint Venture Purchase Agreement pursuant to which the Company
will sell to CBHS, for no additional consideration, its interest in the Joint
Ventures or (ii) amendments to the services agreement between the Company and
certain subsidiaries of CBHS relating to the Joint Ventures pursuant to which
the Company will transfer to CBHS all rights to receive certain distributions
with respect to the Joint Ventures and pursuant to which CBHS would assume all
obligations of the Company with respect to the Joint Ventures arising after
consummation of the CBHS Transactions.
Pursuant to the Purchase Agreement, CBHS will be obligated to repay to the
Company, within 180 days after the consummation of the CBHS Transactions, all
amounts owed under any working capital loan and other loans, advances and
prepaid items from the Company existing on the date of the execution of the
Purchase Agreement and thereafter made by the Company. The Purchase Agreement
also provides that the Company and CBHS will execute an amendment to the Master
Franchise Agreement upon the closing of the Purchase Agreement which will reduce
the Franchise Fees from the current amount of approximately $6.5 million per
month to $5.0 million per month from February 1, 1998 until the closing of the
Purchase Agreement. If, however, the transactions contemplated by the Purchase
Agreement are not consummated, CBHS will be obligated to pay the full amount of
the Franchise Fees during the period between February 1, 1998 and the
termination of the Purchase Agreement. Any amount of accrued and unpaid
Franchise Fees on the date of the execution of the Purchase Agreement and the
amount of the Franchise Fees accrued but not paid following the execution of the
Purchase
111
<PAGE>
Agreement must be paid by CBHS no later than 180 days following the consummation
of the CBHS Transactions.
THE SUPPORT AGREEMENT. The Company and COI also entered into the Support
Agreement. Pursuant to the Support Agreement, COI agreed to cooperate with and
provide assistance to CBHS in the preparation of any offering documents or other
material required in connection with CBHS's efforts to obtain financing for its
payment obligation under the Purchase Agreement. COI further agreed to reimburse
CBHS for all expenses incurred in connection with obtaining such financing,
whether or not the CBHS Transactions are consummated. In addition, COI agreed to
purchase up to $25.0 million of CBHS securities if necessary to permit CBHS to
obtain the required financing. Pursuant to the Support Agreement, the Company
agreed to cooperate with CBHS in obtaining the financing by providing any
information required in connection with the financing.
The Support Agreement also provides that if, as a result of the failure of
CBHS to obtain sufficient financing for its payment obligations under the
Purchase Agreement, the transactions contemplated by the Purchase Agreement are
not consummated or the Purchase Agreement is terminated, then COI will pay the
Company the Termination Fee which is comprised of $2.5 million in cash and the
number of shares of COI Common Stock obtained by dividing $2.5 million by the
average closing price of a share of COI Common Stock for the five trading days
prior to the date of termination of the Purchase Agreement and for the five
trading days after the termination of the Purchase Agreement. COI shall not be
obligated to pay the Termination Fee until the later to occur of (i) 30 days
after the date of the execution of the Support Agreement or (ii) the date on
which the Company and CBHS agree on a schedule defining CBHS's obligation to
open additional psychiatric facilities and implement services at such
facilities. Furthermore, COI may terminate either the Equity Purchase Agreement
or the Support Agreement for any reason within 30 days of the signing of the
agreements without incurring the Termination Fee.
All of COI's obligations under the Support Agreement described above are
also subject to the Final Rule becoming effective. If the Final Rule becomes
effective in the form proposed on the date of execution of the Support
Agreement, COI's obligations under the Support Agreement are also subject to
execution and delivery of the Services Purchase Agreement substantially in the
form agreed to by the parties. If the Final Rule does not become effective in
the form proposed on the date of the Support Agreement, it is a condition of
COI's obligations under the Support Agreement that the Company and CBHS shall
have executed the Services Purchase Agreement in a form that complies with the
Final Rule without any material loss of the proposed benefits to be provided
under the Services Purchase Agreement.
THE SERVICES PURCHASE AGREEMENT. The obligations of the Company and CBHS to
consumate the transactions contemplated by the Equity Purchase Agreement and the
Support Agreement are conditioned upon the execution and delivery of the
Services Purchase Agreement upon consummation of the CBHS Transactions. The
Company now contemplates that, pursuant to the Services Purchase Agreement, CBHS
would agree to comply with certain standards required of it pursuant to the
Provider Services Agreement to maintain existing inpatient facilities and
service capabilities and to develop and implement (i) a buildout of outpatient
facilities within a 20-mile radius of certain existing CBHS facilities providing
inpatient services and (ii) a comprehensive, nationwide buildout of additional
services and facilities to service the Company's gate-kept risk-based covered
lives. In exchange, the Company would agree to purchase a designated amount of
behavioral healthcare services for the Company's gate-kept risk-based covered
lives from CBHS and the entities managed by CBHS (collectively, the "CBHS
Entities") for the five year term of the Services Purchase Agreement.
The Services Purchase Agreement would obligate the Company to purchase
during each year of the term of the agreement not less than $18 million of
inpatient services (the "Designated Inpatient Amount") and not less than $20
million of outpatient services, each subject to certain reductions under certain
circumstances (the "Designated Outpatient Amount," and together with the
Designated Inpatient
112
<PAGE>
Amount, the "Designated Amounts"). A liason committee made up of representatives
of the Company and CBHS (the "Committee") would adjust the Designated Amounts,
either up or down, subject to certain minimum Designated Amounts to be mutually
agreed on by the parties. The Committee would make the following adjustments to
the Designated Amounts, as applicable: (i) an upward adjustment due to the CBHS
Entities' build out of additional services and facilities, (ii) a downward
adjustment due to CBHS Facilities (as defined) being closed or (iii) a downward
adjustment due to reductions in the number of the Company's risk based lives due
to expired or terminated customer contracts.
To the extent that the Company purchases less than the Designated Amounts
during any of the years of the term of the Services Purchase Agreement, (each
year a "Contract Year") the Company is required to pay service fees to CBHS as
calculated by the Committee pursuant to a formula to be set forth in the
Services Purchase Agreement ("Service Fees"). The maximum potential Service Fees
payable to CBHS by the Company for the five-year term of the Service Purchase
Agreement is expected to be approximately $59.4 million, assuming no changes to
the Designated Amounts. To determine the amount of the Service Fees, the
Committee will first determine the Purchased Inpatient and Purchased Outpatient
Amounts (collectively, the "Purchased Amounts") by adding (i) the amount of
certain defined inpatient and outpatient services, respectively, which the
Company refers to CBHS Entities but which the CBHS Entities do not actually
provide to (ii) the amounts of inpatient and outpatient services actually
purchased by the Company.
Next, the Committee will determine the amounts of shortfalls and/or excess
purchases made by the Company based on the Purchased Amounts as compared to the
Designated Amounts. If the Purchased Inpatient Amount is less than the
Designated Inpatient Amount, then there is deemed to be an Inpatient Shortfall
which is equal to 33% of the difference between the Purchased Inpatient Amount
and the Designated Inpatient Amount. Likewise, if the Purchased Outpatient
Amount is less than the Designated Outpatient Amount, then there is deemed to be
an Outpatient Shortfall which is equal to 17% of the difference in the Purchased
Outpatient Amount and the Designated Outpatient Amount. On the other hand, if
either of the Purchased Amounts exceeds its respective Designated Amount, then
there is an Excess Purchase. If the Purchased Inpatient Amount exceeds the
Designated Inpatient Amount, then the Inpatient Excess Purchase is equal to 33%
of the difference in the Purchased Inpatient Amount and the Designated Inpatient
Amount. Similarly, if the Purchased Outpatient Amount exceeds the Designated
Outpatient Amount, then the Outpatient Excess Purchase is equal to 17% of the
difference in the Purchased Outpatient Amount and the Designated Outpatient
Amount. The resulting Inpatient Shortfall or Inpatient Excess Purchase and
Outpatient Shortfall or Outpatient Excess Purchase will then be netted against
one another to determine the Net Shortfall or Net Excess Purchase.
In the event of a Net Excess Purchase, no Services Fees are due and 50% of
the Net Excess Purchase (the "Carryforward Amount") will be carried forward to
reduce any Net Shortfall in future years. In the event of a Net Shortfall, the
Committee will determine the Final Shortfall by subtracting the Carryforward
Amount from previous years, if any, from the Net Shortfall. The Final Shortfall,
if any, will then be divided into a Final Inpatient Shortfall and Final
Outpatient Shortfall by reducing the Inpatient and/or Outpatient Shortfalls by
the Carryforward Amount allocated on a pro rata basis in percentages equal to
the proportions in which the Inpatient and Outpatient Shortfalls comprise the
Net Shortfall. The Service Fee is then calculated by multiplying the Final
Inpatient and Outpatient Shortfalls by the appropriate factors for each Contract
Year, as set forth below:
<TABLE>
<CAPTION>
CONTRACT YEAR OUTPATIENT SHORTFALL FACTORS INPATIENT SHORTFALL FACTORS
- --------------------------------------------------------- ----------------------------- ---------------------------
<S> <C> <C>
First.................................................... 1 50/33
Second................................................... 50/17 50/33
Third.................................................... 1 1
Fourth................................................... 1 1
Fifth.................................................... 1 1
</TABLE>
113
<PAGE>
THE PROVIDER SERVICES AGREEMENT. The Company and CBHS expect to enter into
a Provider Services Agreement upon the consummation of the CBHS Transactions.
The Company will grant "national preferred provider" status to CBHS and the
entities managed by CBHS (collectively, the "CBHS Entities") for a period of ten
years, pursuant to the Provider Services Agreement. The Provider Services
Agreement would replace, amend or supercede all existing provider agreements
between the Company and the CBHS Entities. If one of the CBHS Entities'
facilities ("CBHS Facilities") is qualified to provide behavioral health
services required by an individual patient and if permitted by the patient's
benefit agreement, the Company's customer and applicable law, a CBHS Facility
meeting the patient's needs will be the first provider recommended by the
Company to a patient at the time the patient is provided with a list of
potential providers. Pursuant to the Provider Services Agreement, in order to
retain their national preferred provider status, the CBHS Entities are required
to: (i) provide services to the Company and its customers at market rates
comparable to those charged by comparable facilities in the geographic area of a
particular facility; (ii) comply with terms and conditions for participation in
the provider networks of the Company and its customers; (iii) have available
certain required behavioral health services at each of the CBHS Facilities, (iv)
have facilities geographically located such that they are accessable to patients
within the Company's provider networks; (v) comply with certain service
standards and requirements of the Company and its customers; and (vi) comply
with enhanced clinical, quality assurance, reporting and customer service
standards in addition to the standards currently required of other providers of
such services to the Company which will be mutually agreed on by the Company and
CBHS. The Provider Services Agreement would also standardize the provider
arrangements between the Company and CBHS to include additional representations,
covenants and agreements customarily present in contracts with similar providers
of behavioral healthcare.
IMPACT ON THE COMPANY
REDUCTION IN NUMBER OF COVERED LIVES. Consummation of the CBHS Transactions
will result in a reduction in the number of covered lives in the Company's
behavioral managed care products by the approximately 1.1 million lives enrolled
in behavioral managed care products offered by GPA. The following table sets
forth, on a pro forma basis after giving effect to the CBHS Transactions, the
approximate number of covered lives as of December 31, 1997 and revenue for
fiscal 1997 for each type of managed behavioral healthcare program offered by
the Company:
<TABLE>
<CAPTION>
PROGRAMS COVERED LIVES PERCENT REVENUE PERCENT
- ----------------------------------------------------------- ----------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PERCENTAGES)
Risk-Based Products........................................ 17.2 30.1% $ 795.1 72.7%
EAPs....................................................... 10.5 18.4 99.7 9.1
Integrated Products........................................ 3.1 5.4 54.2 5.0
ASO Products............................................... 23.0 40.2 131.1 11.9
Other...................................................... 3.4 5.9 14.2 1.3
----- ----------- ---------- -----------
Total.................................................. 57.2 100.0% $ 1,094.3 100.0%
----- ----------- ---------- -----------
----- ----------- ---------- -----------
</TABLE>
114
<PAGE>
The following table sets forth, on a pro forma basis after giving effect to
the CBHS Transactions, the approximate number of covered lives as of December
31, 1997, and revenue for fiscal 1997 in each of the Company's market segments
described below:
<TABLE>
<CAPTION>
MARKET COVERED LIVES PERCENT REVENUE PERCENT
- ------------------------------------------------------------ ----------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PERCENTAGES)
Corporations and Labor Unions............................... 20.6 36.1% $ 193.2 17.7%
HMOs........................................................ 7.6 13.3 226.4 20.7
Blue Cross/Blue Shield and Insurance Companies.............. 18.4 32.1 311.0 28.4
Medicaid Programs........................................... 2.5 4.4 265.4 24.3
Governmental Agencies (including CHAMPUS)................... 4.7 8.2 84.7 7.7
Other....................................................... 3.4 5.9 13.6 1.2
--- ----- --------- -----
Total................................................... 57.2 100.0% $ 1,094.3 100.0%
--- ----- --------- -----
--- ----- --------- -----
</TABLE>
REDUCTION IN INDEBTEDNESS. If the CBHS Transactions are consummated, the
Company will use the estimated net proceeds of $272.0 million received from the
CBHS Transactions to reduce indebtedness outstanding under the Term Loan
Facility. The following table sets forth the capitalization of the Company on a
pro forma basis, before and after giving effect to the consummation of the CBHS
Transactions, at December 31, 1997. The information in this table should be read
in conjunction with "Unaudited Pro Forma Consolidated Financial Information,"
"The Transactions," "--Unaudited Pro Forma Consolidated Financial
Information--CBHS Transactions" and the financial statements and notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
<S> <C> <C>
BEFORE THE CBHS AFTER THE CBHS
TRANSACTIONS TRANSACTIONS
----------------- ---------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents(1)............................... $ 160,609 $ 128,393
----------------- ---------------
----------------- ---------------
Total debt (including current maturities):
New Credit Agreement:
Revolving Facility(2).................................. $ 20,000 $ 20,000
Term Loan Facility(3).................................. 550,000 278,000
New Notes................................................ 625,000 625,000
Other(4)................................................. 20,154 19,494
----------------- ---------------
Total debt............................................. 1,215,154 942,494
Stockholders' equity(5).................................. 179,033 278,619
----------------- ---------------
Total capitalization................................... $ 1,394,187 $ 1,221,113
----------------- ---------------
----------------- ---------------
</TABLE>
-------------------------------
(1) Includes restricted cash of $52.1 million. See "Risk Factors--Risk
Based Products" and "Merit's Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(2) The Revolving Facility provides for borrowings of up to $150.0
million. As of February 12, 1998, the Company had $112.5 million
available under the Revolving Facility, excluding approximately $17.5
million of availability reserved for certain letters of credit.
(3) The Term Loan Facility consists of: (i) a 6 year Tranche A Term Loan;
(ii) a 7 year Tranche B Term Loan; and (iii) an 8 year Tranche C Term
Loan each in an aggregate principal amount of $183.3 million. If the
CBHS Transactions are consummated, the net proceeds of an estimated
$272.0 million will be used to repay approximately $90.7 million of
each tranche of the Term Loan Facility.
(4) Other debt consists primarily of: (i) $7.6 million of mortgages and
other notes payable through 1999, bearing interest at 6.8% to 8.0%;
(ii) $6.1 million of 7.5% Swiss Bonds due 2001, which were redeemed in
March, 1998; and (iii) $6.4 million in 3.95% capital lease obligations
due in 2014.
(5) Represents the pro forma book value of the Company's stockholders'
equity. The Company's Common Stock is publicly traded on The New York
Stock Exchange. As of March 31, 1998 the market value of the Company's
Common Stock was approximately $818.7 million.
115
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--CBHS TRANSACTIONS
The Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions is based on the pro forma presentation included in Unaudited Pro
Forma Consolidated Financial Information appearing elsewhere herein. The
Unaudited Pro Forma Consolidated Statements of Operations--CBHS Transactions for
the year ended September 30, 1997 and the three months ended December 31, 1997
give effect to the CBHS Transactions as if they had been consummated on October
1, 1996. The Unaudited Pro Forma Consolidated Balance Sheet--CBHS Transactions
as of December 31, 1997 gives effect to the CBHS Transactions as if they had
been consummated on December 31, 1997. "Pro Forma Combined" in the Unaudited Pro
Forma Consolidated Statements of Operations--CBHS Transactions and Unaudited Pro
Forma Consolidated Balance Sheet--CBHS Transactions gives effect to all the
transactions described in "Unaudited Pro Forma Consolidated Financial
Information."
The Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions does not purport to be indicative of the results that actually
would have been obtained if the operations had been conducted as presented and
they are not necessarily indicative of operating results to be expected in
future periods. The Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions and notes thereto should be read in conjunction with the historical
consolidated financial statements and notes thereto of Magellan, Merit, CBHS and
HAI, which appear elsewhere herein, the Unaudited Pro Forma Consolidated
Financial Information which appear elsewhere herein and Management's Discussion
and Analysis of Financial Condition and Results of Operations of Magellan and
Merit, which appear elsewhere herein.
116
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--CBHS TRANSACTIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
DIVESTED
PRO FORMA OPERATIONS--CBHS PRO FORMA PRO FORMA
COMBINED TRANSACTIONS(1) ADJUSTMENTS CONSOLIDATED
------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenue......................... $ 1,601,606 $ (138,684) $ (55,463)(2) $ 1,407,459
------------- ---------- ------------- -------------
Salaries, cost of care and other
operating expenses................ 1,355,098 (101,096) (16,064)(3) 1,237,938
Bad debt expense.................... 3,491 (4,115) 0 (624)
Depreciation and amortization....... 68,962 (4,131) 0 64,831
Interest, net....................... 96,389 1,042 (22,032)(4) 75,399
Stock option expense................ 4,292 0 0 4,292
Equity in loss of CBHS.............. 20,150 0 (20,150)(5) 0
Unusual items....................... (943) 0 0 (943)
------------- ---------- ------------- -------------
1,547,439 (108,300) (58,246) 1,380,893
------------- ---------- ------------- -------------
Income (loss) before income taxes
and minority interest............. 54,167 (30,384) 2,783 26,566
Provision for (benefit from) income
taxes............................. 30,033 (12,154) 1,113(6) 18,992
------------- ---------- ------------- -------------
Income (loss) before minority
interest.......................... 24,134 (18,230) 1,670 7,574
Minority interest................... 2,267 (2,400) 0 (133)
------------- ---------- ------------- -------------
Net income (loss)................... $ 21,867 $ (15,830) $ 1,670 $ 7,707
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
Average number of common shares
outstanding--basic................ 31,613 31,613
------------- -------------
------------- -------------
Average number of common shares
outstanding--diluted.............. 32,306 32,306
------------- -------------
------------- -------------
Net income per common share--basic.. $ 0.69 $ 0.24
------------- -------------
------------- -------------
Net income per common share--
diluted........................... $ 0.68 $ 0.24
------------- -------------
------------- -------------
Ratio of earnings to fixed
charges........................... 1.38 1.26
------------- -------------
------------- -------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations--CBHS
Transactions
117
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
DIVESTED
PRO FORMA OPERATIONS--CBHS PRO FORMA PRO FORMA
COMBINED TRANSACTIONS ADJUSTMENTS CONSOLIDATED
----------- ------------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenue........................... $ 443,293 $ (49,150) $ 0 $ 394,143
----------- ---------- ------------- -------------
Salaries, cost of care and other
operating expenses.................. 382,704 (29,361) 0 353,343
Bad debt expense...................... 1,070 (1,020) 0 50
Depreciation and amortization......... 17,470 (1,076) 0 16,394
Interest, net......................... 24,685 299 (5,610)(4) 19,374
Stock option expense (credit)......... (3,959) 0 0 (3,959)
Equity in loss of CBHS................ 11,488 0 (11,488)(5) 0
----------- ---------- ------------- -------------
433,458 (31,158) (17,098) 385,202
----------- ---------- ------------- -------------
Income (loss) before income taxes and
minority interest................... 9,835 (17,992) 17,098 8,941
Provision for (benefit from) income
taxes............................... 6,202 (7,197) 6,839(6) 5,844
----------- ---------- ------------- -------------
Income (loss) before minority
interest............................ 3,633 (10,795) 10,259 3,097
Minority interest..................... 518 (517) 0 1
----------- ---------- ------------- -------------
Net income (loss)..................... $ 3,115 $ (10,278) $ 10,259 $ 3,096
----------- ---------- ------------- -------------
----------- ---------- ------------- -------------
Average number of common shares
outstanding--basic.................. 31,801 31,801
----------- -------------
----------- -------------
Average number of common shares
outstanding--diluted................ 32,616 32,616
----------- -------------
----------- -------------
Net income per common share--basic.... $ 0.10 $ 0.10
----------- -------------
----------- -------------
Net income per common share--diluted.. $ 0.10 $ 0.09
----------- -------------
----------- -------------
Ratio of earnings to fixed charges.... 1.27 1.35
----------- -------------
----------- -------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations--CBHS
Transactions
118
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--CBHS
TRANSACTIONS
(1) Represents the elimination of historical operations as a result of the CBHS
Transactions, including franchise operations from June 17, 1997 through
December 31, 1997, and the operations of GPA, the Puerto Rican provider
business, the Joint Ventures and other operations.
(2) Adjustment to net revenue represents the elimination of pro forma Franchise
Fees for the 259 days ended June 16, 1997.
(3) Adjustments to salaries, cost of care and other operating expenses represent
the elimination of fees payable to CBHS by Magellan for the management of
less than wholly-owned hospital based joint ventures controlled by Magellan
for the 259 days ended June 16, 1997 and the elimination of estimated
franchise overhead and personnel.
(4) Adjustment to interest, net, represents the reductions in interest expense
as a result of the repayment of pro forma outstanding borrowings under the
New Credit Agreement with the net proceeds from the CBHS Transactions. The
net proceeds would be applied ratably to repay each tranche of the Term Loan
Facility upon consummation of the CBHS Transactions.
(5) Adjustment to equity in loss of CBHS represents the elimination of
Magellan's pro forma equity in loss of CBHS.
(6) Adjustment to provision for income taxes represents the tax expense related
to the pro forma adjustments at the Company's historic effective tax rate of
40%.
119
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--CBHS TRANSACTIONS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA DIVESTED OPERATIONS-- PRO FORMA PRO FORMA
ASSETS COMBINED CBHS TRANSACTIONS ADJUSTMENTS CONSOLIDATED
-------- ------------- ---------------------- ------------ -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........ $ 160,609 $ (32,216) $ 0 $ 128,393
Accounts receivable, net......... 190,136 (14,468) 0 175,668
Deferred income taxes............ 6,616 0 0 6,616
Other current assets............. 45,847 (3,206) 0 42,641
------------- ---------- ------------ -------------
Total current assets........... 403,208 (49,890) 0 353,318
Assets restricted for settlement of
unpaid claims and other long-term
liabilities...................... 73,020 0 0 73,020
Property and equipment:
Land............................. 11,687 (2,018) 0 9,669
Buildings and improvements....... 75,698 (47,196) 0 28,502
Equipment........................ 123,150 (14,317) 0 108,833
------------- ---------- ------------ -------------
210,535 (63,531) 0 147,004
Accumulated depreciation......... (41,169) 12,806 0 (28,363)
------------- ---------- ------------ -------------
169,366 (50,725) 0 118,641
Construction in progress......... 995 (83) 0 912
------------- ---------- ------------ -------------
Total property and equipment... 170,361 (50,808) 0 119,553
Other long-term assets............. 61,740 (687) 0 61,053
Deferred income taxes.............. 71,529 0 (66,390)(1) 5,139
Investment in CBHS................. 5,390 0 (5,390)(2) 0
Investment in COI.................. 0 0 30,000(3) 30,000
Goodwill, net...................... 846,982 (10,272) 0 836,710
Other intangible assets, net....... 224,820 (2,259) 0 222,561
------------- ---------- ------------ -------------
$ 1,857,050 $ (113,916) $ (41,780) $ 1,701,354
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................. $ 44,880 $ (6,661) $ 0 $ 38,219
Accrued liabilities.............. 335,714 (10,438) 12,400(4) 337,676
Current maturities of long-term
debt and capital lease
obligations...................... 3,604 (577) 0 3,027
------------- ---------- ------------ -------------
Total current liabilities.... 384,198 (17,676) 12,400 378,922
Long-term debt and capital lease
obligations...................... 1,211,550 (83) (272,000)(5) 939,467
Reserve for unpaid claims.......... 40,201 0 0 40,201
Deferred tax liabilities........... 0 0 0 0
Deferred credits and other
long-term liabilities............ 16,795 0 47,020(4) 63,815
Minority interest.................. 25,273 (24,943) 0 330
Commitments and contingencies
Stockholders' equity:
Common stock..................... 9,095 0 0 9,095
Additional paid-in capital....... 399,141 0 0 399,141
Retained earnings (accumulated
deficit)......................... (156,044) 0 99,586(6) (56,458)
Warrants outstanding............. 25,050 0 0 25,050
Common stock in treasury......... (95,187) 0 0 (95,187)
Cumulative foreign currency
adjustments...................... (3,022) 0 0 (3,022)
------------- ---------- ------------ -------------
Total stockholders' equity..... 179,033 0 99,586 278,619
------------- ---------- ------------ -------------
$ 1,857,050 $ (42,702) $ (112,994) $ 1,701,354
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet--CBHS Transactions
120
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--CBHS TRANSACTIONS
(1) Adjustment to deferred income tax assets represents the tax consequences of
the gains related to the CBHS Transactions which relate primarily to the
utilization of historical and pro forma net operating loss carryforwards.
(2) Adjustment to Investment in CBHS represents the elimination of the Company's
investment.
(3) Adjustment to Investment in COI represents the Company's basis in COI common
stock received as consideration in the CBHS Transactions. The Company's
investment in COI would have represented approximately % of COI's
outstanding common stock based on the closing price of COI's common stock on
March , 1998. The Company expects to account for its investment in COI as
an available-for-sale security.
(4) Adjustment to accrued liabilities and deferred credits and other long-term
liabilities represents the current and long-term portion of the net deferred
gain recorded on the CBHS Transaction equal to the maximum potential
obligation payable under the Services Purchase Agreement. Such amounts, or
portions thereof, would be payable to CBHS to the extent that shortfalls
exist under the Services Purchase Agreement. The Company will recognize a
gain from the CBHS Transactions in future periods for that portion of
services purchased from CBHS.
(5) Adjustment to long-term debt and capital lease obligations represents the
repayment of long-term debt under the New Credit Agreement with the
estimated net proceeds of approximately $280.0 million less approximately
$8.0 million of transaction costs from the CBHS Transactions.
(6) Adjustment to accumulated deficit represents the net gain on the CBHS
Transactions, computed as follows (in thousands):
<TABLE>
<S> <C>
Net consideration--CBHS Transactions............................. $ 302,000
Net assets sold to COI and CBHS.................................. (71,214)
Basis of CBHS Investment Sold.................................... (5,390)
Obligations under the Services Purchase Agreement................ (59,420)
---------
Gain on sale before income taxes............................. 165,976
Provision for income taxes................................... 66,390
---------
$ 99,586
---------
---------
</TABLE>
121
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name and certain other information about
each director and
executive officer of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Henry T. Harbin M.D.................... 51 President, Chief Executive Officer and Director
Craig L. McKnight...................... 46 Executive Vice President and Chief Financial Officer
John J. Wider, Jr...................... 50 President and Chief Operating Officer of Magellan BHO
Clarissa C. Marques, Ph.D.............. 46 Executive Vice President of Clinical and Quality Management of
Magellan BHO and Magellan Specialty Medical
Gregory T. Torres...................... 48 President and Chief Executive Officer of Mentor
Raymond H. Kiefer...................... 70 Director
Gerald L. McManis...................... 61 Director
Andre C. Dimitriadis................... 57 Director
A.D. Frazier, Jr....................... 53 Director
G. Fred DiBona, Jr..................... 46 Director
Edwin M. Banks......................... 35 Director
Daniel S. Messina...................... 42 Director
Robert W. Miller....................... 56 Chairman of the Board of Directors
Darla D. Moore......................... 43 Director
Jeffrey A. Sonnenfeld Ph.D............. 43 Director
</TABLE>
HENRY T. HARBIN, M.D. became President, Chief Executive Officer and a
Director of the Company on March 18, 1998. Dr. Harbin served as President and
Chief Executive Officer of Green Spring from 1994 to 1998. Dr. Harbin served as
Executive Vice President of the Company from 1995 until becoming President and
Chief Executive Officer of the Company. Dr. Harbin served as Executive Vice
President and Chief Clinical Officer of Green Spring during 1993 and 1994.
CRAIG L. MCKNIGHT became Executive Vice President and Chief Financial
Officer of the Company in October 1995. From March 1995 through September 1995,
he served as Executive Vice President-- Office of the President and Chairman.
Mr. McKnight practiced public accounting with Coopers & Lybrand L.L.P. from 1985
through 1995. Coopers & Lybrand L.L.P. is an international accounting firm that
provides accounting and auditing services, tax services and consulting services.
As an audit partner at Coopers & Lybrand L.L.P., from 1985 to 1995, Mr. McKnight
had responsibility for a wide range of hospital and managed-care engagements, as
well as assisting clients with formulating financing options, financial
restructurings and the purchase and sale of health plans and facilities.
JOHN J. WIDER, JR. has served as President and Chief Operating Officer of
Magellan BHO since March 1998. Mr. Wider served as Executive Vice President and
Chief Operating Officer of Green Spring from 1997 to 1998. Mr. Wider was
President and General Manager for Cigna Healthcare Corporation's ("Cigna")
Mid-Atlantic region from 1996 to 1997. Mr. Wider served as Area Operations
Officer for Cigna during 1995 and 1996 and as Vice President of Sales of Cigna's
Midwest region from 1993 to 1995.
CLARISSA C. MARQUES, PH.D. has served as Executive Vice President of
Clinical and Quality Management of both Magellan BHO and Magellan Specialty
Medical since March 1998. Dr. Marques served as Executive Vice President and
Chief Clinical Officer of Green Spring during 1997 and 1998. Dr. Marques served
as Senior Vice President of Green Spring from 1992 to 1997. Dr. Marques also
serves as a director of Community Sector Systems.
122
<PAGE>
GREGORY T. TORRES is President and Chief Executive Officer of Mentor,
positions he has held since 1996. Mr. Torres served as Senior Vice President for
Public Affairs of Mentor from 1992 until 1996.
RAYMOND H. KIEFER has been a Director of the Company since July 1992. Mr.
Kiefer was President of Allstate Insurance Company from 1989 until he retired in
1992.
GERALD L. MCMANIS has been a Director of the Company since February 1994.
Mr. McManis is President of McManis Associates, Inc., a strategy development and
management consulting firm for healthcare and healthcare related companies, a
position he has occupied since 1965. Mr. McManis serves on the board of
directors of MMI Companies, Inc.
ANDRE C. DIMITRIADIS has been a Director since July 1992. Mr. Dimitriadis
has been Chairman and Chief Executive Officer of LTC Properties, Inc., a
healthcare real estate investment trust, since 1992. Mr. Dimitriadis is a
director of Health Management, Inc. and Assisted Living Concepts, Inc.
A.D. FRAZIER, JR. has been a Director since May 1995. He is currently
President and Chief Executive Officer of Invesco, Inc., a registered investment
advisor, a position he has held since 1996. Prior to joining Invesco, Mr.
Frazier was Senior Executive Vice President and Chief Operating Officer for the
Atlanta Committee for the Olympic Games, Inc., a position he occupied from 1991
through 1996. Mr. Frazier also serves on the board of directors of Invesco PLC
and three registered investment companies of which Invesco PLC is the registered
investment advisor.
G. FRED DIBONA, JR. has been a Director since January 1996. Mr. DiBona has
been President and Chief Executive Officer of and a director of Independence
Blue Cross, a health insurance company, since 1990. Mr. DiBona serves on the
board of directors of Philadelphia Savings Bank and Philadelphia Suburban Water
Company.
EDWIN M. BANKS has been a Director since July 1992. Mr. Banks has been a
securities analyst with W.R. Huff Asset Management Co., LLC, a registered
investment advisor, since 1988. Mr. Banks also serves on the board of directors
of American Communications Services, Inc. and Del Monte Corporation.
DANIEL S. MESSINA has been a Director since December 1997. Mr. Messina
currently is Chief Financial Officer of Aetna U.S. Healthcare. Mr. Messina was
Vice President-Business Strategy of Aetna U.S. Healthcare in 1997 and served as
Deputy Chief Financial Officer of Aetna in 1996 and 1997. During 1995 and 1996,
Mr. Messina served as Vice President Financial Relations and Chief of Staff to
the Vice Chairman for Strategy, Finance and Administration of Aetna, Inc. Mr.
Messina also was the Vice President and Controller of Aetna Health Plans from
1991 to 1995.
ROBERT W. MILLER has been the Chairman of the Board since March 1998 and a
Director since February 1998. Mr. Miller practiced law with the law firm King &
Spalding in Atlanta from 1985 to 1997. In his practice, Mr. Miller specialized
in representing health care clients in a variety of different capacities,
including representations in mergers and acquisitions involving more than 75
hospitals, debt and equity restructurings and other corporate finance
transactions.
DARLA D. MOORE has been a Director since February 1996. Ms. Moore has been a
private investor of Rainwater, Inc., a private investment firm, since 1994. From
1982 through 1994 she was a Managing Director of The Chase Manhattan Bank, N.A.
JEFFREY A. SONNENFELD, PH.D. has been a Director since September 1997. Dr.
Sonnenfeld has been President of The Chief Executive Institute (education) since
December 1997. Dr. Sonnenfeld is a professor of organization and management and
director of the Center for Leadership & Career Studies of the Goizueta Business
School at Emory University. Dr. Sonnenfeld received his AB, MBA and doctorate
degrees from Harvard University. Dr. Sonnenfeld also serves on the board of
directors of Klaster Cruise Limited, Masely Securities Corporations,
Transmedia-CBS, Inc. and U.S. Franchise Systems.
123
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to the
Company's Chief Executive Officer and the Company's four next most highly
compensated executive officers (the "Named Executive Officers"), for the three
fiscal years ended September 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
COMPENSATION (3)
------------------
ANNUAL COMPENSATION LONG-TERM
---------------------------------------------- COMPENSATION
NAME AND PRINCIPAL FISCAL OTHER ANNUAL --------------
POSITIONS YEAR SALARY BONUS COMPENSATION (1) OPTIONS(#) (2)
- ----------------------------- ----------- ----------- ------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford (4).......... 1997 $ 806,250 $ 2,475,000 $ -- 933,666 $ 166,575
Chairman of the Board, 1996 712,500 153,500 -- 300,000 181,936
President and Chief 1995 600,000 -- 177,236 -- 204,095
Executive Officer
Craig L. McKnight (5)........ 1997 378,688 150,000 59,743 65,000 45,158
Executive Vice President 1996 361,250 50,000 -- 25,000 73,891
and Chief Financial Officer 1995 204,167 -- 45,668 100,000 11,218
Steve J. Davis (6)........... 1997 337,500 150,000 -- 167,500 43,750
Executive Vice President- 1996 256,667 50,000 -- 40,000 50,449
Administrative Services and 1995 182,083 -- 21,121 -- 91,972
General Counsel
Henry T. Harbin M.D. (7)..... 1997 338,069 161,707 -- 125,000 10,750
Executive Vice President 1996 236,705 167,195 -- 100,000 10,750
and President and Chief
Executive Officer of Green
Spring
Danna Mauch Ph.D. (8)........ 1997 304,500 -- -- -- 33,660
Executive Vice President 1996 125,000 10,000 -- 50,000 23,452
and President and Chief
Operating Officer of
Magellan Public Solutions,
Inc.
</TABLE>
- ------------------------
(1) Other Annual Compensation for fiscal 1997 includes country club initiation
fees and dues of $42,004 for Mr. McKnight. Other Annual Compensation for
fiscal 1995 includes: (a) reimbursement of relocation expenses of $157,558
and $38,289 for Messrs. Crawford and McKnight, respectively, and (b) a car
allowance of $12,000 for Mr. Davis.
(2) Represents the number of stock options granted under the Company's 1994
Stock Option Plan, 1996 Stock Option Plan and 1997 Stock Option Plan.
(3) All Other Compensation for fiscal 1997 includes: (a) contributions to the
Company's 401(k) Plan of $5,250 for Messrs. Crawford and Davis, $3,000 for
Mr. McKnight and contributions to the Green Spring 401(k) plan of $10,750
for Dr. Harbin; (b) amounts deposited in trust pursuant to the Company's
Executive Benefits Plan ("EBP") of $151,816, $42,158, $38,500 and $33,660
for Messrs. Crawford, McKnight, Davis and Dr. Mauch, respectively and (c)
premiums paid for disability insurance of $9,509 for Mr. Crawford. All Other
Compensation for fiscal 1996 includes: (a) contributions to the ESOP of
$18,050, $22,795 and $22,795 for Messrs. Crawford,
124
<PAGE>
McKnight and Davis, respectively, which represents the Company's expense
(the fair value of the ESOP shares on the date earned was $699, $883 and
$883 for Messrs. Crawford, McKnight and Davis, respectively); (b)
contributions to the Company's 401(k) Plan of $5,250 for Mr. Crawford and
contributions to the Green Spring 401(k) Plan of $10,750 for Dr. Harbin; (c)
amounts deposited in trust pursuant to the EBP of $137,191, $40,150, $23,375
and $23,452 for Messrs. Crawford, McKnight, Davis and Dr. Mauch,
respectively; (d) premiums paid for life and disability insurance of
$19,840, $10,260 and $3,595 for Messrs. Crawford, McKnight and Davis,
respectively; and (e) term life insurance premiums of $1,605, $686 and $684
for Messrs. Crawford, McKnight and Davis, respectively. All Other
Compensation for fiscal 1995 includes: (a) contributions to the ESOP of
$20,408 and $18,560 for Messrs. Crawford and Davis, respectively, which
represents the Company's expense (the fair value of the ESOP shares on the
date earned was $465 and $424 for Messrs. Crawford, and Davis,
respectively); (b) contributions to the Company's 401(k) Plan of $5,250 for
Mr. Crawford; (c) amounts deposited in trust pursuant to the EBP of $104,877
and $25,897 for Messrs. Crawford and Davis, respectively; (d) premiums paid
for life and disability insurance of $72,954, $11,010 and $4,410 for Messrs.
Crawford, McKnight and Davis, respectively; (e) term life insurance premiums
of $606, $208 and $685 for Messrs. Crawford, McKnight and Davis,
respectively; and (f) amounts paid to Mr. Davis of $42,420 pursuant to Mr.
Davis achieving performance goals set relating to his employment with the
Company.
(4) Mr. Crawford resigned his position with the Company on March 18, 1998.
(5) Mr. McKnight became an employee of the Company effective March 1, 1995.
(6) In November, 1997, Mr. Davis resigned his position with the Company to
become President and Chief Executive Officer of CBHS.
(7) Dr. Harbin became an executive officer of the Company effective December 13,
1995.
(8) Dr. Mauch became an employee of the Company effective May 1, 1996.
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information with respect to grants of
options to the Named Executive Officers who were granted options during fiscal
1997 and the potential realizable value of such options on September 30, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS GRANTED EMPLOYEES IN PRICE EXERCISE ------------------------------
NAME (#) FISCAL 1997 PER SHARE EXPIRATION DATE 5% 10%
- ------------------------- ---------------- --------------- ----------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford (1)...... 183,666(2) 11.2% $ 20.875 12/17/06 $ 2,411,199 $ 6,110,453
750,000(4) 45.7 24.375 2/28/07 11,496,980 29,135,604
Craig L. McKnight........ 15,000(2) 0.9 20.875 12/17/06 196,923 499,041
50,000(3) 3.0 23.438 11/30/05 631,648 1,570,244
Steve J. Davis........... 67,500(2) 4.1 20.875 12/17/06 886,152 2,245,683
100,000(3) 6.1 23.438 11/30/05 1,263,296 3,140,488
Henry T. Harbin M.D...... 25,000(2) 1.5 20.875 12/17/06 328,204 831,734
100,000(4) 6.1 30.438 2/28/07 1,796,152 4,492,103
</TABLE>
- ------------------------
(1) Mr. Crawford resigned his position with the Company on March 18, 1998.
(2) Options granted under the 1994 Stock Option Plan which become exercisable
over three years at the rate of 33 1/3% of the total number of options per
year.
(3) Options granted under the 1996 Stock Option Plan which became exercisable on
June 17, 1997.
(4) Options granted under the 1997 Stock Option Plan, which become exercisable
over three years at the rate of 33 1/3% of the total number of options per
year.
125
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND OPTION VALUES AT SEPTEMBER 30,1997
The following table sets forth certain information with respect to options
exercised by the Named Executive Officers during fiscal 1997, and the number and
value of options held on September 30, 1997:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF LN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES VALUE AT SEPTEMBER 30, 1997 SEPTEMBER 30, 1997($)(1)
ACQUIRED ON REALIZED ---------------------------- ------------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ------------ ----------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
E. Mac Crawford (2)...... -- $ -- 755,440 933,666 $ 14,791,046 $ 7,528,618
Craig L. McKnight........ -- -- 141,667 48,333 1,648,996 611,054
Steve J. Davis........... -- -- 157,500 67,500 1,526,563 734,063
Henry T. Harbin M.D...... -- -- 100,000 125,000 1,287,500 403,125
Danna Mauch Ph.D......... -- -- 50,000 -- 437,500 --
</TABLE>
- ------------------------
(1) The closing price for the Common Stock as reported on September 30, 1997 was
$31.75. The value of unexercised in-the-money options is the difference
between the per share option exercise price and $31.75, multiplied by the
number of shares of Common Stock underlying in-the-money options.
(2) Mr. Crawford resigned his position with the Company on March 18, 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets
forth certain information as of November 30, 1997 (except as otherwise noted)
with respect to any person known by the Company to be the beneficial owner of
more than five percent of the Company's outstanding Common Stock:
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP CLASS
- ---------------------------------------------------------------------------- ----------------------- -------------
<S> <C> <C>
Rainwater-Magellan Holdings, L.P.(1)........................................ 5,835,078 18.8%
777 Main Street
Suite 2700
Ft. Worth, TX 76102
Albert O. Nicholas.......................................................... 2,736,000 9.4%
Nicholas Company, Inc.(2)
700 North Water Street
Suite 1010
Milwaukee, WI 53202
Wellington Management Company, LLP(3)....................................... 2,337,300 8.0%
75 State Street
Boston, MA 02109
Lazard Freres & Co., LLC(4)................................................. 2,101,895 7.2%
30 Rockefeller Plaza
New York, NY 10020
First Pacific Advisors, Inc.(5)............................................. 1,592,500 5.5%
11400 West Olympic Blvd.
Suite 1200
Los Angeles, CA 90064
</TABLE>
- ------------------------
(1) Includes 1,942,996 shares of Common Stock that Rainwater-Magellan has the
right to acquire pursuant to the Rainwater-Magellan Warrant and 6,250 shares
that Darla D. Moore, a director of the Company and spouse of Richard E.
Rainwater, has the right to acquire upon the exercise of options. Under the
rules of the SEC, Rainwater, Inc., the general partner of Rainwater-Magellan
and Richard E. Rainwater, the sole owner and sole director of Rainwater,
Inc., are also deemed to be beneficial owners of the shares owned by
Rainwater-
126
<PAGE>
Magellan. Information concerning beneficial ownership of securities by
Rainwater-Magellan is based on its Form 4, dated April 4, 1997.
(2) Information concerning beneficial ownership of securities by Nicholas
Company, Inc. is based on its Form 13F, dated October 21, 1997.
(3) Information concerning beneficial ownership of securities by Wellington
Management Company, LLP is based on its Form 13F, dated November 7, 1997.
(4) Information concerning beneficial ownership of securities by Lazard Freres &
Co., LLC is based on its Form 13F, dated November 12, 1997.
(5) Information concerning beneficial ownership of securities by First Pacific
Advisors, Inc. is based on its Form 13F, dated November 13, 1997.
Nicholas Company, Inc. is a registered investment advisor and possesses sole
dispositive power over the 2,736,000 shares of Common Stock owned by it.
Nicholas Fund, Inc. is a registered investment company managed by Nicholas
Company, Inc. and possesses sole voting power over 166,000 shares of the
2,736,000 shares owned by Nicholas Company, Inc. and no voting power over
2,570,000 of such shares. Albert O. Nicholas may be deemed to be a beneficial
owner of the shares held by Nicholas Company, Inc. under SEC rules because of
his control of Nicholas Company, Inc. Mr. Nicholas is the President, a director
and majority stockholder of Nicholas Company, Inc. and disclaims beneficial
ownership of all securities reported as beneficially owned by Nicholas Company,
Inc.
Wellington Management Company, LLP is an institutional investment manager
and possesses sole dispositive power over 2,299,300 shares of Common Stock and
shares dispositive power over 38,000 shares of Common Stock owned by it.
Wellington Management Company, LLP possesses sole voting authority over
1,416,200 shares of Common Stock, shared voting power over 38,000 shares of
Common Stock and no voting power over 883,100 shares of Common Stock.
Lazard Freres & Co., LLC is an institutional money manager and possesses
sole dispositive power and sole voting authority over all shares of Common Stock
owned by it.
First Pacific Advisors, Inc. is an institutional money manager and possesses
sole dispositive power over 1,200,000 of the shares of Common Stock owned by it
and shares dispositive power over 392,500 of such shares. It possesses no voting
power over 1,200,000 of such shares and shares voting power over 392,500 of such
shares.
127
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth certain
information concerning the beneficial ownership of Common Stock by (i)
directors, (ii) the Named Executive Officers and other executive officers and
(iii) directors and executive officers as a group, as of March 1, 1998:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OWNERSHIP (1)(2) TOTAL OUTSTANDING
- ------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
E. Mac Crawford(2)....................................................... 1,067,016 3.3%
Craig L. McKnight........................................................ 180,037 *
Henry T. Harbin M.D...................................................... 108,333 *
John J. Wider, Jr........................................................ -- *
Clarissa C. Marques, Ph.D. .............................................. 20,000 *
Gregory T. Torres........................................................ 35,000 *
Edwin M. Banks(4)........................................................ 39,500 *
G. Fred DiBona, Jr.(5)................................................... 901,956 2.8
Andre C. Dimitriadis..................................................... 39,000 *
A.D. Frazier, Jr......................................................... 28,500 *
Raymond H. Kiefer........................................................ 40,000 *
Gerald L. McManis........................................................ 39,000 *
Darla D. Moore(6)........................................................ 5,841,328 17.5
Robert W. Miller......................................................... -- *
Jeffrey A. Sonnenfeld Ph.D............................................... -- *
Daniel S. Messina........................................................ --(7) *
All directors and executive officers as a group (16 persons)............. 8,339,670(8) 23.2
</TABLE>
- ------------------------
* Less than 1% of total outstanding.
(1) Includes 1,066,662, 180,000, 108,333, 35,000 and 20,000 shares that Messrs.
Crawford, McKnight, Harbin, Torres and Ms. Marques, respectively, have the
right to acquire upon the exercise of options and warrants within 60 days of
March 1, 1998.
(2) Includes 39,000 shares that each of Messrs. Dimitriadis, Kiefer, Banks and
McManis have the right to acquire, 28,500 shares that Mr. Frazier has the
right to acquire, and 12,500 shares that each of Mr. DiBona and Ms. Moore
have the right to acquire within 60 days of March 1, 1998.
(3) Mr. Crawford resigned his position with the Company on March 18, 1998.
(4) Does not include shares owned by W.R. Huff Asset Management Co., LLC, a
registered investment advisor ("Huff"), of which Mr. Banks disclaims
beneficial ownership. Mr. Banks is a securities analyst with Huff.
(5) Includes 889,456 shares that Independence Blue Cross owns. See "Certain
Relationships and Related Transactions." Mr. DiBona is a director and the
President and Chief Executive Officer of Independence Blue Cross and
disclaims beneficial ownership of all securities attributed to him because
of his positions with Independence Blue Cross.
(6) Includes 3,885,832 shares owned by Rainwater-Magellan and 1,942,996 shares
that Rainwater-Magellan has the right to acquire pursuant to the
Rainwater-Magellan Warrant. Ms. Moore is the spouse of Richard F. Rainwater,
the sole stockholder and sole director of Rainwater, Inc., which is the sole
general partner of Rainwater-Magellan.
(7) In accordance with Aetna U.S. Healthcare's policy, Mr. Messina will not
accept any option grants for serving as a director.
(8) Includes 1,556,162 shares that the directors and executive officers have the
right to acquire upon the exercise of options, 889,456 shares that
Independence Blue Cross owns and 1,942,996 shares that Rainwater-Magellan,
L.P. has the right to acquire upon the exercise of the Rainwater-Magellan
Warrant, all of which are exercisable within 60 days of March 1, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gerald L. McManis, a director of the Company, is the President of McManis
Associates, Inc. ("MAI"), a strategy development and management consulting firm
for healthcare and health-related companies.
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During fiscal 1997, MAI provided consulting services to the Company with respect
to the development of strategic plans and a review of the Company's business
processes. The Company paid approximately $825,000 in fees for such services
during fiscal 1997 and reimbursed MAI approximately $60,000 for expenses.
G. Fred DiBona, Jr., a director of the Company, is a director and the
President and Chief Executive Officer of Independence Blue Cross. As of November
30, 1997, Independence Blue Cross had a 12.25% equity interest in Green Spring.
The Company acquired a 51% equity interest in Green Spring on December 13,
1995 for approximately $68.9 million in cash, the issuance of Common Stock
valued at approximately $4.3 million and the contribution of Group Practice
Affiliates, Inc., a wholly-owned subsidiary of the Company ("GPA"), to Green
Spring. The Exchange Agreement provided that the minority stockholders of Green
Spring, including Independence Blue Cross, had the option (the "Exchange
Option") under certain circumstances, to exchange their equity interests in
Green Spring for 2,831,516 shares of Common Stock or $65.1 million in
subordinated notes. In the event of an exchange, the Company could have elected
to pay cash in lieu of issuing subordinated notes. Each of the Exchange Options
has been exercised. The consideration paid and terms of the Exchange Option were
determined through arm's length negotiations that considered, among other
factors, the historical and projected income of Green Spring and the value of
GPA. The consideration paid by the Company was determined by the Board with the
advice of management and the Company's investment bankers. On December 20, 1995,
the Company acquired an additional 10% equity interest in Green Spring for $16.7
million in cash as a result of the exercise of the Exchange Option by a minority
stockholder of Green Spring. The Company had a 61% equity interest in Green
Spring as of November 30, 1997.
On December 13, 1995, as part of the Company's initial investment in Green
Spring, Independence Blue Cross sold a 4.42% equity interest in Green Spring, in
which it had a cost basis of $3.2 million, to the Company for $5.4 million in
cash. The Exchange Option gave Independence Blue Cross the right, until December
13, 1998, to exchange its remaining equity interest in Green Spring for a
maximum of 889,565 shares of Common Stock or $20.5 million in subordinated
notes. Independence Blue Cross converted its equity interest in Green Spring
into 889,456 shares of Common Stock during January 1998 in connection with the
Company's announced acquisition of Merit and related transactions.
Independence Blue Cross and its affiliated entities contract with Green
Spring for provider network, care management and medical review services
pursuant to contractual relationships entered into on July 7, 1994, with terms
of up to five years. During fiscal 1997, Independence Blue Cross and its
affiliated entities paid Green Spring approximately $48.0 million for such
services. As of September 30, 1997, Independence Blue Cross and its affiliated
entities owed Green Spring approximately $13.6 million. Green Spring recorded
revenue of approximately $47.4 million from Independence Blue Cross during
fiscal 1997.
On July 7, 1994, Independence Blue Cross sold a subsidiary to Green Spring
in exchange for a $15.0 million promissory note. As of November 30, 1997, $6.0
million remained outstanding under such promissory note and is due and payable
in equal installments on July 7, 1998 and 1999.
Daniel S. Messina, a director of the Company, is the Chief Financial Officer
of Aetna. On December 4, 1997, the Company consummated the purchase of HAI,
formerly a unit of Aetna, for approximately $122.1 million, which the Company
funded from cash on hand. HAI manages the care of over 16.0 million covered
lives, primarily through EAPs and other non-risk-based managed behavioral
healthcare plans. The Company may be required to make additional contingent
payments of up to $60.0 million annually to Aetna over the five-year period
subsequent to closing. The amount and timing of the payments will be contingent
upon net increases in the number of HAI's covered lives in specified products.
For the twelve months ended September 30, 1997, HAI had revenue of $117.0
million. The consideration paid was determined through arm's length negotiations
that considered, among other
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factors, the historical and projected income of HAI. The consideration paid by
the Company was determined by the Board with the advice of management and the
Company's investment bankers. A contract between HAI and Aetna represents 21% of
the Company's pro forma covered lives and would represent 5% of its pro forma
managed behavioral healthcare revenues for fiscal 1997.
Richard E. Rainwater and certain of his affiliates have a significant
interest in Crescent and the Company. Set forth below is a summary of the
interests of such persons.
On June 17, 1997, the Company sold the Psychiatric Hospital Facilities to
Crescent for $417.2 million in cash (before costs of approximately $16 million)
and warrants for the purchase of 2.5% of the common stock of COI. Simultaneously
with the sale of the Psychiatric Hospital Facilities to Crescent, the Company
and COI formed CBHS to conduct the operations of the Psychiatric Hospital
Facilities and certain other facilities transferred to CBHS by the Company. The
Company owns a 50% interest in CBHS, which it obtained by contributing
approximately $5 million of certain net assets to CBHS. The Company franchises
the "CHARTER" System of behavioral healthcare to each of the Psychiatric
Hospital Facilities and other facilities operated by CBHS. In exchange, CBHS
pays certain franchise fees to the Company.
Crescent is the operating partnership of Crescent Real Estate Equities
("CEI"). Mr. Rainwater is the Chairman of the Board of Directors of CEI. The
sole general partner of Crescent is Crescent Real Estate Equities ("Crescent
GP"), which is a wholly-owned subsidiary of CEI. Mr. Rainwater owns beneficially
12.5% of Crescent, which interests consist of common stock in CEI (including
common stock of CEI that may be acquired pursuant to the exercise of options)
and units of ownership in Crescent. Mr. Rainwater is an affiliate of Crescent,
Crescent GP, COI and CEI.
A total of 4,000,000 shares of Common Stock and warrants for an additional
2,000,000 shares of Common Stock were acquired by Rainwater-Magellan from the
Company in a Private Placement pursuant to a Stock and Warrant Purchase
Agreement and certain related agreements (the "Private Placement Agreements").
Rainwater-Magellan owns 3,885,832 shares of Common Stock and holds a portion
of the Rainwater-Magellan Warrant, which gives Rainwater-Magellan the right to
purchase an additional 1,942,996 shares of Common Stock. Rainwater, Inc. is the
sole general partner of Rainwater-Magellan. Richard E. Rainwater is the sole
stockholder and a director of Rainwater, Inc. Mr. Rainwater has sole voting and
dispositive power over the shares of Common Stock owned by Rainwater-Magellan
and the shares of Common Stock underlying the Rainwater-Magellan Warrant. As a
result of such relationships, Mr. Rainwater is deemed to be the beneficial owner
of the shares of Common Stock held by Rainwater-Magellan, including the shares
of Common Stock which can be purchased under the Rainwater-Magellan Warrant.
Mr. Rainwater owns beneficially approximately 62.8% of Rainwater-Magellan.
Mr. Rainwater's three children own beneficially an additional 4.8% of
Rainwater-Magellan through a limited partnership of which Mr. Rainwater is
general partner and an additional 1.2% each through trusts which are managed by
an unaffiliated trustee.
The Rainwater-Magellan Warrant entitles the holders to purchase in the
aggregate, at any time prior to its January 25, 2000 expiration date, up to
2,000,000 shares of Common Stock at a purchase price of $26.15 per share. The
Private Placement Agreements provide, among other things, for the adjustment of
the number of shares of Common Stock that can be purchased under the
Rainwater-Magellan Warrant and the purchase price, respectively, for certain
dilutive events, for registration rights for the shares of Common Stock owned by
Rainwater-Magellan, including those underlying the Rainwater-Magellan Warrant
(which registration rights, as mentioned below, have been exercised), and for a
variety of other customary provisions, including, without limitation, certain
restrictions on Rainwater-Magellan's private sale of such shares, certain
preemptive rights of Rainwater-Magellan to acquire additional securities issued
by the Company for cash in a private placement transaction and standstill
covenants restricting
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the purchase of additional shares of Common Stock by Rainwater-Magellan and its
affiliates in certain circumstances.
Darla D. Moore, a director of the Company, is the spouse of Richard E.
Rainwater. Under the terms of the Private Placement Agreements,
Rainwater-Magellan has the right to designate a nominee acceptable to the
Company for election as a director of the Company for so long as the Rainwater
Group continues to own beneficially a specified minimum number of shares of
Common Stock. Rainwater-Magellan proposed Ms. Moore as its nominee for director,
and Ms. Moore was elected a director by the Board in February 1996. For purposes
of this Prospectus, any reference to the "Rainwater Group" includes Rainwater
Magellan, Rainwater, Inc., Richard E. Rainwater, Darla D. Moore and their
affiliates and associates.
As of November 30, 1997, Rainwater-Magellan beneficially owned 5,835,078
shares of Common Stock (including the 1,942,996 shares which can be purchased
under the Rainwater-Magellan Warrant), which represented in the aggregate 18.8%
of the Common Stock.
Under the terms of the Private Placement Agreements, the Company agreed (i)
to pay a transaction fee of $150,000; (ii) to reimburse certain expenses of
Rainwater, Inc. in connection with the Private Placement; (iii) to pay the
Rainwater Group an annual monitoring fee of $75,000 commencing on March 31,
1996; and (iv) to reimburse the Rainwater Group for reasonable fees and expenses
(up to a maximum of $25,000 annually) incurred in connection with its ownership
of the Common Stock and the Rainwater-Magellan Warrant. The Company also agreed
under the Private Placement Agreements to reimburse the Rainwater Group in the
future for one additional filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, if a filing under such act is required in
connection with an exercise of the Rainwater-Magellan Warrant.
Rainwater-Magellan purchased the Common Stock and the Rainwater-Magellan
Warrant on January 25, 1996. During fiscal 1997, the Company paid an aggregate
of $77,019 for the annual monitoring fee and fees and expenses incurred in
connection with Rainwater-Magellan's ownership of the Common Stock and
Rainwater-Magellan Warrant. Excluded from these amounts are directors' fees and
expense reimbursement paid to Ms. Moore in her capacity as a director of the
Company. The Company has incurred costs to date of approximately $55,000 in
connection with its registration of the shares and approximately $40,000 in
costs to register the shares of Common Stock underlying the Rainwater-Magellan
Warrant.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Company sold the Old Notes to the Initial Purchaser on February 12, 1998
pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold
the Old Notes to "qualified institutional buyers" in reliance on Rule 144A under
the Securities Act or pursuant to offers and sales that occurred outside the
United States within the meaning of Regulation S under the Securities Act. As a
condition to the Purchase Agreement, the Company entered into the Registration
Rights Agreement, pursuant to which the Company agreed, for the benefit of all
holders of the Old Notes, that it would, at its expense, (i) as soon as
practicable after the initial issuance of the Old Notes, file a registration
statement with the Commission with respect to a registered offer to exchange the
Old Notes for the New Notes and (ii) use its best efforts to cause such
registration statement to be declared effective under the Securities Act by July
10, 1998. The Company also agreed that upon effectiveness of the Registration
Statement, it would offer to all holders of the Old Notes an opportunity to
exchange their securities for an equal principal amount of the New Notes.
Further, the Company agreed that it would keep the Exchange Offer open for
acceptance for not less than 30 business days (subject to any extensions
required by applicable law) after the date such Registration Statement was
declared effective and would comply with Regulation 14E and Rule 13e-4 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the
filing requirements of Rule 13e-4). A copy of the Registration Rights Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The term "Holder" with respect to the Exchange Offer means
any person in whose name Old Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered holder. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement.
Based on existing interpretations of the Staff with respect to similar
transactions, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders are not engaged
in, have no arrangement with any person to participate in, and do not intend to
engage in, any public distribution of the New Notes. Each broker or dealer
registered as such under Section 15 of the Exchange Act receiving New Notes in
the Exchange Offer ("Participating Broker-Dealers") will be subject to a
prospectus delivery requirement with respect to resales of such New Notes. Each
Participating Broker-Dealer must acknowledge that it will deliver a resale
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal which accompanies this Prospectus states that by so acknowledging
and by delivering a resale prospectus, a Participating Broker-Dealer will not be
deemed to admit to be acting in the capacity of an "underwriter" (within the
meaning of Section 2(11) of the Securities Act). This Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as result of market-making or other trading activities. Pursuant to the
Registration Rights Agreement, the Company has agreed to permit Participating
Broker-Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use this Prospectus in connection with the resale of such New
Notes for a period of 180 days from the date on which the Registration Statement
of which this Prospectus is a part is first declared effective.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
the Company in the accompanying Letter of Transmittal, including that (i) any
New Notes to be received by it will be acquired in the ordinary course of its
business, (ii) it is not participating in, does not intend to participate in and
has no arrangement with
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any person to participate in a public distribution (within the meaning of the
Securities Act) of the New Notes, and (iii) it is not an "affiliate," as defined
in Rule 405 of the Securities Act of the Company, or if it is such an affiliate,
that it will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable to it. In addition, each holder
who is not a broker-dealer will be required to represent that it is not engaged
in, and does not intend to engage in, a public distribution of the New Notes.
Each Participating Broker-Dealer who receives New Notes for its own account in
exchange for Old Notes that were acquired by it as a result of market-making or
other trading activities, will be required to acknowledge that it will deliver
this Prospectus in connection with any resale by it of such New Notes.
Accordingly, subject to the aforementioned interpretations of the Staff with
respect to the free transferability of the New Notes received by holders in
exchange for their Old Notes pursuant to the Exchange Offer and, as set forth in
such interpretations, the ability of certain holders to participate in the
Exchange Offer, holders of Old Notes otherwise eligible to participate in the
Exchange Offer and receive pursuant thereto freely tradeable New Notes but who
elect not to tender their Old Notes for exchange, will not have any further
registration rights under the Registration Rights Agreement and the Old Notes
not so exchanged will remain "restricted securities" (within the meaning of the
Securities Act) and subject to restrictions on transfer under the Securities
Act.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (together, the "Exchange Offer"),
the Company will accept for exchange and exchange any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
Expiration Date. The Company will issue $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of outstanding Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes have been registered under the
Securities Act and will not bear legends restricting the transfer thereof, (ii)
the holders of the New Notes will not be entitled to certain rights under the
Registration Rights Agreement, which rights will terminate when the Exchange
Offer is terminated and (iii) the New Notes have been given a series designation
to distinguish the New Notes from the Old Notes. The New Notes will evidence the
same debt as the Old Notes and will be entitled to the benefits of the
Indenture.
As of the date of this Prospectus, all $625,000,000 outstanding principal
amount of the Old Notes were evidenced by global securities, registered in the
name of CEDE & Co., as nominee for DTC, and held by Marine Midland Bank as
securities custodian for CEDE & Co. As indicated elsewhere in this Prospectus,
the Old Notes have been included in the PORTAL Market for trading among
"qualified institutional buyers" pursuant to Rule 144A under the Securities Act.
For purposes of administration, the Company has fixed the close of business
on [ ], 1998 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the accompanying Letter of
Transmittal will be mailed initially. There will be no fixed record date for
determining generally registered holders of Old Notes entitled to participate in
the Exchange Offer.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with Regulation 14E and Rule 13e-4 under the Exchange Act (other than the filing
requirements of Rule 13e-4).
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The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein under
"--Conditions" or otherwise, the certificates for any such unaccepted Old Notes
will be returned, without expense, to the tendering Holder thereof as promptly
as practicable after the Expiration Date. See "--Procedures for Tendering."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
[ ], 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will notify the registered
Holders as promptly as practicable by public announcement thereof, the
announcement in the case of an extension to be issued no later than 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered Holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer, in accordance with applicable rules of the
Commission and published interpretations of the Staff, for a period of five to
ten business days, depending upon the significance of the amendment and the
manner of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
Each New Note will bear interest from its date of original issuance. Holders
of Old Notes that are accepted for exchange and exchanged for New Notes will
receive, in cash, accrued interest thereon to, but not including, the original
issuance date of the New Notes. The Old Notes will bear interest at a rate per
annum of 9% through the date next preceding the date of the original issuance of
the New Notes. Such interest will be paid on the first interest payment date for
the New Notes. Interest on the Old Notes accepted for exchange and exchanged in
the Exchange Offer will cease to accrue on the date next preceding the date of
original issuance of the New Notes. The New Notes will bear interest (as do the
Old
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Notes) at a rate per annum of 9%, which interest will be payable semi-annually
on each February 15 and August 15, commencing on August 15, 1998.
PROCEDURES FOR TENDERING
Only a Holder of Old Notes may participate in the Exchange Offer. The tender
to the Exchange Agent of Old Notes by a Holder thereof as set forth below and
the acceptance thereof by the Company will constitute a binding agreement
between the tendering Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a Holder who wishes to tender Old Notes
for exchange pursuant to the Exchange Offer must transmit a properly completed
and duly executed Letter of Transmittal, including all other documents required
by such Letter of Transmittal, to the Exchange Agent at one of the addresses set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) a timely Book-Entry Confirmation (as hereinafter defined)
of such Old Notes into the Exchange Agent's account at the Depositary (the "Book
Entry Transfer Facility") pursuant to the procedure for book-entry transfer
described below must be received by the Exchange Agent prior to the Expiration
Date or (ii) the Holder must comply with the guaranteed delivery procedures
described below.
By executing the accompanying Letter of Transmittal, each Holder will
thereby make to the Company the representations set forth above in the third
paragraph under the heading "--Purpose and Effect of the Exchange Offer."
The tender by a Holder and the acceptance thereof by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the accompanying
Letter of Transmittal.
THE METHOD OF DELIVERY OF THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR
HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE
ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered Holder promptly and instruct such registered
Holder to tender on such beneficial owner's behalf. See "Instruction to
Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder
who has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such person must submit a properly
completed bond power, signed by such registered
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Holder as such registered Holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and DTC have confirmed to the Company that any financial
institution that maintains a direct account with DTC (a "Participant") may
utilize DTC's Automated Tender Offer Program ("ATOP") to tender Old Notes for
exchange in the Exchange Offer. The Exchange Agent will request that DTC
establish an account with respect to the Old Notes for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any
Participant may effect book-entry delivery of Old Notes by causing DTC to record
the transfer of the tendering Participant's beneficial interests in the global
Old Notes into the Exchange Agent's account in accordance with DTC's ATOP
procedures for such transfer. However, the exchange of New Notes for Old Notes
so tendered only will be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer of Old Notes into the Exchange
Agent's account, and timely receipt by the Exchange Agent of an Agent's Message
(as defined below) and any other documents required by the Letter of
Transmittal. The term "Agent's Message" as used herein means a message,
transmitted by DTC and received by the Exchange Agent and forming part of a
Book-Entry Confirmation, which states that DTC has received an express
acknowledgment from a Participant tendering Old Notes for exchange which are the
subject of such Book-Entry Confirmation that such Participant has received and
agrees to be bound by the terms and conditions of the Letter of Transmittal, and
that the Company may enforce such agreement against such Participant.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify Holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) who cannot deliver the
Letter of Transmittal or any other required documents to the Exchange Agent or
(ii) who cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Holder and such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Holder and the principal
amount of Old Notes tendered, stating that the tender is being made thereby
and
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guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with a confirmation of book-entry transfer of such Old Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility, and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility, and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number(s) and
principal amount of such Old Notes, or, in the case of Old Notes transferred by
book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Old Notes register the transfer of such Old Notes into the name of the
person withdrawing the tender and (iv) specify the name in which any such Old
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for exchange, will be returned to the Holder thereof without cost to
such Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment
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of the Company, might materially impair the ability of the Company to
proceed with the Exchange Offer; or
(c) any law, statute, rule, regulation or interpretation by the Staff is
proposed, adopted or enacted, which, in the sole judgment of the Company,
might materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(d) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering Holders, (ii) extend the Exchange Offer
and retain all Old Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of Holders to withdraw such Old Notes (see
"--Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Old Notes which
have not been withdrawn. If such waiver constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer, in accordance with applicable rules
of the Commission and published interpretation of the Staff, for a period of
five to ten business days, depending upon the significance of the waiver and the
manner of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
Marine Midland Bank
140 Broadway, Level A
New York, New York 10005-1180
Attention: Corporate Trust Operations
Telephone: (212) 658-6433
Facsimile: (212) 658-6425
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith and will reimburse
the Holders of the Old Notes for the reasonable fees and expenses of not more
than one firm of counsel designated by the holders of a majority in principal
amount of the Old Notes outstanding within the meaning of the Indenture to act
as counsel for all Holders of Old Notes in connection therewith and will
reimburse the Holders of the Old Notes for the reasonable fees and expenses of
not more than one firm of counsel designated by the holders of a majority in
principal amount of the Old Notes outstanding
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within the meaning of the Indenture to act as counsel for all Holders of Old
Notes in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Holder or any other persons) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be be recognized.
TERMINATION OF CERTAIN RIGHTS
Holders of the New Notes will not be entitled to the benefits of the
Registration Rights Agreement, pursuant to which the Company agreed, for the
benefit of holders of the Old Notes, that it would, at its expense, (i) as soon
as practicable after the initial issuance of the Old Notes, file a registration
statement with the Commission with respect to a registered offer to exchange the
Old Notes for the New Notes and (ii) use its best efforts to cause such
registration statement to be declared effective under the Securities Act by July
10, 1998.
In addition, pursuant to the Registration Rights Agreement, if (i) because
of any change in law or applicable interpretations thereof by the staff of the
Commission, the Company is not permitted to effect the Exchange Offer as
contemplated hereby, (ii) any Old Notes validly tendered pursuant to the
Exchange Offer are not exchanged for New Notes by September 10, 1998, (iii) the
Initial Purchaser so requests with respect to Old Notes not eligible to be
exchanged for New Notes in the Exchange Offer, (iv) any applicable law or
interpretations do not permit any holder of Old Notes to participate in the
Exchange Offer, (v) any holder of Old Notes that participates in the Exchange
Offer does not receive freely transferable New Notes in exchange for tendered
Old Notes, or (vi) the Company so elects, then the Company will file with the
Commission a shelf registration statement (the "Shelf Registration Statement")
to cover resales of Transfer Restricted Securities by such holders who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Securities" means each Old Note until (i) the date on which such Old
Note has been exchanged for a freely transferable New Note in the Exchange
Offer; (ii) the date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iii) the date on which such Old Note is distributed
to the public pursuant to Rule 144 under the Securities Act or is saleable
pursuant to Rule 144(k) under the Securities Act. The Company will use its
reasonable best efforts to have the Shelf Registration Statement declared
effective by the Commission as promptly as practicable after the filing thereof
and to keep the Shelf Registration Statement continuously effective until
February 12, 2000. The Company, at its expense, will provide to each holder of
the Old Notes copies of the prospectus that is a part of the Shelf
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Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Old Notes from time to time. A holder of Old
Notes who sells such Old Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such holder (including certain indemnification
obligations).
Pursuant to the Registration Rights Agreement, the Company agreed that, in
the event that the Exchange Offer is not consummated on or prior to September
10, 1998, the Company will be obligated to pay liquidated damages to each holder
of the Old Notes in an amount equal to $0.192 per week per $1,000 principal
amount of the Old Notes held by such holder until the Exchange Offer is
consummated. See "--Purpose and Effect of the Exchange Offer."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain "restricted securities" (within the meaning of the Securities
Act). Accordingly, prior to the date that is two years after the later of the
date of the original issue thereof and the last date on which the Company or any
affiliate of the Company was the owner of such Old Notes (the "Resale
Restriction Termination Date"), such Old Notes may be resold only (i) to the
Company, (ii) to a person whom the seller reasonably believes is a "qualified
institutional buyer" purchasing for its own account or for the account of
another "qualified institutional buyer" in compliance with the resale
limitations of Rule 144A, (iii) to an "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) that is an
institution (an "Institutional Accredited Investor") that, prior to such
transfer, furnishes to the Trustee a written certification containing certain
representations and agreements relating to the restrictions on transfer of the
Notes (the form of which letter can be obtained from the Trustee), (iv) pursuant
to the limitations on resale provided by Rule 144 under the Securities Act (if
available), (v) pursuant to the resale provisions of Rule 904 of Regulation S
under the Securities Act, (vi) pursuant to an effective registration statement
under the Securities Act or (vii) pursuant to any other available exemption from
the registration requirements of the Securities Act, subject in each of the
foregoing cases to any requirement of law that the disposition of its property
or the property of such account be at all times within its control and to
compliance with applicable state securities laws. The foregoing restrictions on
resale will not apply subsequent to the Resale Restriction Termination Date.
RESALES OF THE NEW NOTES
With respect to resales of New Notes, based on existing interpretations of
the Staff, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided such New Notes are acquired in the
ordinary course of such holders' business and such holders are not engaged in,
have no arrangement with any person to participate in, and do not intend to
engage in any public distribution of the New Notes. Each Participating
Broker-Dealer receiving New Notes in the Exchange Offer will be subject to a
prospectus delivery requirement with respect to resales of such New Notes. Each
Participating Broker-Dealer must acknowledge that it will deliver a resale
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal which accompanies this Prospectus states that by so acknowledging
and by delivering a resale prospectus, a Participating Broker-Dealer will be
deemed not to be acting in the capacity of an "underwriter" (within the meaning
of Section 2(11) of the Securities Act). This Prospectus, as it may be amended
or supplemented from time to time, may be used by a Participating Broker-Dealer
in connection with resales of New Notes received
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in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as result of market-making or other trading
activities. Pursuant to the Registration Rights Agreement, the Company has
agreed to permit Participating Broker-Dealers and other persons, if any, subject
to similar prospectus delivery requirements to use this Prospectus in connection
with the resale of such New Notes for a period of 180 days from the date on
which the Registration Statement of which this Prospectus is a part is first
declared effective.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
the Company in the accompanying Letter of Transmittal, including that (i) any
New Notes to be received by it will be acquired in the ordinary course of its
business, (ii) it has no arrangement with any person to participate in a public
distribution (within the meaning of the Securities Act) of the New Notes, and
(iii) it is not an "affiliate," as defined in Rule 405 of the Securities Act of
the Company, or if it is such an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable to it. In addition, each holder who is not a broker-dealer
will be required to represent that it is not engaged in, and does not intend to
engage in, a public distribution of the New Notes. Each Participating
Broker-Dealer who receives New Notes for its own account in exchange for Old
Notes that were acquired by it as a result of market-making or other trading
activities, will be required to acknowledge that it will deliver a Prospectus in
connection with any resale by it of such Old Notes. For a description of the
procedures for certain resales by broker-dealers, see "Plan of Distribution."
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that holds Old Notes that were acquired for
its own account as a result of market-making or other trading activities (other
than Old Notes acquired directly from the Company), may exchange such Old Notes
for New Notes pursuant to the Exchange Offer. However, a Participating
Broker-Dealer may be deemed to be an "underwriter" within the meaning of the
Securities Act and, therefore, will be required to deliver a prospectus
satisfying the requirements of the Act in connection with any resales by it of
such New Notes. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of New Notes received in exchange for Old Notes in satisfaction of such
prospectus-delivery requirement. The delivery by a Participating Broker-Dealer
of this Prospectus in connection with resales of New Notes shall not be deemed
to be an admission by such Participating Broker-Dealer that it is an
"underwriter" within the meaning of the Act. The Company has agreed that it
shall cause the Registration Statement of which this Prospectus is a part to
remain current and continuously effective for a period of 180 days from the date
on which such Registration Statement was first declared effective and that it
shall supplement or amend from time to time this Prospectus to the extent
necessary to permit this Prospectus (as so supplemented or amended) to be
delivered by Participating Broker-Dealers in connection with their resales of
New Notes.
The Company will not receive any proceeds from any sale of New Notes by
Participating Broker-Dealers or otherwise. New Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
dealers who may receive compensation in the form of commissions, concessions or
allowances from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Broker-Dealer that resells New Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such New Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions, concessions or allowances received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The accompanying Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period 180 days from the date on which the Registration Statement of
which this Prospectus is a part is first declared effective, the Company will
deliver to each holder of New Notes, without charge, as many copies of this
Prospectus and any amendment or supplement to this Prospectus as such person may
reasonably request. The Company has agreed to pay all expenses incident to the
Exchange Offer other than commissions, concessions or allowances of any brokers
or dealers and certain transfer taxes and will indemnify the holders of the New
Notes (including any Participating Broker-Dealers) against certain liabilities,
including liabilities under the Securities Act, or to the extent such
indemnification is unavailable or insufficient, to contribute to any payments
that such Participating Broker-Dealers may be required to make in respect
thereof.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The New Notes will be issued under the Indenture, dated February 12, 1998,
between the Company and Marine Midland Bank, as trustee (the "Trustee"),
pursuant to which the Old Notes were issued. For purposes of the following
summary, the Old Notes and the New Notes shall be collectively referred to as
the "Notes." The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such
terms, and holders of the Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below and those terms made a part thereof by the Trust
Indenture Act. The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions." Copies of the Indenture will
be made available to holders of Notes upon request.
The Notes will be general unsecured senior subordinated obligations of the
Company. The Notes are limited in aggregate principal amount to $625 million and
will mature on February 15, 2008. Interest on the Notes will accrue at the rate
of 9% per annum and will be payable semi-annually on each February 15 and August
15, commencing on August 15, 1998, to the holders of record on the immediately
preceding February 1 and August 1, whether or not a business day. Interest on
the Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of issuance. Interest will be
computed on the basis of a 360-day year, comprised of twelve 30-day months.
Interest and principal on the Notes will be payable at the office or agency of
the Company maintained for such purpose within the City of New York, Borough of
Manhattan or, at the option of the Company, payment of interest may be made by
check mailed to the holders of the Notes at their respective addresses set forth
in the register of holders of Notes. Unless otherwise designated by the Company,
the Company's office or agency maintained for such purpose in the City of New
York, Borough of Manhattan will be the office of the Trustee located at 140
Broadway, New York, New York 10005. The Notes will be issued only in fully
registered form, without coupons in denominations of $1,000 and integral
multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable at the option of the Company prior to February
15, 2003. The Notes will be redeemable at the option of the Company on or after
such date, in whole or in part, upon not less than 30 nor more than 60 days
prior notice mailed by first-class mail to each holder's registered address, at
the redemption prices (expressed as a percentage of the principal amount) set
forth below, plus accrued and unpaid interest thereon to the applicable
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the twelve-month period beginning on February 15 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICES
- -------------------------------------------------------------------------------- ------------
<S> <C>
2003............................................................................ 104.500%
2004............................................................................ 103.000%
2005............................................................................ 101.500%
2006 and thereafter............................................................. 100.000%
</TABLE>
In addition, at any time and from time to time prior to February 15, 2001,
the Company may, at its option, redeem up to 35% of the original aggregate
principal amount of Notes at a redemption price (expressed as a percentage of
the principal amount) of 109%, plus accrued and unpaid interest thereon, if any,
to the redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), with the net cash proceeds of one or more
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Equity Offerings; PROVIDED that at least 65% of such original aggregate
principal amount of Notes remains outstanding immediately after the occurrence
of such redemption; and PROVIDED, FURTHER, that such redemption shall occur
within 60 days of the date of the closing of any such Equity Offering.
SINKING FUND
The Notes are not subject to the benefit of any sinking fund.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
the Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not listed on a national securities
exchange, on a pro rata basis, provided that Notes shall be redeemed in
principal amounts of $1,000 or integral multiples thereof. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days before
the redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes shall have
the right to require the repurchase of such holder's Notes in whole or in part
pursuant to the offer described below (the "Change of Control Offer") at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date). Within 10 days following any Change of
Control, the Company shall mail a notice (along with any other instructions
determined by the Company, consistent with this covenant, that a holder must
follow in order to have its Notes purchased) to the Trustee and to each holder
stating: (i) that the Change of Control Offer is being made pursuant to the
"Change of Control" provision of the Indenture and that all Notes tendered and
not subsequently withdrawn will be accepted for payment and paid for by the
Company; (ii) the purchase price and the purchase date (which shall not be less
than 30 days nor more than 60 days after the date such notice is mailed) (the
"Change of Control Payment Date"); (iii) that any Note not tendered will
continue to accrue interest and shall continue to be governed by the terms of
the Indenture in all respects; (iv) that, unless the Company defaults in the
payment thereof, all Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest on and after the Change of Control
Payment Date; (v) that holders electing to have any Notes purchased pursuant to
a Change of Control Offer will be required to surrender the Notes to be
purchased to the Paying Agent at the address specified in the notice prior to
the close of business on the business day next preceding the Change of Control
Payment Date; (vi) that holders will be entitled to withdraw their election on
the terms and conditions set forth in such notice; and (vii) that holders whose
Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each such new Note issued shall be in a principal
amount of $1,000 or integral multiples thereof.
On (or, in the case of clause (ii) of this paragraph, at the Company's
election, before) the Change of Control Payment Date, the Company shall (i)
accept for payment all Notes or portions thereof tendered and not theretofore
withdrawn, pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent immediately available funds sufficient to pay the purchase price of all
Notes or portions thereof accepted for payment, and (iii) deliver or cause to be
delivered to the Trustee all Notes so tendered, together with
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an officer's certificate specifying the Notes or portions thereof tendered to
the Company. The Paying Agent shall promptly mail to each holder of Notes so
tendered payment in an amount equal to the purchase price for such Notes, and
the Trustee shall promptly authenticate and mail to such holder one or more
certificates evidencing new Notes equal in principal amount to any unpurchased
portion of the Notes surrendered; provided that each such new Note shall be in a
principal amount of $1,000 or integral multiples thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
If at the time of such Change of Control the terms of the Bank Indebtedness
restrict or prohibit the repurchase of Notes pursuant to this covenant, then
prior to the mailing of the notice to holders provided for in the second
preceding paragraph, the Company shall (i) repay in full all Bank Indebtedness
or offer to repay in full all Bank Indebtedness and repay the Bank Indebtedness
of each lender who has accepted such offer or (ii) (x) obtain any requisite
consent under the agreements governing the Bank Indebtedness to permit the
repurchase of Notes as provided for in this covenant or (y) deliver to the
Trustee an officer's certificate signed by a responsible financial officer of
the Company that no such consent is required.
The Company will comply with the requirements of Regulation 14E and Rule
13e-4 (other than the filing requirements of such rule) under the Exchange Act,
and any other securities laws and regulations thereunder that are applicable in
connection with the repurchase of the Notes resulting from a Change of Control.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the New Credit Agreement. Future Senior
Indebtedness of the Company may contain prohibitions of certain events which
would constitute a Change of Control or require such Senior Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the holders of
their right to require the Company to repurchase the Notes could cause a default
under such Senior Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Company. Finally, the
Company's ability to pay cash to the holders upon a repurchase may be limited by
the Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
SUBORDINATION
The indebtedness evidenced by the Notes will be unsecured Senior
Subordinated Indebtedness of the Company, will be subordinated in right of
payment, as set forth in the Indenture, to all existing and future Senior
Indebtedness of the Company, will rank PARI PASSU in right of payment with all
existing and future Senior Subordinated Indebtedness of the Company and will be
senior in right of payment to all existing and future Subordinated Obligations
of the Company. The Notes will also be effectively subordinated to any Secured
Indebtedness of the Company and its subsidiaries to the extent of the value of
the assets securing such Indebtedness. However, payment from the money or the
proceeds of U.S. Government Obligations (as defined in the Indenture) held in
any defeasance trust described under "Defeasance and Discharge of the Indenture
and the Notes" below is not subordinated to any Senior Indebtedness or subject
to the restrictions described herein.
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Currently, substantially all of the operations of the Company are conducted
through its subsidiaries. Claims of creditors of such subsidiaries, including
trade creditors, and claims of preferred stockholders (if any) of such
subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes. The Notes, therefore, will be effectively
subordinated to creditors (including trade creditors) and preferred stockholders
(if any) of subsidiaries of the Company. At December 31, 1997, after giving pro
forma effect to the Transactions, the total liabilities (including indebtedness
but excluding subsidiary guarantees of amounts outstanding under the New Credit
Agreement) of the Company's subsidiaries were approximately $746.5 million,
including trade payables. Although the Indenture limits the incurrence of
indebtedness and preferred stock of certain of the Company's subsidiaries, such
limitation is subject to a number of significant qualifications.
As of December 31, 1997, on a pro forma basis after giving effect to the
Transactions, (i) the aggregate amount of the Company's outstanding Senior
Indebtedness would have been $590.2 million (exclusive of unused commitments),
substantially all of which would have been Secured Indebtedness and would have
been guaranteed by substantially all of the Company's subsidiaries, (ii) the
Company would have had no Senior Subordinated Indebtedness other than the Notes
and no Indebtedness that is subordinate or junior in right of payment to the
Notes and (iii) the outstanding indebtedness of the Company's subsidiaries
(excluding guarantees of the Company's indebtedness) would have been $363.1
million, substantially all of which would have been Secured Indebtedness.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes. The Notes will in all respects rank PARI PASSU with all
other Senior Subordinated Indebtedness of the Company. The Company has agreed in
the Indenture that it will not incur, directly or indirectly, any Indebtedness
which is subordinate or junior in ranking in any respect to Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness
merely because it is unsecured.
Upon any distribution to creditors upon any liquidation, dissolution,
winding up, bankruptcy, reorganization, assignment for the benefit of creditors,
marshaling of assets and liabilities, insolvency, receivership or similar
proceedings relating to the Company, the holders of Senior Indebtedness will be
entitled to receive payment in full of all obligations with respect to Senior
Indebtedness before the holders of Notes receive any direct or indirect payment
(excluding certain permitted equity or subordinated securities) on account of
principal of, premium, if any, or interest on the Notes.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under "Defeasance
and Discharge of the Indenture and the Notes" below and may not otherwise
purchase, redeem or otherwise retire any Notes (collectively, "pay the Notes")
if (i) any Specified Senior Indebtedness is not paid when due or (ii) any other
default on Specified Senior Indebtedness occurs which results in the maturity of
such Specified Senior Indebtedness being accelerated in accordance with its
terms unless, in either case, the default has been cured or waived or any such
acceleration has been rescinded or such Specified Senior Indebtedness has been
paid in full. However, the Company may pay the Notes without regard to the
foregoing if the Company and the Trustee receive written notice approving such
payment from the Representative of the Specified Senior Indebtedness with
respect to which either of the events set forth in clause (i) or (ii) of the
immediately preceding sentence has occurred and is continuing. During the
continuance of any default (other than a default described in clause (i) or (ii)
of the second preceding sentence) with respect to any Specified Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative of
the Specified Senior
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Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the Person
or Persons who gave such Blockage Notice, (ii) by repayment in full of such
Specified Senior Indebtedness or (iii) because the default giving rise to such
Blockage Notice is no longer continuing). Notwithstanding the provisions
described in the immediately preceding sentence (but subject to the provisions
contained in the first sentence of this paragraph), unless the holders of such
Specified Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Specified Senior Indebtedness, the Company may
resume payments on the Notes after the end of such Payment Blockage Period. Not
more than one Blockage Notice may be given in any consecutive 360-day period,
irrespective of the number of defaults that may exist or occur with respect to
Specified Senior Indebtedness during such period. However, subject to the
following sentence, if any Blockage Notice within such 360-day period is given
by or on behalf of any holders of Specified Senior Indebtedness other than the
Bank Indebtedness, the Representative of the Bank Indebtedness may give another
Blockage Notice within such period. In no event, however, may the total number
of days during which any Payment Blockage Period or Periods is in effect exceed
179 days in the aggregate during any 360 consecutive day period. For purposes of
this Section, no default or event of default that existed or was continuing on
the date of the commencement of any Payment Blockage Period with respect to the
Specified Senior Indebtedness initiating such Payment Blockage Period shall be,
or be made, the basis of the commencement of a subsequent Payment Blockage
Period by the Representative of such Specified Senior Indebtedness, whether or
not within a period of 360 consecutive days, unless such default or event of
default shall have been cured or waived for a period of not less than 90
consecutive days.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, (i)
declare or pay any dividend or make any distribution on or in respect of the
Company's or any of its Restricted Subsidiaries' Capital Stock or other Equity
Interests, including any such payment in connection with any merger or
consolidation (other than dividends or distributions payable to the Company or
any of its Restricted Subsidiaries or payable in shares of Capital Stock or
other Equity Interests of the Company other than Redeemable Stock), (ii)
purchase, repurchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any of its Subsidiaries from any Person (other than
from the Company or any of its Restricted Subsidiaries); (iii) purchase,
repurchase, redeem, prepay, defease, or otherwise acquire or retire for value
(A) any Subordinated Obligations prior to scheduled maturity, repayment or
sinking fund payment or (B) any Indebtedness of any Unrestricted Subsidiary or
(iv) make any Investment other than a Permitted Investment (the foregoing
actions set forth in clauses (i) through (iv) being referred to as "Restricted
Payments"), if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) such Restricted Payment (the amount so expended, if other than in
cash and if greater than $20 million, to be determined in good faith by the
Board of Directors, whose determination will be conclusive and evidenced by
a resolution of the Board of Directors), together with the aggregate of all
other Restricted Payments made on or after the Closing Date, exceeds the sum
of (A) $15 million, (B) 50% of the Consolidated Net Income of the Company
accrued on a cumulative basis for the period beginning on the first day of
the first month following the Closing Date and ending on the last day of the
last month immediately preceding the month in which such Restricted Payment
occurs (or, if aggregate cumulative Consolidated Net Income for such period
is a deficit, minus 100% of such deficit), (C) 100% of the aggregate net
cash proceeds received by the Company after the Closing Date from the
issuance or sale of Capital Stock or other Equity Interests of the Company
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(other than such Capital Stock or other Equity Interests issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or similar
trust established by the Company or any of its Subsidiaries and other than
Redeemable Stock), (D) the aggregate net cash proceeds received on or after
the Closing Date by the Company from the issuance or sale of debt securities
of the Company that have subsequently been converted into or exchanged for
Capital Stock or other Equity Interests of the Company (other than
Redeemable Stock) plus the aggregate net cash proceeds received by the
Company at the time of such conversion or exchange less the amount of any
cash or other property distributed by the Company or any Restricted
Subsidiary upon such conversion or exchange, (E) 100% of the aggregate net
cash proceeds received by the Company after the Closing Date upon the
exercise of options, warrants or similar instruments or rights (whether
issued prior to or after the Closing Date) to purchase the Company's Capital
Stock (other than Redeemable Stock) and (F) 100% of the aggregate net cash
proceeds received by the Company or any Restricted Subsidiary after the
Closing Date from (i) the sale or other disposition of Investments (other
than Permitted Investments) made by the Company and its Restricted
Subsidiaries in an Unrestricted Subsidiary or (ii) a dividend from, or the
sale of the stock of, an Unrestricted Subsidiary; or
(c) the Company would not be permitted to incur $1.00 of additional
Indebtedness pursuant to the first paragraph of "--Limitation on Additional
Indebtedness" below.
The foregoing provisions will not prohibit (i) so long as no Default or
Event of Default has occurred and is continuing or would result therefrom, the
payment of any dividend within 60 days after the date of declaration thereof, if
at said date of declaration such payment would have complied with the provisions
of the Indenture; (ii) to the extent required under applicable law, rule, order
or regulation or if the failure to do so would create a material risk of
disqualification of the ESOP under the Internal Revenue Code, the acquisition by
the Company of its common stock from the ESOP or from participants and
beneficiaries of the ESOP; (iii) the acquisition or retirement of Capital Stock
of the Company held by any future, present or former employee, director or
consultant of the Company or any Subsidiary of the Company pursuant to any
management or employee equity, stock option or other benefit plan or any other
agreement in an amount not to exceed $5 million in any fiscal year; (iv) the
acquisition by the Company or any of its Restricted Subsidiaries of Equity
Interests of the Company or such Restricted Subsidiary, if the exclusive
consideration for such acquisition is the issuance by the Company or such
Restricted Subsidiary of its Equity Interests (other than Redeemable Stock); (v)
the purchase, redemption or acquisition by the Company of rights under the
Rights Plan prior to such time as such rights have become exercisable not to
exceed $2 million in the aggregate; (vi) the redemption, repurchase, acquisition
or retirement of Indebtedness of the Company or its Restricted Subsidiaries
being concurrently refinanced by Refinancing Indebtedness permitted under
"--Limitation on Additional Indebtedness" below; (vii) the purchase, repayment,
redemption, prepayment, defeasance, acquisition or retirement of any
Indebtedness, if the exclusive consideration therefor is the issuance by the
Company of its Equity Interests (other than Redeemable Stock); (viii) the
redemption, repurchase, acquisition or retirement of Equity Interests in a
Permitted Joint Venture of the Company or of a Restricted Subsidiary, provided
that (A) if the Company or any of its Restricted Subsidiaries incurs
Indebtedness in connection with such redemption, repurchase, acquisition or
retirement, after giving effect to such incurrence and such redemption,
repurchase, acquisition or retirement, the Company could incur $1.00 of
additional Indebtedness pursuant to the first paragraph of "--Limitation on
Additional Indebtedness" below and (B) no Default or Event of Default has
occurred and is continuing or would result therefrom; (ix) dividend payments to
the holders of interests in Permitted Joint Ventures of the Company or of a
Restricted Subsidiary, ratably in accordance with their respective Equity
Interests or, if not ratably, then in accordance with the priorities set forth
in the respective organizational documents for, and agreements among holders of
Equity Interests in, such Permitted Joint Ventures; (x) the acquisition or
retirement of options, warrants and similar instruments and rights upon the
exercise thereof; (xi) any purchase, redemption or other acquisition of Equity
Interests of a Healthcare Service Business which is required by applicable law,
regulation, rule, order,
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approval, license, permit or similar restriction (in each case issued by a
governmental authority) to be purchased, redeemed or otherwise acquired by the
Company or one of its Restricted Subsidiaries; (xii) the acquisition or
retirement for value of any Equity Interests of the Company, or the making of
any Investments in Charter Behavioral Health Systems, LLC or any Subsidiaries of
Charter Behavioral Health Systems, LLC consisting of loans, advances, or other
extensions of credit, in any case as acquired, retired or made as part of the
consideration for the sale by the Company of Equity Interests in Charter
Behavioral Health Systems, LLC and certain Subsidiaries and joint ventures of
the Company and related transactions, where the aggregate value of such Equity
Interests of the Company and the aggregate amount of such Investments do not
collectively exceed a total of $40 million; or (xiii) other Restricted Payments
(excluding Investments that were Restricted Payments when made but are no longer
outstanding at the time of determination of Restricted Payments permitted by
this clause (xiii), but not excluding Investments made in accordance with this
clause (xiii) that are subsequently sold or otherwise disposed of, to the extent
such sale or other disposition increases the amount of Restricted Payments
permitted to be made in accordance with clause (F) of paragraph (b) above) made
after the Closing Date in an aggregate amount not to exceed $25 million.
The Company shall deliver to the Trustee within 60 days after the end of
each of the Company's first three fiscal quarters (and 120 days after the end of
the Company's fiscal year) in which a Restricted Payment is made under the first
paragraph of this covenant, an officer's certificate setting forth each
Restricted Payment made in such fiscal quarter, stating that each such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the "Limitation on Restricted Payments" covenant were
computed, which calculations may be based on the Company's financial statements
included in filings required under the Exchange Act for such quarter or such
year. For purposes of calculating the aggregate amount of Restricted Payments
that are permitted under clause (b) of the first paragraph of "--Limitation on
Restricted Payments," the amounts expended for Restricted Payments permitted
under clauses (ii) through (xiii) above shall be excluded.
LIMITATION ON PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The
Indenture provides that the Company shall not, and shall not permit any of its
Restricted Subsidiaries to, from and after the Closing Date, directly or
indirectly, create or otherwise cause or permit to exist or become effective or
enter into any consensual encumbrance or consensual restriction on the ability
of any Restricted Subsidiary to (A) pay dividends or make any other
distributions on its Equity Interests, the Equity Interests of any of its
Restricted Subsidiaries or on any other interest or participation in, or
measured by, its profits, which interest or participation is owned by the
Company or any of its Restricted Subsidiaries; (B) pay any Indebtedness owed to
the Company or any of its Restricted Subsidiaries; (C) make loans or advances to
the Company or any of its Restricted Subsidiaries; or (D) sell, lease or
transfer any of its properties or assets to the Company or any of its Restricted
Subsidiaries except, in each case, for such encumbrances or restrictions
existing under or by reason of (1) applicable law, regulation, rule, order,
approval, license, permit or similar restriction, in each case issued by a
governmental authority; (2) the Indenture and the Notes; (3) contractual
encumbrances or restrictions in effect on the Closing Date, including, without
limitation, pursuant to the New Credit Agreement and its related documentation;
(4) in the case of clause (D), by reason of customary non-assignment or
subletting provisions in leases entered into in the ordinary course of business;
(5) Prior Purchase Money Obligations; (6) Indebtedness or Capital Stock of
Restricted Subsidiaries that are acquired by or merged with or into the Company
or any of its Restricted Subsidiaries after the Closing Date; PROVIDED that such
Indebtedness or Capital Stock is in existence prior to the time of such
acquisition or merger and was not incurred, assumed or issued by the Person so
acquired or merged in contemplation of such acquisition or merger or to provide
all or any portion of the funds or credit support utilized to consummate such
acquisition or merger; provided further that such restrictions only apply to
such Restricted Subsidiary and its Subsidiaries; (7) contracts for the sale of
assets not otherwise prohibited by the Indenture, including without limitation
customary restrictions with respect to a Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Subsidiary; (8) in
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the case of clause (D), secured Indebtedness otherwise permitted to be incurred
pursuant to the covenants described under "--Limitation on Additional
Indebtedness" and "--Limitation on Liens" that limit the right of the debtor to
sell, lease, transfer or otherwise dispose of the assets securing such
Indebtedness; (9) customary provisions contained in leases or other agreements
entered into in the ordinary course of business or in Indebtedness permitted to
be incurred subsequent to the Closing Date pursuant to the provisions of the
covenant described under "--Limitation on Additional Indebtedness", in each case
which do not limit the ability of any Restricted Subsidiary to take any of the
actions described in clauses (A) through (D) above with respect to a material
amount of dividends, distributions, Indebtedness, loans, advances or sales,
leases or transfers of properties or assets, as applicable; (10) provisions in
joint venture agreements and other similar agreements in each case related to
Permitted Joint Ventures of the Company or of a Restricted Subsidiary that are
materially similar to customary provisions entered into by parties to joint
ventures in the Healthcare Service Business at the time of such joint venture or
similar agreement; (11) restrictions on cash or other deposits or net worth or
similar type restrictions imposed by customers under contracts entered into in
the ordinary course of business; and (12) any encumbrances or restrictions
imposed by any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings of the contracts,
instruments or obligations referred to in clauses (1) through (11) above, in
whole or in part, PROVIDED that such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings are
not materially more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment restrictions
prior to such amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing.
LIMITATION ON ADDITIONAL INDEBTEDNESS. The Indenture provides that the
Company shall not, and shall not permit any of its Restricted Subsidiaries,
directly or indirectly, to create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable with respect to (collectively, "incur") any
Indebtedness; PROVIDED, HOWEVER, the Company may incur Indebtedness if, after
giving pro forma effect to the incurrence of such Indebtedness and the
application of any of the proceeds therefrom to repay Indebtedness, the
Consolidated Cash Interest Coverage Ratio of the Company for the four most
recent consecutive fiscal quarters for which financial statements are available
prior to the date such additional Indebtedness is incurred will be at least (i)
2.00 to 1.00x if such Indebtedness is incurred on or prior to the second
anniversary of the Closing Date and (ii) 2.25 to 1.00x if such Indebtedness is
incurred thereafter. Any Indebtedness or Capital Stock of a Person existing at
the time such person becomes a Subsidiary of the Company (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
person at the time it becomes a Subsidiary of the Company.
Notwithstanding the foregoing paragraph, the Company and its Restricted
Subsidiaries may incur the following Indebtedness: (i) Indebtedness under the
New Credit Agreement and any replacements, refundings, refinancings and
substitute facility or facilities thereof, in whole or in part, and additional
facility or facilities (provided that Indebtedness under the New Credit
Agreement and any such replacements, refundings, refinancings and substitute and
additional facility or facilities, including unused commitments, shall not at
any time exceed $700 million in aggregate outstanding principal amount
(including the available undrawn amount of any letters of credit issued under
the New Credit Agreement and any such replacements, refundings, refinancings,
and substitute and additional facility or facilities); (ii) Indebtedness of the
Company and its Restricted Subsidiaries, which Indebtedness is in existence on
the Closing Date (including any existing or future Guarantees of the Company's
11.25% Series A Senior Subordinated Notes due 2004, but excluding Indebtedness
permitted by clause (i) above); (iii) Indebtedness represented by the Notes;
(iv) Indebtedness of the Company and its Restricted Subsidiaries incurred in
exchange for, or the proceeds of which are used to extend, refinance, renew,
replace, substitute or refund, in whole or in part, Indebtedness (subject to the
following proviso, "Refinancing Indebtedness") permitted by clauses (ii) and
(iii) of this covenant; PROVIDED, HOWEVER, that (A) the
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principal amount of such Refinancing Indebtedness shall not exceed the principal
amount of Indebtedness (including unused commitments) so extended, refinanced,
renewed, replaced, substituted or refunded (plus costs of issuance), (B) such
Refinancing Indebtedness ranks, relative to the Notes, no more senior than the
Indebtedness being refinanced thereby (excluding the effect of the granting of
security for any Senior Indebtedness), (C) such Refinancing Indebtedness bears
interest at a market rate, (D) such Refinancing Indebtedness (1) shall have an
Average Life equal to or greater than the Average Life of the Indebtedness being
extended, refinanced, renewed, replaced, substituted or refunded and (2) shall
not have a Stated Maturity prior to the Stated Maturity of the Indebtedness
being extended, refinanced, renewed, replaced, substituted or refunded, (E) such
Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted
Subsidiary (other than Guarantees by a Restricted Subsidiary of (i) Senior
Indebtedness or (ii) Refinancing Indebtedness the proceeds of which are used to
extend, refinance, renew, replace, substitute or refund Indebtedness that was
Guaranteed by such Restricted Subsidiary) that refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary; (v) Indebtedness of the
Company or any Restricted Subsidiary to any Restricted Subsidiary or to the
Company; PROVIDED, HOWEVER, that any subsequent issuance or transfer of any
Capital Stock or any other event that results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of any such
Indebtedness (except to the Company or a Restricted Subsidiary) will be deemed,
in each case, to constitute the incurrence of such Indebtedness by the issuer
thereof; (vi) Indebtedness arising from Guarantees, letters of credit, and bid,
performance or surety bonds or similar bonds or instruments securing any
obligations of the Company or any Restricted Subsidiary incurred in the ordinary
course of business, which Guarantees, letters of credit, bonds or similar
instruments do not secure other Indebtedness; (vii) Indebtedness (including
Capitalized Lease Obligations) incurred by the Company or any of its Restricted
Subsidiaries to finance the purchase, lease or improvement of property (real or
personal) (whether through the direct purchase, lease or improvement of assets
or purchase of the Equity Interests of any Person owning such assets) in an
aggregate principal amount outstanding not to exceed 5% of Total Assets of the
Company at the time of any incurrence thereof (including any Refinancing
Indebtedness with respect thereto); (viii) Non-Recourse Indebtedness incurred in
connection with the acquisition of real and/or personal property by the Company
or its Restricted Subsidiaries; provided that such Indebtedness was in existence
prior to the time of such acquisition and was not incurred by the Person from
whom such property was acquired in contemplation of such acquisition or in order
to provide all or any portion of the funds or credit support utilized to
consummate such acquisition; (ix) Guarantees of any Senior Indebtedness; (x)
Indebtedness under Hedging Obligations entered into for bona fide hedging
purposes of the Company and not for speculative purposes; PROVIDED, HOWEVER,
that such Hedging Obligations do not increase the Indebtedness of the Company
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates, as applicable, or by reason of fees,
indemnities and compensation payable thereunder; and (xi) Indebtedness other
than that permitted pursuant to the foregoing clauses (i) through (x) provided
that the aggregate outstanding amount of such additional Indebtedness does not
at any time exceed $50 million, all or any portion of which Indebtedness,
notwithstanding clause (i) above, may be incurred pursuant to the New Credit
Agreement and any replacements, refinancings, refundings, and substitute
facility or facilities thereof, in whole or in part, and additional facility or
facilities.
LIMITATION ON LIENS. The Indenture provides that the Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any of their respective
assets, now owned or hereinafter acquired, securing any Indebtedness that is
PARI PASSU with or subordinated in right of payment to the Notes, unless the
Notes are equally and ratably secured; provided that, if such Indebtedness is by
its terms expressly subordinate or junior in right of payment to the Notes, the
Lien securing such subordinate or junior Indebtedness shall be subordinate and
junior to the Lien securing the Notes with the same relative priority as such
subordinated or junior Indebtedness shall have with respect to the Notes. The
Company and its Restricted Subsidiaries may at
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any time, directly or indirectly, create, incur, assume or suffer to exist any
Lien on any of their respective assets, now owned or hereafter acquired,
securing any Senior Indebtedness permitted under the covenant described under
"--Limitation on Additional Indebtedness" above.
LIMITATION ON USE OF PROCEEDS FROM ASSET SALES. The Indenture provides that
the Company and its Restricted Subsidiaries shall not, directly or indirectly,
consummate any Asset Sale with or to any Person other than the Company or a
Restricted Subsidiary, unless (i) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of any such Asset Sale at
least equal to the fair market value of the asset sold or otherwise disposed of,
(ii) at least 70% of the net proceeds from such Asset Sale are received in Cash
at closing (unless (A) such Asset Sale is a lease, or (B) such Asset Sale is in
connection with the creation of, Investment in, or issuance or sale of Equity
Interests by, a Permitted Joint Venture of the Company or of a Restricted
Subsidiary or other Permitted Investment) and (iii) with respect to any Asset
Sale involving the Equity Interest of any Restricted Subsidiary (unless such
Restricted Subsidiary is, or as a result of such Asset Sale would be, a
Permitted Joint Venture of the Company or of a Restricted Subsidiary or other
Permitted Investment), the Company shall sell all of the Equity Interests of
such Restricted Subsidiary it owns. Within 365 days after the receipt of Net
Cash Proceeds in respect of any Asset Sale, the Company must use all such Net
Cash Proceeds either to invest in properties and assets used in a Healthcare
Service Business (including, without limitation, a capital investment in any
Person which becomes a Restricted Subsidiary) or to reduce Senior Indebtedness;
PROVIDED, that when any non-Cash proceeds are liquidated, such proceeds (to the
extent they are Net Cash Proceeds) will be deemed to be Net Cash Proceeds at
that time. When the aggregate amount of Excess Proceeds (as defined below)
exceeds $20 million, the Company shall make an offer (the "Excess Proceeds
Offer") to apply the Excess Proceeds to repurchase the Notes at a purchase price
equal to 100% of the principal amount of such Notes, plus accrued and unpaid
interest to the date of purchase. The Excess Proceeds Offer shall be made
substantially in accordance with the procedures for a Change of Control Offer
described under "--Change of Control" above. To the extent that the aggregate
principal amount of the Notes (plus accrued interest thereon) tendered pursuant
to the Excess Proceeds Offer is less than the Excess Proceeds, the Company may
use such deficiency, or a portion thereof, for general corporate purposes. If
the aggregate principal amount of the Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Company shall select the Notes to be
purchased in accordance with the procedures described above under "--Selection
and Notice." "Excess Proceeds" shall mean any Net Cash Proceeds from an Asset
Sale that is not invested or used to reduce Senior Indebtedness as provided in
the second sentence of this paragraph. Notwithstanding the foregoing, any Asset
Sale which results in Net Cash Proceeds of less than $5 million and all Asset
Sales (including any Asset Sale which results in Net Cash Proceeds of less than
$5 million) in any twelve consecutive-month period which result in Net Cash
Proceeds of less than $10 million in the aggregate shall not be subject to the
requirement of clause (ii) of the first sentence of this paragraph.
The Company will comply with the requirements of Regulation 14E and Rule
13e-4 (other than the filing requirements of such rule) under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes
pursuant to an Excess Proceeds Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Indenture provides that
the Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or conduct any transaction (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") (i) on
terms that are materially less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arm's-length dealings with a Person who is not such an
Affiliate and (ii) that, in the event such Affiliate Transaction involves an
aggregate amount in excess of $15 million, are not in writing and have not been
approved by a majority of the Disinterested Directors. In
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addition, if such Affiliate Transaction involves an amount in excess of $30
million, a fairness opinion must be provided by a nationally recognized
appraisal or investment banking firm.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"--Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors, (iii) loans or advances to employees in the
ordinary course of business in accordance with past practices of the Company,
but in any event not to exceed $7.5 million in the aggregate outstanding at any
one time, (iv) the payment of reasonable fees to directors of the Company and
its Subsidiaries who are not employees of the Company or its Subsidiaries, (v)
any transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries or (vi) arrangements in existence as of the date hereof
with Persons that employ staff providers and which provide service exclusively
on behalf of the Company and its Subsidiaries, which arrangements are not
material to the Company and its Subsidiaries taken as a whole.
MERGER, CONSOLIDATION OR SALE OF ASSETS. The Indenture provides that the
Company shall not consolidate with, merge with or into, or transfer all or
substantially all of its assets (in one transaction or a series of related
transactions) to, any Person or permit any party to merge with or into it
unless: (i) the Company shall be the continuing Person, or the Person (if other
than the Company) (the "Successor Company") formed by such consolidation or into
or with which the Company is merged or to which the properties and assets of the
Company are transferred shall be a corporation organized and existing under the
laws of the United States or any State thereof or the District of Columbia and
shall expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all of the obligations of the
Company under the Notes and the Indenture and the Indenture remains in full
force and effect; (ii) immediately before and immediately after giving effect to
such transaction (and treating any Indebtedness which becomes an obligation of
the Company, the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been incurred by the Company, the Successor Company
or such Restricted Subsidiary at the time of such transaction), no Event of
Default or Default shall have occurred and be continuing; (iii) except in the
case of a merger of the Company with a wholly-owned subsidiary (which does not
have assets or liabilities in excess of $1 million) of a newly-formed holding
company for the sole purpose of forming a holding company structure, the Company
or the Successor Company, as applicable, could, after giving pro forma effect to
such transaction, incur $1.00 of Indebtedness pursuant to the first paragraph of
"--Limitation on Additional Indebtedness" and (iv) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture. Notwithstanding the foregoing
clauses (ii) and (iii), (a) any Restricted Subsidiary may consolidate with,
merge into or transfer all or part of its properties and assets to the Company
or another Restricted Subsidiary and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, and the
predecessor Company in the case of a conveyance, transfer or lease of all or
substantially all its assets will be released from all obligations under the
Indenture, including, without limitation, any obligation to pay the principal of
and interest on the Notes.
PAYMENT FOR CONSENT. The Indenture provides that neither the Company nor
any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any holder
of any Notes for or as an inducement to obtaining any consent, waiver or
amendment of, or direction in respect of, any of the terms or provisions of the
Indenture or the Notes, unless such consideration is offered or agreed to be
paid, and paid, to all holders of the Notes which so consent, waive, agree or
direct to amend in the time frame set forth in solicitation documents relating
to such consent, waiver, agreement or direction.
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PROVISIONS OF REPORTS AND OTHER INFORMATION. The Indenture provides that at
all times while any Note is outstanding, the Company shall timely file with the
Commission and furnish to each holder of Notes all such reports and other
information as required by Section 13 or 15(d) of the Exchange Act, including,
without limitation, Forms 10-K, 10-Q and 8-K. At such time as the Company is not
subject to the reporting requirements of the Exchange Act, promptly after the
same would be required to be filed with the Commission if the Company then were
subject to Section 13 or 15(d) of the Exchange Act, the Company will file with
the Trustee and supply to each holder of the Notes and, upon request, to any
prospective purchaser of Notes, without cost, copies of its financial statements
and certain other reports or information comparable to that which the Company
would have been required to report pursuant to Sections 13 and 15(d) of the
Exchange Act, including, without limitation, the information that would be
required by Forms 10-K, 10-Q and 8-K.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in payment of interest on the Notes, whether or
not prohibited by provisions described under
"--Subordination" above; (ii) default in payment when due of principal of or
premium, if any, on the Notes, whether at maturity, or upon acceleration,
redemption or otherwise, whether or not prohibited by provisions described under
"--Subordination" above; (iii) failure by the Company to comply with its
obligations under the covenant described under "--Merger, Consolidation or Sale
of Assets" above, (iv) failure by the Company to comply in any respect with any
of its other agreements in the Indenture or the Notes which failure continues
for 30 days after receipt of a written notice from the Trustee or holders of at
least 25% of the aggregate principal amount of the Notes then outstanding,
specifying such Default and requiring that it be remedied; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness of the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company or
any of its Restricted Subsidiaries) whether such Indebtedness is now existing or
hereafter created, which default results from the failure to pay any such
Indebtedness at its stated final maturity or results in the acceleration of such
Indebtedness prior to its stated final maturity and the principal amount of such
Indebtedness is at least $20 million, or the principal amount of such
Indebtedness, together with the principal amount of any other such Indebtedness
the maturity of which has been accelerated, aggregates $35 million or more; (vi)
failure by the Company or any Restricted Subsidiary to pay final judgments
aggregating in excess of $20 million which judgments are not paid, discharged or
stayed within 60 days after their entry; and (vii) certain events of bankruptcy
or insolvency with respect to the Company and its Restricted Subsidiaries.
If an Event of Default occurs and is continuing and if it is known to the
Trustee, the Trustee shall mail to each holder of the Notes notice of the Event
of Default within 90 days after it becomes known to the Trustee, unless such
Event of Default has been cured or waived. Except in the case of an Event of
Default in the payment of principal of, premium, if any, or interest on any
Note, the Trustee may withhold the notice if and so long as a committee of its
trust officers in good faith determines that withholding the notice is in the
interest of the holders of the Notes.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization) occurs and is continuing, the Trustee
or the holders of at least 25% of the principal amount of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such notice
is given by such holders) (the "Acceleration Notice"), may, and the Trustee at
the request of such holders shall, declare all unpaid principal of, premium, if
any, and accrued interest on such Notes to be due and payable immediately. Upon
a declaration of acceleration, such principal, premium, if any, and accrued
interest shall be due and payable. If an Event of Default resulting from certain
events of bankruptcy, insolvency or reorganization occurs, all unpaid principal
of, premium, if any, and accrued interest on the Notes then outstanding shall
IPSO FACTO become and be immediately due and payable
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without any declaration or other act on the part of the Company, the Trustee or
any holder. The holders of a majority of the aggregate principal amount of the
Notes outstanding by notice to the Trustee may rescind an acceleration and its
consequences, except an acceleration due to default in payment of principal or
interest on the Notes upon conditions provided in the Indenture. Subject to
certain restrictions set forth in the Indenture, the holders of a majority of
the aggregate principal amount of the outstanding Notes by notice to the Trustee
may waive an existing Default or Event of Default and its consequences, except a
Default in the payment of principal of, premium, if any, or interest on, such
Notes or a Default under a provision which requires consent of all holders to
amend. When a Default or Event of Default is waived, it is cured and ceases to
exist, but no waiver shall extend to any subsequent or other Default or impair
any consequent right. A holder of Notes may not pursue any remedy with respect
to the Indenture or the Notes unless: (i) the holder gives to the Trustee
written notice of a continuing Event of Default; (ii) the holders of at least
25% in principal amount of such Notes outstanding make a written request to the
Trustee to pursue the remedy; (iii) such holder or holders offer to the Trustee
indemnity or security satisfactory to the Trustee against any loss, liability or
expense; (iv) the Trustee does not comply with the request within 30 days after
receipt thereof and the offer of indemnity or security; and (v) during such
30-day period the holders of a majority of the aggregate principal amount of the
outstanding Notes do not give the Trustee a direction which is inconsistent with
the request.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver a statement to the
Trustee specifying such Default or Event of Default.
DEFEASANCE AND DISCHARGE OF THE INDENTURE AND THE NOTES
The Indenture provides that the Company may, at its option and at any time,
elect to have the obligations of the Company discharged with respect to the
outstanding Notes ("legal defeasance"). Such legal defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of holders of
outstanding Notes to receive solely out of the trust described below payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due, (ii) the obligations of the Company with respect to the
Notes concerning issuing temporary Notes, registration of Notes, replacing
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and (iv) the
defeasance provisions of the Indenture.
The Company may, at its option and at any time, elect to have its
obligations under the provisions "Certain Covenants" and "Change of Control"
discharged with respect to the outstanding Notes ("covenant defeasance"). Such
covenant defeasance means that, with respect to the outstanding Notes, the
Company may omit to comply with and shall have no liability in respect of any
term, condition or limitation set forth in any such provisions and such omission
to comply shall not constitute a Default or an Event of Default.
In order to exercise defeasance, (i) the Company must have irrevocably
deposited with the Trustee, in trust, for the benefit of the holders of the
Notes, cash in U.S. Dollars, U.S. Government Obligations (as defined in the
Indenture), or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity of such principal (and premium, if any) or installment of
interest or upon redemption; (ii) the Company shall have delivered to the
Trustee an opinion of counsel stating that the holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such defeasance had not occurred, which such opinion, in the case of legal
defeasance, will also state that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a
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ruling to such effect or (B) since the Closing Date there has been a change in
the applicable federal income tax laws or regulations to such effect or (C)
there exists controlling precedent to such effect; (iii) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit; (iv)
such defeasance shall not result in a breach or violation of or constitute a
default under any material agreement or instrument to which the Company is a
party or by which it is bound; and (v) the Company shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent to such defeasance have been satisfied.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder of the Company shall have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of such obligations or their
creation. Each holder of the Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that such
a waiver is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar may require a holder, among other things, to furnish appropriate
endorsements and transfer documents, and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar is not required to register a
transfer or exchange of any Note selected for redemption except for the
unredeemed portion of any Note being redeemed in part. Also, the Registrar is
not required to register a transfer or exchange of any Note for a period of 15
days before the mailing of a notice of redemption offer. The registered holder
of a Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Notes may be amended or
supplemented with the consent of the holders of a majority of the aggregate
principal amount of the Notes then outstanding, and any existing Default or
compliance with any provision may be waived (other than a continuing Default or
Event of Default in the payment of principal or interest on any Note) with the
consent of the holders of a majority of the aggregate principal amount of the
then outstanding Notes.
Without the consent of each holder affected, an amendment, supplement or
waiver may not (i) reduce the percentage of principal amount of the Notes whose
holders must consent to an amendment, supplement or waiver, (ii) change the
stated maturity or the time or currency of payment of the principal of, premium,
if any, or any interest on, or reduce the rate of interest on or principal of or
premium payable on any Note or alter the redemption provisions with respect
thereto, (iii) make any change in the subordination provisions of the Indenture
that adversely affects the rights of any holder of the Notes under the
subordination provisions of the Indenture, (iv) impair the right of any holder
to institute suit for the enforcement of any payment on or with respect to such
holder's Notes, (v) waive a default in the payment of the principal of, premium,
if any, or interest on, any Note, (vi) make any change to the provisions of the
Indenture relating to the Excess Proceeds Offer, (vii) make any change to the
"--Payment for Consent" covenant of the Indenture, or (viii) make any change in
the provision of the Indenture containing the terms described in this paragraph.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
certificated or uncertificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code) to provide for the assumption of
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the Company's obligations to holders of the Notes in the case of a merger or
consolidation, to make any change that does not adversely affect the rights of
any holder of the Notes or to comply with any requirement of the Commission in
connection with the qualification of the Indenture or the Trustee under the
Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days or apply to the Commission for permission
to continue or resign.
The holders of a majority of the aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care and skill of a prudent
person under the circumstances in the conduct of such person's own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any of the
holders of the Notes, unless they shall have offered to the Trustee security or
indemnity satisfactory to it against any loss, liability or expense.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. A Person shall be deemed to "control"
(including the correlative meanings, the terms "controlling," "controlled by,"
and "under common control with") another Person if the controlling Person (a)
possesses, directly or indirectly, the power to direct or cause the direction of
the management or policies of the controlled Person, whether through ownership
of voting securities, by agreement or otherwise, or (b) owns, directly or
indirectly, 10% or more of any class of the issued and outstanding equity
securities of the controlled Person.
"Asset Sale" means, with respect to any Person, the sale, lease, conveyance,
disposition or other transfer by such Person of any of its assets (including by
way of a sale-and-leaseback and including the sale or other transfer of any
Equity Interests in any Restricted Subsidiary) which results in proceeds with a
fair market value of $1 million or more. However, the following shall not
constitute an Asset Sale: (i) unless part of a disposition including other
assets or operations, (A) dispositions of Cash, Cash Equivalents and Investment
Grade Securities, (B) payments on or in respect of non-Cash proceeds of Asset
Sales, and (C) dispositions of Investments by foreign subsidiaries of the
Company in Cash and instruments or securities or in certificates of deposit (or
comparable instruments) with banks or similar institutions; (ii) the lease of
space in the ordinary course of business and in a manner consistent with either
past practices or the healthcare industry generally; or (iii) the issuance or
sale by the Company of any Equity Interests in the Company.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years
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from the date of determination to the dates of each successive scheduled
principal payment (assuming the exercise by the obligor of such Indebtedness of
all unconditional (other than as to the giving of notice) extension options of
each such scheduled payment date) of such Indebtedness or redemption or similar
payment with respect to such Preferred Stock multiplied by the amount of such
principal payment by (ii) the sum of all such principal payments.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the New Credit Agreement (and any substitutes, refundings, refinancings and
replacements thereof, in whole or in part) and all related documentation, as
amended from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, Guarantees and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease which
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock (including, without
limitation, common and preferred stock), excluding warrants, options or similar
instruments or other rights to acquire Capital Stock.
"Cash" means money or currency or a credit balance in a Deposit Account.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency,
instrumentality or sponsored corporation thereof which are rated at least A or
the equivalent thereof by Standard and Poor's Ratings Services ("S&P") or at
least A-2 or the equivalent thereof by Moody's Investor Services, Inc.
("Moody's") (or if at such time neither is issuing ratings, then a comparable
rating of another nationally recognized rating agency), and in each case having
maturities of not more than one year from the date of acquisition, (ii) time
deposits, certificates of deposit, Eurodollar time deposits, and overnight bank
deposits with any commercial bank of recognized standing, having capital and
surplus in excess of $250 million and the commercial paper of the holding
company of which is rated at least A-2 or the equivalent thereof by S&P or at
least P-2 or the equivalent thereof by Moody's (or if at such time neither is
issuing ratings, then a comparable rating of another nationally recognized
rating agency), or, if no such commercial paper rating is available, a long-term
debt rating of at least A or the equivalent thereof by S&P or at least A-2 or
the equivalent thereof by Moody's (or if at such time neither is issuing
ratings, then a comparable rating of another nationally recognized rating
agency), (iii) repurchase obligations with a term of not more than ninety-two
days for underlying securities of the types described in clause (i) above
entered into with any commercial bank meeting the qualifications specified in
clause (ii) above, (iv) other investment instruments offered or sponsored by
financial institutions having capital and surplus in excess of $250 million and
the commercial paper of the holding company of which is rated at least A-2 or
the equivalent thereof by S&P or at least P-2 or the equivalent thereof by
Moody's (or if at such time neither is issuing ratings, then a comparable rating
of another nationally recognized rating agency), or, if no such commercial paper
rating is available, a long-term debt rating of at least A or the equivalent
thereof by S&P or at least A-2 or the equivalent thereof by Moody's (or if at
such time neither is issuing ratings, then a comparable rating of another
nationally recognized rating agency), (v) readily marketable direct obligations
issued by any state of the United States of America or any political subdivision
thereof having one of the two highest rating categories obtainable from either
Moody's or S&P (or if at such time neither is issuing ratings, then a comparable
rating of another nationally recognized rating agency), (vi) commercial paper
rated at least A-2 or the equivalent thereof by S&P or at least P-2 or the
equivalent thereof by Moody's (or if at
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such time neither is issuing ratings, then a comparable rating of another
nationally recognized rating agency), in each case maturing within one year
after the date of acquisition and (vii) other money market investments with a
weighted average maturity of less than one year in an aggregate amount not to
exceed $10 million at any time outstanding.
"Change of Control" means (a) the sale, lease, transfer or other disposition
in one or more related transactions of all or substantially all of the Company's
assets, or the sale of substantially all of the Capital Stock or assets of the
Company's Subsidiaries that constitutes a sale of substantially all of the
Company's assets, to any Person or group (as such term is used in Section
13(d)(3) of the Exchange Act), (b) the merger or consolidation of the Company
with or into another corporation, or the merger of another corporation into the
Company or any other transaction, with the effect, in any such case, that the
stockholders of the Company immediately prior to such transaction hold 50% or
less of the total voting power entitled to vote in the election of directors,
managers or trustees of the surviving corporation or, in the case of a
triangular merger, the parent corporation of the surviving corporation resulting
from such merger, consolidation or such other transaction, (c) any Person
(except for the parent corporation of the surviving corporation in a triangular
merger) or group acquires beneficial ownership of a majority in interest of the
voting power or voting Capital Stock of the Company, or (d) the liquidation or
dissolution of the Company; PROVIDED, HOWEVER, that in no event shall the sale
of any Equity Interests in, or assets of, Charter Behavioral Health Systems,
LLC, Charter Advantage, LLC, or Charter System, LLC, be deemed to constitute a
sale of all or substantially all of the Company's assets.
"Closing Date" means February 12, 1998.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Interest Coverage Ratio" means the ratio of (i)
Consolidated Net Income plus the sum of Consolidated Interest Expense, income
tax expense, depreciation expense, amortization expense and other non-cash
charges of the Company and its Restricted Subsidiaries (to the extent such items
were deducted in computing Consolidated Net Income of the Company)
(collectively, "EBITDA") for the preceding four fiscal quarters to (ii) the
Consolidated Cash Interest Expense of the Company and its Restricted
Subsidiaries for the preceding four fiscal quarters; PROVIDED that (without
duplication) (A) if the Company or any of its Restricted Subsidiaries incurs,
assumes, guarantees, repays or redeems any Indebtedness subsequent to the
commencement of the period for which the Consolidated Cash Interest Coverage
Ratio is being calculated but prior to the event for which the calculation of
the Consolidated Cash Interest Coverage Ratio is made or if the transaction
giving rise to the need to calculate the Consolidated Cash Interest Coverage
Ratio is an incurrence, assumption, Guarantee, repayment or redemption of
Indebtedness, then the Consolidated Cash Interest Coverage Ratio will be
calculated giving pro forma effect to any such incurrence, assumption,
Guarantee, repayment or redemption of Indebtedness, as if the same had occurred
at the beginning of the applicable period, (B) if the Company or any Restricted
Subsidiary shall have made any Material Asset Sale subsequent to the
commencement of the period for which the Consolidated Cash Interest Coverage
Ratio is being calculated but prior to the event for which the calculation of
the Consolidated Cash Interest Coverage Ratio is made, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets that are the subject of such Material Asset Sale for
such period or increased by an amount equal to the EBITDA (if negative) directly
attributable thereto for such period and Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
for such period directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in connection
with such Material Asset Sale (or, if the Equity Interests of any Restricted
Subsidiary are sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (C) if the Company or any Restricted Subsidiary
(by merger or otherwise) shall have made an Investment in any
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Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or an
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
Investment or acquisition of assets constitutes all or substantially all an
operating unit of a business subsequent to the commencement of the period for
which the Consolidated Cash Interest Coverage Ratio is being calculated but
prior to the event for which the calculation of the Consolidated Cash Interest
Coverage Ratio is made, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
incurrence, assumption, Guarantee, repayment or redemption of any Indebtedness
and any pro forma expense and cost reductions that are directly attributable to
such transaction), as if such Investment or acquisition occurred at the
beginning of the applicable period and (D) if subsequent to the commencement of
the period for which the Consolidated Cash Interest Coverage Ratio is being
calculated but prior to the event for which the calculation of the Consolidated
Cash Interest Coverage Ratio is made any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Material
Asset Sale or any Investment or acquisition of assets that would have required
an adjustment pursuant to clause (B) or (C) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Material Asset Sale, Investment or acquisition of assets
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is given for a transaction, the pro forma calculation
shall be made in good faith by a responsible financial or accounting officer of
the Company. In making such calculations on a pro forma basis, interest
attributable to Indebtedness bearing a floating interest rate shall be computed
as if the rate in effect on the date of computation had been the applicable rate
for the entire period.
"Consolidated Cash Interest Expense" of any Person means, for any period for
which the determination thereof is to be made, the Consolidated Interest Expense
of such Person less, to the extent incurred, assumed or Guaranteed by such
Person and its Subsidiaries in such period and included in such Consolidated
Interest Expense (i) deferred financing costs and (ii) other noncash interest
expense; PROVIDED, HOWEVER, that amortization of original issue discount shall
be included in Consolidated Cash Interest Expense.
"Consolidated Interest Expense" of any Person means, for any period for
which the determination thereof is to be made, the total interest expense of
such Person and its consolidated Restricted Subsidiaries, plus, without
duplication, to the extent incurred, assumed or Guaranteed by such Person and
its Subsidiaries in such period but not included in such interest expense,
(A)(i) all commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing, (ii) all but the
principal component of rentals in respect of Capital Lease Obligations, paid,
accrued or scheduled to be paid or accrued by such Person during such period,
(iii) capitalized interest, (iv) amortization of original issue discount and
deferred financing costs, (v) noncash interest expense, (vi) interest accruing
on any Indebtedness of any other Person to the extent such Indebtedness is
Guaranteed by such Person or any of its Restricted Subsidiaries; PROVIDED that
payment of such amounts by the Company or any Restricted Subsidiary is being
made to, or is sought by, the holders of such Indebtedness pursuant to such
guarantee, (vii) net costs (benefits) associated with Hedging Obligations
relating to interest rate protection (including amortization of fees), (viii)
Preferred Stock dividends in respect of all Preferred Stock of the Subsidiaries
of such Person and Redeemable Stock of such Person held by Persons other than
such Person or a Wholly-owned Subsidiary of such Person, and (ix) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than such Person) in connection with Indebtedness incurred,
assumed or Guaranteed by such plan or trust, all as determined in accordance
with GAAP, less (B) interest expense of the type described in clause (A) above
attributable to Unrestricted Subsidiaries of such Person to the extent the
related Indebtedness is not Guaranteed or paid by such Person or any Restricted
Subsidiary of such Person.
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"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP, plus the
sum of the amount allocated to excess reorganization value, employee stock
ownership plan expense and consolidated stock option expense (to the extent such
items were taken into account in computing the Net Income of such Person and its
Subsidiaries); PROVIDED, HOWEVER, that (i) the Net Income of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions actually paid in cash to the referent Person or its Restricted
Subsidiaries, (ii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iii) the cumulative effect of a change in accounting principles
shall be excluded and (iv) any net income (loss) of any Restricted Subsidiary of
such Person if such Restricted Subsidiary of such Person is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to such
Person that violate the covenant described under "--Limitation on Payment
Restrictions Affecting Restricted Subsidiaries" (without giving effect to clause
(6) thereof with respect to any Indebtedness) shall be excluded, except that (A)
such Persons's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such Restricted
Subsidiary during such period to the Company or another Restricted Subsidiary as
a dividend or otherwise (subject, in the case of a dividend or distribution that
could have been made to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any such
Restricted Subsidiary for such period shall be included in determining such
Consolidated Net Income.
Notwithstanding the foregoing, for the purpose of the covenant described
under "--Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets or other amounts from or in respect of Unrestricted
Subsidiaries to such Person or a Restricted Subsidiary of such Person to the
extent such dividends, repayments or transfers or other amounts increase the
amount of Restricted Payments permitted under such covenant pursuant to clause
(F) of paragraph (b) thereof.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Deposit Account" means a demand, savings, passbook, money market or like
account with or sponsored by a commercial bank, financial institution,
investment bank or brokerage firm, savings and loan association or like
organization or a government securities dealer, other than an account evidenced
by a negotiable certificate of deposit.
"Disinterested Director" means, with respect to any specific transaction,
any director of the Company that does not have a direct or indirect interest
(other than any interest resulting solely from such director's ownership of
Equity Interests in the Company) in such transaction.
"Equity Interests" means (a) Capital Stock, warrants, options or similar
instruments or other rights to acquire Capital Stock (but excluding any debt
security which is convertible into, or exchangeable for, Capital Stock), and (b)
limited and general partnership interests, interests in limited liability
companies, joint venture interests and other ownership interests in any Person.
"Equity Offering" means an underwritten primary public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act or a private primary offering of common stock of the Company.
"ESOP" means the Employee Stock Ownership Plan of the Company as established
on September 1, 1988, and effective as of January 1, 1988, as from time to time
amended, and/or the trust created in accordance with such plan pursuant to the
Trust Agreement between the Company and the trustee
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named therein, executed as of September 1, 1988, as amended, as the context in
which the term "ESOP" is used permits.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
as in effect on the Closing Date.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by arrangements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include (i) endorsements
for collection or deposit in the ordinary course of business or (ii) obligations
under preferred provider arrangements with Charter Behavioral Health Systems,
LLC and its Affiliates related to the purchase of minimum amounts of behavioral
healthcare services at market rates. The term "Guarantee" used as a verb has a
corresponding meaning.
"Healthcare Service Business" means a business, the majority of whose
revenues are derived from providing or arranging to provide or administering,
managing or monitoring healthcare services or any business or activity that is
reasonably similar thereto or a reasonable extension, development or expansion
thereof or ancillary thereto.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"Indebtedness" of any Person means, without duplication at the date of
determination thereof, (i) the principal of and premium (if any) in respect of
indebtedness of such Person for borrowed money (including in respect of
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments) or for the deferred purchase price of property or services
(other than (a) trade payables on terms of 365 days or less incurred in the
ordinary course of business, (b) deferred earn-out and other performance-based
payment obligations incurred in connection with acquisitions of Healthcare
Service Businesses and (c) obligations under preferred provider arrangements
with Charter Behavioral Health Systems, LLC and its Affiliates related to the
purchase of minimum amounts of behavioral healthcare services at market rates),
all as determined in accordance with GAAP, (ii) all Capital Lease Obligations of
such Person, (iii) all Guarantees of such Person in respect of Indebtedness of
others, (iv) the aggregate amount of all unreimbursed drawings in respect of
letters of credit or other similar instruments issued for the account of such
Person (less the amount of Cash, Cash Equivalents or Investment Grade Securities
on deposit securing reimbursement obligations in respect of such letters of
credit or similar instruments), (v) all indebtedness, obligations or other
liabilities of such person or of others for borrowed money secured by a Lien on
any property of such Person, whether or not such indebtedness, obligations or
liabilities are assumed by such Person, (vi) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Redeemable Stock and, with respect to any Subsidiary of the Company, any
Preferred Stock (but excluding, in each case, any accrued dividends); and (vii)
to the extent not otherwise included in this definition actual (rather than
notional) liabilities under Hedging Obligations of such Person; PROVIDED,
HOWEVER, that all or any portion
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of Indebtedness that becomes the subject of a defeasance (whether a "legal"
defeasance or a "covenant" or "in substance" defeasance) shall, at all times
that such defeasance remains in effect, cease to be treated as Indebtedness for
purposes of the Indenture.
"Investment" means, when used with respect to any Person, any direct or
indirect advance, loan or other extension of credit (other than the creation of
receivables in the ordinary course of business) or capital contribution by such
Person (by means of transfers of cash or property (other than Equity Interests
in the Company) to others or payments for property or services for the account
or use of others, or otherwise) to any other Person, or any direct or indirect
purchase or other acquisition by such Person of a beneficial interest in capital
stock, bonds, notes, debentures or other securities issued by any other Person,
or any Guarantee by such Person of the Indebtedness of any other Person (in
which case such Guarantee shall be deemed an Investment in such other Person in
an amount equal to the aggregate amount of Indebtedness so guaranteed). For
purposes of the definition of "Unrestricted Subsidiary" and the covenant
described under "--Limitation on Restricted Payments," (i) "Investment" shall
include the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of any Subsidiary of the
Company at the time that such Subsidiary is designated an Unrestricted
Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in the case of property with a fair market value
of up to $15 million, as determined in good faith by a responsible financial
officer of the Company, and in the case of property with a fair market value in
excess of $15 million, as determined in good faith by the Board of Directors.
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P, Baa3 or higher by
Moody's or Class (2) or higher by NAIC or the equivalent of such rating by such
rating organization, or, if no rating of S&P, Moody's or NAIC then exists, the
equivalent of such rating by any other nationally recognized securities rating
agency, but excluding any debt securities or instruments constituting loans or
advances among the Company and its Subsidiaries, and (iii) investments in any
fund that invests exclusively in investments of the type described in clauses
(i) and (ii) which fund may also hold immaterial amounts of Cash or Cash
Equivalents pending investment and/or distribution.
"Lien" means any mortgage, pledge, security interest, charge, hypothecation,
collateral assignment, deposit arrangement, encumbrance, lien (statutory or
otherwise), or security agreement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing and the filing of any financing statement, other than notice or
precautionary filings not perfecting a security interest, under the Uniform
Commercial Code or comparable law of any jurisdiction, domestic or foreign, in
respect of any of the foregoing).
"Material Asset Sale" means any Asset Sale exceeding $25 million of all or
substantially all of an operating unit of a business.
"NAIC" means National Association of Insurance Commissioners.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds of
such Asset Sale in the form of Cash or Cash Equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not the interest, component thereof) when received in the form of
Cash or Cash Equivalents (except to the extent such obligations are financed or
sold with recourse to
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the Company or any Restricted Subsidiary of the Company), casualty loss
insurance proceeds, condemnation awards and proceeds from the conversion of
other property received when converted to Cash or Cash Equivalents, net of (i)
brokerage commissions and other fees and expenses related to such Asset Sale,
(ii) provision for all taxes as a result of such Asset Sale without regard to
the consolidated results of operations of the Company and its Subsidiaries,
taken as a whole, (iii) payments made to repay Indebtedness or any other
obligation outstanding at the time of such Asset Sale that either, (A) in the
case of a sale of all of the Equity Interests in any Restricted Subsidiary, is a
direct obligation of such Restricted Subsidiary or (B) is secured by the asset
subject to such sale or was incurred to finance the acquisition or construction
of, improvements on, or operations related to, the assets subject to such sale
and (iv) appropriate amounts to be provided by the Company or any Restricted
Subsidiary of the Company as a reserve against any liabilities associated with
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under indemnification obligations associated with such
Asset Sale, all as determined in conformity with GAAP.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with any Asset Sale (including, without limitation,
dispositions pursuant to Sale/Leaseback Transactions) not in the ordinary course
of business, and excluding any extraordinary, unusual, non-recurring or similar
type of gain or loss, together with any related provision for taxes.
"New Credit Agreement" means (a) the Credit Agreement, to be dated as of the
Closing Date, among the Company, the banks and other financial institutions
named therein and The Chase Manhattan Bank, as Administrative Agent, and (b)
each note, guaranty, mortgage, pledge agreement, security agreement, indemnity,
subrogation and contribution agreement, and other instruments and documents from
time to time entered into pursuant to or in respect of either such credit
agreement or any such guaranty, as each such credit agreement and other
documents may be amended, restated, supplemented, extended, renewed, increased,
replaced, substituted, refunded, refinanced or otherwise modified from time to
time, in whole or in part.
"Non-Recourse Indebtedness" shall mean any Indebtedness of the Company or
any of its Restricted Subsidiaries if the holder of such Indebtedness has no
recourse, direct or indirect, absolute or contingent, to the general assets of
the Company or any of its Restricted Subsidiaries.
"Permitted Asset Swap" means any one or more transactions in which the
Company or any of its Restricted Subsidiaries exchanges assets for consideration
consisting of Equity Interests in or assets of a Person engaged in a Healthcare
Service Business or assets of a Person the Company or any of its Restricted
Subsidiaries intends to use in a Healthcare Service Business, and, to the extent
necessary to equalize the value of the assets being exchanged, cash; PROVIDED
that cash does not exceed 30% of the sum of the amount of the cash and the fair
market value of the Equity Interests or assets received or given by the Company
and its Restricted Subsidiaries in such transaction.
"Permitted Investments" means (a) any Investment in the Company, any
Restricted Subsidiary or any Permitted Joint Venture of the Company or of a
Restricted Subsidiary that in each case is a Healthcare Service Business; (b)
any Investment in Cash and Cash Equivalents or Investment Grade Securities; (c)
any Investment by the Company or any Restricted Subsidiary of the Company in a
Person that is engaged in the Healthcare Service Business if as a result of such
Investment (i) such Person becomes a Restricted Subsidiary or a Permitted Joint
Venture of the Company or of a Restricted Subsidiary or (ii) such Person, in one
transaction or a series of related transactions, is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary or a
Permitted Joint Venture of the Company or of a Restricted Subsidiary; (d) any
Investment in securities or other assets not constituting Cash or Cash
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Equivalents and received in connection with an Asset Sale made pursuant to the
provisions of "--Limitation on Use of Proceeds from Asset Sales" or any other
disposition of assets not constituting an Asset Sale; (e) any Investment
existing on the Closing Date; (f) any transaction to the extent it constitutes
an Investment that is permitted by and made in accordance with the provisions of
clause (ii) of paragraph (b) of the covenant described under "--Limitation on
Transactions with Affiliates"; (g) any Investment in Healthcare Service
Businesses having an aggregate fair market value, taken together with all other
Investments made pursuant to this clause (g) that are at that time outstanding
(and not including any Investments outstanding on the Closing Date), not to
exceed 5% of Total Assets of the Company at the time of such Investment (with
the fair market value of each Investment being measured at the time made and
without giving effect to subsequent changes in value); (h) any Investment by
Restricted Subsidiaries in other Restricted Subsidiaries and Investments by
Subsidiaries of the Company that are not Restricted Subsidiaries in Subsidiaries
of the Company that are not Restricted Subsidiaries; (i) advances to employees
in the ordinary course of business not in excess of $7.5 million outstanding at
any one time; (j) any Investment acquired by the Company or any of its
Restricted Subsidiaries (i) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in connection
with or as a result of a bankruptcy, workout, reorganization or recapitalization
of the issuer of such other Investment or accounts receivable or (ii) as a
result of a foreclosure by the Company or any of its Restricted Subsidiaries
with respect to any secured Investment or other transfer of title with respect
to any secured Investment in default; (k) Hedging Obligations; (l) Investments
the payment for which consists exclusively of Equity Interests (other than
Redeemable Stock) of the Company; (m) Investments made in connection with
Permitted Asset Swaps; and (n) additional Investments having an aggregate fair
market value, taken together with all other Investments made pursuant to this
clause (n) that are at that time outstanding, not to exceed $30 million at the
time of such Investment (with fair market value of each Investment being
measured at the time made and without giving effect to subsequent changes in
value).
"Permitted Joint Venture" means, with respect to any Person, (i) any
corporation, association, limited liability company or other business entity
(other than a partnership) (A) of which 50% or more of the total voting power of
shares of Capital Stock or other Equity Interests entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the
Restricted Subsidiaries of that Person or a combination thereof and (B) which is
either managed or controlled by such Person or any of its Restricted
Subsidiaries and (ii) any partnership of which (x) 50% or more of the general or
limited partnership interests are owned or controlled, directly or indirectly,
by such Person or one or more of the Restricted Subsidiaries of that Person or a
combination thereof and (y) which is either managed or controlled by such Person
or any of its Restricted Subsidiaries, and which in the case of each of clauses
(i) and (ii) is engaged in a Healthcare Service Business; PROVIDED, HOWEVER,
that none of Charter Behavioral Health Systems, LLC or any of its Affiliates
shall in any event be deemed to be a Permitted Joint Venture of the Company or
of a Restricted Subsidiary (provided that for the purposes of this proviso the
Company and its Subsidiaries shall not be considered Affiliates of Charter
Behavioral Health Systems, LLC).
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint-stock company, limited
liability company, trust, unincorporated organization or government or other
agency or political subdivision thereof or other entity of any kind.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Prior Purchase Money Obligations" means purchase money obligations relating
to property acquired by the Company or any of its Restricted Subsidiaries in the
ordinary course of business that
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existed prior to the acquisition of such property by the Company or any of its
Restricted Subsidiaries and that impose restrictions of the nature described
under "--Limitation on Payment Restrictions Affecting Restricted Subsidiaries"
on the property so acquired.
"Redeemable Stock" means any Equity Interest which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable or exercisable), or upon the happening of any event, (i) matures or
is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Redeemable Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to four months after the stated maturity of the Notes.
"Representative" means the trustee, agent or representative (if any) for an
issue of Specified Senior Indebtedness.
"Restricted Subsidiary" means each of the Subsidiaries of the Company that
has not been designated an Unrestricted Subsidiary.
"Rights Plan" means the Company's Share Purchase Rights Plan, dated July 21,
1992, as amended, restated, supplemented or otherwise modified from time to
time.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person, other than leases between the Company and a
Wholly-owned Subsidiary or between Wholly-owned Subsidiaries.
"Secured Indebtedness" means any Indebtedness secured by a Lien.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank PARI PASSU with the Notes and is not subordinated by its terms to any
Indebtedness or other obligation of the Company which is not Senior
Indebtedness.
"Senior Indebtedness" means the principal of and premium, if any, and
interest on (such interest on Senior Indebtedness, wherever referred to in the
Indenture, is deemed to include interest accruing after the filing of a petition
initiating any proceeding pursuant to any bankruptcy law in accordance with and
at the rate (including any rate applicable upon any default or event of default,
to the extent lawful) specified in any document evidencing the Senior
Indebtedness, whether or not the claim for such interest is allowed as a claim
after such filing in any proceeding under such bankruptcy law) and other amounts
(including, but not limited to, fees, expenses, reimbursement obligations in
respect of letters of credit and indemnities) due or payable from time to time
on or in connection with any Indebtedness of the Company incurred pursuant to
the first paragraph of the "Limitation on Additional Indebtedness" covenant
described above or permitted under clauses (i), (ii), (iv), (vi), (vii), (viii),
(ix), (x) and (xi) of the second paragraph under "--Limitation on Additional
Indebtedness" described above, in each case whether outstanding on the Closing
Date or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
shall not include (a) any Indebtedness of the Company to any of its Subsidiaries
or other Affiliates, (b) any Indebtedness incurred after the Closing Date that
is contractually subordinated in right of payment to any Senior Indebtedness,
(c) amounts owed (except to banks and other financial institutions) for goods,
materials or services purchased in the ordinary course of business or for
compensation to employees, (d) any liability for Federal, state, local or other
taxes owed or owing by the Company, (e) any obligations with respect to any
Capital Stock, or (f) any Indebtedness incurred, assumed or Guaranteed in
violation of the Indenture, except where at the time of such incurrence,
assumption or Guarantee, a responsible financial officer of the Company has
delivered a certification as to its compliance at such time with the
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first paragraph of the covenant described under "--Limitation on Additional
Indebtedness" above, and the holder of such Indebtedness or its trustee, agent
or representative is not aware of facts or circumstances such that such Person
could not rely in good faith on such certification.
"Specified Senior Indebtedness" means (i) Bank Indebtedness under the New
Credit Agreement and any replacements, refinancings, refundings, and substitute
facility or facilities thereof, and additional facility or facilities permitted
by clause (i) of the second paragraph of the covenant described under
"--Limitation on Additional Indebtedness" and (ii) each single issue of other
Senior Indebtedness having an outstanding principal balance of $50 million or
more and which is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Specified Senior
Indebtedness" for purposes of the Indenture.
"Stated Maturity" means, with respect to any Indebtedness, the date or dates
specified in such Indebtedness as the fixed date or dates on which the payment
of principal of such Indebtedness is due and payable, including pursuant to any
mandatory redemption provision, it being understood that if an issue of
Indebtedness has more than one fixed date on which the payment of principal is
due and payable, each such fixed date shall be a separate Stated Maturity with
respect to the principal amount of Indebtedness due on such date.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Closing Date or thereafter incurred, assumed or Guaranteed)
that is subordinate or junior in right of payment to the Notes pursuant to a
written agreement.
"Subsidiary" means with respect to any Person, (i) any corporation,
association, limited liability company or other business entity (other than a
partnership) of which more than 50% of the total voting power of the Equity
Interests entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof is at the time of
determination owned or controlled, directly or indirectly, by such Person or one
or more of the other Subsidiaries of that Person or a combination thereof, (ii)
any partnership of which more than 50% of the general or limited partnership
interests are owned or controlled, directly or indirectly, by such Person or one
or more of the other Subsidiaries of that Person or a combination thereof and
(iii) any Permitted Joint Venture of such Person.
"Total Assets" means, with respect to any Person, the total consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company, as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company (including any Subsidiary and any newly acquired
or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such
subsidiary owns any Equity Interests or Indebtedness (other than any
Indebtedness incurred in connection with services performed in the ordinary
course of business by such Subsidiary for the Company or any of its Restricted
Subsidiaries) of, or owns, or holds any Lien on, any property of, the Company or
any Restricted Subsidiary of the Company, provided that (a) any Unrestricted
Subsidiary must be an entity of which shares of the Capital Stock or other
Equity Interests (including partnership interests) entitled to cast at least a
majority of the votes that may be cast by all shares or Equity Interests having
ordinary voting power for the election of directors or other governing body are
owned, directly or indirectly, by the Company, (b) such designation complies
with the covenants described under "--Limitation on Restricted Payments" and (c)
each of (I) the Subsidiary to be designated and (II) its Subsidiaries has not at
the time of designation, and does not thereafter, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any of its Restricted Subsidiaries. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED,
HOWEVER, that immediately after giving effect to such designation (x) the
Company could incur $1.00 of additional Indebtedness under the first paragraph
of
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the covenant described under "--Limitation on Additional Indebtedness" and (y)
no Default shall have occurred and be continuing. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the resolution of the Board of Directors giving effect to such
designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means, with respect to any Person, any class or series of
Capital Stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of stockholders called for such purpose,
without the occurrence of any additional event or contingency.
"Wholly-owned Subsidiary" of any Person means any Restricted Subsidiary of
such Person of which 95% or more of the outstanding Equity Interests of such
Restricted Subsidiary are owned by such Person (either directly or indirectly
through Wholly-owned Subsidiaries).
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SUMMARY OF NEW CREDIT AGREEMENT
Concurrently with the sale of the Old Notes on February 12, 1998, the
Company paid all amounts outstanding pursuant to the Existing Credit Agreements
and entered into a $700 million Credit Agreement with the banks and other
financial institutions named therein and The Chase Manhattan Bank, as
administrative agent (the "New Credit Agreement"). The following is a summary of
the material terms of the New Credit Agreement. This summary is not a complete
description of the New Credit Agreement and is qualified in its entirety by
reference to the terms of the New Credit Agreement.
Pursuant to the terms of the New Credit Agreement, The Chase Manhattan Bank
and such other banks and financial institutions committed to provide to the
Company and certain of its wholly owned domestic subsidiaries, subject to
certain terms and conditions, the credit facilities described below in an
aggregate principal amount equal to $700.0 million. At the closing of the
Transactions, (a) $550.0 million was borrowed under the Term Loan Facility
described below and (b) $20.0 million was drawn under the Revolving Facility
described below and $17.5 million of availability was reserved for certain
letters of credit. The initial loans under the New Credit Agreement were made to
the Company and Merit to finance the Transactions.
THE FACILITIES
STRUCTURE. The New Credit Agreement provides for (a) a term loan facility
in an aggregate principal amount of $550 million (the "Term Loan Facility"),
consisting of an approximately $183.3 million Tranche A Term Loan (the "Tranche
A Term Loan"), an approximately $183.3 million Tranche B Term Loan (the "Tranche
B Term Loan") and an approximately $183.3 million Tranche C Term Loan (the
"Tranche C Term Loan") and (b) a revolving credit facility providing for
revolving loans to the Company and the "Subsidiary Borrowers" (as defined
therein) and the issuance of letters of credit for the account of the Company
and the Subsidiary Borrowers in an aggregate principal amount (including the
aggregate stated amount of letters of credit) of $150 million (the "Revolving
Facility").
AVAILABILITY. The availability of the credit facilities is subject to
various conditions precedent typical of bank loans. The full amount of the Term
Loan Facility was drawn at the closing of the Transactions and amounts repaid or
prepaid under the Term Loan Facility may not be reborrowed. The Company borrowed
$20.0 million under the Revolving Facility to finance, in part, the
Transactions. Amounts repaid under the Revolving Facility may be reborrowed. The
amount available pursuant to the Revolving Facility is available for general
corporate purposes.
COMMITMENT REDUCTIONS AND REPAYMENTS
The Tranche A Term Loan and the Revolving Facility matures on February 12,
2004. The Tranche B Term Loan matures on February 12, 2005 and the Tranche C
Term Loan matures on February 12, 2006. The Tranche A Term Loan amortizes in
installments in each fiscal year in amounts equal to $16.5 in 1999, $28.0
million in 2000, $34.5 million in 2001, $45.0 million in 2002, $48.0 million in
2003, and $11.3 million in 2004. The Tranche B Term Loan amortizes in
installments in each fiscal year in amounts equal to $1.7 in 1999, $2.2 million
in each of 2000 through 2002, $41.8 in 2003, $103.4 million in 2004, and $29.8
million in 2005. The Tranche C Term Loan amortizes in installments in each
fiscal year in amounts equal to $1.7 in 1999, $2.2 million in each of 2000
through 2003, $41.8 in 2004, $101.9 million in 2005, and $29.1 million in 2006.
In addition, the credit facilities are subject to mandatory prepayment and
reductions (to be applied first to the Term Loan Facility) in an amount equal to
(a) 100% of the net proceeds of certain offerings of equity securities by the
Company or any of its subsidiaries, (b) 100% of the net proceeds of certain debt
issuances of the Company or any of its subsidiaries, (c) 75% of the Company's
excess cash flow and (d) 100% of the net proceeds of certain asset sales or
other dispositions of property of the Company and its subsidiaries, in each case
subject to certain limited exceptions.
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INTEREST
At the Company's election, the interest rates per annum applicable to the
loans under the New Credit Agreement are a fluctuating rate of interest measured
by reference to either (a) an adjusted London inter-bank offered rate ("LIBOR")
plus a borrowing margin or (b) an alternate base rate ("ABR") (equal to the
highest of The Chase Manhattan Bank's published prime rate and the Federal Funds
effective rate plus 1/2 of 1%) plus a borrowing margin. The borrowing margins
applicable to the Tranche A Term Loan and loans under the Revolving Facility are
currently 1.25% for ABR loans and 2.25% for LIBOR loans, and are subject to
reduction if the Company's financial results satisfy certain leverage tests. The
borrowing margins applicable to the Tranche B Term Loan and the Tranche C Term
Loan are 1.50% and 1.75%, respectively, for ABR loans and 2.50% and 2.75%,
respectively, for LIBOR loans, and are not subject to reduction. Amounts
outstanding under the credit facilities not paid when due bear interest at a
default rate equal to 2.00% above the rates otherwise applicable to each of the
loans under the Term Loan Facility and the Revolving Facility.
FEES
The Company has agreed to pay certain fees with respect to the credit
facilities, including (i) fees on the unused commitments of the lenders equal to
3/8 to 1/2% on the undrawn portion of the commitments in respect of the
facilities; (ii) letter of credit fees on the aggregate face amount of
outstanding letters of credit equal to the then applicable borrowing margin for
LIBOR Revolving Loans plus a 1/8 of 1% per annum fronting bank fee for the
letter of credit issuing bank; (iii) annual administration fees; and (iv) agent,
arrangement and other similar fees.
SECURITY; GUARANTEES
The obligations of the Company and the Subsidiary Borrowers under the New
Credit Agreement are unconditionally and irrevocably guaranteed by, subject to
certain exceptions, each wholly owned domestic subsidiary and, to the extent no
adverse tax consequences would result, each foreign subsidiary of the Company
(excluding certain subsidiaries that are prohibited by law or any applicable
regulation, rule, order, approval, license or other restriction of any
governmental authority (collectively, "Regulations")). In addition, the Credit
Facilities and the guarantees thereunder are secured by security interests in
and pledges of or liens on substantially all the material tangible and
intangible assets of the Company and the guarantors (subject to certain
limitations to be agreed upon), including pledges of all the capital stock of,
or other equity interests in, each direct or indirect domestic subsidiary of the
Company (except to the extent any such pledge or lien would violate any
applicable Regulations) and, subject to limited exceptions, 65% of the capital
stock of, or other equity interests in, each foreign subsidiary of the Company.
AFFIRMATIVE, NEGATIVE AND FINANCIAL COVENANTS
The New Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, incur or guarantee obligations, prepay
other indebtedness or amend other debt instruments, pay dividends, create liens
on assets, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company and its
subsidiaries, make capital expenditures, or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. In addition, the
New Credit Agreement requires the Company to comply with specified financial
ratios and tests, including minimum interest coverage ratios, maximum leverage
ratios, maximum senior debt ratios, minimum "EBITDA" (as defined in the New
Credit Agreement) and minimum net worth tests.
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EVENTS OF DEFAULT
The New Credit Agreement contains customary events of default, including
non-payment of principal, interest or fees, violation of covenants, inaccuracy
of representations or warranties in any material respect, cross default and
cross acceleration to certain other indebtedness, bankruptcy, material judgments
and liabilities and change of control.
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FEDERAL INCOME TAX CONSEQUENCES
OF THE EXCHANGE OFFER
The following is a description of the material federal income tax
consequences of the Exchange Offer to the holders of the Old Notes and the
Company. The Company's counsel, King & Spalding, has issued an opinion to the
Company, which opinion was filed as an exhibit to the Registration Statement of
which this Prospectus is a part, stating that, in the opinion of such counsel,
the material federal income tax consequences of the Exchange Offer to the
holders of the Old Notes and to the Company are fairly and accurately set forth
below.
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not constitute a material modification of the Old Notes and, accordingly,
such exchange should not constitute an exchange for federal income tax purposes.
Accordingly, such exchange should have no federal income tax consequences to
holders of Old Notes, either to those who exchange their Old Notes for New Notes
or those who do not so exchange their Old Notes, and each holder of Old Notes
would continue to be required to include interest on the Old Notes in its gross
income in accordance with its method of accounting for federal income tax
purposes.
LEGAL MATTERS
The legality of the New Notes offered hereby will be passed upon for the
Company by King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303-1763.
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 this Prospectus and elsewhere in this
Registration Statement, have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report appearing herein, and are included
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 this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein 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
included herein in reliance upon the authority of said firm, as experts in
accouning and auditing.
The audited consolidated financial statements and schedule of CBHS as of
September 30, 1997 and for the 106 days ended September 30, 1997, included in
this Prospectus and elsewhere in this Registration Statement, have been audited
by Arthur Andersen LLP, independent public accountants, as stated in their
report appearing herein, and are included 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, have been included in this Prospectus in reliance on the report of KPMG
Peat Marwick LLP, certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act for the Registration of the New Notes offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration
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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 New
Notes offered hereby, reference is made to the Registration Statement, including
the exhibits thereto, and financial statements and notes filed as a part
thereof. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the information requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Copies of such material can be obtained from
the Public Reference Section of the Commission, at Room 1024, Judiciary Plaza,
450 Fifth Street, NW, Washington, D.C. 20549 at prescribed rates. In addition,
such reports, proxy statements and other information can be inspected and copied
at the public reference facility referred to above and at Regional Offices of
the Commission located at Seven World Trade Center, Suite 1300, New York, New
York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission also maintains a Web site that contains reports,
proxy statements and other information regarding registrants that file
electronically with the SEC. The address of such site is
http://www.sec.gov. The Company's Common Stock is listed for trading on the New
York Stock Exchange and reports, proxy statements and other information
concerning the Company may be inspected at the office of the New York Stock
Exchange, 20 Broad Street, New York, New York. If, at any time, the Company is
not subject to the information requirements of the Exchange Act, the Company has
agreed to furnish to holders of New Notes and prospective purchasers of New
Notes designated by holders of New Notes, upon request of such holders or such
prospective purchasers financial statements, including notes thereto and with
respect to annual reports, an auditor's report by an accounting firm of
established national reputation and a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and any other information that
would be required by Form 10-K, Form 10-Q and Form 8-K.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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
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director or officer is adjudged liable for negligence or misconduct unless (and
only to the extent that) an appropriate court determines that, in view of all
the circumstances, such person is fairly and reasonably entitled to indemnity.
In addition, Section 102(b)(7) of the DGCL permits Delaware corporations to
include a provision in their certificates of incorporation eliminating or
limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provisions shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for unlawful
payment of dividends or other unlawful distributions, or (iv) for any
transactions from which the director derived an improper personal benefit.
Article Twelfth of the Company's Certificate of Incorporation sets forth such a
provision.
Magellan maintains directors' and officers' liability insurance with various
providers in the aggregate amount of $80 million.
The 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 22 herein.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
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2(a) 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(b) 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(c) 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(d) 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(e) 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.
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2(f) Purchase Agreement, dated March 3, 1998, between the Company, Charter Behav-
ioral Corporation, Charter Behavioral Health Systems,Inc., Green Spring
Health Services, Inc., Advantage Behavioral Systems, Inc. and Charter
Behavioral Health Systems, LLC.
2(g) Equity Purchase Agreement, dated March 3, 1998, between the Company, Charter
Behavioral Health Systems, Inc. and Crescent Operating, Inc.
2(h) Support Agreement, dated March 3, 1998, between the Company and Crescent
Operating, Inc.
2(i) 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(j) 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(k) 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(l) 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(m) Amendment No. 2, dated May 29, 1997, to the Real Estate Purchase and Sale
Agreement, dated January 29, 1997, between the Company and Crescent Real
Estate Equities Limited Partnership, which was filed as Exhibit 2(c) to the
Company's Current Report on Form 8-K filed on June 30, 1997, and is
incorporated herein by reference.
2(n) 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(o) 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(p) 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.
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2(q) 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.
3(a) Restated Certificate of Incorporation of the Company, as filed in Delaware
on October 16, 1992, which was filed as Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the year ended September 30, 1992, and is
incorporated herein by reference.
3(b) Bylaws of the Company, as amended, effective May 19, 1995, which was filed
as Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995, and is incorporated herein by
reference.
3(c) Certificate of Ownership and Merger merging Magellan Health Services, Inc.
(a Delaware corporation) into Charter Medical Corproation (a Delaware
corporation), as filed in Delaware on December 21, 1995, which was filed as
Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1995, and is incorporated herein by reference.
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.
5 Opinion of King & Spalding as to the legality of the securities being
registered.
8 Opinion of King & Spalding as to tax matters.
*10(a) Written description of Corporate Annual Incentive Plan for the year ended
September 30, 1996, which was filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1995, and is incorporated herein by reference.
*10(b) 1989 Non-Qualified Deferred Compensation Plan of the Company, adopted Janu-
ary 1, 1989, as amended, which was filed as Exhibit 10(f) to the Company's
Annual Report on Form 10-K dated as of September 30, 1989 and is
incorporated herein by reference.
*10(c) 1992 Stock Option Plan of the Company, as amended, which was filed as
Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1994, and is incorporated herein by reference.
*10(d) Directors' Stock Option Plan of the Company, as amended, which was filed as
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1994, and is incorporated herein by reference.
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*10(e) 1994 Stock Option Plan of the Company, as amended, which was filed as
Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1994, and is incorporated herein by reference.
*10(f) Directors' Unit Award Plan of the Company, which was filed as Exhibit 10(i)
to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May
18, 1994, and is incorporated herein by reference.
*10(g) Description of Flexible Benefits Plan, which was filed as Exhibit 10(g) to
the Company's Annual Report on Form 10-K for the year ended September 30,
1994, and is incorporated herein by reference.
*10(h) 1996 Stock Option Plan of the Company, which was filed as Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996 and is incorporated herein by reference.
*10(i) 1996 Directors' Stock Option Plan of the Company, which was filed as Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996 and is incorporated herein by reference.
*10(j) 1997 Stock Option Plan of the Company, which was filed as Exhibit 10(i) to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, and is incorporated herein by reference.
*10(k) Employment Agreement, dated February 28, 1995, between the Company and John
Cook Barlett, Executive Vice President--Quality Improvement, which was filed
as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year
ended September 30, 1995, and is incorporated herein by reference.
*10(l) Employment Agreement, dated March 31, 1995, between the Company and Craig L.
McKnight, Executive Vice President and Chief Financial Officer, which was
filed as Exhibit 10(l) to the Company's Annual Report on Form 10-K for the
year ended September 30, 1995, and is incorporated herein by reference.
*10(m) Employment Agreement, dated October 1, 1995, between the Company and E. Mac
Crawford, Chairman of the Board of Directors, President and Chief Executive
Officer, which was filed as Exhibit 10(m) to the Company's Annual Report on
Form 10-K for the year ended September 30, 1995, and is incorporated herein
by reference.
*10(n) Employment Agreement, dated March 1, 1997, between the Company and E. Mac
Crawford, which was filed as Exhibit 10(g) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1997, and is
incorporated by reference.
*10(o) Letter Agreement, dated November 9, 1993, between Green Spring Health
Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the
Company and President and Chief Executive Officer of Green Spring Health
Services, Inc., which was filed as Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1995 and is
incorporated herein by reference.
*10(p) Letter Agreement, dated September 19, 1994, between Green Spring Health
Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the
Company and President and Chief Executive Officer of Green Spring Health
Services, Inc., which was filed as Exhibit 10(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.
*10(q) Employment Agreement, dated May 1, 1996, between the Company and Dr. Danna
Mauch, President and Chief Operating Officer of Magellan Public Solutions,
Inc. and Executive Vice President of the Company, which was filed as Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996 and is incorporated herein by reference.
</TABLE>
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*10(r) Employment Agreement dated April 15, 1996, between the Company and John M.
DeStefanis, President and Chief Operating Officer of Charter Behavioral
Health Systems, Inc. and Executive Vice President of the Company, which was
filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996 and is incorporated herein by
reference.
*10(s) Employment Agreement dated May 7, 1996, between the Company and Steve J.
Davis, Executive Vice President, Administrative Services and General
Counsel, which was filed as Exhibit 10(c) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1996 and is
incorporated herein by reference.
*10(t) Employment Agreement dated February 28, 1996, between Green Spring Health
Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the
Company and President and Chief Executive Officer of Green Spring Health
Services, Inc., which was filed as Exhibit 10(t) to the Company's annual
report on Form 10-K for the year ended September 30, 1996, and is
incorporated herein by reference.
*10(u) Compensation Agreement dated September 30, 1996, between Magellan Health
Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the
Company and President and Chief Executive Officer of Green Spring Health
Services, Inc., which was filed as Exhibit 10(u) to the Company's annual
report on Form 10-K for the year ended September 30, 1996, and is
incorporated herein by reference.
*10(v) Written description of the Green Spring Health Services, Inc. Annual
Incentive Plan for the period ended September 30, 1996, which was filed as
Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1996, and is incorporated herein by reference.
*10(w) Written description of the Green Spring Health Services, Inc. Annual
Incentive Plan for the year ended September 30, 1997, which was filed as
Exhibit 10(w) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1997, and is incorporated herein by reference.
10(x) Master Lease Agreement, dated June 16, 1997, between Crescent Real Estate
Funding VII, L.P., as Landlord, and Charter Behavioral Health Systems, LLC,
as Tenant, which was filed as Exhibit 99(b) to the Company's Current Report
on Form 8-K, which was filed on June 30, 1997, and is incorporated herein by
reference.
10(y) Master Franchise Agreement, dated June 17, 1997, between the Company and
Charter Behavioral Health Systems, LLC, which was filed as Exhibit 99(c) to
the Company's Current Report on Form 8-K, which was filed on June 30, 1997,
and is incorporated herein by reference.
10(z) Form of Franchise Agreement, dated June 17, 1997, between the Company, as
Franchisor, and Franchise Owners, which was filed as Exhibit 99(d) to the
Company's Current Report on Form 8-K, which was filed on June 30, 1997, and
is incorporated herein by reference.
10(aa) Subordination Agreement, dated June 16, 1997, between the Company, Charter
Behavioral Health Systems, LLC and Crescent Real Estate Equities Limited
Partnership, which was filed as Exhibit 99(e) to the Company's Current
Report on Form 8-K, which was filed on June 30, 1997, and is incorporated
herein by reference.
10(ab) Operating Agreement of Charter Behavioral Health Systems, LLC, dated June
16, 1997, between the Company and Crescent Operating, Inc., which was filed
as Exhibit 99(f) to the Company's Current Report on Form 8-K, which was
filed on June 30, 1997, and is incorporated herein by reference.
</TABLE>
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10(ac) Warrant Purchase Agreement, dated June 16, 1997, between the Company and
Crescent Operating, Inc., which was filed as Exhibit 99(g) to the Company's
Current Report on Form 8-K, which was filed on June 30, 1997, and is
incorporated herein by reference.
10(ad) Offer to Purchase and Consent Solicitation Statement, dated January 12,
1998, by the Company for all of its 11 1/4% Series A Senior Subordinated
Notes due 2008.
10(ae) Offer to Purchase and Consent Solicitation Statement, dated January 12,
1998, by Merit Behavioral Care Corporation for all of its 11 1/2% Senior
Subordinated Notes due 2005.
10(af) Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among
the Company, the financial institutions listed therein, Bankers Trust
Company, as Agent, and First Union National Bank of North Carolina, as
Co-Agent, which was filed as Exhibit 4(e) to the Company's Registration
Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated
herein by reference.
10(ag) Amendment No. 1, dated as of June 9, 1994, to Second Amended and Restated
Credit Agreement, dated as of May 2, 1994, among the Company, the financial
institutions listed therein, Bankers Trust Company, as Agent, and First
Union National Bank of North Carolina, as Co-Agent, which was filed as
Exhibit 4(w) to the Company's Amendment No. 1 to Registration Statement on
Form S-4 (No. 33-53701) filed July 1, 1994, and is incorporated herein by
reference.
10(ah) Amendment No. 2, dated September 30, 1994, to Second Amended and Restated
Credit Agreement, dated as of May 2, 1994, among the Company, the financial
institutions listed therein, Bankers Trust Company, as Agent, and First
Union National Bank of North Carolina, as Co-Agent, which was filed as
Exhibit 4(s) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1994, and is incorporated herein by reference.
10(ai) Amendment No. 3, dated as of December 12, 1994, to Second Amended and
Restated Credit Agreement, dated as of May 2, 1994, among the Company, the
financial institutions listed herein, Bankers Trust Company, as Agent, and
First Union National Bank of North Carolina, as Co-Agent, which was filed as
Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period ended December 31, 1994, and is incorporated herein by
reference.
10(aj) Amendment No. 4, dated as of January 11, 1995, to Second Amended and
Restated Credit Agreement, dated as of May 2, 1994, among the Company, the
financial institutions listed therein, Bankers Trust Company, as Agent, and
First Union National Bank of North Carolina, as Co-Agent, which was filed as
Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period ended December 31, 1994, and is incorporated herein by
reference.
10(ak) Amendment No. 5, dated as of March 17, 1995, to Second Amended and Restated
Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust
Company, as Agent, First Union National Bank of North Carolina, as Co-Agent,
and the lenders listed on Annex I, which was filed as Exhibit 4(a) to the
Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March
31, 1995, and is incorporated herein by reference.
</TABLE>
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10(al) Amendment No. 6, dated as of October 17, 1995, to Second Amended and
Restated Credit Agreement, dated as of May 2, 1994, among the Company,
Bankers Trust Company, as Agent and First Union National Bank of North
Carolina, as Co-Agent, which was filed as Exhibit 4(a) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1995, and is incorporated herein by reference.
10(am) Amendment No. 7, dated as of November 30, 1995, to Second Amended and
Restated Credit Agreement, dated as of May 2, 1994, among the Company,
Bankers Trust Company, as Agent, First Union National Bank of North
Carolina, as Co-Agent, which was filed as exhibit 4(b) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1995, and is incorporated herein by reference.
10(an) Amendment No. 8, dated as of January 24,, 1996, to Second Amended and
Restated Credit Agreement, dated as of May 2, 1994, among the Company,
Bankers Trust Company, as Agent, First Union National Bank of North
Carolina, as Co-Agent, which was filed as exhibit 4(c) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1995, and is incorporated herein by reference.
10(ao) Amendment No. 9, dated as of June 30, 1996, to Second Amended and Restated
Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust
Company, as Agent, First Union National Bank of North Carolina, as Co-Agent,
which was filed as exhibit 4(a) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996, and is incorporated
herein by reference.
10(ap) Amendment No. 10, dated as of July 31, 1996, to Second Amended and Restated
Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust
Company, as Agent, First Union National Bank of North Carolina, as Co-Agent,
which was filed as exhibit 4(b) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996, and is incorporated
herein by reference.
10(aq) Amendment No. 11, dated as of September 3, 1996, to Second Amended and
Restated Credit Agreement, dated as of May 2, 1994, among the Company,
Bankers Trust Company, as Agent, First Union National Bank of North
Carolina, as Co-Agent, which was filed as Exhibit (b) 12 to the Company's
Amendment No. 2 to Schedule 13 E-4 dated September 5, 1996 and is
incorporated herein by reference.
10(ar) Credit Agreement, dated as of October 16, 1996, among the Company, the
lenders named therein, The Chase Manhattan Bank as Administrative Agent and
Collateral Agent and First Union National Bank of North Carolina as
Syndication Agent, which was filed as Exhibit 4(ai) to the Company's Annual
Report on Form 10-K for the year ended September 30, 1996, and is
incorporated by reference.
10(as) Amended and Restated Credit Agreement, dated June 16, 1997, among the Com-
pany and Chase Manhattan Bank, as Administrative Agent, and First Union Bank
of North Carolina as Syndication Agent, which was filed as Exhibit 10(h) to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, and is incorporated herein by reference.
10(at) Amendment No 1. to Amended and Restated Credit Agreement, dated September
10, 1997, among the Company and Chase Manhattan Bank, as Administrative
Agent, and First Union National Bank of North Carolina as Syndication Agent,
which was filed as Exhibit 10(al) to the Company's Annual Report on Form
10-K for the year ended September 30, 1997, and is incorporated herein by
reference.
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10(au) Amendment No 2. to Amended and Restated Credit Agreement, dated October 9,
1997, among the Company and Chase Manhattan Bank, as Administrative Agent,
and First Union National Bank of North Carolina as Syndication Agent, which
was filed as Exhibit 4(am) to the Company's Annual Report on Form 10-K for
the year ended September 30, 1997, and is incorporated herein by reference.
10(av) Stock and Warrant Purchase Agreement, dated December 22, 1995, between the
Company and Richard E. Rainwater, which was filed as Exhibit 4(f) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1995, and is incorporated herein by reference.
10(aw) Warrant Purchase Agreement, dated January 29, 1997, between the Company and
Crescent Real Estate Equities Limited Partnership, which was filed as
Exhibit 4(a) to the Company's Current Report on Form 8-K, which was filed on
April 23, 1997, and is incorporated herein by reference.
10(ax) Amendment No. 1, dated June 17, 1997, to the Warrant Purchase Agreement,
dated January 29, 1997, between the Company and Crescent Real Estate
Equities Limited Partnership, which was filed as Exhibit 4(b) to the
Company's Current Report on Form 8-K, which was filed on June 30, 1997, and
is incorporated herein by reference.
10(ay) 1998 Stock Option Plan of the Company.
10(az) Letter Agreement, dated May 7, 1997, between Green Spring Health Services,
Inc. and John J. Wider, Jr., Executive Vice President and Chief Operating
Officer of Green Spring Health Services, Inc.
10(ba) Employment Agreement, dated March 12, 1997, between Green Spring Health Ser-
vices, Inc. and Clarissa C. Marques, Chief Clinical Officer of Green Spring
Health Services, Inc.
10(bb) Letter Agreement, dated February 2, 1995, between Green Spring Health
Services, Inc. and Clarissa C. Marques, Senior Vice President of Green
Spring Health Services, Inc.
10(bc) Indenture, dated May 2, 1994, among the Company, the Guarantors listed
therein and Marine Midland Bank, as Trustee, relating to the 11 1/4% Senior
Subordinated Notes due April 15, 2004 of the Company, which was filed as
Exhibit 4(a) to the Company's Registration Statement on Form S-4 (No.
33-53701) filed May 18, 1994, and is incorporated herein by reference.
10(bd) Indenture Supplement No. 1, dated June 3, 1994, among the Company, the
Guarantors listed therein and Marine Midland Bank, as Trustee, relating to
the 11 1/4% Senior Subordinated Notes due April 15, 2004 of the Company,
together with a schedule identifying substantially similar documents,
pursuant to Instruction 2 to Item 601 of Regulation S-K, which was filed as
Exhibit 4(t) to the Company's Annual Report on Form 10-K for the year ended
September 30, 1994, and is incorporated herein by reference.
10(be) Indenture Supplement No. 3, dated August 30, 1994, among the Company, the
Guarantors listed therein and Marine Midland Bank, as Trustee, relating to
the 11 1/4% Senior Subordinated Notes due April 15, 2004 of the Company,
which was filed as Exhibit 4(v) to the Company's Annual Report on Form 10-K
for the year ended September 30, 1994, and is incorporated herein by
reference.
10(bf) Indenture Supplement No. 20, dated January 26, 1998, among the Company, the
Guarantors listed therein and Marine Midland Bank, as Trustee, relating to
the 11 1/4% Senior Subordinated Notes due April 15, 2004 of the Company.
12 Statement regarding computation of ratios.
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21 List of subsidiaries of the Registrant, which was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended September 30, 1997,
and is incorporated herein by reference.
23(a) Consent of Arthur Andersen LLP for the Company.
23(b) Consent of Deloitte & Touche.
23(c) Consent of KPMG Peat Marwick LLP.
23(d) Consent of Arthur Andersen LLP for CBHS.
23(e) Consent of King & Spalding (included in opinion filed as Exhibit 5).
24 Powers of Attorney (see signature pages).
25 Statement of Eligibility and Qualification on Form T-1 of Marine Midland
Bank, as Trustee, under the Indenture relating to the Senior Subordinated
Notes due February 15, 2008.
99(a) Form of Letter of Transmittal (Proof of March 31, 1998).
99(b) Form of Notice of Guaranteed Delivery (Proof of March 31, 1998)
99(c) Form of Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner (Proof of March 31, 1998)
99(d) Form of Exchange Agent Agreement between the Company and Marine Midland Bank
(Proof of March 31, 1998)
</TABLE>
- ------------------------
* Constitutes a management contract of compensatory plan arrangement.
(b) Financial Statement Schedules
The following financial statement schedules are set forth on pages S-1
through S-2 hereof.
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<C> <C> <S>
Report of Arthur Andersen LLP regarding financial statement schedules (included in the
Report set forth on page F-2 and F-72).
II -- Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted as the required information is presented in
the Company's consolidated financial statements or related notes or such
schedules are not applicable.
ITEM 22. UNDERTAKINGS.
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective admendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(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; and
(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.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the
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securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this Form within one business day of receipt of such request,
and to send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed subsequent
to the effective date of this Registration Statement through the date of
responding to the request.
(e) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in this
Registration Statement when it became effective.
(f) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 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 person
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 whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on April 2, 1998.
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MAGELLAN HEALTH SERVICES, INC.
By: /s/ CRAIG L. MCKNIGHT
-----------------------------------------
Craig L. McKnight
Executive Vice President and
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. KNOW ALL MEN BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints Craig L. McKnight
and Howard A. McClure and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ HENRY T. HARBIN
- ------------------------------ President, Chief Executive April 2, 1998
Henry T. Harbin Officer and Director
/s/ CRAIG L. MCKNIGHT Executive Vice President
- ------------------------------ and Chief Financial April 2, 1998
Craig L. McKnight Officer
/s/ HOWARD A. MCLURE Senior Vice President and
- ------------------------------ Controller April 2, 1998
Howard A. McLure (Chief Accounting Officer)
/s/ EDWIN M. BANKS
- ------------------------------ Director April 2, 1998
Edwin M. Banks
/s/ G. FRED DIBONA, JR.
- ------------------------------ Director April 2, 1998
G. Fred DiBona, Jr.
/s/ ANDRE C. DIMITRIADIS
- ------------------------------ Director April 2, 1998
Andre C. Dimitriadis
</TABLE>
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<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ A.D. FRAZIER, JR.
- ------------------------------ Director April 2, 1998
A.D. Frazier, Jr.
/s/ RAYMOND H. KIEFER
- ------------------------------ Director March 11, 1998
Raymond H. Kiefer
/s/ GERALD L. MCMANIS
- ------------------------------ Director March 10, 1998
Gerald L. McManis
/s/ DANIEL S. MESSINA
- ------------------------------ Director April 2, 1998
Daniel S. Messina
/s/ ROBERT W. MILLER
- ------------------------------ Chairman of the Board April 2, 1998
Robert W. Miller of Directors
/s/ DARLA D. MOORE
- ------------------------------ Director March 10, 1998
Darla D. Moore
/s/ JEFFREY A. SONNENFELD
- ------------------------------ Director March 11, 1998
Jeffrey A. Sonnenfeld
</TABLE>
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EXHIBIT 2(F)
PURCHASE AGREEMENT
This Purchase Agreement (this "Agreement"), dated as of March 3, 1998, is
entered into by and among Magellan Health Services, Inc., a Delaware corporation
("Magellan"), Charter Behavioral Corporation, a Delaware corporation ("CBC"),
Charter Behavioral Health Systems, Inc., a Delaware corporation ("Charter
Inc."), Green Spring Health Services, Inc., a Delaware corporation ("Green
Spring"), Advantage Behavioral Systems, Inc., a Delaware corporation ("Advantage
Behavioral") (collectively, the "Sellers"), and Charter Behavioral Health
Systems, LLC, a Delaware limited liability company ("Charter LLC" or
"Purchaser").
WHEREAS, Magellan owns 100% of the membership interests in Charter
Advantage, LLC, a Delaware limited liability company ("Charter Advantage"), and
CBC, a wholly-owned subsidiary of Magellan, owns 100% of the membership
interests in Charter System, LLC, a Delaware limited liability company ("CS");
WHEREAS, Charter Inc., a wholly-owned subsidiary of Magellan, owns all of
the outstanding common stock of Golden Isle Assurance Company, Ltd., a Bermuda
company ("Golden Isle"), of Charter Behavioral Health of Puerto Rico, Inc., a
Georgia corporation ("Charter of Puerto Rico"), of Strategic Advantage, Inc., a
Minnesota corporation ("Strategic Advantage"), and of Charter Medical of Puerto
Rico, Inc., a Puerto Rican corporation ("Charter Medical");
WHEREAS, Green Spring, an affiliate of Magellan, owns all of the
outstanding common stock of Group Practice Affiliates, Inc., a Delaware
corporation ("Group Practice" and collectively with Charter Advantage, CS,
Golden Isle, Charter of Puerto Rico, Charter Medical and Strategic Advantage,
the "Subsidiaries") (the Group Practice stock, collectively with all of the
outstanding common stock of Golden Isle, Charter of Puerto Rico, Charter
Medical, and Strategic Advantage, the "Shares");
WHEREAS Green Spring and Advantage Behavioral own certain assets comprising
certain Staff Model Clinics (as hereinafter defined);
WHEREAS, the Sellers desire to sell, and Purchaser desires to purchase (i)
all of the membership interests of Charter Advantage (the "Advantage Interest"),
(ii) all of the membership interests of CS (the "CS Interest", collectively with
the Advantage Interest and the Shares, the "Subsidiary Equity Interests"), (iii)
all of the Shares, and (iv) the assets of certain Staff Model Clinics (such
assets are set forth on Schedule 1.02, as such schedule is updated as provided
in Section 8.13 of this Agreement, and hereinafter referred to as the "Staff
Model Clinics");
WHEREAS, Charter, Inc., Magellan and Crescent Operating, Inc. have agreed
to enter into that certain Equity Purchase Agreement dated March 3, 1998 (the
"Equity Purchase Agreement") pursuant to which Charter, Inc. will sell to
Crescent Operating and Crescent Operating will purchase from Charter, Inc. 100%
of Charter, Inc.'s membership interest in Charter LLC;
<PAGE>
WHEREAS, in connection with the purchase and sale contemplated by this
Agreement and the Equity Purchase Agreement, the parties have agreed to
terminate, as of the Closing, Magellan's rights (other than related to
indemnification) under the Master Franchise Agreement dated as of June 17, 1997
between Magellan, Charter Advantage and Charter LLC (the "Master Franchise
Agreement") and the OpCo Franchise Agreements (as defined in the Master
Franchise Agreement; collectively, the Master Franchise Agreement and the OpCo
Franchise Agreements, the "Franchise Agreements") and to terminate, amend or
enter into certain other agreements as provided herein;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
PURCHASE AND SALE
1.01 Closing. Upon the terms and subject to the conditions hereof, the
closing (the "Closing") of the purchase and sale of the Subsidiary Equity
Interests and the purchase and sale of certain assets as provided herein, as set
forth herein shall take place at the offices of Dow, Lohnes & Albertson, One
Ravinia Drive, Suite 1600, Atlanta, Georgia 30346, on the fifth business day
following the date on which all of the conditions to the obligations of the
parties hereunder have been satisfied or waived or at such other time or place
as the parties hereto shall agree (the "Closing Date").
1.02 Purchase Price. Subject to the terms and conditions of this
Agreement, the Sellers shall sell, assign, transfer and convey to the Purchaser,
and the Purchaser shall purchase from the Sellers, (i) all of the Subsidiary
Equity Interests, free and clear of all liens, charges, pledges, security
interests, encumbrances, restrictions and claims of any kind whatsoever and (ii)
those assets of the Staff Model Clinics set forth on Schedule 1.02, free and
clear of all liens, charges, pledges, security interests, encumbrances,
restrictions and claims of any kind whatsoever, except as provided herein. The
aggregate consideration for the purchase and sale of the Subsidiary Equity
Interests and the Staff Model Clinics and the assets referred to in Section 4.18
hereof, for the transactions contemplated by the Joint Venture Purchase
Agreement to be executed by Magellan and Charter LLC prior to the Closing (the
"JV Purchase Agreement") and for the other agreements herein, including
Magellan's agreement to terminate its rights under the Franchise Agreement in
accordance with the Termination Agreement to be entered into pursuant to Section
4.07 hereof, is $280,000,000 (the "Purchase Price"). The parties shall agree
on an allocation of the Purchase Price at or prior to the Closing and, upon
agreement, such allocation shall be attached hereto as Exhibit A.
1.03 Deliveries.
(a) Delivery of the Shares shall be made by the Sellers at the
Closing by delivering to the Purchaser certificates representing the Shares,
each duly endorsed for transfer in
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blank or accompanied by a stock power duly endorsed in blank. Delivery of the
Advantage Interest and the CS Interest shall be made by the Sellers at the
Closing by delivering to the Purchaser instruments of transfer reasonably
satisfactory to the Purchaser and sufficient to transfer title free and clear of
all liens, charges, security interests, pledges and encumbrances of any kind.
Delivery of the Staff Model Clinics shall be made by Sellers at the Closing by
delivery to the Purchaser instruments of transfer reasonably satisfactory to the
Purchaser and sufficient to transfer title free and clear of all liens, charges,
security interests, pledges and encumbrances of any kind, except as otherwise
provided herein.
(b) The Purchaser shall deliver $280,000,000, plus the amount of
Creative Development Expenses referred to in Section 4.13 of this Agreement to
the Sellers at the Closing by wire transfer to Magellan in immediately available
funds.
(c) Each of the Sellers and the Purchaser shall deliver all other
documents, instruments and writings required to be delivered by either of them
at or prior to the Closing Date pursuant to this Agreement or as otherwise
required herein.
(d) As used in this Agreement the term affiliate of any of the
Sellers shall not be deemed to include Charter LLC.
ARTICLE II
REPRESENTATIONS OF THE SELLERS
Each of the Sellers hereby jointly and severally represents and warrants to
the Purchaser as follows:
2.01 Organization.
(a) Each Seller is duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has the
requisite corporate or other power and authority to conduct its business as now
conducted. Each of the Subsidiaries is duly organized, validly existing and in
good standing under the laws of its respective jurisdiction of organization and
has the requisite corporate power and authority to conduct its business as now
conducted.
(b) Each Subsidiary is duly qualified or licensed to do business as a
foreign corporation or limited liability company, as the case may be, and is in
good standing in each of the jurisdictions in which it is required to be so
qualified or licensed, except jurisdictions in which the failure to qualify to
do business would not have material adverse effect on the business or operations
of such Subsidiary.
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(c) The copies of the respective organizational documents of each of
the Sellers and each of the Subsidiaries heretofore delivered to the Purchaser
are complete and correct copies of such instruments as presently in effect and
include all amendments thereto.
(d) There are no dissolution, liquidation or revocation proceedings
pending with respect to any of the Sellers or Subsidiaries.
2.02 Authorization. Each Seller has the corporate power and authority to
enter into this Agreement and, assuming approval of their respective Boards of
Directors, to carry out the transactions contemplated hereby. The Board of
Directors of Magellan has preliminarily approved the transactions contemplated
herein and shall meet within seven (7) days of the execution of this Agreement
to consider final approval of such transactions. Promptly thereafter the Boards
of Directors of the other Sellers shall meet for the purpose of approving the
transactions contemplated herein. No other corporate or stockholder proceedings
on the part of any of the Sellers are necessary to consummate the transactions
contemplated hereby and perform such Seller's obligations hereunder. This
Agreement has been duly and validly executed and delivered by each of the
Sellers and, assuming that it is approved by the Boards of Directors of the
Sellers as provided above, and assuming the Agreement constitutes the legal,
valid and binding obligation of the Purchaser, constitutes a legal, valid and
binding obligation of each of the Sellers enforceable against each of the
Sellers in accordance with its terms, except that: (a) such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights; and (b) the
remedies of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses.
2.03 No Violation. Subject to receipt of the consents referenced in
Section 2.05 of this Agreement, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will:
(a) violate any provisions of the Certificate of Incorporation or By-Laws or
organizational documents of any of the Sellers or the Subsidiaries; (b) violate,
or constitute a default under or result in the loss (with or without lapse of
time) of any benefit under, or the creation of any lien upon any property,
assets or operation of any of the Sellers or any of the Subsidiaries, any
license, permit, registration, mortgage indenture, loan or credit agreement,
franchise or agreement to which any of the Sellers or any of the Subsidiaries is
a party, or by which any of the Sellers or any of the Subsidiaries is bound or
to which any of the assets or property of the Sellers or the Subsidiaries may be
subject, except such violations, defaults or losses individually or in the
aggregate as would not have a material adverse effect on any of the Sellers or
the Subsidiaries; or (c) violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental agency or body to which
any of the Sellers or the Subsidiaries is subject or to which any of the assets
or property of the Sellers or the Subsidiaries may be subject, except such
violations as would not, individually or in the aggregate, have a material
adverse effect on any of the Sellers or any of the Subsidiaries.
2.04 Litigation. Except as set forth on Schedule 2.04(a) hereto, there are
no actions, suits or other proceedings pending or, to the Sellers' Knowledge,
threatened against any of the
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Subsidiaries or against any of the Sellers with respect to any of the
Subsidiaries or the business of any of the Subsidiaries or which could affect
the Sellers' ability to consummate the transaction contemplated by this
Agreement, except for actions, suits or other proceedings which would not,
individually or in the aggregate, have a material adverse effect on the
Subsidiaries, taken as a whole. As used in this Agreement, the "Sellers'
Knowledge" shall mean the actual knowledge of those individuals listed on
Schedule 2.04(b).
2.05 Consents. Except for (a) the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "HSR Act"), (b) the items as set forth on Schedule 2.05 hereto, and
(c) as may be necessary as a result of any facts or circumstances related solely
to Charter LLC, no consent, approval, authorization or order of, or registration
or filing with, any court or governmental agency or body (U.S. or foreign), or
other material consents from third parties, are required to be obtained by any
of the Sellers in connection with the execution, delivery or performance by any
of the Sellers of this Agreement or the consummation of the transactions
contemplated hereby.
2.06 Capitalization. The authorized capital stock of Golden Isle consists
of 3,500 shares of common stock, of which 3,500 shares have been issued and
3,500 shares are outstanding on the date hereof, all of which at the Closing
will be delivered by the Sellers free and clear of all liens, charges, security
interests, pledges or encumbrances of any kind. All of the outstanding shares
of common stock of Golden Isle have been duly and validly issued and are fully
paid and nonassessable. There are no subscriptions, warrants, options, calls,
commitments or agreements related to the issuance of shares of capital stock of
Golden Isle or any preemptive or similar rights held by any party with respect
to the shares of capital stock of Golden Isle. The authorized common stock of
Charter of Puerto Rico consists of 1000 shares of common stock, of which 1000
shares have been issued and are outstanding on the date hereof, all of which
will be delivered at the Closing to the Purchaser free of all liens, charges,
security interests, pledges or encumbrances of any kind. All of the outstanding
shares of common stock of Charter of Puerto Rico have been duly and validly
issued and are fully paid and nonassessable. There are no subscriptions,
warrants, options, calls, commitments or agreements related to the issuance of
the shares of capital stock of Charter of Puerto Rico or any preemptive or
similar rights held by any party with respect to the shares of capital stock of
Charter of Puerto Rico. The authorized common stock of Charter Medical consists
of 1000 shares of common stock, of which 500 shares have been issued and are
outstanding on the date hereof, all of which will be delivered at the Closing to
the Purchaser free of all liens, charges, security interests, pledges or
encumbrances of any kind. All of the outstanding shares of common stock of
Charter Medical have been duly and validly issued and are fully paid and
nonassessable. There are no subscriptions, warrants, options, calls,
commitments or agreements related to the issuance of the shares of capital stock
of Charter Medical or any preemptive or similar rights held by any party with
respect to the shares of capital stock of Charter Medical. The authorized
common stock of Group Practice consists of 2,000,000 shares of common stock, of
which 1,000,000 shares have been issued and 1,000,000 shares are outstanding on
the date hereof, all of which will be delivered at the Closing to the Purchaser
free of all liens, charges, security interests, pledges or encumbrances of any
kind. All of the outstanding shares of common stock of Group Practice have been
duly and validly issued
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and are fully paid and nonassessable. There are no subscriptions, warrants,
options, calls, commitments or agreements related to the issuance of the shares
of capital stock of Group Practice or any preemptive or similar rights held by
any party with respect to the shares of capital stock of Group Practice. The
authorized common stock of Strategic Advantage consists of 25,000 shares of
common stock, of which 25,000 shares have been issued and 25,000 shares are
outstanding on the date hereof, all of which will be delivered at the Closing to
the Purchaser free of all liens, charges, security interests, pledges or
encumbrances of any kind. All of the outstanding shares of common stock of
Strategic Advantage have been duly and validly issued and are fully paid and
nonassessable. There are no subscriptions, warrants, options, calls,
commitments or agreements related to the issuance of the shares of capital stock
of Strategic Advantage or any preemptive or similar rights held by any party
with respect to the shares of capital stock of Strategic Advantage. The Sellers
own directly or through subsidiaries, 100% of the membership interest in Charter
Advantage and CS and there are no other equity interests of Charter Advantage or
CS outstanding. There are no subscriptions, warrants, options, calls,
commitments or agreements related to the issuance of additional membership
interests of Charter Advantage or CS or any preemptive or similar rights held by
any party with respect to any membership interest in each of Charter Advantage
or CS. At the Closing, the Sellers will deliver the Advantage Interest and the
CS Interest to the Purchaser free and clear of all liens, charges, security
interests, pledges or encumbrances of any kind. Except as set forth on Schedule
2.06, none of the Subsidiaries owns an equity interest in any other entity.
2.07 Assets. Each of the Subsidiaries has good and marketable title to the
assets which it owns. None of the Subsidiaries owns any real property. Except
as disclosed in Schedule 2.07, the assets of each of the Subsidiaries and the
Staff Model Clinics are owned free and clear of any liens, encumbrances or
security interests (collectively, "Liens"), except: (i) Liens disclosed on the
Balance Sheets (as defined in Section 2.11 below); (ii) Liens for taxes not yet
due or being contested in good faith (and for which adequate accruals or
reserves have been established on the Balance Sheet); (iii) Liens which do not
detract from the value in any material respect of such property or assets as now
used, or interfere with any present or intended use in any material respect of
such property or assets; (iv) Liens attaching by operation of law, incurred in
the ordinary course of business consistent with past practices; or (v) Liens
with respect to which deposits or pledges have been made to obtain the release
of any such Liens described in clause (iv) above. Upon consummation of the
transactions contemplated hereby and by the JV Purchase Agreement, Charter LLC
will own or, through the Administrative Services Agreement dated as of June 16,
1997 between Magellan and Charter LLC (the "Administrative Services Agreement"),
as amended prior to Closing in accordance with the mutual agreement of the
parties, have access to (and assuming that (i) Charter LLC will continue to have
the right to utilize the assets of the Subsidiaries following consummation of
the transactions contemplated hereby and (ii) Charter LLC has retained all the
tangible and intangible assets received pursuant to the transactions consummated
under the Contribution Agreement dated as of June 16, 1997 by and among
Magellan, COI and Charter LLC (the "Contribution Agreement"), all tangible and
intangible assets reasonably necessary to conduct a business that is
substantially the same as, and that operates in accordance with substantially
the same standards of operation as, the business of the Hospitals (as such term
is defined in the Contribution Agreement) as operated immediately prior to June
17, 1997. Magellan reasonably believes that the services to be provided to
Charter LLC
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under the Administrative Services Agreement can be obtained from
other third parties at reasonable market rates. Schedule 8.13 identifies each
of the staff model clinics (other than the Merit staff model clinics) which are
required by any customer contract or dedicated to a specific customer
relationship of, or are related to the provision of EAP services by, Magellan or
its affiliates. Schedule 1.02 identifies all other Staff Model Clinics of
Magellan other than the Merit staff model clinics.
2.08 Trademarks, Licences, Etc.
(a) Charter Advantage owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Rights (as defined below)
needed or used in the operation of its business as presently conducted, except
that no representation is made with respect to the common law trademarks. Each
item of Rights owned or used (subject to the receipt of any required consent) by
Charter Advantage immediately prior to the Closing hereunder will be owned or
available for use by the Purchaser on substantially the same terms and
conditions immediately subsequent to the Closing hereunder.
(b) Set forth in Schedule 2.08 hereto is a list and brief description
of the material patents, registered and common law trademarks, service marks,
trade names, copyrights, licenses and other similar material rights ("Rights,")
used in the operation of the Subsidiaries' businesses as presently conducted.
Except as set forth in such Schedule 2.08, each Subsidiary owns all right, title
and interest in and to all such Rights (other than common law trademarks, as to
which no representation is made) identified as owned by it in Schedule 2.08 and
no material adverse claims have been made and no material dispute has arisen
with respect to any of such Rights; and, to Sellers' Knowledge, the operations
of the Subsidiaries and the use by the Subsidiaries of such Rights do not
involve infringement of any patent, trademark, service mark, trade name,
copyright, license or similar right. As of the date of this Agreement, no
suspension or cancellation of any of the Rights is pending or, to Sellers'
Knowledge, threatened except where any such suspension or cancellation would
have no material adverse effect on such Subsidiary.
2.09 Compliance with Laws. Except as set forth in Schedule 2.09 hereto,
the Staff Model Clinics are operated in compliance with, and each Subsidiary is
in compliance with, all laws, rules, regulations and ordinances relating to it
and its business and properties, except those the noncompliance with which would
not have a material adverse effect on the Subsidiaries and the Staff Model
Clinics, taken as a whole.
2.10 Broker's and Finder's Fees. Except for fees to be paid by Sellers in
connection with the rendering of a fairness opinion by its financial advisors,
neither the Sellers nor any of the Subsidiaries is obligated to pay, nor has any
of them retained, or entered into an agreement to retain, any broker or finder
or other person who is entitled to, any broker's or finder's fee or any other
commission or financial advisory fee based on any agreement or undertaking made
by the Sellers in connection with the transactions contemplated by this
Agreement.
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2.11 No Undisclosed Liabilities; Etc. Except as (i) disclosed on the
balance sheet of each of the Subsidiaries dated as of December 31, 1997 (the
"Balance Sheets"), attached hereto as Exhibit C, (ii) set forth on Schedule 2.11
or (iii) liabilities which have arisen after December 31, 1997 in the ordinary
course of the Subsidiaries' business, the Subsidiaries have no liabilities other
than liabilities which are immaterial to the Subsidiaries, taken as a whole.
2.12 Labor Matters. Except as disclosed on Schedule 2.12, there is no
organizing activity, labor strike or slowdown pending against or involving any
of the Subsidiaries and no labor union representation question exists under the
National Labor Relation Act respecting employees of any Subsidiary. There is no
collective bargain agreement that is binding on any Subsidiary. Except as
disclosed on Schedule 2.12, none of the Subsidiaries is a party to any written
employment agreement.
2.13 Material Contracts. Except for the agreements set forth on Schedule
2.13, there are no other material contracts to which any of the Subsidiaries are
a party or by which any of the Subsidiaries are bound.
2.14 Tax Matters. Except as otherwise set forth in Schedule 2.14, (i) each
of the Subsidiaries have timely filed all material federal, state, local,
foreign and provincial income and franchise tax returns and all other material
tax returns required to have been filed or appropriate extensions therefor have
been properly obtained; (ii) all taxes required to have been paid by each of the
Subsidiaries which are due under the tax returns referred to in clause (i) have
been timely paid or extensions for payment have been properly obtained; (iii)
each of the Subsidiaries have complied in all material respects with all rules
and regulations relating to the withholding of taxes except to the extent that
any failure to comply with such rules and regulations, individually or in the
aggregate, has not had, and would not reasonably be expected to have, a material
adverse effect on any of the Subsidiaries; (iv) none of the Subsidiaries has
waived in writing any statute of limitations in respect of its federal, state,
local, foreign or provincial income or franchise taxes and no deficiency with
respect to any taxes has been proposed, asserted or assessed against any of the
Subsidiaries, except to the extent that any such waiver or deficiency,
individually or in the aggregate has not had, and would not reasonably be
expected to have a material adverse effect on any of the Subsidiaries; (v) the
Internal Revenue Service is not currently examining any of the federal income
tax returns referred to in clause (i); (vi) no material issues that have been
raised in writing by the relevant taxing authority in connection with the
examination of the tax returns referred to in clause (i) are currently pending;
(vii) all material written final deficiencies asserted or material written final
assessments made as a result of any examination of any tax returns referred to
in clause (i) by any taxing authority have been paid in full, or are adequately
reserved; and (viii) there are no material liens for taxes (other than for
current taxes not yet due and payable) on the assets of any of the
Subsidiaries).
2.15 Material Adverse Effect. Except with respect to the level of
franchise fees anticipated being received by Charter Advantage pursuant to the
Franchise Agreements, since December 31, 1997 (the "Balance Sheets Date"), there
has been no material adverse change on the financial condition, business or
assets of the Subsidiaries taken as a whole.
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2.16 Disposition of Assets. Since the Balance Sheets Date, except as
disclosed on Schedule 2.16, none of the Subsidiaries has sold or otherwise
disposed of, or committed to dispose of, any material assets other than in the
ordinary course of business.
2.17 Events Subsequent to the Balance Sheets Date. Since the Balance
Sheets Date through the date of this Agreement, except as disclosed on Schedule
2.17, (a) no party (including any Seller or Subsidiary) has accelerated,
terminated, amended, or canceled any of the contracts referred to in Section
2.13 or any of the insurance contracts referred to in Section 2.19; (b) none of
the Subsidiaries has made any capital expenditure (or series of related capital
expenditures) outside the ordinary course of business; (c) none of the
Subsidiaries has issued any note, bond or other debt security or, other than in
the ordinary course of business, created, incurred, assumed, or guaranteed any
indebtedness for borrowed money or capitalized lease obligation; (d) none of the
Subsidiaries has experienced any material damage, destruction, or loss (whether
or not covered by insurance) to its property; (e) none of the Subsidiaries has
entered into any employment agreement or severance agreement providing for
compensation in excess of $100,000 in a twelve month period; and (f) none of the
Subsidiaries is under any legal obligation, whether written or oral, to do any
of the foregoing.
2.18 Licenses. Except as disclosed on Schedule 2.18, each of the
Subsidiaries and the Staff Model Clinics have all licenses which are necessary
for the conduct of their respective businesses as historically operated, except
those licenses the lack of which would not have a material adverse effect on the
Subsidiaries and Staff Model Clinics taken as a whole.
2.19 Insurance. Set forth on Schedule 2.19 are a list of material
insurance policies and the types and amounts of coverages related to the
operation of the Subsidiaries and the Staff Model Clinics. The Sellers believe
such policies provide customary and commercially reasonable coverages for the
operations of the Subsidiaries and the Staff Model Clinics. Each of the
policies is in full force and effect except as disclosed on Schedule 2.19. Upon
Closing, the parties hereto shall use commercially reasonable efforts to bring
the Subsidiaries under the coverage of the insurance policies in effect for
Charter LLC.
ARTICLE III
REPRESENTATIONS OF THE PURCHASER
The Purchaser hereby represents and warrants to the Sellers as follows:
3.01 Corporate Organization.
(a) The Purchaser is a limited liability company duly organized,
validly existing and in good standing under the laws of its jurisdiction of
formation and has the requisite power and authority to conduct its business as
now conducted.
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(b) The copies of the organizational documents of the Purchaser
heretofore delivered to the Sellers are complete and correct copies of such
instruments as presently in effect.
3.02 Authorization. The Purchaser has the limited liability company power
and authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The governing body of the Purchaser has approved this
Agreement and the transactions contemplated hereby and has authorized the
execution and delivery of this Agreement. No other limited liability company or
member proceedings on the part of the Purchaser are necessary to consummate the
transactions contemplated hereby and perform the Purchaser's obligations
hereunder. This Agreement has been duly and validly executed and delivered by
the Purchaser and, assuming the Agreement constitutes the legal, valid and
binding obligation of the Sellers, constitutes a legal, valid and binding
obligation of the Purchaser enforceable against the Purchaser in accordance with
its terms, except that: (a) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights; and (b) the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses.
3.03 No Violation. Subject to the receipt of the consents referenced in
Section 3.04 of this Agreement, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will:
(a) violate any provisions of the organizational documents of the Purchaser; (b)
violate, or constitute a default under or result in the loss (with or without
lapse of time) of any benefit under, or the creation of any lien upon any
property, assets or operation of the Purchaser, any license, permit, mortgage
indenture, loan or credit agreement, franchise or agreement to which the
Purchaser is a party, or by which the Purchaser is bound, except such
violations, defaults or losses individually or in the aggregate as would not
have a material adverse effect on the Purchaser; or (c) violate any statute or
law or any judgment, decree, order, regulation or rule of any court or
governmental agency or body to which the Purchaser is subject, except such
violations as would not have a material adverse effect on the Purchaser.
3.04 Consents. Except (a) as set forth in Schedule 3.04 hereto, (b) for
the expiration or termination of any applicable HSR Act waiting period, and (c)
as may be necessary as a result of any facts or circumstances related solely to
any of the Sellers, no consent, approval, authorization or order of, or
registration or filing with, any court or governmental agency or body or other
material consents from third parties, are required to be obtained by Purchaser
in connection with the execution, delivery or performance by the Purchaser of
this Agreement.
3.05 Broker's and Finder's Fees. The Purchaser is not obligated to pay,
and has not retained, or entered any agreement to retain, any broker or finder
or other person who is entitled to, any broker's or finder's fee or any other
commission or financial advisory fee based on any agreement or undertaking made
by the Purchaser in connection with the transactions contemplated by this
Agreement.
3.06 Restrictions on Transfer. The Purchaser understands and agrees that
the Subsidiary Equity Interests have not been registered under the Securities
Act of 1933, as amended, or the
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securities laws of any state (collectively, "Securities Acts"), and may not be
resold unless permitted under applicable exemptions contained in such Securities
Acts or upon satisfaction of the registration or qualification requirements of
such Securities Acts. Purchaser acknowledges that it must bear the economic
risk of its investment in the Subsidiary Equity Interests for an indefinite
period of time since the Subsidiary Equity Interests have not been registered or
qualified under such Securities Acts and, therefore, cannot be sold unless they
are subsequently registered or exemptions from registration or qualification are
available.
3.07 Qualification of Purchaser.
(a) Purchaser is acquiring the Subsidiary Equity Interests for
investment purposes only, for its own account, not as nominee or agent for any
other person, firm or corporation, and not with a view to, or for resale in
connection with, a distribution or public offering thereof within the meaning of
such Securities Acts.
(b) Purchaser has knowledge and experience in financial and business
matters, is capable of evaluating the merits and risks of its investment in the
Subsidiary Equity Interests, and is able to bear the economic risks inherent in
its investment in the Subsidiary Equity Interests.
ARTICLE IV
COVENANTS AND AGREEMENTS
4.01 Conduct and Business. The Sellers covenant that, except for actions
taken to implement this Agreement and as specifically consented to in writing by
the Purchaser, from and after the date of this Agreement and until the Closing
Date they shall cause each of the Subsidiaries to:
(a) use commercially reasonable best efforts consistent with good
business judgment to: (i) preserve its present business organization intact;
(ii) keep available the services of its present employees; (iii) preserve its
present relationships with entities or persons having business dealings with it;
and (iv) generally operate its business in the ordinary and regular course
consistent with its prior practices;
(b) other than cash dividends, dividends of intercompany receivables
and repayment of intercompany loans each of which is expressly permitted by this
Agreement, refrain from declaring or paying any dividend or other distribution
in respect of its capital stock, or, directly or indirectly, purchasing,
redeeming or otherwise acquiring or disposing of any shares of its capital stock
and shall not issue any additional equity interest or any subscription,
warrants, options, calls, commitments or rights to acquire any shares of its
capital stock or membership interests or take any steps otherwise affecting or
changing its capitalization;
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(c) maintain its books and records in accordance with good business
practice, on a basis consistent with prior practice and in accordance with
generally accepted accounting principles, subject to normal year end
adjustments;
(d) make no changes or amendment in its organizational documents;
(e) The Sellers also covenant that, except as otherwise permitted
under Section 8.04, from and after the date of this Agreement until the Closing
Date, they shall ensure that each of the Subsidiaries does not (i) adopt a plan
of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization; (ii) make any
acquisition, by means of merger, consolidation or otherwise, of any direct or
indirect ownership interest in or assets comprising any business enterprise or
operation; (iii) incur any indebtedness for borrowed money or guarantee such
indebtedness or agree to become contingently liable, by guaranty or otherwise,
for the obligations or indebtedness of any other person or make any loans,
advances or capital contributions to, or investments in, any other corporation,
any partnership or other legal entity or to any other persons, except for bank
deposits and other investments in marketable securities and cash equivalents
made in the ordinary course of its business; (iv) authorize or enter into any
agreement providing for management services to be obtained by any Subsidiary
from any third party or an increase in management fees paid to any third-party
under existing management agreements; (v) mortgage, pledge, encumber or lease
any material assets of any Subsidiary or except with the prior written consent
of the Purchaser or as contemplated by this Agreement; or (vi) authorize or
announce an intention to do any of the foregoing, or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing; and
(f) Between the date of this Agreement and the Closing Date, the
Sellers will not willfully take any action or willfully fail to take any action,
in either case, which would result in any representation or warranty of any
Seller being untrue in any material respect.
4.02 Access. From the date hereof until the Closing Date, the Sellers will
and will cause each Subsidiary to afford to the Purchaser and its
representatives, during regular business hours and upon reasonable notice, such
access to its personnel, offices and books and records as the Purchaser may
reasonably request in connection with the transactions contemplated by this
Agreement; provided, however, that any investigation made by the Purchaser
pursuant to this clause shall be conducted in such a manner as not to interfere
unreasonably with the operation of the businesses of any of the Subsidiaries.
4.03 Filings and Consents. After the execution hereof, each of the Sellers
(and the Subsidiaries to the extent applicable) and the Purchaser: (a) shall
promptly prepare and make any required filings with, and shall thereafter
promptly make any required submissions to any applicable governmental agency or
authority; and (b) shall use its commercially reasonable best efforts to obtain
and to cooperate in obtaining any consent, approval, authorization or order of,
or in making any registration or filing with, any governmental agency or body or
other third party required in connection with the execution, delivery or
performance of this Agreement. Notwithstanding
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anything herein to the contrary, Purchaser acknowledges that Golden Isle has no
active business operations and Purchaser has agreed to prepare, make and be
responsible for any filings, consents, authorizations, license transfers and
approvals needed with respect to the purchase of Golden Isle and the startup of
its operations.
4.04 Confidential Information.
The Purchaser hereby covenants and agrees that prior to Closing
neither it nor any of its officers or agents shall reveal to any person,
association or company, without the consent of the Sellers, any of the trade
secrets or confidential information concerning the organization, business or
finances of any of the Subsidiaries, except as may be required by law (or the
rules of the National Association of Security Dealers, Inc. or of the New York
Stock Exchange) or except as such information may be in the public domain
without violation by the Purchaser of this or any other confidentiality
obligation between Purchaser and a Seller (or a Seller's affiliate), or use or
attempt to use any such information in any manner which may injure, cause loss
or be otherwise detrimental, directly or may benefit or may be calculated to
benefit a direct competitor of any of the Subsidiaries or of the Sellers;
provided, however, that the foregoing in no way prohibits Purchaser from making
available to any financial institution or other person engaged in providing or
assisting Purchaser in evaluating the transaction (including investment bankers)
or obtaining the financing necessary for the subject transaction any of the
foregoing information, or to its representatives or other agents retained in
connection with this transaction, so long as such financial institution or other
person is bound by similar confidentiality restrictions. The provisions of this
Section 4.04 shall terminate upon Closing or, if Closing does not occur, the
provisions of this Section 4.04 shall terminate two (2) years after the
termination of this Agreement.
4.05 Directors. The Sellers shall cause, immediately prior to the Closing,
each member of the Board of Directors of each of the Subsidiaries so requested
by the Purchaser to deliver to the Purchaser a written resignation from such
Board of Directors effective as of the Closing Date.
4.06 Certain Tax Matters.
(a) The Sellers shall be entitled to any credits or refunds of
federal income taxes (including interest), and shall pay, and indemnify and hold
harmless the Purchaser against, all federal income taxes (including interest and
penalties and any pending or future assessments), attributable to any Subsidiary
with respect to any taxable year, or portion thereof, of any Subsidiary which
ends on a date which is on or before the Closing Date. Any amount in respect of
federal income taxes (including interest) to which the Sellers are entitled
under this Section 4.06 but which is received by or credited to the Purchaser
any time after the Closing Date shall promptly be paid to the Sellers following
such receipt or crediting. The limitations on the amount of indemnification
obligations specified in Article VI shall not apply to this provision.
(b) The Sellers and the Purchaser (i) will each provide the other,
and the Purchaser will cause each Subsidiary to provide the Sellers, with such
assistance as may reasonably
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be requested by either of them in connection with the assessment of taxes, any
audit or other examination by any taxing authority, any judicial or
administrative proceedings relating to liability for taxes; (ii) will each
retain and provide the other with any records or information which may be
reasonably necessary to such return, audit or examination, proceeding or
determination; and (iii) will each provide the other with the final
determination of any such audit or examination, proceeding or determination that
affects any amount required to be shown on any return of the other for any
period. The party requesting assistance hereunder shall promptly reimburse the
other for reasonable expenses incurred for providing such assistance.
(c) The Sellers shall prepare and send to the Purchaser when due all
tax returns that are required to be filed by the Subsidiaries for all tax
periods ending on or before the Closing Date and the Purchaser shall file or
cause to be filed when due such tax returns and all other tax returns that are
required to be filed by or with respect to the Subsidiaries for all tax periods
ending after the Closing Date.
(d) The Sellers and the Purchaser shall cooperate fully, as and to
the extent reasonably requested by the other party, in connection with any
audit, litigation or other proceeding with respect to taxes and with the
preparation of any tax returns. The Sellers, the Subsidiaries, and the
Purchaser agree (i) to retain all books and records under their control with
respect to tax matters pertinent to the Subsidiaries relating to any tax period
ending on or before the Closing Date in accordance with customary record
retention policies, and (ii) to give the other party reasonable written notice
prior to transferring, destroying or discarding any such books and records and,
if the other party so requests, the Sellers, the Subsidiaries, and the
Purchaser, as the case may be, shall allow the other party to take possession of
such books and records.
4.07 Other Agreements. At the Closing, the parties shall terminate or
execute amendments to certain agreements entered into in connection with the
Contribution Agreement, or enter into certain additional agreements, which
amendments and agreements shall be in the form mutually agreeable to the parties
to such agreements. The parties shall agree on the form of the agreements
within thirty (30) days after the execution of this Agreement and the form of
the agreements shall be added as Schedule 4.07 to this Agreement.
4.08 Non Compete. The parties shall execute at the Closing the Non
Compete Agreements attached as Exhibit D.
4.09 The Charter System. Each Seller covenants and agrees that to the
extent any intellectual property rights or other assets used predominantly as
part of the Charter System (as defined in Exhibit E hereto) are presently owned
or held by it or any of its subsidiaries (other than the Subsidiaries) it will
transfer, or cause to be transferred, subject to the receipt of any required
consent, any such rights or assets to the appropriate Subsidiary prior to the
Closing. Each Seller also agrees that to the extent it or any of its affiliates
is a party to any lease or other agreement related exclusively to the operation
of any Subsidiary, it will assign (or cause to be assigned), subject to
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receipt of any required consent, such lease or agreement to the appropriate
Subsidiary prior to Closing.
4.10 Repayment of Loans. Charter LLC hereby agrees to repay to the
Sellers, within 180 days after the Closing Date, all amounts owed (including
principal, interest or other amounts but net of amounts owed to Charter LLC and
its subsidiaries from the Sellers and their affiliates) under any working
capital loan or advances or other loan or advance or prepaid items
(collectively, including any deferred revenue referred to below and including
amounts added to Schedule 4.10 as provided below, the "Advances") to any of the
Sellers or any of their affiliates from Charter LLC or any of its subsidiaries
as well as any deferred revenue owed to the Sellers or their affiliates. The
amount of each Advance and the total amount of net Advances owed by Charter LLC
and its subsidiaries to the Sellers or their affiliates as of January 31, 1998
is set forth on Schedule 4.10; provided it is understood that any distributions
due pursuant to the Partial Satisfaction Agreement dated as of January 30, 1998
between Magellan and Charter LLC (the "Partial Satisfaction Agreement") are not
listed as an Advance and are governed pursuant to the terms of the above Partial
Satisfaction Agreement. The parties shall update Schedule 4.10 on a monthly
basis, for the period between the date hereof and Closing, using the same method
pursuant to which Schedule 4.10 was compiled, and shall update Schedule 4.10 as
of the Closing Date; it being understood that the amounts referenced in Section
4.23 shall be included on Schedule 4.10. Charter LLC shall not be obligated to
repay Charter Inc.'s capital contribution of $17,500,000, received for a
preferred interest in Charter LLC. It is understood by the parties that nothing
in this Agreement is intended to affect the rights and obligations of the
parties under the Working Capital Settlement Agreement dated June 17, 1997
between Charter LLC and Magellan. Any amounts or Advances Charter LLC fails to
pay to any of the Sellers or any of their affiliates, as the case may be, within
180 days after Closing shall bear interest at a rate of nine (9) percent per
annum until such amounts are paid by Charter LLC. As of the Closing, Magellan,
Charter LLC and the affiliates of Charter LLC that are parties to the Services
Agreements (as said term is defined in Section 5.01(j)) shall enter into a
security agreement, in a form acceptable to Magellan, subject to any required
consent of a senior lender, and all necessary or ancillary documentation related
thereto, to provide Magellan, in connection with providing security for the
repayment of such amounts or Advances, with a security interest in the rights of
said affiliates of Charter LLC to receive amounts under the Services
Agreements. In the event Charter LLC is not be able to obtain the consent of
its senior lender as provided above, it shall use its commercially reasonable
best efforts to provide comparable security to Magellan for repayment of the
above amounts.
4.11 Guarantees. (a) Charter LLC agrees to use its commercially reasonable
best efforts to secure the full and complete release, prior to the Closing (and
continuously thereafter if not released prior to Closing), of any and all
guarantees (the "Magellan Guarantees") by the Sellers or any of their affiliates
of any indebtedness or obligations of Charter LLC or its affiliates (other than
Charter Inc.) or any of the Subsidiaries or their subsidiaries (or under any
contract assigned to Purchaser pursuant to this Agreement) and to secure full
and complete release, prior to Closing (and continuously thereafter if not
released prior to Closing), of any and all obligations (the "Magellan
Obligations") (i) of the Sellers or any of their affiliates (other than the
Subsidiaries) under any
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agreement which was assigned to Charter LLC or its subsidiaries pursuant to
the Contribution Agreement and under which Sellers or any of their affiliates
(other than the Subsidiaries) remain obligors or indemnitors in any manner
and (ii) under any agreement of any of the Subsidiaries or their subsidiaries
(or under any contract assigned to Purchaser pursuant to this Agreement) and
under which Sellers or any of their affiliates (other than the Subsidiaries)
will remain obligors or indemnitors in any manner after the Closing. Set
forth on Schedule 4.11, to Sellers' Knowledge after reasonable inquiry, is a
list of all Magellan Guarantees and Magellan Obligations. To the extent,
after the date hereof, Sellers discover there are other Magellan Guarantees
or Magellan Obligations not identified on Schedule 4.11 ("Unlisted
Obligations"), Sellers may request Purchaser to add any such Unlisted
Obligation to Schedule 4.11. If Purchaser agrees to add an Unlisted
Obligation, Schedule 4.11 shall be automatically amended to include the
Unlisted Obligation, which shall be treated as if it had appeared on Schedule
4.11 at the time of execution of this Agreement. Should Purchaser object to
the addition of an Unlisted Obligation, Magellan may terminate any such
Unlisted Obligation (and the related underlying obligations, if any) provided
that such termination is permitted under the applicable contractual
agreement; provided further that Charter LLC or its affiliates shall agree to
such termination if permitted under such agreement or permitted by any third
party to such agreement. Charter LLC agrees that, to the extent any Magellan
Guarantee (listed on Schedule 4.11) of any such indebtedness or obligation or
any Magellan Obligation (listed on Schedule 4.11) is not fully and completely
released on or before the Closing, Charter LLC will indemnify and hold
harmless the Sellers and their respective affiliates and their successors and
assigns from, against and in respect of any and all claims, liabilities,
obligations, losses, costs, expenses, penalties, fines and other judgments
(at equity or at law) and damages whenever arising or incurred (including,
without limitation, amounts paid in settlement, costs of investigation and
reasonable attorneys' fees and expenses) arising out of or relating to the
Magellan Guarantees and Magellan Obligations. The limitations on the amount
of indemnification obligations specified in Article VI shall not apply to
this provision.
(b) Magellan acknowledges that it has agreed to use its
commercially reasonable best efforts to secure the full and complete release,
prior to Closing (and continuously thereafter if not released prior to
Closing), of any and all guarantees made by the Subsidiaries, or of any
pledge of the stock or assets of the Subsidiaries, with regard to existing or
new Magellan credit facilities or other indebtedness or refinancings thereof
(the "Subsidiary Pledges and Guarantees"). Magellan agrees that to the
extent any Subsidiary Pledges and Guarantees are not fully and completely
released on or before Closing, Magellan will indemnify and hold harmless
Purchaser and its respective affiliates and their successors and assigns
from, against and respect of any and all claims, liabilities, obligations,
losses, costs, expenses, penalties, fines and other judgments (at equity or
at law) and damages whenever arising or incurred (including, without
limitation, amounts paid in settlement, costs of investigation and reasonable
attorneys' fees and expenses) arising out of or relating to the Subsidiary
Pledges and Guarantees. The limitations on the amount of indemnification
specified in Article VI shall not apply to this provision.
4.12 License of the Charter System. Magellan and the Purchaser shall
enter into a royalty free, non-exclusive license granting Magellan and its
wholly-owned subsidiaries the right to use the
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Charter System in connection with its respective existing hospital operations
headquartered in London, England and Nyon, Switzerland which license shall be
substantially in the form of Exhibit F attached hereto and will provide for a
mutually agreeable designated territory. Charter LLC and its affiliates
shall not compete within such designated territory nor shall Charter LLC
license to any other party the right to use the Charter System within such
designated territory. In the event Magellan sells its operations in London,
England to the party with which it is in current discussions within the next
(twelve) 12 months, Charter LLC agrees that Magellan may sublicense the
Charter System, including the Intellectual Property, to such party on
substantially the terms which have been discussed between Magellan and
Charter LLC, and which shall be added on Schedule 4.12 within twenty-one (21)
days of the date of this Agreement.
4.13 Creative Development Expenses. Charter LLC shall reimburse the
Sellers at Closing for actual creative developmental expenses incurred by the
Subsidiaries, with the prior approval of Charter LLC, through the Closing
Date.
4.14 Group Practice shall use commercially reasonable best efforts to
terminate the non-compete obligations related to the Services Agreement
between GPA Pennsylvania and Intercare dated December 1, 1994 (the "Intercare
Contract") or to terminate the Intercare Contract (and related agreements),
including, without limitation, the commitment to retransfer to Intercare
those assets purchased under the purchase agreement for no or minimal legal
consideration prior to Closing. In the event Group Practice is unable to
terminate the Intercare non-compete obligations or the Intercare Contract,
Magellan, at its option, may require Charter LLC to manage the Intercare
Contract for a management fee equal to Charter LLC's cost of managing the
Intercare Contract (provided, however, that in no event shall Charter LLC be
subject to the non-compete obligations) or may cause the shares of GPA
Pennsylvania to be transferred to an affiliate of Magellan which is not a
Subsidiary.
4.15 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its commercially
reasonable best efforts to satisfy the conditions set forth in Article V
hereof insofar as such matters are within its control, and to take, or cause
to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
4.16 Intercompany Receivable. Except as set forth on Schedule 4.16, or
as otherwise expressly provided in this Agreement, the parties acknowledge
and agree that all intercompany receivables due to any of the Subsidiaries
from Magellan or any of its affiliates, or due to Magellan or any of its
affiliates from any of the Subsidiaries, will extinguish as of the Closing,
and Magellan or its affiliates and the Subsidiaries shall not be obligated to
fund such receivables.
4.17 Financing. Immediately after the execution of this Agreement,
Charter LLC will begin preparation of any offering documents or other
material required in connection with obtaining financing for the transactions
contemplated by this Agreement. Charter LLC shall use its commercially
reasonable best efforts to obtain such financing, upon terms acceptable to
Charter LLC in its sole judgment, within 120 days after the date of this
Agreement; it being understood by the
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parties that certain extensions to this 120 day period may be necessary to
complete all actions necessary to obtain such financing. Magellan agrees to
cooperate with Charter LLC in providing any information needed in connection
with obtaining the financing.
4.18 Merit Staff Model Clinics and RDTC. (a) After the date this
Agreement is executed, Magellan shall permit the Purchaser to conduct a due
diligence investigation of the staff model clinics of Merit Behavioral Care
Corporation ("Merit"). Within twenty-one (21) days after the execution of
this Agreement, Purchaser shall complete its due diligence and make an
election as to whether it will purchase from Magellan (subject to any
required consents) the staff model clinics of Merit and its subsidiaries for
no additional consideration, other than staff model clinics of Merit which
are required by any customer contract or dedicated to a specific customer
relationship of Merit or any of its subsidiaries (the "Retained Merit
Clinics"). The Sellers acknowledge and agree that the Purchaser may elect not
to purchase any or all of the staff model clinics of Merit and its
subsidiaries (provided Purchaser may not elect to purchase some but not all
of the assets of any particular staff model clinic of Merit) based on its due
diligence investigation. Such election by the Purchaser may be done so
without penalty to the Purchaser. To the extent Purchaser decides to
purchase from Magellan any or all staff model clinics of Merit or any of its
subsidiaries, Magellan and the Purchaser shall execute a definitive agreement
with respect to such staff model clinics of Merit and close the transaction
within fourteen (14) days after making the election referred to above. In
the event Magellan becomes aware of any Merit staff model clinic (other than
the Retained Merit Clinics) which was not disclosed to the Purchaser prior to
the date of this Agreement, it shall notify (the "Subsequent Notice")
Purchaser of such staff model clinic; the time periods referred to in this
Section 4.18 with respect to any such staff model clinic shall commence from
the date Purchaser receives the Subsequent Notice. In the event Purchaser
does not elect to purchase any staff model clinic of Merit, Magellan may
either continue to operate such staff model clinic or dispose of such staff
model clinic, in its sole discretion.
(b) Magellan shall permit the Purchaser to conduct a due diligence
investigation of the Resource Day Treatment Center ("RDTC"), a Pennsylvania
non profit entity. If requested in writing by Purchaser, Advantage
Behavioral shall use its commercially reasonable best efforts, consistent
with applicable law, to resign as the managing member of RDTC and have
Purchaser elected as the managing member.
4.19 Assets. The Sellers covenant and agree that the current assets of
the Subsidiaries will exceed, on an aggregate basis, the current liabilities
of the Subsidiaries, as of the date of Closing.
4.20 Lease of Monarch Space. Charter LLC agrees that, as of the
Closing, and subject to the required consent, it will enter into a sublease
with Magellan of the entire 9th floor leased under the Master Lease (defined
below) at 3414 Peachtree Road, N.E., Atlanta, Georgia. The sublease will be
on substantially the same terms as Magellan leases this space under a lease
dated July 25, 1994 between Charter Medical Corporation and Equity Life
Society of the United States, as amended on July 19, 1996 (the "Master
Lease") and the sublease will be for a term equal to the remaining term under
the Master Lease.
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4.21 Software.
a. The parties agree that proprietary software presently owned by
Magellan (or its affiliates), the Subsidiaries or Charter LLC that is used
exclusively (or will be used exclusively after the Closing) by either
Magellan or its affiliates, the Subsidiaries or Charter LLC shall be
transferred to (or remain with, as the case may be) the exclusive user of
such software as of Closing. The parties acknowledge that certain
proprietary software ("Shared Software") is used, and will be used after
Closing, by each of Magellan, the Subsidiaries and Charter LLC. The parties
agree that the title to any Shared Software shall be transferred to (or
remain with, as the case may be) the predominate user of such Shared
Software, as of the Closing, and that the predominate user shall license the
software to the other users of such Shared Software in perpetuity, on a
non-exclusive, royalty free basis. Between the date of this Agreement and
the Closing, the parties shall cooperate with each other in determining which
parties are the exclusive, predominate or other users of proprietary software
and the parties shall take the necessary actions to implement the above
agreements.
b. The parties agree that to the extent software licensed from a
vendor ("Vendor Software") by Magellan (or its affiliates), the Subsidiaries
or Charter LLC is used exclusively (or will be used exclusively after
Closing) by Magellan or its affiliates, the Subsidiaries or Charter LLC, each
party shall use its commercially reasonable best efforts to register the
licenses in the name of the exclusive user of such Vendor Software as of
Closing. The parties also acknowledge that certain software licensed from a
vendor is used (or will be used after Closing) by each of Magellan, the
Subsidiaries or Charter LLC ("Shared Vendor Software"). The parties agree
that, under such circumstances, each party will use its commercially
reasonable best efforts to register in the name of the other users of such
Shared Vendor Software the appropriate number of licensees with respect to
such Shared Vendor Software as of the Closing Date. Between the date of this
Agreement and Closing, the parties shall cooperate with each other in
determining which parties are the exclusive or other users of Shared Vendor
Software and the parties shall take the necessary actions to implement the
above agreements.
c. To the extent maintenance/service agreements are in place for,
or otherwise relate to, the proprietary software, the Shared Software, the
Vendor Software or the Shared Vendor Software (jointly referred to herein as
the "Operations Software"), or the hardware upon which such Operations
Software is run, each party shall use its commercially reasonable best
efforts to assign each of such agreements, or the benefits of each of such
agreements, to the exclusive user or predominant user, as the case may be, of
Operations Software being serviced/maintained pursuant to such agreements .
Each party also agrees that it will use its commercially reasonable best
efforts to obtain continued maintenance/service support for other users of
the Operations Software and related hardware for the term of the existing
maintenance/service agreements. Between the date of this Agreement and
Closing, the parties shall cooperate with each other in determining which
parties are the exclusive, predominant or other users of the Operations
Software and the parties shall take the necessary actions to implement the
above agreements.
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4.22 Assignment of Contracts. As of the Closing, Green Spring shall
assign to Purchaser, subject to any required consents, all of the contracts,
agreements and leases of the Staff Model Clinics and Purchaser shall assume
any and all obligations and liabilities under such contracts, agreements and
leases from the Closing Date forward. In addition, Magellan shall use
commercially reasonable best efforts to assign to Purchaser, subject to any
required consents, those contracts with payors described on Schedule 4.22 and
Purchaser shall assume any and all obligations and liabilities under such
contracts. To the extent that a required consent with respect to the
assignment of any such contract has not been obtained by the Closing,
Magellan shall continue to use its commercially reasonable best efforts to
obtain such consent and until such time as such consents are obtained,
Magellan and/or the Magellan affiliate that is a party to the contract and
the Purchaser shall treat such contract as though it had been assigned to
and assumed by the Purchaser.
4.23 Franchise Fees. Magellan and Charter LLC agree that
contemporaneously with Closing (and only in the event the transactions
contemplated herein are consummated) they will execute an amendment to the
Franchise Agreement which will provide the following terms: (i) during the
period from February 1, 1998 until the Closing Date, the franchise fees due
under Section 5 of the Master Franchise Agreement will be $5 million per
month (prorated for any partial month); and (ii) all fees due under clause
(i) above and all accrued and unpaid franchise fees as of the date of this
Agreement shall be due and payable on the date which is no later than 180
days after the Closing Date. From the execution of this Agreement until the
Closing Date, to the extent Magellan has rights under Section 5.9 of the
Master Franchise Agreement, Magellan will use commercially reasonable best
efforts to obtain any consent of the lenders necessary under that certain
Credit Agreement dated as of February 12, 1998 (which Credit Agreement is
disclosed on Schedule 2.05) to permit Magellan to forebear from the exercise
of such rights. Between the date of this Agreement and the Closing, Charter
LLC will pay franchise fees to the extent it has available funds.
4.24 In the event that the transfer of the Group Practice stock triggers
a buy-out right of a party with which Group Practice has a joint venture, any
proceeds received pursuant to such buy-out right shall be part of the assets
being purchased by Charter LLC pursuant to this Agreement. Magellan will
consult with Charter LLC in the event any party with which Group Practice has
entered into a joint venture gives notice to Group Practice of its intent to
exercise any buy-out rights which may exist.
ARTICLE V
CLOSING CONDITIONS
5.01 Conditions to Obligations of the Purchaser. The obligation of the
Purchaser to deliver the Purchase Price at the Closing is subject to
satisfaction of the following conditions precedent, any and all of which may
be waived in writing by the Purchaser at its sole discretion:
(a) The representations and warranties of the Sellers contained
herein shall be true and correct in all material respects at and as of the
Closing Date with the same effect as though such
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representations and warranties were made at and as of the Closing Date other
than representations and warranties that speak as of a specific date or time
(which need only be true and correct as of such date or time) and the Sellers
shall furnish Purchaser with an officer's certificate as to the foregoing;
(b) Each of the Sellers shall have performed in all material
respects all of its obligations required by this Agreement to be performed
by it on or prior to the Closing and the Sellers shall furnish Purchaser with
an officer's certificate as to the foregoing;
(c) As of the Closing Date, there shall be no effective
injunction, writ or preliminary restraining order or any order of any nature
issued by a court or governmental or regulatory agency of competent
jurisdiction to the effect that the transactions contemplated by this
Agreement may not be consummated and there shall be no action, suit or
proceeding pending, which is brought by any governmental or regulatory
agency, seeking to so enjoin the transaction;
(d) The applicable waiting period under the HSR Act shall have
expired or been terminated;
(e) The Purchaser shall have received all consents, approvals,
authorizations or orders required as set forth on Schedule 3.04;
(f) The Purchaser shall have received an opinion from Dow, Lohnes
& Albertson, in form and substance reasonably acceptable to the Purchaser,
dated as of the Closing Date: (i) as to the due authorization, execution,
delivery and enforceability of this Agreement; (ii) as to the good standing
of the Subsidiaries; and (iii) that the transactions contemplated by this
Agreement do not violate the organizational documents of the Subsidiaries.
(g) The Sellers (or their affiliates as applicable) shall have
executed the agreements referenced in Section 4.07 and as set forth on
Schedule 4.07, and the other agreements required to be entered into pursuant
to this Agreement;
(h) The Purchaser shall have obtained the financing referred to in
Section 4.17;
(i) The closing of the transactions contemplated by the Equity
Purchase Agreement shall have occurred or shall occur simultaneously with the
Closing; and
(j) Magellan and the Purchaser (or their respective affiliates)
shall have either (i) executed the JV Purchase Agreement, upon terms and
conditions mutually agreeable to Magellan and Purchaser, pursuant to which
Magellan will cause its subsidiaries which are joint venture partners (the
"Joint Venture Partners") in joint ventures ("Joint Ventures") which are the
subject of the services agreements dated June 16, 1997 (the "Services
Agreements") between Magellan and certain subsidiaries of Purchaser, to
transfer to Purchaser the joint venture interests in the Joint Ventures or
(ii) executed amendments to the Services Agreements, upon terms mutually
agreeable to the parties, pursuant to which Magellan will transfer to
Purchaser all rights to receive all
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distributions with respect to the Joint Ventures other than pursuant to
working capital loan agreements and the Partial Satisfaction Agreement and
pursuant to which Purchaser shall assume all obligations of the Joint Venture
Partners thereafter arising with respect to the interests in the Joint
Ventures.
5.02 Conditions to Obligations of the Sellers. The obligation of the
Sellers to deliver the Subsidiary Equity Interests at the Closing is subject
to the satisfaction of the following conditions precedent, any or all of
which may be waived in writing by the Sellers at their sole discretion:
(a) The representations and warranties of the Purchaser contained
herein shall be true and correct in all material respects at and as of the
Closing Date with the same effect as though such representations and
warranties were made at and as of the Closing Date other than representations
and warranties that speak as of a specific date or time (which need only be
true and correct as of such date or time) and Purchaser shall furnish the
Sellers with an officer's certificate as to the foregoing;
(b) The Purchaser shall have performed in all material respects
all of its obligations required by this Agreement to be performed by it on
or prior to the Closing and the Purchaser shall furnish the Sellers with an
officer's certificate as to the foregoing;
(c) As of the Closing Date, there shall be no effective
injunction, writ or preliminary restraining order or any order of any nature
issued by a court or governmental or regulatory agency of competent
jurisdiction to the effect that the transactions contemplated by this
Agreement may not be consummated and there shall be no action, suit or
proceeding pending, which is brought by any governmental or regulatory
agency, seeking to so enjoin the transaction;
(d) The Sellers shall have received all consents, approvals,
authorizations or orders required as set forth on Schedule 2.05;
(e) The applicable waiting period under the HSR Act shall have
expired or been terminated;
(f) The Purchaser (or its affiliate as applicable) shall have
executed the agreements referenced in Section 4.07 and as set forth on
Schedule 4.07 and the other agreements required to be entered into pursuant
to this Agreement;
(g) The Purchaser shall have obtained the financing referred to in
Section 4.17;
(h) The closing of the transactions contemplated by the Equity
Purchase Agreement shall have occurred or shall occur simultaneously with the
Closing; and
(i) Magellan and the Purchaser (or their respective affiliates)
shall have either (i) executed the JV Purchase Agreement, upon terms and
conditions mutually agreeable to Magellan
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and Purchaser, pursuant to which Magellan will cause its subsidiaries which
are Joint Venture Partners in Joint Ventures which are the subject of the
Services Agreements between Magellan and certain subsidiaries of Purchaser,
to transfer to Purchaser the joint venture interests in the Joint Ventures or
(ii) executed amendments to the Services Agreements, upon terms mutually
agreeable to the parties, pursuant to which Magellan will transfer to
Purchaser all rights to receive all distributions with respect to the Joint
Ventures other than pursuant to working capital loan agreements and the
Partial Satisfaction Agreement and pursuant to which Purchaser shall assume
all obligations of the Joint Venture Partners thereafter arising with respect
to the interests in the Joint Ventures.
(j) The Boards of Directors of the Sellers shall have approved, in
accordance with Section 2.02, the transactions contemplated in this
Agreement.
ARTICLE VI
INDEMNIFICATION AND ASSUMPTION OF CERTAIN LIABILITIES
6.01 Indemnification for Breach of Representation or Warranty.
(a) After the Closing, each of the Sellers hereby jointly and
severally agrees to indemnify and hold the Purchaser harmless from any
claims, liabilities, obligations, losses, costs, expenses, penalties, fines,
judgments and other damages including reasonable attorneys' fees
(collectively "Damages"), incurred by the Purchaser as a result of (i) any
breach by any Seller of any representation or warranty of any of the Sellers
contained in Article II of this Agreement; or (ii) a failure by the Sellers
to perform in any material respect any covenant or agreement required to be
performed by it under this Agreement, or (iii) the litigation set forth on
Schedule 2.04 provided, however, that the Sellers shall have no liability to
the Purchaser under this paragraph unless the Purchaser shall have first
delivered to Magellan a written claim to indemnification hereunder on or
before the date which is 18 months after the Closing Date except as otherwise
provided in Section 8.01; provided, further, that the Sellers shall only be
liable to indemnify the Purchaser in the event that (i) Damages arising under
this Agreement for which claims may be brought under this Section 6.01(a),
and (ii) Damages for which indemnification claims may be brought by the
purchaser(s) under, and that are incorporated into this Agreement pursuant
to, the JV Purchase Agreement ("JV Damages") exceed, in the aggregate,
$6,000,000 (the "Indemnification Threshold"). In the event the
Indemnification Threshold is met or has been met at any time in the past,
Sellers shall indemnify Purchaser for all Damages hereunder for which claims
for indemnification may be brought. Notwithstanding the foregoing, the
Indemnification Threshold shall not be applicable to Damages incurred by the
Purchaser as a result of a breach by the Sellers of the representations and
warranties set forth in Sections 2.01(a), (b) and (d), 2.02, 2.04, 2.06, and
2.14, and with respect to clause (iii) in the first sentence of this Section
6.01(a) ("Purchaser's First Dollar Damages"). The parties acknowledge and
agree that Purchaser's First Dollar Damages or first dollar Damages incurred
by purchaser(s) under the JV Purchase Agreement shall not count toward or be
applied against the Indemnification Threshold.
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(b) After the Closing, Purchaser hereby agrees to indemnify and
hold the Sellers harmless from any Damages incurred by the Sellers as a
result of (i) any breach by the Purchaser of any representation or warranty
contained in Article III of this Agreement; or (ii) a failure by the
Purchaser to perform in any material respect a covenant or agreement required
to be performed by it under this Agreement; provided, however, that the
Purchaser shall have no liability to the Sellers under this paragraph unless
a Seller shall have first delivered to the Purchaser a written claim to
indemnification hereunder on or before the date which is 18 months after the
Closing Date; provided, further, that Purchaser shall only be liable to
indemnify the Sellers in the event that (i) Damages arising under this
Agreement for which claims may be brought under this Section 6.01(b), and
(ii) JV Damages for which indemnification claims may be brought by seller(s)
under the JV Purchaser Agreement exceed, in the aggregate, the
Indemnification Threshold. In the event the Indemnification Threshold under
this Section 6.01(b) is met or has been met at any time in the past, the
Purchaser shall indemnify the Sellers for all Damages hereunder for which
claims for indemnification may be brought. Notwithstanding the foregoing,
the representations and warranties set forth in Section 3.06 shall survive
until the date that the representations and warranties in the Contribution
Agreement survive and the Indemnification Threshold shall not be applicable
to Damages incurred by the Sellers as a result of a breach by Purchaser of
the representations and warranties in Sections 3.01, 3.02 and 3.06 ("Seller's
First Dollar Damages"). The parties acknowledge and agree that Seller's
First Dollar Damages or first dollar Damages incurred by seller(s) under the
JV Purchase Agreement shall not count toward or be applied against the
Indemnification Threshold provided for in this Section 6.01(b).
(c) Subject to the provisions of Sections 6.01(a) and 6.01(b), in
the event of the occurrence of an event which any party asserts a claim for
Damages, such party shall provide the indemnifying party with prompt notice
of such event and shall otherwise make available to the indemnifying party
all relevant information which is material to the claim and which is in the
possession of the indemnified party. If such event involves the claim of any
third party (a "Third-Party Claim"), the indemnified party shall have the
right to elect to join in the defense, settlement, adjustment or compromise
of any such Third-Party Claim, and to employ counsel to assist such
indemnifying party in connection with the handling of such claim, at the sole
expense of the indemnifying party, and no such claim shall be settled,
adjusted or compromised, or the defense thereof terminated, without the prior
consent of the indemnifying party unless and until the indemnifying party
shall have failed, after the lapse of a reasonable period of time, but in no
event more than 30 days after written notice to it of the Third-Party Claim,
to join in the defense, settlement, adjustment or compromise of the same. An
indemnified party's failure to give timely notice or to furnish the
indemnifying party with any relevant data and documents in connection with
any Third-Party Claim shall not constitute a defense (in part or in whole) to
any claim for indemnification by such party, except and only to the extent
that such failure shall result in any material prejudice to the indemnifying
party. If so desired by any indemnifying party, such party may elect, at
such party's sole expense, to assume control of the defense, settlement,
adjustment or compromise of any Third-Party Claim, with counsel reasonably
acceptable to the indemnified parties, insofar as such claim relates to the
liability of the indemnifying party, provided that such indemnifying party
shall obtain the consent of all indemnified parties before entering into any
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settlement, adjustment or compromise of such claims, or ceasing to defend
against such claims, if as a result thereof, or pursuant thereto, there would
be imposed on an indemnified party any material liability or obligation not
covered by the indemnity obligations of the indemnifying parties under the
Acquisition Agreements (including, without limitation, any injunctive relief
or other remedy). In connection with any Third-Party Claim, the indemnified
party, or the indemnifying party if it has assumed the defense of such claim
pursuant to the preceding sentence, shall diligently pursue the defense of
such Third-Party Claim.
(d) The maximum amount of (i) the Sellers' indemnification
obligation under this Section 6.01 together with (ii) that of the seller(s)
under, and that are incorporated into this Agreement pursuant to, the JV
Purchase Agreement together with (iii) that of Charter Inc. under the Equity
Purchase Agreement shall not exceed $100,000,000, in the aggregate. The
maximum amount of (i) the Purchaser's indemnification obligation under this
Section 6.01 together with (ii) that of the purchaser(s) under the JV
Purchase Agreement together with (iii) that of Crescent Operating, Inc. under
the Equity Purchase Agreement shall not exceed $100,000,000, in the aggregate.
(e) The amount of any and all Damages for which indemnification is
provided pursuant to this Article VI shall be net of any amounts received by
the indemnified party under insurance policies with respect to such Damages
(it being understood that any proceeds obtainable from a captive insurance
company of the indemnified party or any amounts which the indemnified party
self-insures shall not be so taken into account). In the event that any
claim for indemnification asserted under this Article VI is, or may be, the
subject of the insurance coverages of the Sellers and Purchaser, the
indemnified party agrees to promptly notify the applicable insurance carrier
of such claim and tender defense thereof to such carrier. If insurance
coverage is denied (in whole or in part), or if no resolution of an insurance
claim shall have occurred upon payment of the relevant indemnification
obligation, the indemnifying party shall be subrogated to the rights of the
indemnified party against such insurance carrier.
(f) The indemnification provided in this Article VI and in Section
4.11 of this Agreement, and the obligations in Section 7.02 of this
Agreement, shall be the exclusive remedy of the parties for any breach of
this Agreement.
ARTICLE VII
TERMINATION PRIOR TO CLOSING
7.01 Termination Prior to Closing. This Agreement may be terminated and
abandoned at any time prior to the Closing:
(a) by the mutual consent of the Sellers and the Purchaser;
(b) by the Sellers or the Purchaser, in the event the Closing has
not occurred by the date which is six months after the date of this Agreement
(the "Cut-Off Date"), unless failure of
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such consummation shall be due to the failure of the party seeking to
terminate this Agreement to comply in all material respects with the
agreements and covenants contained herein to be performed by such party on or
before the Cut-Off Date.
7.02 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.01 hereof, such termination shall be without
liability or obligation of either party (or any director, officer, employee,
or representative of such party) to the other party to this Agreement;
provided that if such termination shall result from the willful failure of
either party to fulfill a condition to the performance of the obligations of
the other party or to perform a covenant of this Agreement or from a breach
by either party to this Agreement, such party, once the Indemnification
Threshold has been met, shall be fully liable for any and all Damages
incurred or suffered by the other party as a result of such failure or breach
and provided the Indemnification Threshold shall not apply to breaches
referred to in the last sentences of Section 6.01(a) and 6.01(b). The
provisions of Sections 4.04 and 8.05 shall survive any termination hereof
pursuant to Section 7.01.
ARTICLE VIII
MISCELLANEOUS
8.01 Survival. The representations and warranties made by the parties
in this Agreement shall expire with, and be terminated and extinguished on
the date which is 18 months after the Closing Date, and thereafter neither
the Sellers nor the Purchaser, nor any officer, director or principal
thereof, shall have any liability whatsoever with respect to any such
representation or warranty, except that the representations and warranties in
Sections 2.01(a), (b) and (d), 2.02, 2.06 shall survive without limitation
and that the representations and warranties in Sections 2.04 and 2.14 shall
survive until the applicable statute of limitations period for any applicable
claim. The covenants and agreements of the parties contained herein shall
survive the Closing to the extent they relate to an agreement or obligation
to be performed after the Closing.
8.02 Notices. All notices, requests, instructions or documents
hereunder shall be in writing and delivered personally or by Federal Express,
or sent by telecopy, or sent by United States registered or certified mail,
postage prepaid as follows:
(i) if to the Purchaser:
Mark Ford, Esq.
General Counsel
Charter Behavioral Health Systems, LLC
3414 Peachtree Road, N.E.
Suite 900
Atlanta, GA 30319
Facsimile: (404) 814-5795
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(ii) if to any of the Sellers:
David Hansen, Esq.
General Counsel
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Facsimile: (404) 869-5660
with a copy to:
J. Eric Dahlgren, Esq.
Dow, Lohnes & Albertson
One Ravinia Drive
Suite 1600
Atlanta, Georgia 30346
Facsimile: (770) 901-8874
or such other address as any party may designated by written notice to the
other parties. Any notice, request, demand, waiver or other communication
required or permitted to be given under this Agreement will be deemed to have
been duly given only if delivered in person or by first class, prepaid,
registered or certified mail, or sent by courier or, if receipt is confirmed,
by telecopier.
8.03 Entire Agreement. This Agreement and the Exhibits and Schedules
hereto contain the entire agreement between the parties hereto with respect
to the transaction contemplated herein, and no modification hereof shall be
effective unless in writing and signed by the party against which it is
sought to be enforced. This Agreement supersedes all prior understandings,
negotiations and agreements relating to the transactions contemplated herein.
8.04 Successors and Assigns. The terms, covenants and conditions of
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and assigns; provided, however, that
neither party may assign its rights and obligations under this Agreement
without the prior written consent of the other party except that any Seller
may assign this Agreement to any other wholly-owned subsidiary of Magellan
provided that it transfers its ownership interest of any Subsidiary Equity
Interest to such wholly-owned subsidiary. It is understood by the parties
that Charter LLC anticipates becoming a corporation prior to the closing in
connection with the financing referred to in Section 4.17; the parties agree
to cooperate in taking further action in connection with Charter LLC's change
to a corporate form, provided that the Sellers are not required to take any
such further action which adversely affects the Sellers or their rights or
benefits under this Agreement. Within thirty (30) days from the date of this
Agreement, the parties shall use commercially reasonable best efforts to
agree to the structure of Charter LLC's conversion to a corporate form.
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8.05 Expenses. Each of the Sellers and the Purchaser shall bear its own
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby. Charter LLC shall be solely responsible
for any fees and expenses associated with the purchase and startup of Golden
Isle and any consents, license transfers, authorizations or approvals
associated therewith.
8.06 Severability. If any provision of this Agreement shall be
determined by arbitration in accordance with Section 8.08 to be void and of
no effect, the provisions of this Agreement shall be deemed amended to delete
or modify, as necessary, the offending provision, and this Agreement as so
amended or modified shall not be rendered unenforceable or impaired but shall
remain in force to the fullest extent possible in keeping with the intention
of the parties hereto.
8.07 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, applicable in the case
of agreements made and to be performed entirely within such state, without
regard to such state's conflicts of laws rules.
8.08 Arbitration. The parties agree to resolve any dispute, controversy
or claim arising out of or relating to this Agreement, its interpretation or
performance (a "Controversy"), in accordance with this Section 8.08.
(a) The parties agree to negotiate in good faith for up to 45 days after
written notice by one party to the other party or parties to the
Controversy, in order to attempt to resolve such Controversy. In this
regard, the parties agree to involve senior management in these
discussions if necessary.
(b) In the event that such Controversy is not resolved through mutual
discussions within such 45 day period of time, such dispute or
controversy may be submitted by any such party to, and if so submitted
shall be finally settled by, arbitration in accordance with the
Commercial Arbitration Rules (The "Rules") of the American Arbitration
Association, and judgment upon the award may be entered in any court
where the arbitration takes place or any court having jurisdiction.
Any such arbitration shall take place in Atlanta, Georgia, and there
shall be one arbitrator. The parties shall attempt to agree on the
selection of the arbitrator within 60 days after receipt of the
written notice referred to in clause (a); if the parties agree, the
agreed-upon person shall be the arbitrator; if the parties cannot so
agree, the arbitrator shall be selected by the American Arbitration
Association in accordance with the Rules. The arbitrator may order
specific performance or other equitable relief or remedies to the
extent he or she deems it appropriate, in any situation in which a
court could so order. All costs of such arbitration, including the
compensation of the arbitrator (but not including the parties'
attorneys', accounts' and other professionals' fees, as to which each
party shall pay its own), shall be allocated 50% to the Purchaser and
its affiliates, and 50% to such Sellers as are parties to the
arbitration. The decision of the arbitrators shall be final and
binding upon the parties, their successors and assigns, and they shall
comply with such decision in good faith, and each party
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hereby submits itself to the jurisdiction of the courts of the place
where the arbitration is held, but only for the entry of judgment with
respect to and to enforce the decision of the arbitrators hereunder.
8.09 Headings. The headings in this Agreement are included herein for
convenience of reference only, and shall not constitute a part of this
Agreement for any other purpose.
8.10 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and same instrument.
8.11 Waiver. Any of the terms or conditions of this Agreement which may
be lawfully waived may be waived in writing at any time by the party which is
entitled to the benefits thereof. Any waiver of any of the provisions of
this Agreement by any party hereto shall be binding only if set forth in an
instrument in writing signed on behalf of such party. No failure to enforce
any provision of this Agreement shall be deemed to or shall constitute a
waiver of such provision and no waiver of any of the provisions of this
Agreement shall be deemed to or shall constitute a waiver of any other
provision hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
8.12 Variations of Pronouns; Definitions; Number; Gender. All pronouns
and all variations thereof shall be deemed to refer to the masculine,
feminine or neuter, singular or plural, as the identity of the person or
persons may require. Whenever used herein the singular number shall include
the plural, the plural shall include the singular, and the use of any gender
shall include all genders. "Person" shall mean an individual, firm, trust,
association, corporation, limited liability company, partnership, government
(whether federal, state, local or other political subdivision, or any agency
or bureau of any of them) or other entity.
8.13 Group Practice and Staff Model Clinics. The Sellers hereby
acknowledge and agree that the Purchaser's due diligence investigation of
Group Practice and the Staff Model Clinics may continue after the date this
Agreement is executed. Notwithstanding any provision to the contrary, the
Sellers further acknowledge and agree that the Purchaser, at any time prior
to the Closing Date and in its sole and absolute discretion, may elect not to
purchase the shares of Group Practice (provided Purchaser may not elect to
purchase some but not all of the shares of Group Practice) and/or the Staff
Model Clinics (provided Purchaser may not elect to purchase some but not all
of the assets of any particular Staff Model Clinic) based on its due
diligence investigation. Such election by the Purchaser may be done so
without penalty to the Purchaser. There shall be no reduction in the Purchase
Price if Purchaser determines not to purchase the shares of Group Practice
and/or the Staff Model Clinics. Schedule 8.13 sets forth those staff model
clinics of Magellan (not including the Merit staff model clinics referred to
in Section 4.18) which will be retained by Magellan and will not be subject
to Section 8.13.
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IN WITNESS WHEREOF, this Purchase Agreement has been duly executed by
the parties hereto as of the date first above written.
MAGELLAN HEALTH SERVICES, INC.
By: /s/ Craig L. McKnight
-------------------------------------------
CHARTER BEHAVIORAL CORPORATION
By: /s/ Howard McLure
-------------------------------------------
CHARTER BEHAVIORAL HEALTH
SYSTEMS, INC.
By: /s/ Howard McLure
-------------------------------------------
GREEN SPRING HEALTH SERVICES, INC.
By: /s/ Charlotte Sanford
-------------------------------------------
ADVANTAGE BEHAVIORAL SYSTEMS, INC.
By: /s/ Charlotte Sanford
-------------------------------------------
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
By: /s/ Steve Davis
-------------------------------------------
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Exhibit 2(g)
EXECUTION COPY
EQUITY PURCHASE AGREEMENT
This Equity Purchase Agreement (the "Agreement"), dated as of March 3,
1998, is entered into by and among Charter Behavioral Health Systems, Inc., a
Delaware corporation ("Charter Inc."), Crescent Operating, Inc., a Delaware
corporation ("Crescent Operating"), and, solely for purposes of Section 4.4
hereto, Magellan Health Services, Inc., a Delaware corporation ("Magellan").
WHEREAS, Charter Inc. owns 50% of the membership interests in Charter
Behavioral Health Systems, LLC ("CBHS"), which is operated pursuant to an
Amended and Restated Operating Agreement, dated as of June 16, 1997, among
Charter Inc., Crescent Operating and Magellan (the "Operating Agreement");
WHEREAS, Charter Inc. desires to sell, and Crescent Operating desires
to purchase, 100% of Charter Inc.'s membership interests in CBHS, including
without limitation all of Charter Inc.'s preferred interest or right to receive
preferred distributions (the "Charter LLC Interest").
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows.
ARTICLE I
PURCHASE AND SALE
1.1 Closing. Upon the terms and subject to the conditions hereof, the
closing (the "Closing") of the purchase and sale of the Charter LLC Interest as
set forth herein shall take place at the offices of Dow, Lohnes & Albertson,
PLLC, One Ravinia Drive, Suite 1600, Atlanta, Georgia 30346, on the business day
on which all of the conditions to the obligations of the parties hereunder have
been satisfied or waived or at such other time or place as the parties hereto
shall agree (the "Closing Date").
1.2 Consideration.
(a) Subject to the terms and conditions of this Agreement, and
in reliance upon the representations, warranties and agreements of the parties
contained herein, Charter Inc. hereby agrees to sell, assign, transfer and
convey to Crescent Operating, and Crescent Operating hereby agrees to purchase
from Charter Inc., all of the Charter LLC Interest, free and clear of all liens,
charges, pledges, security interests, encumbrances, restrictions, judgments and
claims of any kind or character whatsoever (collectively, "Encumbrances"). The
consideration for the purchase and sale of the Charter LLC Interest shall be
that number of
<PAGE>
shares of common stock, par value $0.01 per share, of Crescent Operating (the
"Crescent Operating Shares") determined in accordance with the provisions of
Section 1.2(b) below.
(b) The number of Crescent Operating Shares to be issued to Charter
Inc. in consideration for its sale of the Charter LLC Interest (the "Purchased
Shares") shall equal: $30,000,000 divided by the average closing price for a
Crescent Operating Share, determined based on the average of the "Closing Price"
of Crescent Operating Shares for the 10 "Trading Days" preceding the Closing
Date, rounded up to the next whole number. The "Closing Price" for each such
Trading Day means the last reported sales price, regular way, on such day, or if
no such sale takes place on that day, the average of the reported closing bid
and asked prices on that day, regular way, in either case as reported on the
Nasdaq National Market. "Trading Day" means any day on which the Nasdaq National
Market is open for the transaction of business.
1.3 Deliveries.
(a) Delivery of the Charter LLC Interest shall be made by
Charter Inc. at the Closing by delivering to Crescent Operating instruments of
transfer sufficient to transfer title free and clear of all Encumbrances and
satisfactory to Crescent Operating in form and substance.
(b) Crescent Operating shall deliver a stock certificate or
certificates for the Purchased Shares in the name of Charter Inc. at the Closing
free and clear of all Encumbrances. The Purchased Shares shall be issued
pursuant to a registration statement on Form S-3 of Crescent Operating that has
been declared effective by the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act").
(c) Each of Charter Inc. and Crescent Operating shall deliver
all other documents, instruments and writings required to be delivered by either
of them at or prior to the Closing Date pursuant to this Agreement and such
other documents, instruments and writings relating to the transactions
contemplated hereby as either party or its counsel may reasonably request.
ARTICLE II
REPRESENTATIONS OF CHARTER INC.
Charter Inc. hereby represents and warrants to Crescent Operating as
follows:
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<PAGE>
2.1 Organization.
(a) Charter Inc. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority necessary to conduct its business as
now conducted.
(b) Attached hereto as Exhibit 2.1(b) are complete and correct
copies of the Certificate of Incorporation and By-Laws of Charter Inc.,
including all amendments thereto, as presently in effect.
(c) There are no dissolution, liquidation or revocation
proceedings pending with respect to Charter Inc.
(d) CBHS is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite limited liability company power and authority necessary to
conduct its business as now conducted.
2.2 Authorization. Charter Inc. has all requisite corporate power and
authority to execute and deliver this Agreement and, assuming approval of the
Board of Directors of each of Magellan and Charter Inc., to carry out the
transactions contemplated hereby. The Board of Directors of Magellan has
preliminarily approved the transactions contemplated herein and shall meet
within seven (7) days of the execution of this Agreement to consider final
approval of such transactions. Promptly thereafter, the Board of Directors of
Charter Inc. shall meet for the purpose of approving the transactions
contemplated herein. No other corporate or stockholder actions or proceedings on
the part of Charter Inc. are necessary to consummate the transactions
contemplated hereby and perform Charter Inc.'s obligations hereunder. This
Agreement has been duly and validly executed and delivered by Charter Inc. and,
assuming this Agreement is approved by the Board of Directors of each of
Magellan and Charter Inc. as provided above, and assuming it constitutes the
legal, valid and binding obligation of Crescent Operating, constitutes a legal,
valid and binding obligation of Charter Inc., enforceable against Charter Inc.
in accordance with its terms, except that: (a) such enforcement may be subject
to bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally; and (b) the
remedies of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses.
2.3 No Violation. Subject to receipt of the consents referenced in
Section 2.4 of this Agreement, neither the execution, delivery and performance
of this Agreement nor the consummation of the transactions contemplated hereby
will: (a) violate any provisions of the Certificate of Incorporation or By-Laws
of Charter Inc., (b) violate or constitute a default under any agreement to
which Charter Inc. is a party, or by which Charter Inc. is bound or to which any
of the assets or property of Charter Inc. is subject, or (c) violate any statute
or law or any judgment, decree, order, regulation or rule of any court or
governmental agency or body to which Charter Inc. is subject or to which any of
the assets or property of Charter Inc. is subject, except, in the case of clause
(b) or (c) of this Section 2.3, any such violations or
-3-
<PAGE>
defaults as would not, individually, or in the aggregate, materially impair the
ability of Charter Inc. to perform its obligations hereunder or prevent the
consummation of the transactions contemplated hereby.
2.4 Consents. Except (a) for the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), (b) as set forth on Schedule 2.4 hereto,
and (c) as may be necessary as a result of any facts or circumstances related
solely to Crescent Operating, no consent, approval, authorization or order of,
or registration or filing with, any court or governmental agency or body
(domestic or foreign), or other third party under any agreement to which Charter
Inc. is a party, is required to be obtained by Charter Inc. in connection with
the execution, delivery or performance by Charter Inc. of this Agreement or the
consummation of the transactions contemplated hereby.
2.5 Compliance with Laws. (a) Except as disclosed to the Board of
Directors of CBHS in writing on the date hereof, the conduct of the business and
the operations of CBHS and Charter Advantage LLC, a Delaware limited liability
company ("Charter Advantage"), (i) have not violated or infringed, and do not
violate or infringe, in any material respect, and (ii) comply in all material
respects with, domestic (federal, state or local) or foreign laws, statutes,
ordinances, regulations, decrees or orders now in effect, and (b) Charter Inc.
has not received a notice with respect to CBHS or Charter Advantage of violation
of any such laws, statutes, ordinances, regulations, decrees or orders other
than violations which have been cured and as to which any related proceedings
before or involving any governmental authority have been finally resolved;
provided, however, that, with respect to CBHS, the foregoing representation and
warranty is made solely to the knowledge of Charter Inc. To the knowledge of
Charter Inc., no law, statute, ordinance, regulation, decree or order is
proposed to be adopted, the enforcement of which is likely to have a material
adverse affect on the business or operations or the value of the property or
assets of CBHS. Whenever a representation and warranty contained in this
Agreement is made to the "knowledge of Charter Inc." it shall mean all facts and
conditions which are actually known by those persons specified on Schedule 2.5
hereto.
2.6 Litigation. There are no claims, actions, suits, proceedings or
investigations pending, or, to the knowledge of Charter Inc., threatened or
anticipated, against Charter Inc. that would, individually, or in the aggregate,
materially impair the ability of Charter Inc. to perform its obligations
hereunder or prevent the consummation of the transactions contemplated hereby.
2.7 Broker's and Finder's Fees. Charter Inc. is not obligated to pay,
and has not retained, or entered into an agreement to retain, any broker or
finder or other person who is entitled to, any broker's or finder's fee or any
other commission or financial advisory fee based on any agreement or undertaking
made by Charter Inc. in connection with the transactions contemplated by this
Agreement.
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ARTICLE III
REPRESENTATIONS OF CRESCENT OPERATING
Crescent Operating hereby represents and warrants to Charter Inc. as follows:
3.1 Corporate Organization.
(a) Crescent Operating is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority necessary
to conduct its business as now conducted.
(b) Attached hereto as Exhibit 3.1(b) are complete and correct
copies of the Certificate of Incorporation and By-Laws of Crescent
Operating, including all amendments thereto, as presently in effect.
(c) The Purchased Shares, when issued and delivered at the
Closing in accordance with this Agreement, shall be validly issued,
fully paid and nonassessable, and free and clear of all Encumbrances.
The Purchased Shares shall be issued pursuant to a registration
statement on Form S-3 of Crescent Operating that has been declared
effective by the Commission under the Securities Act.
(d) The Crescent Operating Shares are currently (i) registered
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and (ii) traded on the Nasdaq National Market.
3.2 Authorization. Crescent Operating has all requisite corporate power
and authority to execute and deliver this Agreement and to carry out the
transactions contemplated hereby. The Executive Committee of the Board of
Directors of Crescent Operating has approved this Agreement and the transactions
contemplated hereby and has authorized the execution, delivery and performance
of this Agreement. No other corporate or stockholder actions or proceedings on
the part of Crescent Operating are necessary to consummate the transactions
contemplated hereby and perform Crescent Operating's obligations hereunder. This
Agreement has been duly and validly executed and delivered by Crescent Operating
and, assuming this Agreement constitutes the legal, valid and binding obligation
of Charter Inc., constitutes a legal, valid and binding obligation of Crescent
Operating, enforceable against Crescent Operating in accordance with its terms,
except that: (a) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally; and (b) the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses.
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3.3 No Violation. Subject to receipt of the consents referenced in
Section 3.4 of this Agreement, neither the execution, delivery and performance
of this Agreement nor the consummation of the transactions contemplated hereby
will: (a) violate any provisions of the Certificate of Incorporation or By-Laws
of Crescent Operating, (b) violate or constitute a default under any other
agreement to which Crescent Operating is a party, or by which Crescent Operating
is bound or to which any of the assets or property of Crescent Operating is
subject, or (c) violate any statute or law or any judgment, decree, order,
regulation or rule of any court or governmental agency or body to which Crescent
Operating is subject or to which any of the assets or property of Crescent
Operating is subject, except in the case of clause (b) or (c) of this Section
3.3, any such violations or defaults as would not, individually, or in the
aggregate, materially impair the ability of Crescent Operating to perform its
obligations hereunder or prevent the consummation of the transactions
contemplated hereby.
3.4 Consents. Except (a) for the expiration or termination of any
applicable waiting period under the HSR Act, (b) as set forth on Schedule 3.4
hereto, and (c) as may be necessary as a result of any facts or circumstances
related solely to Charter Inc., no consent, approval, authorization or order of,
or registration or filing with, any court or governmental agency or body
(domestic or foreign) or other third party is required to be obtained by
Crescent Operating in connection with the execution, delivery or performance by
Crescent Operating of this Agreement or the consummation of the transaction
contemplated hereby.
3.5 Compliance with Laws. (a) Except as disclosed to the Board of
Directors of CBHS in writing on the date hereof, the conduct of the business and
the operations of CBHS (i) have not violated or infringed, and do not violate or
infringe, in any material respect, and (ii) comply in all material respects
with, domestic (federal, state or local) or foreign laws, statutes, ordinances,
regulations, decrees or orders now in effect, and (b) Crescent Operating has not
received a notice with respect to CBHS of violation of any such laws, statutes,
ordinances, regulations, decrees or orders other than violations which have been
cured and as to which any related proceedings before or involving any
governmental authority have been finally resolved; provided, however, that the
foregoing representation and warranty is made solely to the knowledge of
Crescent Operating. To the knowledge of Crescent Operating, no law, statute,
ordinance, regulation, decree or order is proposed to be adopted, the
enforcement of which is likely to have a material adverse affect on the business
or operations or the value of the property or assets of CBHS. Whenever a
representation and warranty contained in this Agreement is made to the
"knowledge of Crescent Operating" it shall mean all facts and conditions which
are actually known by those persons specified on Schedule 3.5 hereto; provided,
however, that the provisions of this Section 3.5 are not intended to, and will
not, have an adverse affect on any rights or benefits that Crescent Real Estate
Equities Company or Crescent Real Estate Equities Limited Partnership may have
under any agreement to which either of them is a party.
3.6 Prior Representations and Warranties. To the knowledge of Crescent
Operating, none of the representations and warranties made by Magellan in the
Contribution
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Agreement, dated as of June 16, 1997, by and among Magellan, Crescent Operating
and CBHS, are untrue or inaccurate in any material respect.
3.7 Broker's and Finder's Fees. Crescent Operating is not obligated to
pay, and has not retained, or entered into any agreement to retain, any broker
or finder or other person who is entitled to, any broker's or finder's fee or
any other commission or financial advisory fee based on any agreement or
undertaking made by Crescent Operating in connection with the transactions
contemplated by this Agreement.
3.8 Restrictions on Transfer. Crescent Operating understands that the
Charter LLC Interest has not been registered under the Securities Act or the
securities laws of any state (collectively, "Securities Acts") and may not be
resold unless permitted under applicable exemptions contained in such Securities
Acts or upon satisfaction of the registration or qualification requirements of
such Securities Acts. Crescent Operating acknowledges that it must bear the
economic risk of its investment in the Charter LLC Interest for an indefinite
period of time since the Charter LLC Interest has not been registered or
qualified under such Securities Acts and, therefore, cannot be sold unless it is
subsequently registered or exemptions from registration or qualification are
available.
3.9 Qualification of Crescent Operating.
(a) Crescent Operating is acquiring the Charter LLC Interest
for investment purposes only, for its own account, not as nominee or agent for
any other person, firm or corporation, and not with a view to, or for resale in
connection with, a distribution or public offering thereof within the meaning of
such Securities Acts.
(b) Crescent Operating has knowledge and experience in
financial and business matters, is capable of evaluating the merits and risks of
its investment in the Charter LLC Interest, and is able to bear the economic
risks inherent in its investment in the Charter LLC Interest.
3.10 Commission Filings. Crescent Operating has filed all required
documents with the Commission since June 12, 1997 (the "Filings"). As of their
respective dates, the Filings complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and,
at the respective times they were filed, none of the Filings contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
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ARTICLE IV
COVENANTS AND AGREEMENTS
4.1 No Action to Render Representations and Warranties Untrue. Between
the date of this Agreement and the Closing Date:
(a) Charter Inc. and Crescent Operating, each as to CBHS,
shall use commercially reasonable best efforts consistent with good business
judgment to (i) preserve the present business organization of CBHS intact; (ii)
keep available the services of the present employees of CBHS; (iii) preserve the
present relationships of CBHS with entities or persons having business dealings
with CBHS; and (iv) generally operate the business of CBHS in the ordinary and
regular course consistent with the prior practices of CBHS;
(b) Charter Inc. and Crescent Operating, each as to CBHS,
shall cause CBHS to maintain its books and records in accordance with good
business practice, on a basis consistent with prior practice and in accordance
with generally accepted accounting principles, subject to normal year-end
adjustments; and
(c) Neither Charter Inc. nor Crescent Operating, as to either
itself or CBHS, shall willfully take any action or willfully fail to take any
action, in either case, which would result in any representation or warranty
being untrue in any material respect.
4.2 Filings and Consents. After the execution hereof, each of Charter
Inc. and Crescent Operating: (a) shall promptly prepare and make any required
filings with, and shall thereafter promptly make any required submissions to any
applicable governmental agency or authority; and (b) shall use its commercially
reasonable best efforts to obtain and to cooperate in obtaining any consent,
approval, authorization or order of, or in making any registration or filing
with, any governmental agency or body or other third party required in
connection with the execution, delivery or performance of this Agreement.
4.3 Certain Tax Matters.
(a) Each of Charter Inc. and Crescent Operating, to the extent
related to its ownership of interests in CBHS or its participation in CBHS as a
member prior to the Closing Date, (i) will each provide the other with such
assistance as may reasonably be requested by either of them in connection with
the assessment of taxes, any audit or other examination by any taxing authority,
any judicial or administrative proceedings relating to liability for taxes; (ii)
will each retain and provide the other with any records or information which may
be reasonably necessary to such assessment, audit or examination, proceeding or
determination; and (iii) will each provide the other with the final
determination of any such audit or examination, proceeding or determination that
affects any amount required to be
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shown on any return of the other for any period. The party requesting assistance
hereunder shall promptly reimburse the other for reasonable expenses incurred
for providing such assistance.
(b) Charter Inc. and Crescent Operating shall cooperate fully,
as and to the extent reasonably requested by the other party, in connection with
any audit, litigation or other proceeding with respect to taxes and with the
preparation of any tax returns to the extent related to its ownership of
interests in CBHS or its participation in CBHS as a member prior to the Closing
Date.
(c) Each of the parties hereto acknowledges that CBHS or its
successor intends to make an election (the "Election") pursuant to Section 754
of the Internal Revenue Code of 1986, as amended, to step up the basis of the
assets of CBHS as a result of the sale of the Charter LLC Interest and agrees to
cooperate with CBHS or its successor in making the Election by, among other
things, providing to CBHS such information as is reasonably necessary to enable
CBHS to determine the basis of its assets following the Election, provided that
none of the parties hereto shall be required to take any action in connection
with the Election that would adversely affect such party or its respective
rights and benefits under this Agreement. Within 30 days from the Closing Date,
the parties hereto shall use commercially reasonable best efforts to cause CBHS
to make the Election.
4.4 Termination of Operating Agreement. Immediately prior to and
effective as of the Closing, Charter Inc., Crescent Operating and Magellan shall
have terminated the Operating Agreement, and Charter Inc. and Magellan shall
have relinquished all of their respective rights under the Operating Agreement
as of the Closing Date.
4.5 Consent Decree. Crescent Operating agrees that, if required by the
Federal Trade Commission (the "FTC"), it will commit to the FTC to be bound by
the requirements of the Consent Order entered into in the case entitled, In the
Matter of Charter Medical Corporation, Docket No. C-3558, as modified by the
FTC's Order Reopening and Modifying Order dated January 29, 1996.
4.6 CBHS Restructuring. Each of the parties hereto acknowledges that
CBHS has indicated to it that CBHS anticipates converting from a limited
liability company to a corporation (the "Restructuring") prior to the Closing in
connection with the financing of the transactions contemplated by the Purchase
Agreement and agrees to reasonably cooperate with CBHS and to take any actions
that CBHS may reasonably request in order to implement the Restructuring,
provided that none of the parties hereto shall be required to take any action in
connection with the Restructuring that would adversely affect such party or its
respective rights and benefits under this Agreement. Within 30 days from the
date hereof, the parties hereto shall use commercially reasonable best efforts
to agree to the terms of the Restructuring.
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4.7 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its commercially reasonable
best efforts to satisfy the conditions set forth in Article V hereof insofar as
such matters are within its control, and to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement.
ARTICLE V
CLOSING CONDITIONS
5.1 Conditions to Obligations of Crescent Operating. The obligation of
Crescent Operating to deliver the Purchased Shares at the Closing is subject to
satisfaction of the following conditions precedent, any or all of which may be
waived in writing by Crescent Operating at its sole discretion:
(a) The representations and warranties of Charter Inc.
contained herein shall be true and correct in all material respects at and as of
the Closing Date with the same effect as though such representations and
warranties were made at and as of the Closing Date, other than representations
and warranties that speak as of a specific date or time (which need only be true
and correct as of such date or time), and Charter Inc. shall furnish Crescent
Operating with an officer's certificate as to the foregoing;
(b) Charter Inc. shall have performed in all material respects
all of its obligations required by this Agreement to be performed by it on or
prior to the Closing, and Charter Inc. shall furnish Crescent Operating with an
officer's certificate as to the foregoing;
(c) As of the Closing Date, there shall be no effective
injunction, writ or preliminary restraining order or any order of any nature
issued by a court or governmental or regulatory agency of competent jurisdiction
to the effect that the transactions contemplated by this Agreement may not be
consummated, and there shall be no action, suit or proceeding pending, which is
brought by any governmental or regulatory agency, seeking to so enjoin the
transactions;
(d) The applicable waiting period under the HSR Act shall have
expired or been terminated;
(e) Crescent Operating shall have received all consents,
approvals, authorizations or orders required as set forth on Schedule 3.4;
(f) Crescent Operating shall have received an opinion from
Dow, Lohnes & Albertson, PLLC, counsel to Charter Inc., in form and substance
reasonably acceptable to Crescent Operating, dated as of the Closing Date,) as
to the due authorization, execution and delivery of this Agreement by, and as to
the enforceability of this Agreement against, Charter Inc., and as to the good
standing of Charter Inc.;
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(g) The conditions set forth in the Purchase Agreement, dated
as of the date hereof, by and between CBHS and Magellan with respect to the
purchase by CBHS of certain equity interests and assets of certain subsidiaries
of Magellan (the "Purchase Agreement"), and in any agreements referenced
therein, shall have been fulfilled or waived, and all transactions contemplated
by the Purchase Agreement and any such agreements shall have been consummated;
(h) Charter Inc. and Magellan shall have complied with the
provisions of Section 4.4 of this Agreement; and
(i) The following conditions (the "Shared Risk Conditions")
regarding the interim final rule to be recommended by the United States
Department of Health and Human Services Negotiated Rulemaking Committee (the
"Rulemaking Committee") on the Shared Risk Exception relating to the existing
statutory shared risk safe harbor, 42 U.S.C. ss. 1320a-7b(b)(3)(F) (the "Shared
Risk Exception"), shall have been satisfied: (i) the Shared Risk Exception shall
have become effective, as stated in the notice of publication, and (ii) the
Services Purchase Agreement to be entered into by and between Magellan and CBHS
(the "Services Purchase Agreement") either (A) shall have been executed in the
form agreed to by the parties as of the date hereof if the Shared Risk Exception
is the same as the text, other than nonsubstantive changes, of the statement
issued on January 22, 1998, by the Rulemaking Committee, or (B) shall have been
executed in a form that complies with the Shared Risk Exception and that would
not result in any material loss of the proposed benefits to be provided to
Crescent Operating, CBHS or Magellan thereunder if the Shared Risk Exception is
not the same as the text, other than nonsubstantive changes, of the statement
issued on January 22, 1998, by the Rulemaking Committee.
(j) Magellan shall have executed the Non Compete Agreement
attached as Schedule 5.1 (j).
5.2 Conditions to Obligations of Charter Inc. The obligation of Charter
Inc. to deliver the Charter LLC Interest at the Closing is subject to the
satisfaction of the following conditions precedent, any or all of which may be
waived in writing by Charter Inc. at its sole discretion:
(a) The representations and warranties of Crescent Operating
contained herein shall be true and correct in all material respects at and as of
the Closing Date with the same effect as though such representations and
warranties were made at and as of the Closing Date other than representations
and warranties that speak as of a specific date or time (which need only be true
and correct as of such date or time), and Crescent Operating shall furnish
Charter Inc. with an officer's certificate as to the foregoing;
(b) Crescent Operating shall have performed in all material
respects all of its obligations required by this Agreement to be performed by it
on or prior to the Closing, and Crescent Operating shall furnish Charter Inc.
with an officer's certificate as to the foregoing;
(c) As of the Closing Date, there shall be no effective
injunction, writ or preliminary restraining order or any order of any nature
issued by a court or governmental or regulatory agency of competent jurisdiction
to the effect that the transactions contemplated by this Agreement may not be
consummated, and there shall be no action, suit or proceeding
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pending, which is brought by any governmental or regulatory agency, seeking to
so enjoin the transactions;
(d) The applicable waiting period under the HSR Act shall have
expired or been terminated;
(e) The Board of Directors of each of Magellan and Charter
Inc. shall have approved the transactions contemplated herein pursuant to
Section 2.2;
(f) Charter Inc. shall have received all consents, approvals,
authorizations or orders required as set forth on Schedule 2.4;
(g) Charter Inc. shall have received an opinion from Shaw,
Pittman, Potts & Trowbridge, counsel to Crescent Operating, in form and
substance reasonably acceptable to Charter Inc., dated as of the Closing Date,
as to the due authorization, execution and delivery of this Agreement by, and as
to the enforceability of this Agreement against, Crescent Operating, and as to
the good standing of Crescent Operating;
(h) The conditions set forth in the Purchase Agreement, and in
any agreements referenced therein, shall have been fulfilled or waived, and all
transactions contemplated by the Purchase Agreement and any such agreements
shall have been consummated;
(i) Crescent Operating and Magellan shall have complied with
the provisions of Section 4.4 of this Agreement; and
(j) The Shared Risk Conditions shall have been satisfied.
5.3 Conditions to Obligations of Magellan. The obligation of Magellan
to perform its obligations under Section 4.4 of this Agreement is subject to the
satisfaction of the following conditions precedent, any or all of which may be
waived in writing by Magellan at its sole discretion:
(a) Crescent Operating and Charter Inc. each shall have
performed in all material respects all of its obligations required by this
Agreement to be performed by it on or prior to the Closing;
(b) As of the Closing Date, there shall be no effective
injunction, writ or preliminary restraining order or any order of any nature
issued by a court or governmental or regulatory agency of competent jurisdiction
to the effect that the transactions contemplated by this Agreement may not be
consummated, and there shall be no action, suit or proceeding pending, which is
brought by any governmental or regulatory agency, seeking to so enjoin the
transactions;
(c) The applicable waiting period under the HSR Act shall have
expired or been terminated;
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(d) Charter Inc. shall have received all consents, approvals,
authorizations or orders required as set forth on Schedule 2.4, and Crescent
Operating shall have received all consents, approvals, authorizations or orders
required as set forth on Schedule 3.4;
(e) The conditions set forth in the Purchase Agreement, and in
any agreements referenced therein, shall have been fulfilled or waived, and all
transactions contemplated by the Purchase Agreement and any such agreements
shall have been consummated;
(f) Crescent Operating and Charter Inc. shall have complied with the
provisions of Section 4.4 of this Agreement; and
(g) The Shared Risk Conditions shall have been satisfied.
(h) Crescent Operating shall have executed the Non Compete Agreement
attached as Scheulde 5.3(h).
ARTICLE VI
INDEMNIFICATION AND ASSUMPTION OF CERTAIN LIABILITIES
6.1 Indemnification for Breach of Representation or Warranty.
(a) After the Closing, Charter Inc. agrees to indemnify and
hold Crescent Operating harmless from any claims, liabilities, obligations,
losses, costs, expenses, penalties, fines, judgments and other damages,
including reasonably attorneys' fees and expenses (collectively "Damages"),
incurred by Crescent Operating as a result of (i) any breach by Charter Inc. of
any representation or warranty of Charter Inc. contained in Article II of this
Agreement; or (ii) a failure by Charter Inc. to perform in any material respect
any covenant or agreement required to be performed by it under this Agreement;
provided, however, that Charter Inc. shall have no liability to Crescent
Operating under this paragraph unless Crescent Operating shall have first
delivered to Charter Inc. a written claim to indemnification hereunder on or
before the date which is 18 months after the Closing Date, except as otherwise
provided in Section 8.1; provided, further, that Charter Inc. shall not be
liable for Damages in excess of an aggregate of $100,000,000 under this
Agreement, the Purchase Agreement[and the Joint Venture Purchase Agreement to be
entered into by Magellan and CBHS prior to the closing of the transactions
contemplated by the Purchase Agreement (the "Indemnification Cap").
(b) After the Closing, Crescent Operating agrees to indemnify
and hold Charter Inc. harmless from any Damages incurred by Charter Inc. as a
result of (i) any breach by Crescent Operating of any representation or warranty
of Crescent Operating contained in Article III of this Agreement; or (ii) a
failure by Crescent Operating to perform in any material respect a covenant or
agreement required to be performed by it under this Agreement; provided,
however, that Crescent Operating shall have no liability to Charter Inc. under
this paragraph unless Charter Inc. shall have first delivered to Crescent
Operating a written claim to indemnification hereunder on or before the date
which is 18 months after the Closing Date; provided, further, that Crescent
Operating shall not be liable for Damages in excess of the Indemnification Cap.
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(c) Subject to the provisions of Sections 6.1(a) and 6.1(b),
in the event of the occurrence of an event in which any party asserts a claim
for Damages, such party shall provide the indemnifying party with prompt notice
of such event and shall otherwise make available to the indemnifying party all
relevant information which is material to the claim and which is in the
possession of the indemnified party. If such event involves the claim of any
third party (a "Third-Party Claim"), the indemnified party shall have the right
to elect to join in the defense, settlement, adjustment or compromise of any
such Third-Party Claim, and to employ counsel to assist such indemnifying party
in connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or compromised,
or the defense thereof terminated, without the prior consent of the indemnifying
party unless and until the indemnifying party shall have failed, after the lapse
of a reasonable period of time, but in no event more than 30 days after written
notice to it of the
Third-Party Claim, to join in the defense, settlement, adjustment or compromise
of the same. An indemnified party's failure to give timely notice or to furnish
the indemnifying party with any relevant data and documents in connection with
any Third-Party Claim shall not constitute a defense (in part or in whole) to
any claim for indemnification by such party, except and only to the extent that
such failure shall result in any material prejudice to the indemnifying party.
If so desired by any indemnifying party, such party may elect, at such party's
sole expense, to assume control of the defense, settlement, adjustment or
compromise of any Third-Party Claim, with counsel reasonably acceptable to the
indemnified parties, insofar as such claim relates to the liability of the
indemnifying party, provided that such indemnifying party shall obtain the
consent of all indemnified parties before entering into any settlement,
adjustment or compromise of such claims, or ceasing to defend against such
claims, if as a result thereof, or pursuant thereto, there would be imposed on
an indemnified party any material liability or obligation not covered by the
indemnity obligations of the indemnifying parties under this Agreement
(including, without limitation, any injunctive relief or other remedy). In
connection with any Third-Party Claim, the indemnified party, or the
indemnifying party if it has assumed the defense of such claim pursuant to the
preceding sentence, shall diligently pursue the defense of such Third-Party
Claim.
(d) The amount of any and all Damages for which
indemnification is provided pursuant to this Article VI shall be net of any
amounts received by the indemnified party under insurance policies with respect
to such Damages (it being understood that any proceeds obtainable from a captive
insurance company of the indemnified party or any amounts which the indemnified
party self-insures shall not be so taken into account). In the event that any
claim for indemnification asserted under this Article VI is, or may be, the
subject of the insurance coverages of Charter Inc. and Crescent Operating, the
indemnified party agrees to promptly notify the applicable insurance carrier of
such claim and tender defense thereof to such carrier. If insurance coverage is
denied (in whole or in part), or if no resolution of an insurance claim shall
have occurred upon payment of the relevant indemnification obligation, the
indemnifying party shall be subrogated to the rights of the indemnified party
against such insurance carrier.
(e) The indemnification provided in this Article VI and the obligations
in Section 7.2 shall be the exclusive remedy of the parties for any breach of
this Agreement.
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ARTICLE VII
TERMINATION PRIOR TO CLOSING
7.1 Termination Prior to Closing. This Agreement may be terminated and
abandoned at any time prior to the Closing:
(a) by the mutual consent of Charter Inc. and Crescent
Operating; or
(b) by Charter Inc. or Crescent Operating, in the event the
Closing has not occurred by the date which is six months after the date of this
Agreement (the "Cut-Off Date"), unless failure of such consummation shall be due
to the failure of the party seeking to terminate this Agreement to comply in all
material respects with the agreements and covenants contained herein to be
performed by such party on or before the Cut-Off Date.
7.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1 hereof, such termination shall be without
liability or obligation of either party (or any director, officer, employee, or
representative of such party) to the other party to this Agreement; provided
that if such termination shall result from the willful failure of either party
to fulfill a condition to the performance of the obligations of the other party
or to perform a covenant of this Agreement or from a breach by either party to
this Agreement, such party shall be fully liable for any and all Damages
incurred or suffered by the other party as a result of such failure or breach.
The provisions of Section 8.5 shall survive any termination hereof pursuant to
Section 7.1.
ARTICLE VIII
MISCELLANEOUS
8.1 Survival. The representations and warranties made by the parties in
this Agreement shall expire, and be terminated and extinguished, on the date
which is 18 months after the Closing Date, and thereafter neither Charter Inc.
nor Crescent Operating, nor any officer, director or principal thereof, shall
have any liability whatsoever with respect to any such representation or
warranty, except that the representations and warranties in Sections 2.1(a), (c)
and (d), 2.2, 3.1(a) and (c) and 3.2 shall survive without limitation, and that
the representations and warranties in Sections 2.5 and 2.6 shall survive until
the applicable statute of limitations period for any applicable claim. The
covenants and agreements of the parties contained herein shall survive the
Closing to the extent they relate to an agreement or obligation to be performed
after the Closing.
8.2 Notices. All notices, requests, instructions or documents hereunder
shall be in writing and delivered personally or by Federal Express, or sent by
telecopy, or sent by United States registered or certified mail, postage
prepaid, as follows:
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(i) if to Crescent Operating:
Jeffrey L. Stevens
Executive Vice President and Chief Operating Officer
Crescent Operating
306 West 7th Street, Suite 1025
Fort Worth, Texas 76102
Facsimile: (817) 339-1010
with a copy (which shall not constitute notice) to:
Sylvia M. Mahaffey, Esq.
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Facsimile: (202) 663-8007
if to Charter Inc. or Magellan:
(ii) David Hansen, Esq.
General Counsel
Magellan Health Services, Inc.
3414 Peachtree Road, N.E., Suite 1400
Atlanta, Georgia 30326
Facsimile: (404) 869-5660
with a copy (which shall not constitute notice) to:
J. Eric Dahlgren, Esq.
Dow, Lohnes & Albertson, PLLC
One Ravinia Drive, Suite 1600
Atlanta, Georgia 30346
Facsimile: (770) 901-8874
or such other address as any party may designate by written notice to the other
parties. Any notice, request, demand, waiver or other communication required or
permitted to be given under this Agreement will be deemed to have been duly
given only if delivered in person or by first class, prepaid, registered or
certified mail, or sent by courier or, if receipt is confirmed, by telecopier.
8.3 Entire Agreement. This Agreement, including the Exhibits and
Schedules hereto, constitutes the entire agreement between the parties hereto
with respect to the transactions contemplated herein, and no modification hereof
shall be effective unless in writing and signed by the party against which it is
sought to be enforced. This Agreement supersedes all prior understandings,
negotiations and agreements relating to the transactions contemplated herein.
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8.4 Successors and Assigns. The terms, covenants and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns; provided, however, that neither
party may assign its rights and obligations under this Agreement without the
prior written consent of the other party, except that Charter Inc. may assign
this Agreement to any other wholly-owned subsidiary of Magellan provided that
Charter Inc. transfers its ownership interest of the Charter LLC Interest to
such wholly-owned subsidiary.
8.5 Expenses. Each of Charter Inc. and Crescent Operating shall bear
its own costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby.
8.6 Severability. If any provision of this Agreement shall be
determined by arbitration in accordance with Section 8.8 to be void and of no
effect, the provisions of this Agreement shall be deemed amended to delete or
modify, as necessary, the offending provision, and this Agreement as so amended
or modified shall not be rendered unenforceable or impaired but shall remain in
force to the fullest extent possible in keeping with the intention of the
parties hereto.
8.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, applicable in the case of
agreements made and to be performed entirely within such state, without regard
to such state's conflicts of laws rules.
8.8 Arbitration. The parties agree to resolve any dispute, controversy
or claim arising out of or relating to this Agreement, its interpretation or
performance (a "Controversy") in accordance with this Section 8.8.
(a) The parties agree to negotiate in good faith for up to 45
days after written notice by one party to the other party or parties to the
Controversy, in order to attempt to resolve such Controversy. In this regard,
each party agrees to involve its respective senior management in these
discussions if necessary.
(b) In the event that such Controversy is not resolved through
mutual discussions within such 45-day period of time, such dispute or
controversy may be submitted by any such party to, and if so submitted shall be
finally settled by, arbitration in accordance with the Commercial Arbitration
Rules (the "Rules") of the American Arbitration Association, and judgment upon
the award may be entered in any court where the arbitration takes place or any
court having jurisdiction. Any such arbitration shall take place in Atlanta,
Georgia, and there shall be one arbitrator. The parties shall attempt to agree
on the selection of the arbitrator within 60 days after receipt of the written
notice referred to in clause (a) above; if the parties agree, the agreed-upon
person shall be the arbitrator; if the parties cannot so agree, the arbitrator
shall be selected by the American Arbitration Association in accordance with the
Rules. The arbitrator may order specific performance or other equitable relief
or remedies, to the extent he or she deems it appropriate, in any situation in
which a
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court could so order. All costs of such arbitration, including the compensation
of the arbitrator (but not including the parties' attorneys', accountants' and
other professionals' fees, as to which each party shall pay its own) shall be
allocated 50% to Crescent Operating and 50% to Charter Inc. The decision of the
arbitrator shall be final and binding upon the parties, their successors and
assigns, and they shall comply with such decision in good faith, and each party
hereby submits itself to the jurisdiction of the courts of the place where the
arbitration is held, but only for the entry of judgment with respect to and to
enforce the decision of the arbitrator hereunder.
8.9 Headings. The headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
8.10 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and same instrument.
8.11 Waiver. Any of the terms or conditions of this Agreement which may
be lawfully waived may be waived in writing at any time by the party which is
entitled to the benefits thereof. Any waiver of any of the provisions of this
Agreement by any party hereto shall be binding only if set forth in an
instrument in writing signed on behalf of such party. No failure to enforce any
provision of this Agreement shall be deemed to or shall constitute a waiver of
such provision and no waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
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8.12 Variations of Pronouns; Definitions; Number; Gender. All pronouns
and all variations thereof shall be deemed to refer to the masculine, feminine
or neuter, singular or plural, as the identity of the person or persons may
require. Whenever used herein the singular number shall include the plural, the
plural shall include the singular, and the use of any gender shall include all
genders. "Person" shall mean an individual, firm, trust, association,
corporation, limited liability company, partnership, government (whether
federal, state, local or other political subdivision, or an agency or bureau of
any of them) or other entity.
IN WITNESS WHEREOF, this Equity Purchase Agreement has been duly
executed by the parties hereto as of the date first above written.
CHARTER BEHAVIORAL HEALTH
SYSTEMS, INC.
By: /s/HOWARD A. MCLURE
Name: Howard A. McLure
Title: Vice President
CRESCENT OPERATING, INC.
By: /s/JEFFREY L. STEVENS
Name: Jeffrey L. Stevens
Title: Executive Vice President and
Chief Operating Officer
MAGELLAN HEALTH SERVICES, INC.
Solely for purposes of Section 4.4 hereof:
By: /s/CRAIG L. MCKNIGHT
Name: Craig L. McKnight
Title: Executive Vice President and
Chief Execitive Officer
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Exhibit 2(h)
Execution copy
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT (the "Agreement"), dated as of March 3, 1998, is
entered into by and between Crescent Operating, Inc. ("Crescent Operating") and
Magellan Health Services, Inc. ("Magellan").
WHEREAS, Crescent Operating has entered into that certain Equity
Purchase Agreement, dated of even date herewith, pursuant to which Crescent
Operating agreed to purchase and Charter Behavioral Health System, Inc.
("Charter Inc.") agreed to sell 100% of Charter Inc.'s membership interest in
Charter Behavioral Health Systems, LLC ("CBHS");
WHEREAS, CBHS, Magellan and certain direct and indirect subsidiaries of
Magellan, excluding CBHS (Magellan, together with such subsidiaries, the
"Sellers"), have entered into that certain Purchase Agreement, dated of even
date herewith (the "Purchase Agreement"), pursuant to which CBHS agreed to
purchase and the Sellers agreed to sell certain equity interests in certain
entities (the "Subsidiaries") and the assets of certain staff model clinics;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
ARTICLE 1
REPRESENTATIONS OF CRESCENT OPERATING
Crescent Operating hereby represents and warrants to CBHS and Magellan
as follows:
1.1 Corporate Organization. Crescent Operating is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to conduct its
business as now conducted. There are no dissolution, liquidation or revocation
proceedings pending with respect to Crescent Operating.
1.2 Authorization. Crescent Operating has the corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The Executive Committee of the Board of Directors of
Crescent Operating has approved this Agreement and the transactions contemplated
hereby and has authorized the execution and delivery of this Agreement. No other
corporate or stockholder proceedings on the part of Crescent Operating are
necessary to consummate the transactions contemplated hereby and perform
Crescent Operating's obligations hereunder. This Agreement has been duly and
validly executed and delivered by Crescent Operating and, assuming the Agreement
constitutes the legal, valid and binding obligation of CBHS and Magellan,
constitutes a legal, valid and binding obligation of Crescent Operating,
enforceable against Crescent Operating in accordance with its terms, except
that: (a) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
<PAGE>
relating to creditors' rights; and (b) the remedies of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses.
1.3 No Violation. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will: (a) violate
any provisions of the Certificate of Incorporation or By-Laws of Crescent
Operating; (b) violate or constitute a default under any agreement to which
Crescent Operating is a party, or by which Crescent Operating is bound; or (c)
violate any statute or law or any judgment, decree, order, regulation or rule of
any court or governmental agency or body to which Crescent Operating is subject,
except, in the case of clause (b) or (c), any such violations or defaults as
would not, individually or in the aggregate, materially impair the ability of
Crescent Operating to perform its obligations hereunder or prevent the
consummation of the transactions contemplated hereby.
1.4 Consents. Except (a) as set forth in Schedule 1.4 hereto and (b) as
may be necessary as a result of any facts or circumstances related solely to
CBHS or Magellan, no consent, approval, authorization or order of, or
registration or filing with, any court or governmental agency or body or other
third party is required to be obtained by Crescent Operating in connection with
the execution, delivery or performance by Crescent Operating of this Agreement.
ARTICLE II
REPRESENTATIONS OF MAGELLAN
Magellan hereby represents and warrants to Crescent Operating as
follows:
2.1 Corporate Organization.
(a) Each Seller is duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has the
requisite corporate or other power and authority to conduct its business as now
conducted. Each of the Subsidiaries is duly organized, validly existing and in
good standing under the laws of its respective jurisdiction of organization and
has the requisite corporate power and authority to conduct its business as now
conducted.
(b) Each of the Subsidiaries is duly qualified or licensed to
do business as a foreign corporation or limited liability company, as the case
may be, and is in good standing in each of the jurisdictions in which it is
required to be so qualified or licensed, except jurisdictions in which the
failure to qualify to do business would not have a material effect on the
business or operations of such Subsidiary.
(c) There are no dissolution, liquidation or revocation proceedings
pending with respect to any of the Sellers or Subsidiaries.
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2.2 Authorization. Magellan has the corporate power and authority to
enter into this Agreement and, assuming approval of the Board of Directors of
Magellan, to carry out the transactions contemplated hereby. The Board of
Directors of Magellan has preliminarily approved the transactions contemplated
herein and shall meet within seven (7) days of the execution of this Agreement
to consider final approval of such transactions. No other corporate or
stockholder proceedings on the part of Magellan are necessary to consummate the
transactions contemplated hereby and perform Magellan's obligations hereunder.
This Agreement has been duly and validly executed and delivered by Magellan and,
assuming the Agreement is approved by the Board of Directors of Magellan as
provided above, and assuming it constitutes the legal, valid and binding
obligation of Crescent Operating, constitutes a legal, valid and binding
obligation of Magellan, enforceable against Magellan in accordance with its
terms, except that: (a) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights; and (b) the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses.
2.3 No Violation. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will: (a) violate
any provisions of the Certificate of Incorporation or By-Laws of Magellan; (b)
violate or constitute a default under any agreement to which Magellan is a
party, or by which Magellan is bound or to which any of the assets or property
of Magellan is subject; or (c) violate any statute or law or any judgment,
decree, order, regulation or rule of any court or governmental agency or body to
which Magellan is subject or to which any of the assets or property of Magellan
is subject, except, in the case of clause (b) or (c), any such violations or
defaults as would not, individually or in the aggregate, materially impair the
ability of Magellan to perform its obligations hereunder or prevent the
consummation of the transactions contemplated hereby.
ARTICLE III
COVENANTS AND AGREEMENTS
3.1 Financing. Crescent Operating hereby agrees as soon as practicable
after execution of this Agreement to cooperate with CBHS and provide assistance
to CBHS in the preparation of any offering documents or other material required
in connection with CBHS's efforts to obtain financing for CBHS's payment
obligations under the Purchase Agreement. Crescent Operating shall use its
commercially reasonable best efforts to assist CBHS in obtaining such financing,
upon terms acceptable to CBHS and Crescent Operating in their sole judgment,
within 120 days after the date of this Agreement; it being understood by the
parties that certain extensions to the 120-day period may be necessary to
complete all actions necessary to obtain such financing. All expenses incurred
in connection with obtaining such financing, including accounting costs, legal
fees, investment banking fees, printing costs and SEC filing fees, shall be
reimbursed by Crescent Operating. Magellan agrees to cooperate with CBHS in
providing any information needed in connection with obtaining the financing
referenced herein. Crescent Operating further agrees that, in the event an
offering is to be consummated and, at the time the pricing of the offering is to
occur, the offering proceeds to
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be received in such offering, based on the proposed pricing, would be less than
$280,000,000 plus any and all Advances, then Crescent Operating shall purchase,
on the closing date of such offering, the amount of CBHS securities offered in
such offering necessary to cause the offering proceeds to be received in such
offering to equal $280,000,000 plus any and all Advances, but in no event shall
Crescent Operating be obligated to purchase CBHS securities having an aggregate
purchase price in excess of $25,000,000. Crescent Operating agrees, in any
public equity financing proposed to be undertaken by CBHS, to sell a sufficient
percentage of the ownership interests of CBHS, based on advice of the managing
underwriter(s) for any such offering, to raise $280,000,000 plus an amount equal
to the amount of the Advances. "Advances" shall having the meaning ascribed to
such term in Section 4.10 of the Purchase Agreement.
3.2 Termination Fee. In the event that, as a result of the failure by
CBHS to obtain sufficient financing in accordance with Section 3.1 above, (i)
the transactions contemplated by the Purchase Agreement are not consummated
within the time period specified in the Purchase Agreement or (ii) the Purchase
Agreement is terminated, then Crescent Operating shall promptly pay to Magellan
cash in the amount of $2,500,000 and shall issue Magellan a number of shares of
Crescent Operating common stock, par value $0.01 per share, equal to the number
obtained by dividing $2,500,000 by the average "closing price" of a share of
Crescent Operating common stock for the five "trading days" prior to the date of
termination of the Purchase Agreement and for the five "trading days" after the
date of termination of the Purchase Agreement (collectively, the "Termination
Fee"). The "closing price" for each such trading day means the last reported
sales price, regular way, on such day, or if no such sale takes place on that
day, the average of the reported closing bid and asked prices on that day,
regular way, in either case as reported on the Nasdaq National Market. A
"trading day" is any day on which the Nasdaq National Market is open for the
transaction of business. Both parties hereto acknowledge that the Termination
Fee is not intended as a penalty, but rather is intended as a reasonable
estimate of Magellan's costs and expenses incurred in connection with the
transactions contemplated by the Purchase Agreement and the Equity Purchase
Agreement, as well as consideration for other opportunities it did not pursue in
anticipation of the consummation of the such transactions. Notwithstanding
anything to the contrary contained in this Agreement, Crescent Operating shall
have no obligation under this Section 3.2 until the later of (i) 30 days after
the date hereof or (ii) the date on which Magellan shall have delivered to CBHS
Schedules 3.4(a) and 3.4(c) to the Services Purchase Agreement, which schedules
shall be in a form and of a substance satisfactory to CBHS and Magellan;
provided, however, that Crescent Operating shall have the right to terminate
this Agreement or the Equity Purchase Agreement for any reason within 30 days
after the date hereof, in which event the Termination Fee shall not be payable
under any circumstances. In the event that Crescent Operating is required to pay
Magellan the Termination Fee pursuant to this Section 3.2, payment of the
Termination Fee shall be Magellan's sole remedy for the termination of this
Agreement.
3.3 Guarantees. Crescent Operating acknowledges that CBHS has agreed to
use its commercially reasonable best efforts to secure the full and complete
release, prior to the
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closing under the Purchase Agreement (and continuously thereafter if not
released prior to such closing), of any and all guarantees (the "Magellan
Guarantees") by the Sellers or any of their affiliates of any indebtedness or
obligations of CBHS or its affiliates (other than CBHS) or any of the
Subsidiaries or their subsidiaries (or under any contract assigned to CBHS
pursuant to the Purchase Agreement) and to secure full and complete release,
prior to the closing under the Purchase Agreement (and continuously thereafter
if not released prior to such closing), of any and all obligations (the
"Magellan Obligations") (i) of the Sellers or any of their affiliates (other
than the Subsidiaries) under any agreement which was assigned to CBHS or its
subsidiaries pursuant to the Contribution Agreement, dated as of June 16, 1997,
by and among Magellan, Crescent Operating and CBHS, and under which the Sellers
or any of their affiliates (other than the Subsidiaries) remain obligors or
indemnitors in any manner and (ii) under any agreement of any of the
Subsidiaries or their subsidiaries (or under any contract assigned to CBHS
pursuant to the Purchase Agreement) and under which the Sellers or any of their
affiliates (other than the Subsidiaries) will remain obligors or indemnitors in
any manner after the closing under the Purchase Agreement. Set forth on Schedule
4.11 to the Purchase Agreement, to the knowledge, after reasonable inquiry, of
those persons specified on Schedule 2.04(b) to the Purchase Agreement, is a list
of all Magellan Guarantees and Magellan Obligations. To the extent, after the
date hereof, the Sellers discover there are other Magellan Guarantees or
Magellan Obligations not identified on Schedule 4.11 to the Purchase Agreement
("Unlisted Obligations"), the Sellers may request Crescent Operating to add any
such Unlisted Obligation to such Schedule 4.11. If Crescent Operating agrees to
add an Unlisted Obligation, such Schedule 4.11 shall be automatically amended to
include the Unlisted Obligation, which shall be treated as if it had appeared on
such Schedule 4.11 at the time of execution of this Agreement. Should Crescent
Operating object to the addition of an Unlisted Obligation, Magellan may
terminate any such Unlisted Obligation (and the related underlying obligations,
if any); provided that such termination is permitted under the applicable
contractual agreement; provided, further, that CBHS or its affiliates shall
agree to such termination if permitted under such agreement or permitted by any
third party to such agreement. Crescent Operating agrees that, to the extent any
Magellan Guarantee (listed on Schedule 4.11 to the Purchase Agreement) of any
such indebtedness or obligation or any Magellan Obligation (listed on Schedule
4.11 to the Purchase Agreement) is not fully and completely released on or
before the closing under the Purchase Agreement, Crescent Operating will
indemnify and hold harmless the Sellers and their respective affiliates and
their successors and assigns from, against and in respect of any and all claims,
liabilities, obligations, losses, costs, expenses, penalties, fines and other
judgments (at equity or at law) and damages whenever arising or incurred
(including, without limitation, amounts paid in settlement, costs of
investigation and reasonable attorneys' fees and expenses) arising out of or
relating to the Magellan Guarantees and Magellan Obligations. Notwithstanding
anything to the contrary contained in this Agreement, Crescent Operating shall
have no obligation under this Section 3.3 unless and until the conditions set
forth in the Purchase Agreement shall have been fulfilled or waived, and all
transactions contemplated by the Purchase Agreement shall have been consummated.
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3.4 Conditions to Obligations of Crescent Operating. Notwithstanding
anything to the contrary contained in this Agreement, Crescent Operating shall
have no obligation under Sections 3.1 or 3.2 above unless and until:
(a) Magellan shall have delivered, and shall have caused each
of the Sellers to deliver, a certificate stating that: (i) the representations
and warranties made by Magellan or the Sellers, as the case may be, in this
Agreement and the Purchase Agreement were true and correct in all material
respects at the time of execution of the Purchase Agreement and, if applicable,
as of the date on which the offering commenced and as of the date on which the
offering closed, and (ii) the covenants required to be performed by Magellan or
the Sellers, as the case may be, on or before the date on which Crescent
Operating's obligations arose had been performed as of such date; provided,
however, that the failure of Magellan to deliver (or to cause each of the
Sellers to deliver) such certificate shall not relieve Crescent Operating of any
such obligation unless Crescent Operating reasonably demonstrates (including,
but not limited to, by receipt of advice provided to Crescent Operating and
Magellan by the managing underwriter(s) in any such financing) that the fact
that a contributing factor to the inability of CBHS to complete the financing
described in Section 3.1 above was the fact that (A) such representations and
warranties were not true or correct in all material respects as of the
applicable date or (B) one or more of the covenants required to be performed was
not performed by the applicable date, and
(b) the following conditions regarding interim final rule to
be recommended by the United States Department of Health and Human Services
Negotiated Rulemaking Committee (the "Rulemaking Committee") on the Shared Risk
Exception relating to the existing statutory shared risk safe harbor, 42 U.S.C.
SECTION 1320a-7b(b)(3)(F) (the "Shared Risk Exception"), shall have been
satisfied: (i) the Shared Risk Exception shall have become effective, as stated
in the notice of publication, and (ii) the Services Purchase Agreement to be
entered into by and between Magellan and CBHS (the "Services Purchase
Agreement") either (A) shall have been executed in the form agreed to by the
parties as of the date hereof if the Shared Risk Exception is the same as the
text, other than nonsubstantive changes, of the statement issued on January 22,
1998, by the Rulemaking Committee, or (B) shall have been executed in a form
that complies with the Shared Risk Exception and that would not result in any
material loss of the proposed benefits to be provided to Crescent Operating or
CBHS thereunder if the Shared Risk Exception is not the same as the text, other
than nonsubstantive changes, of the statement issued on January 22, 1998, by the
Rulemaking Committee.
ARTICLE IV
MISCELLANEOUS
4.1 Notices. All notices, requests, instructions or documents hereunder
shall be in writing and delivered personally or by Federal Express, or sent by
telecopy, or sent by United States registered or certified mail, postage prepaid
as follows:
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(i) if to Crescent Operating:
Jeffrey L. Stevens
Executive Vice President and Chief Operating
Officer
Crescent Operating
307 West 7th Street
Suite 1025
Fort Worth, Texas 76102
Facsimile: (817) 339-1001
with a copy to:
Sylvia M. Mahaffey, Esq.
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Facsimile: (202) 663-8007
(ii) if to any of the Sellers:
David Hansen, Esq.
General Counsel
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Facsimile: (404) 869-5660
with a copy to:
J. Eric Dahlgren, Esq.
Dow, Lohnes & Albertson
One Ravinia Drive
Suite 1600
Atlanta, Georgia 30346
Facsimile: (770) 901-8874
or such other address as any party may designated by written notice to the other
parties. Any notice, request, demand, waiver or other communication required or
permitted to be given under this Agreement will be deemed to have been duly
given only if delivered in person or by first class, prepaid, registered or
certified mail, or sent by courier or, if receipt is confirmed, by telecopier.
4.2 Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the transaction contemplated herein,
and no modification hereof
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shall be effective unless in writing and signed by the party against which it is
sought to be enforced. This Agreement supersedes all prior understandings,
negotiations and agreements relating to the transactions contemplated herein.
4.3 Successors and Assigns. The terms, covenants and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns; provided, however, that neither
party may assign its rights and obligations under this Agreement without the
prior written consent of the other party, except that Magellan may assign its
rights under this Agreement to one or more of its subsidiaries.
4.4 Expenses. Each of Magellan and Crescent Operating shall bear its
own costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby; provided, however, that Crescent Operating
shall reimburse Magellan for reasonable attorneys' fees incurred by Magellan in
connection with Magellan's enforcement of the obligations of Crescent Operating
hereunder upon the failure of Crescent Operating to perform such obligations.
4.5 Severability. If any provision of this Agreement shall be
determined by arbitration in accordance with Section 4.6 to be void and of no
effect, the provisions of this Agreement shall be deemed amended to delete or
modify, as necessary, the offending provision, and this Agreement as so amended
or modified shall not be rendered unenforceable or impaired but shall remain in
force to the fullest extent possible in keeping with the intention of the
parties hereto.
4.6 Arbitration. The parties agree to resolve any dispute, controversy
or claim arising out of or relating to this Agreement, its interpretation or
performance (a "Controversy") in accordance with this Section 4.6.
(a) The parties agree to negotiate in good faith for up to 45
days after written notice by one party to the other party or parties to the
Controversy, in order to attempt to resolve such Controversy. In this regard,
each party agrees to involve its respective senior management in these
discussions if necessary.
(b) In the event that such Controversy is not resolved through
mutual discussions within such 45-day period of time, such dispute or
controversy may be submitted by any such party to, and if so submitted shall be
finally settled by, arbitration in accordance with the Commercial Arbitration
Rules (the "Rules") of the American Arbitration Association, and judgment upon
the award may be entered in any court where the arbitration takes place or any
court having jurisdiction. Any such arbitration shall take place in Atlanta,
Georgia, and there shall be one arbitrator. The parties shall attempt to agree
on the selection of the arbitrator within 60 days after receipt of the written
notice referred to in clause (a) above; if the parties agree, the agreed-upon
person shall be the arbitrator; if the parties cannot so agree, the arbitrator
shall be selected by the American Arbitration Association in
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accordance with the Rules. The arbitrator may order specific performance or
other equitable relief or remedies, to the extent he or she deems it
appropriate, in any situation in which a court could so order. All costs of such
arbitration, including the compensation of the arbitrator (but not including the
parties' attorneys', accountants' and other professionals' fees, as to which
each party shall pay its own, except as otherwise provided in Section 4.4) shall
be allocated 50% to Crescent Operating and 50% to Magellan. The decision of the
arbitrator shall be final and binding upon the parties, their successors and
assigns, and they shall comply with such decision in good faith, and each party
hereby submits itself to the jurisdiction of the courts of the place where the
arbitration is held, but only for the entry of judgment with respect to and to
enforce the decision of the arbitrator hereunder.
4.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, applicable in the case of
agreements made and to be performed entirely within such State, without regard
to such State's conflicts of laws rules.
4.8 Headings. The headings in this Agreement are included herein for
convenience of reference only, and shall not constitute a part of this Agreement
for any other purpose.
4.9 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and same instrument.
4.10 Waiver. Any of the terms or conditions of this Agreement which may
be lawfully waived may be waived in writing at any time by the party which is
entitled to the benefits thereof. Any waiver of any of the provisions of this
Agreement by any party hereto shall be binding only if set forth in an
instrument in writing signed on behalf of such party. No failure to enforce any
provision of this Agreement shall be deemed to or shall constitute a waiver of
such provision and no waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
-9-
<PAGE>
4.11 Variations of Pronouns; Definitions; Number; Gender. All pronouns
and all variations thereof shall be deemed to refer to the masculine, feminine
or neuter, singular or plural, as the identity of the person or persons may
require. Whenever used herein the singular number shall include the plural, the
plural shall include the singular, and the use of any gender shall include all
genders. "Person" shall mean an individual, firm, trust, association,
corporation, limited liability company, partnership, government (whether
federal, state, local or other political subdivision, or an agency or bureau of
any of them) or other entity.
IN WITNESS WHEREOF, this Support Agreement has been duly executed by
the parties hereto as of the date first above written.
MAGELLAN HEALTH SERVICES, INC.
By:/s/ CRAIG L. MCKNIGHT
----------------------
Craig L. McKnight
Its: Executive Vice President and
Chief Executive Officer
------------------------------
CRESCENT OPERATING, INC.
By: /s/ JEFFREY L. STEVENS
-----------------------
Its: Executive Vice President and
Chief Operating Officer
------------------------------
-10-
<PAGE>
Schedule 1.4
Consent of the shareholders of Crescent Operating for issuance of
common stock under Section 3.2, if required by Rule 4460(i) of the Rules of the
Nasdaq Stock Market
<PAGE>
Exhibit 5
[Letterhead]
April 2, 1998
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Re: Magellan Health Services, Inc.
Registration Statement on Form S-4
Gentleman:
We have acted as counsel to Magellan Health Services, Inc., a Delaware
corporation ("Magellan"), in connection with the registration, pursuant to
the above-captioned registration statement (the "Registration Statement"), of
Magellan's 9% Series A Senior Subordinated Notes due 2008 (the "Notes"). The
Notes are to be issued pursuant to the terms of an Indenture, dated as of
February 12, 1998 (the "Indenture"), among Magellan and Marine Midland Bank,
as Trustee, which Indenture is Exhibit 4(a) to the Registration Statement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the Indenture, such
records of Magellan and all such agreements, certificates of officers or
representatives of Magellan and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinion set forth herein. In our examination
we have assumed the genuineness of all signatures, the legal capacity of
natural persons, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of
the originals of such copies. As to any facts material to this opinion which
we did not independently establish or verify, we have relied upon statements
and representations of representatives of Magellan and of public officials.
We have no reason to believe that such statements and representations are
untrue.
Based upon and subject to the foregoing, it is our opinion that the
Notes, when executed by duly authorized officers of Magellan, authenticated
by duly authorized officers of the Trustee and delivered in accordance with
the terms of the Indenture, will constitute the legal, valid and binding
obligations of Magellan, enforceable against Magellan in accordance with
their respective terms.
<PAGE>
Our opinion is subject to the following qualifications:
(a) The enforceability of the Indenture and Notes against Magellan may
be limited by (i) bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and by general principles of equity, including principles
of commercial reasonableness, good faith and fair dealing (regardless of
whether enforceability is sought in a proceeding in law or at equity). Such
principles of equity are of general application, and in applying such
principles, a court, among other things, might not allow a creditor to
accelerate maturity of a debt upon the occurrence of a default deemed
immaterial or for non-credit reasons or might decline to order a debtor to
perform covenants.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the prospectus included in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Philip A. Theodore
---------------------------
King & Spalding
<PAGE>
EXHIBIT 8
[KING & SPALDING LETTERHEAD]
April 2, 1998
Magellan Health Services, Inc.
3414 Peachtree Road N.E.
Suite 1400
Atlanta, Georgia 30326
Ladies and Gentlemen:
We have acted as counsel to Magellan Health Services, Inc., a Delaware
corporation ("the Company"), in connection with the Prospectus (the
"Prospectus") that forms a part of the Registration Statement on Form S-4
that was filed by the Company on March 13, 1998 with the Securities and
Exchange Commission (the "Registration Statement"), relating to the
registration of the Company's 9% Series A Senior Subordinated Notes due 2008
(the "Notes").
All capitalized terms used herein without definition have the respective
meanings specified in the Prospectus.
You have requested our opinion with respect to the description contained
in the Prospectus of the federal income tax consequences of the exchange (the
"Exchange") of the Notes for the Company's outstanding 9% Senior Subordinated
Notes due 2008 (the "Old Notes"). We understand that our opinion will be
attached as an Exhibit to the Registration Statement and that our opinion
will be referred to in the Prospectus. We hereby consent to such use of our
opinion.
In rendering the opinion expressed herein, we have examined such
documents as we have deemed appropriate, including the Prospectus. In our
examination of documents, we have assumed, with your consent, that all
documents submitted to us are authentic originals, or if submitted as
photocopies, that they faithfully reproduce the originals thereof, that all
such documents have been or will be duly executed to the extent required,
that all representations and statements set forth in such documents are true
and correct, and that all obligations imposed by any such documents on the
parties thereto have been or will be performed or satisfied in accordance
with their terms. We also have obtained such additional information and
representations as we have deemed relevant and necessary.
<PAGE>
Magellan Health Services, Inc.
April 2, 1998
Page 2
Based upon and subject to the foregoing, it is our opinion that the
material federal income tax consequences of the Exchange to the holders of
the Old Notes are fairly and accurately described in the Prospectus under the
caption "Certain Federal Income Tax Consequences of the Exchange Offer."
The opinion expressed herein is based upon existing statutory,
regulatory and judicial authority, any of which may be changed at any time
with retroactive effect. In addition, as noted above, our opinion is based
solely on the documents that we have examined, the additional information
that we have obtained, and the representations that have been made to us. Our
opinion cannot be relied upon if any of the facts contained in such documents
or such additional information is, or later becomes, inaccurate or if any of
the representations made to us is, or later becomes, inaccurate.
Finally, our opinion is limited to the tax matters specifically
discussed under the caption "Certain Federal Income Tax Consequences of the
Exchange Offer" in the Prospectus, and we have not been asked to address, nor
have we addressed, any other tax consequences relating to the issuance or
sale of the Notes.
Very truly yours,
/s/ KING & SPALDING
-----------------------------------
King & Spalding
<PAGE>
OFFER TO PURCHASE
AND CONSENT SOLICITATION STATEMENT
MAGELLAN HEALTH SERVICES, INC.
OFFER TO PURCHASE FOR CASH
ANY AND ALL OUTSTANDING
11 1/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2004
AND SOLICITATION OF CONSENTS TO
PROPOSED AMENDMENTS OF RELATED INDENTURE
AND TERMINATION OF THE LISTING OF THE NOTES
ON THE NEW YORK STOCK EXCHANGE, INC.
------------------------
Magellan Health Services, Inc., a Delaware corporation ("Purchaser"), hereby
offers to purchase for cash, upon the terms and subject to the conditions set
forth in this Offer to Purchase and Consent Solicitation Statement (as it may be
amended from time to time, the "Statement") and in the accompanying Consent and
Letter of Transmittal (the "Consent and Letter of Transmittal" and, together
with this Statement, the "Offer"), any and all of its outstanding 11 1/4% Series
A Senior Subordinated Notes due 2004 (the "Notes") from any and all Holders (as
defined in the Indenture relating to the Notes, the "Holders") thereof, at a
purchase price determined in the manner described herein by reference to a fixed
spread of 30 basis points over the yield to maturity of the 7% U.S. Treasury
Note due April 15, 1999 (of which an amount equal to 2% of the principal amount
($20 for each $1,000 principal amount) of each Note purchased shall constitute a
consent payment (the "Consent Payment") that will only be paid for Notes validly
tendered (and not withdrawn) on or prior to the Consent Date) (the "Offer
Consideration"). Holders who validly tender their Notes pursuant to the Offer on
or prior to the Consent Date will receive the Offer Consideration (which
includes the Consent Payment), whereas Holders who validly tender their Notes
thereafter will receive an amount equal to the Offer Consideration less the
Consent Payment. In each case, Holders will also receive accrued and unpaid
interest on the Notes up to, but not including, the Payment Date (as hereinafter
defined).
The Offer Consideration (including the Consent Payment) for Notes tendered
pursuant to the Offer shall be the price (calculated as described in Schedule I
to this Statement) equal to the present value on the Payment Date of $1,056.25
per $1,000 principal amount of Notes (the amount payable on April 15, 1999,
which is the first date on which the Notes are redeemable (the " Earliest
Redemption Date")), determined on the basis of a yield (the "Tender Offer
Yield") to the Earliest Redemption Date equal to the sum of (x) the yield on the
7% U.S. Treasury Note due April 15, 1999 (the "Reference Security"), as
calculated by the Dealer Manager in accordance with standard market practice,
based on the bid price for such security as of 2:00 p.m., New York City Time, on
January 26, 1998, the tenth business day immediately preceding the scheduled
Expiration Date (the "Price Determination Date"), as displayed on the Bloomberg
Government Pricing Monitor on "Page PX4" (the "Bloomberg Page") (or, if any
relevant price is not available on a timely basis on the Bloomberg Page or is
manifestly erroneous, such other recognized quotation source as the Dealer
Manager shall elect in its sole discretion) plus (y) 30 basis points (the "Fixed
Spread") (such price being rounded to the nearest cent per $1,000 principal
amount of Notes). In the event the Offer is extended for any period of time
longer than ten (10) business days from the previously scheduled Expiration
Date, a new Price Determination Date will be established.
(CONTINUED ON FOLLOWING PAGE)
THE SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY,
JANUARY 26, 1998 IF ON SUCH DATE PURCHASER HAS RECEIVED THE REQUISITE CONSENTS
(AS HEREINAFTER DEFINED) OR THE FIRST DATE THEREAFTER THAT PURCHASER RECEIVES
THE REQUISITE CONSENTS FROM HOLDERS OF THE NOTES, UNLESS EXTENDED (SUCH DATE, AS
THE SAME MAY BE EXTENDED, THE "CONSENT DATE"). THE OFFER WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, FEBRUARY 9, 1998 UNLESS EXTENDED (SUCH
DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). HOLDERS WHO DESIRE TO
RECEIVE THE OFFER CONSIDERATION (WHICH INCLUDES THE CONSENT PAYMENT) MUST
VALIDLY TENDER (AND NOT WITHDRAW) THEIR NOTES ON OR PRIOR TO THE CONSENT DATE.
HOLDERS WHO TENDER THEIR NOTES AFTER THE CONSENT DATE WILL RECEIVE THE OFFER
CONSIDERATION LESS THE CONSENT PAYMENT. CONSENTS MAY BE REVOKED AND TENDERS OF
NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE CONSENT DATE.
------------------------
THE DEALER MANAGER FOR THE OFFER AND THE SOLICITATION AGENT FOR THE SOLICITATION
IS:
CHASE SECURITIES INC.
January 12, 1998
<PAGE>
(COVER PAGE CONTINUED)
In conjunction with the Offer, Purchaser hereby solicits (the
"Solicitation") consents (the "Consents") of Holders to (i) certain proposed
amendments (the "Proposed Amendments") to the Indenture, dated as of May 2,
1994, as supplemented (the "Indenture"), by and among Purchaser, the Guarantors
(as such term is defined in the Indenture) and Marine Midland Bank, as trustee
(the "Trustee"), pursuant to which the Notes were issued, to, among other
things, eliminate substantially all the covenants contained in the Indenture and
(ii) the termination of the listing (the "Delisting") of the Notes on the New
York Stock Exchange, Inc. (the "NYSE"). The Proposed Amendments and the
Delisting require the Consent of the Holders of at least 66 2/3% in aggregate
principal amount of the Notes outstanding (the "Requisite Consents"). The
Proposed Amendments will be implemented by a supplemental indenture (the
"Supplemental Indenture"), which is expected to be executed promptly following
receipt of the Requisite Consents. Although the Supplemental Indenture
reflecting the Proposed Amendments will become effective upon execution by
Purchaser, the Guarantors and the Trustee, the Proposed Amendments will not
become operative until Notes are accepted for purchase by Purchaser pursuant to
the Offer, which is expected to occur promptly following the Expiration Date.
See Sections 4 and 7.
NOTWITHSTANDING ANY OTHER PROVISION OF THE OFFER OR THE SOLICITATION,
PURCHASER'S OBLIGATION TO ACCEPT FOR PURCHASE, AND TO PAY FOR, NOTES VALIDLY
TENDERED PURSUANT TO THE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE SECTION 11.
If the Offer is consummated and the Proposed Amendments become operative,
Notes that are not tendered, or are not accepted for purchase pursuant to the
Offer, will remain outstanding, but will be subject to the terms of the
Indenture as modified by the Supplemental Indenture. If a Holder does not
properly tender Notes pursuant to the Offer on or prior to the Consent Date, or
Consents either are not properly delivered or are revoked and not properly
redelivered, on or prior to the Consent Date, such Holder will not receive the
Consent Payment, even though the Proposed Amendments will be effective as to all
Notes. As a result of the adoption of the Proposed Amendments, Holders of such
outstanding Notes will not be entitled to the benefit of substantially all the
covenants presently contained in the Indenture. In addition, if the Offer is
consummated, the listing of the Notes on the NYSE will be terminated and, as a
result, the trading market for Notes not properly tendered pursuant to the Offer
is likely to be significantly limited. Consequently, the consummation of the
Offer, the adoption of the Proposed Amendments and the Delisting may have
adverse consequences for Holders who do not validly tender Notes pursuant to the
Offer. See Section 3.
The Notes are currently listed and principally traded on the NYSE. On
January 9, 1998, the last full trading day on the NYSE prior to the announcement
of the Offer, the closing bid price per $100 principal amount of the Notes was
$109.61. HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE NOTES.
The Delisting requires the Consent of Holders of at least 66 2/3% in aggregate
principal amount of the Notes outstanding. Trading of the Notes on the NYSE will
not be terminated until the Notes are accepted for purchase by Purchaser
pursuant to the Offer. See Section 7.
If the Notes are accepted for payment pursuant to the Offer, Holders who
validly tender Notes pursuant to the Offer on or prior to the Consent Date and
do not withdraw such tender or revoke such Consent on or prior to the Consent
Date will receive the Offer Consideration (which includes the Consent Payment).
Holders who validly tender Notes and deliver Consents pursuant to the Offer on
or prior to the Consent Date may not revoke such tender of Notes or Consent
after the Consent Date. Holders who validly tender their Notes and deliver
Consents after the Consent Date and on or prior to the Expiration Date will
receive the Offer Consideration less the Consent Payment.
Upon the terms and subject to the conditions of the Offer and the
Solicitation (including, if the Offer or the Solicitation is extended or
amended, the terms and conditions of any such extension or amendment) and
applicable law, Purchaser will (i) purchase, by accepting for payment, and will
pay for, all Notes validly tendered on or prior to the Expiration Date (and not
withdrawn) pursuant to the Offer and (ii) pay for all Consents validly delivered
on or prior to the Consent Date (and not revoked) pursuant to the Solicitation,
in each case promptly after the Expiration Date (the "Payment Date").
HOLDERS WHO TENDER NOTES PURSUANT TO THE OFFER ARE OBLIGATED TO CONSENT TO
THE PROPOSED AMENDMENTS AND THE DELISTING. PURSUANT TO THE TERMS OF THE CONSENT
AND LETTER OF TRANSMITTAL, THE COMPLETION, EXECUTION AND DELIVERY THEREOF BY A
HOLDER IN CONNECTION WITH THE TENDER OF NOTES WILL BE DEEMED TO CONSTITUTE THE
CONSENT WITH RESPECT TO THE NOTES TENDERED. HOLDERS MAY NOT DELIVER CONSENTS
WITHOUT TENDERING THEIR NOTES PURSUANT TO THE OFFER AND MAY NOT REVOKE CONSENTS
WITHOUT WITHDRAWING THE PREVIOUSLY TENDERED NOTES TO WHICH SUCH CONSENTS RELATE.
In the event that the Offer and the Solicitation are withdrawn or otherwise
not completed, the Offer Consideration (including the Consent Payment) will not
be paid or become payable to Holders who have validly tendered their Notes and
delivered Consents in connection with the Offer and the Solicitation. In any
such event, the Notes previously tendered pursuant to the Offer will be promptly
returned to the tendering Holder and the Proposed Amendments will not become
operative.
ii
<PAGE>
(COVER PAGE CONTINUED)
CERTAIN OFFER AND SOLICITATION MATTERS
Tenders of Notes may be withdrawn at any time prior to the Consent Date.
Tenders of Notes may also be withdrawn if the Offer is terminated without any
Notes being purchased thereunder or as otherwise provided herein. For a
withdrawal of a tendered Note to be valid, such withdrawal must comply with the
procedures set forth in Section 9 hereof. A valid withdrawal of tendered Notes
prior to the Consent Date shall be deemed a revocation of the related Consent.
In the event of a termination of the Offer, the Notes tendered pursuant to the
Offer will be returned to the tendering Holders promptly. If Purchaser makes a
material change in the terms of the Offer or the information concerning the
Offer or waives a material condition of the Offer, Purchaser will disseminate
additional Offer materials and extend such Offer to the extent required by law.
Other than as set forth herein, once tendered, Notes may not be withdrawn after
the Consent Date. See Section 9.
Consents may be revoked at any time prior to the Consent Date, but a valid
revocation of a Consent will be deemed a withdrawal of the tendered Notes. For a
revocation of a Consent to be valid, such revocation must comply with the
procedures set forth in Section 9 hereof. If, prior to the Consent Date, the
Solicitation is amended in a manner determined by Purchaser, in its sole
discretion, to constitute a material adverse change to the Holders, Purchaser
promptly will disclose such amendment and may, if appropriate, extend the
Solicitation for a period deemed by Purchaser to be adequate to permit Holders
to properly deliver or revoke their Consents. In addition, Purchaser may, if it
deems appropriate, extend the Solicitation for any other reason. Other than as
set forth herein, once delivered, Consents may not be revoked after the Consent
Date. See Section 9.
NOTWITHSTANDING ANY OTHER PROVISION OF THE OFFER OR THE SOLICITATION,
PURCHASER'S OBLIGATION TO ACCEPT FOR PURCHASE, AND TO PAY FOR, NOTES VALIDLY
TENDERED PURSUANT TO THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THE
SATISFACTION OR WAIVER OF (I) THE CONSENT CONDITION (AS HEREINAFTER DEFINED),
(II) THE FINANCING CONDITION (AS HEREINAFTER DEFINED), (III) THE MERIT TENDER
OFFER CONDITION (AS HEREINAFTER DEFINED), (IV) THE MERGER CONDITION (AS
HEREINAFTER DEFINED) AND (V) THE GENERAL CONDITIONS (AS HEREINAFTER DEFINED).
PURCHASER, IN ITS SOLE DISCRETION, MAY WAIVE ANY OF THE CONDITIONS OF THE OFFER,
IN WHOLE OR IN PART, AT ANY TIME AND FROM TIME TO TIME. SEE SECTIONS 3 AND 11.
From time to time in the future, Purchaser or its subsidiaries may acquire
any Notes that are not tendered pursuant to the Offer (through open market
purchases, privately negotiated transactions, tender offers, exchange offers or
otherwise), upon such terms and at such prices as they may determine, which may
be more or less than the price to be paid pursuant to the Offer and could be for
cash or other consideration. There can be no assurance as to which, if any, of
these alternatives (or combinations thereof) Purchaser or its subsidiaries will
choose to pursue in the future.
PURCHASER RESERVES THE RIGHT TO WAIVE ANY AND ALL CONDITIONS TO THE OFFER OR
THE SOLICITATION AND TO ACCEPT FOR PURCHASE ANY NOTE TENDERED PURSUANT TO THE
OFFER, WHETHER OR NOT THE REQUISITE CONSENTS TO THE PROPOSED AMENDMENTS AND THE
DELISTING ARE RECEIVED. SUBJECT TO COMPLIANCE WITH APPLICABLE SECURITIES LAWS
AND THE TERMS SET FORTH IN THIS STATEMENT, PURCHASER RESERVES THE RIGHT TO
EXTEND OR TERMINATE THE OFFER AND THE SOLICITATION, OR TO OTHERWISE AMEND THE
OFFER AND THE SOLICITATION IN ANY RESPECT.
THIS STATEMENT HAS NOT BEEN FILED WITH OR REVIEWED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY OF ANY COUNTRY, NOR HAS ANY SUCH
COMMISSION OR AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND MAY BE A CRIMINAL OFFENSE.
See "CERTAIN SIGNIFICANT CONSIDERATIONS" and "CERTAIN U.S. FEDERAL INCOME
TAX CONSIDERATIONS" for discussions of certain factors that should be considered
in evaluating the Offer and the Solicitation.
iii
<PAGE>
(COVER PAGE CONTINUED)
IMPORTANT
Any Holder desiring to tender Notes and consent to the Proposed Amendments
and the Delisting should either (a) in the case of a Holder who holds physical
certificates evidencing such Notes, complete and sign the Consent and Letter of
Transmittal (or a manually signed facsimile thereof) in accordance with the
Instructions to the Consent and Letter of Transmittal, have the signature
thereon guaranteed (if required by Instruction 1 to the Consent and Letter of
Transmittal) and deliver it, together with certificates evidencing such Notes
being tendered and any other required documents to Marine Midland Bank ("Marine
Midland"), as depositary (the "Depositary"), at its address set forth on the
back cover of this Statement or (b) in the case of a beneficial owner who holds
Notes in book-entry form, request its broker, dealer, commercial bank, trust
company or other nominee to effect the transaction for such Holder. Beneficial
owners whose Notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee must contact such broker, dealer,
commercial bank, trust company or other nominee if they desire to tender Notes
and deliver Consents with respect to Notes so registered. See Section 8.
Any Holder who desires to tender Notes and whose Notes are not immediately
available, or who cannot complete the procedure set forth herein for tender on a
timely basis, may tender such Notes by following the procedures for guaranteed
delivery set forth in Section 8. The procedures for guaranteed delivery of Notes
may not be used to deliver Consents prior to the Consent Date.
The Depository Trust Company ("DTC") has confirmed that the Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Offer by
causing DTC to transfer Notes to the Depositary in accordance with ATOP
procedures for transfer. DTC will then send an Agent's Message (as defined in
Section 8) to the Depositary. Notwithstanding the tender of Notes by a Holder
pursuant to ATOP, in order to validly deliver a Consent with respect to Notes
transferred pursuant to ATOP on or prior to the Consent Date (and thereby make a
valid tender of such Notes), DTC participants using ATOP must also properly
complete and execute the Consent and Letter of Transmittal and timely deliver it
to the Depositary. See Section 8.
Consents and Letters of Transmittal, the Notes and any other required
documents should be sent to the Depositary only, and the method of delivery of
such documents to the Depositary is at the election and risk of the Holder
tendering such Notes and delivering such Consent and Letter of Transmittal and
any other required documents. Questions and requests for assistance may be
directed to Georgeson & Company Inc. ("Georgeson"), the information agent (the
"Information Agent"), or Chase Securities Inc. ("Chase Securities"), the dealer
manager (the "Dealer Manager"), at their respective addresses and telephone
numbers set forth on the back cover of this Statement. Additional copies of this
Statement, the Consent and Letter of Transmittal, the Notice of Guaranteed
Delivery and other related materials may be obtained from the Information Agent.
Any Holder whose Notes have been mutilated, lost, stolen or destroyed should
contact the Trustee at its address and telephone number set forth in Section 8
for further instructions.
THIS STATEMENT CONSTITUTES NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION
OF CONSENTS IN ANY JURISDICTION IN WHICH, OR TO OR FROM ANY PERSON TO OR FROM
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION UNDER APPLICABLE
SECURITIES OR BLUE SKY LAWS. THE DELIVERY OF THIS STATEMENT SHALL NOT UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN ANY ATTACHMENTS HERETO OR IN
THE AFFAIRS OF PURCHASER OR ANY OF ITS SUBSIDIARIES SINCE THE DATE HEREOF.
NONE OF PURCHASER, THE DEALER MANAGER, THE TRUSTEE, THE DEPOSITARY OR THE
INFORMATION AGENT MAKE ANY RECOMMENDATION AS TO WHETHER HOLDERS SHOULD TENDER
NOTES PURSUANT TO THE OFFER AND DELIVER CONSENTS TO THE PROPOSED AMENDMENTS AND
THE DELISTING.
iv
<PAGE>
All information concerning Merit (as hereinafter defined) that is contained
herein (i) has been provided by Merit or (ii) is based on publicly available
information of Merit.
Certain of the statements in the Statement including, without limitation,
statements regarding opportunities, revenue growth and future transactions
constitute forward-looking statements contemplated under the Private Securities
Litigation Reform Act of 1995. Risk factors such as the ability to successfully
complete and integrate acquisitions and the degree of new product success could
prevent Purchaser from achieving its objectives. For a more complete discussion
of these and other risks, please see "Certain Significant Considerations" and
Purchaser's Annual Report on Form 10-K for the year ended September 30, 1997.
AVAILABLE INFORMATION
Purchaser and Merit Behavioral Care Corporation ("Merit") are subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such information may be obtained from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the SEC's home page on the Internet at
http:/www.sec.gov. The Notes and other securities of the Purchaser are listed on
the NYSE. The reports, proxy statements and other information of Purchaser
referred to above may be inspected at the offices of the NYSE at 20 Broad
Street, New York, New York 10005.
INCORPORATION BY REFERENCE
The following document filed by Purchaser with the SEC is incorporated
herein by reference and shall be deemed to be a part hereof:
1. Annual Report of Purchaser on Form 10-K for the year ended September 30,
1997.
The following document filed by Merit with the SEC is incorporated herein by
reference and shall be deemed to be a part hereof:
1. Annual Report of Merit on Form 10-K for the year ended September 30,
1997.
All documents and reports filed by Purchaser and Merit with the SEC pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Statement and prior to the termination of the Offer shall be deemed incorporated
herein by reference and shall be deemed to be a part hereof from the date of
filing of such documents and reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Statement to the extent that a
statement contained herein or in any subsequently filed document or report that
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Statement.
Purchaser will provide without charge, upon written or oral request, to each
person to whom a copy of this Statement is delivered, a copy of any of the
documents of Purchaser (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference) incorporated by reference
herein. Request for documents incorporated by reference herein should be
directed to Mr. Kevin Helmintoller, Vice President - Investor Relations,
Magellan Health Services, Inc., 3414 Peachtree Road,
v
<PAGE>
N.E., Suite 1400, Atlanta, Georgia 30326, (404) 841-9200. The documents may also
be accessed electronically by means of the SEC's home page on the Internet at
http:/www.sec.gov.
Merit will provide without charge, upon written or oral request, to each
person to whom a copy of this Statement is delivered, a copy of any of the
documents of Merit (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference) incorporated by reference herein.
Request for documents incorporated by reference herein should be directed to Mr.
John A. Budnick, Chief Financial Officer, Merit Behavioral Care Corporation, One
Maynard Drive, Park Ridge, New Jersey 07656, (201) 391-8700. The documents may
also be accessed electronically by means of the SEC's home page on the Internet
at http:/www.sec.gov.
No person has been authorized to give any information or to make any
representation not contained in this Statement or the Consent and Letter of
Transmittal and, if given or made, such information or representation may not be
relied upon as having been authorized by Purchaser, the Dealer Manager, the
Depositary or the Information Agent. Neither the delivery of this Statement nor
any purchase hereunder shall, under any circumstance, create any implication
that the information herein is correct as of any time subsequent to the date
hereof, or that there has been no change in the affairs of Purchaser or Merit as
of such date.
vi
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
SUMMARY.......................................................................................................... 1
1. CERTAIN INFORMATION CONCERNING PURCHASER, THE MERGER AND THE NOTES.................................... 5
2. CAPITALIZATION OF PURCHASER........................................................................... 6
3. CERTAIN SIGNIFICANT CONSIDERATIONS.................................................................... 7
4. PROPOSED AMENDMENTS TO THE INDENTURE.................................................................. 13
5. DELISTING OF NOTES FROM THE NYSE...................................................................... 15
6. TERMS OF THE OFFER AND THE SOLICITATION............................................................... 16
7. ACCEPTANCE FOR PURCHASE AND PAYMENT FOR NOTES; ACCEPTANCE OF CONSENTS................................. 19
8. PROCEDURES FOR TENDERING NOTES AND DELIVERING CONSENTS................................................ 20
9. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS...................................................... 24
10. SOURCE AND AMOUNT OF FUNDS............................................................................ 24
11. CONDITIONS TO THE OFFER AND THE SOLICITATION.......................................................... 24
12. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS........................................................ 26
13. THE DEALER MANAGER, THE INFORMATION AGENT AND THE
DEPOSITARY............................................................................................ 27
14. FEES AND EXPENSES..................................................................................... 28
15. MISCELLANEOUS......................................................................................... 28
SCHEDULE I : FORMULA TO DETERMINE OFFER CONSIDERATION............................................................ I-1
SCHEDULE II: HYPOTHETICAL ILLUSTRATION OF OFFER CONSIDERATION.................................................... II-1
</TABLE>
vii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS STATEMENT
AND THE CONSENT AND LETTER OF TRANSMITTAL. CAPITALIZED TERMS HAVE THE MEANINGS
ASSIGNED TO THEM ELSEWHERE IN THIS STATEMENT.
<TABLE>
<S> <C>
Purchaser:................... Magellan Health Services, Inc., a Delaware corporation, is
one of the nation's largest providers of managed behavioral
healthcare services.
The Notes:................... The Offer and the Solicitation are being made with respect
to the Purchaser's 11 1/4% Series A Senior Subordinated
Notes due 2004.
The Merger:.................. On October 24, 1997, Purchaser announced that it had entered
into a definitive agreement (the "Merger Agreement") to
acquire Merit for cash consideration of approximately $458.3
million, subject to certain adjustments, pursuant to which
Merit will become a wholly-owned subsidiary of Purchaser
(the "Merger"). Consummation of the Merger and the related
financing arrangements would violate certain covenants
contained in the Indenture. In particular, the Merger and
the related financing arrangements would violate the
covenants in the Indenture that prohibit Purchaser from
making investments in excess of certain amounts or incurring
additional indebtedness in excess of certain amounts. The
Purchaser is making this Offer and soliciting the Consents
to eliminate, among other things, the restrictions imposed
by the Indenture on consummating the Merger and the related
financing arrangements.
The Offer:................... Purchaser is offering to purchase any and all of the
outstanding Notes.
The Solicitation:............ As a condition to consummation of the Offer, Purchaser is
also seeking Consents from Holders to the Proposed
Amendments to the Indenture and to the Delisting of the
Notes from the NYSE.
Offer Consideration:......... The Offer Consideration (including the Consent Payment) for
Notes tendered pursuant to the Offer shall be the price
(calculated as described in Schedule I to this Statement)
equal to the present value on the Payment Date of $1,056.25
per $1,000 principal amount of Notes (the amount payable on
April 15, 1999, which is the first date on which the Notes
are redeemable (the "Earliest Redemption Date")), determined
on the basis of a yield (the "Tender Offer Yield") to the
Earliest Redemption Date equal to the sum of (x) the yield
on the 7% U.S. Treasury Note due April 15, 1999 (the
"Reference Security"), as calculated by the Dealer Manager
in accordance with standard market practice, based on the
bid price for such security as of 2:00 p.m., New York City
Time, on January 26, 1998, the tenth business day
immediately preceding the scheduled Expiration Date (the
"Price Determination Date"), as displayed on the Bloomberg
Government Pricing Monitor on "Page PX4" (the "Bloomberg
Page") (or, if any relevant price is not available on a
timely basis on the Bloomberg Page or is manifestly
erroneous, such other recognized quotation source as the
Dealer Manager shall elect in its sole discretion) plus (y)
30 basis points (the "Fixed Spread") (such price being
rounded to the nearest cent per $1,000 principal amount of
Notes), plus accrued and unpaid interest on the Notes to,
but not including, the Payment Date. In the event the Offer
is
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
extended for any period of time longer than ten (10)
business days from the previously scheduled Expiration Date,
a new Price Determination Date will be established. Holders
of Notes tendered after the Consent Date will receive the
Offer Consideration less 2% of the principal amount of each
Note (the "Consent Payment").
Requisite Consents:.......... Approval of the Proposed Amendments to the Indenture and the
Delisting requires the Consent of the Holders of at least
66 2/3% in aggregate principal amount of the Notes
outstanding.
Effectiveness of Proposed
Amendments:................ The Supplemental Indenture implementing the Proposed
Amendments will be executed promptly following receipt of
the Requisite Consents. The Proposed Amendments, however,
will not become operative until Purchaser has accepted for
purchase all Notes validly tendered (and not withdrawn)
pursuant to the Offer. See Section 7. If the Proposed
Amendments become operative, all persons who continue to
hold Notes thereafter will be subject to the provisions of
the Indenture as amended by the Proposed Amendments.
Tender of Notes and Delivery
of Consents:............... Upon the terms of the Offer and the Solicitation and upon
satisfaction or waiver of the conditions thereto, Purchaser
will accept for purchase Notes validly tendered on or prior
to the Expiration Date (and not properly withdrawn). Holders
who validly tender their Notes and deliver their Consents on
or prior to the Consent Date (and do not withdraw such
tender or revoke such Consent) will be entitled to receive
the Offer Consideration (which includes the Consent Payment)
plus accrued and unpaid interest up to, but not including,
the Payment Date. Holders that validly tender their Notes
and deliver their Consents after the Consent Date but on or
prior to the Expiration Date will be entitled to receive the
Offer Consideration less the Consent Payment, plus accrued
and unpaid interest up to, but not including, the Payment
Date. Payment for Notes validly tendered and accepted for
payment will be made by deposit of such amounts, as
applicable, with the Depositary who will act as agent for
the tendering and consenting Holders for the purpose of
receiving payments from Purchaser and transmitting such
payments to the tendering and consenting Holders. Such
payments are expected to be made on the Payment Date,
promptly following the Expiration Date. See Sections 6 and
7.
Proposed Amendments:......... The Proposed Amendments would (i) delete the following
covenants contained in the Indenture: Section 5.02 (SEC
Reports); Section 5.03 (Compliance Certificates); Section
5.04 (Further Instruments and Acts); Section 5.06
(Limitation on Restricted Payments); Section 5.08
(Limitation on Additional Indebtedness); Section 5.10
(Limitation on Sale of Subsidiary Shares); Section 5.11
(Limitation on Liens); Section 5.12 (Limitation on Payment
Restrictions Affecting Restricted Subsidiaries); Section
5.13 (Limitation on Transactions with Affiliates); Section
5.16 (Payment of Taxes and Other Claims); Section 5.18
(Maintenance of Properties and Insurance) and Section 5.21
(Covenant to Comply with Securities Laws Upon Purchase of
Securities); (ii) amend Article 6 (Successor Corporations);
(iii) delete
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
the events of default contained in Section 7.01 relating to
cross-acceleration with respect to debt instruments and
final judgments against Purchaser or its subsidiaries; and
(iv) delete and amend certain definitions contained in the
Indenture, as appropriate.
Delisting of Notes:.......... Upon consummation of the Offer, Purchaser will cause the
NYSE to terminate the listing of the Notes on the NYSE,
which could make trading the Notes difficult.
Source of Funds.............. Assuming 100% of the outstanding principal amount of the
Notes is tendered and accepted for payment and assuming a
Price Determination Date as described on Schedule II,
approximately $419 million will be required to pay the Offer
Consideration in connection with the Offer and the
Solicitation. Such funds will be obtained by Purchaser from
(i) the proceeds of an offering of new senior subordinated
notes due 2008 (the "New Senior Subordinated Notes") to be
consummated simultaneously with the Offer, (ii) borrowings
under a new $900 million senior secured credit agreement
(the "New Credit Agreement") and/or (iii) such other credit
facilities as Purchaser determines are appropriate. See
Section 10.
Conditions to the Offer:..... Purchaser's obligation to accept for purchase and to pay for
the Notes validly tendered pursuant to the Offer is subject
to and conditioned upon satisfaction of: (i) the Consent
Condition, (ii) the Financing Condition, (iii) the Merit
Tender Offer Condition; (iv) the Merger Condition and (v)
the General Conditions. See Section 11.
Consent Date:................ The Solicitation will expire at 5:00 p.m., New York City
time, on Monday, January 26, 1998, if on such date Purchaser
has received the Requisite Consents, or on the first date
thereafter that Purchaser receives the Requisite Consents,
unless extended. The Supplemental Indenture will be executed
promptly following the receipt of the Requisite Consents.
Expiration Date:............. The Offer will expire at 12:00 midnight, New York City time,
on Monday, February 9, 1998, unless extended.
Payment Date:................ Payments will be made promptly following the Expiration
Date.
Procedure for Tendering Notes
and Delivering Consents:... Any Holder desiring to tender Notes and deliver Consents to
the Proposed Amendments and the Delisting should (a) in the
case of a Holder who holds physical certificates evidencing
such Notes, complete and sign the Consent and Letter of
Transmittal (or a manually signed facsimile thereof) in
accordance with the Instructions to the Consent and Letter
of Transmittal, have the signature thereon guaranteed (if
required by Instruction 1 to the Consent and Letter of
Transmittal) and deliver it, together with certificates
evidencing such Notes being tendered and any other required
documents to the Depositary at its address set forth on the
back cover of this Statement or (b) in the case of a
beneficial owner who holds Notes in book-entry form, request
its broker, dealer, commercial bank, trust company or other
nominee to effect the transaction for such Holder. A Holder
who desires to tender Notes after the Consent Date but
cannot comply with the delivery requirements may tender such
Notes by
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
following the procedures set forth herein for guaranteed
delivery. See Section 8. DTC participants may electronically
transmit their acceptance of the Offer by causing DTC to
transfer Notes to the Depositary in accordance with ATOP
procedures for transfer. DTC will then send an Agent's
Message (as defined in Section 8) to the Depositary.
Notwithstanding the tender of Notes by a Holder pursuant to
ATOP, in order to validly deliver a Consent with respect to
Notes transferred pursuant to ATOP on or prior to the
Consent Date (and thereby make a valid tender of such
Notes), DTC participants using ATOP must also properly
complete and execute the Consent and Letter of Transmittal
and timely deliver it to the Depositary.
Revocation of Consents:...... Consents may be revoked at any time prior to the Consent
Date upon compliance with the procedures described herein
but are thereafter irrevocable. A valid revocation of a
Consent will be deemed a withdrawal of tendered Notes. See
Section 9.
Withdrawal of Tenders of
Notes:..................... Tenders of Notes may be withdrawn at any time prior to the
Consent Date upon compliance with the procedures described
herein but are thereafter irrevocable. Tenders of Notes may
also be withdrawn if the Offer is terminated without any
Notes being purchased hereunder. A valid withdrawal of
tendered Notes prior to the Consent Date will be deemed a
revocation of the related Consent. See Section 9.
Certain Significant
Considerations:............ See Section 3 for a discussion of certain factors that
should be considered in evaluating the Offer and the
Solicitation.
Certain Tax Considerations... Holders of Notes should consider certain U.S. Federal income
tax consequences of the Offer and the Solicitation. See
Section 12.
Untendered Notes............. Notes not tendered and purchased pursuant to the Offer will
remain outstanding. If the Requisite Consents are received
and the Proposed Amendments become operative pursuant to the
Supplemental Indenture, such Notes will not have the benefit
of the restrictive covenants that will be eliminated from
the Indenture by the Proposed Amendments. In addition, as a
result of the consummation of the Offer, the aggregate
principal amount of the Notes that are outstanding will be
significantly reduced and the Notes will be delisted from
the NYSE, which may adversely affect the liquidity and,
consequently, the market price for the Notes, if any, that
remain outstanding after consummation of the Offer. See
Section 3.
Dealer Manager:.............. Chase Securities is serving as Dealer Manager in connection
with the Offer and the Solicitation. Its address and
telephone number are set forth on the back cover of this
Statement.
Depositary:.................. Marine Midland is serving as Depositary in connection with
the Offer and the Solicitation. Its address and telephone
numbers are set forth on the back cover of this Statement.
Information Agent:........... Georgeson is serving as Information Agent in connection with
the Offer and the Solicitation. Its address and telephone
number are set forth on the back cover of this Statement.
</TABLE>
4
<PAGE>
TO HOLDERS OF THE 11 1/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2004 OF
MAGELLAN HEALTH SERVICES, INC.
THIS STATEMENT AND THE RELATED CONSENT AND LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE
WITH RESPECT TO THE OFFER AND THE SOLICITATION.
1. CERTAIN INFORMATION CONCERNING PURCHASER, THE MERGER AND THE NOTES.
PURCHASER. Purchaser is one of the nation's largest providers of managed
behavioral healthcare services, offering a broad array of cost-effective managed
behavioral healthcare products. Following the Merger, Purchaser will have over
56 million covered lives under managed behavioral healthcare contracts and will
manage behavioral healthcare programs for over 4,000 customers. Through its
current network of over 33,000 providers and 2,000 treatment facilities,
Purchaser manages behavioral healthcare programs for Blue Cross/Blue Shield
organizations, health maintenance organizations ("HMOs") and other insurance
companies, corporations, federal, state and local government agencies, labor
unions and various state Medicaid programs. Purchaser believes it will have the
largest and most comprehensive behavioral healthcare provider network in the
United States as a result of the Merger. In addition to Purchaser's behavioral
healthcare products, Purchaser offers specialty products related to the
management of certain chronic conditions. Purchaser also offers a broad
continuum of behavioral healthcare services through National Mentor, Inc., its
wholly-owned public-sector provider, to approximately 2,800 individuals who
receive healthcare benefits funded by state and local governmental agencies.
Furthermore, Purchaser 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
Purchaser and an affiliate of Crescent Real Estate Equities Limited Partnership
("Crescent") each own a 50% equity interest.
Purchaser's professional care managers coordinate and manage the delivery of
behavioral healthcare treatment services through Purchaser'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 Purchaser's extensive 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). Purchaser
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, Purchaser arranges for the provision of a
full range of behavioral healthcare services for beneficiaries of customers'
healthcare benefit plans through fee arrangements under which Purchaser 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, Purchaser provides
assessment services to employees and dependants of its customers, and if
required, referral services to the appropriate behavioral healthcare service
provider. Under ASO products, Purchaser provides services such as utilization
review, claims administration and provider network management. Purchaser does
not assume the responsibility for the cost of providing healthcare services
pursuant to its ASO products. Based on total covered lives, Purchaser will be,
following the consummation of the Merger, the industry leader with respect to
risk-based, EAP and ASO products.
Purchaser intends to implement its business strategy, in part, through the
Merger. Furthermore, Purchaser is currently in discussions with Crescent
Operating, Inc., an affiliate of Crescent ("COI"), regarding the purchase by COI
of the franchise operations and all or part of Purchaser's interest in CBHS. The
cash proceeds received by Purchaser upon the consummation of any such
transaction would be used to repay indebtedness. However, there can be no
assurance that a definitive agreement will be executed or that such transaction
will occur.
5
<PAGE>
Purchaser was incorporated in 1969 under the laws of the State of Delaware.
Unless the context otherwise requires, references to Purchaser include Magellan
Health Services, Inc. and its subsidiaries. Purchaser'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.
THE MERGER. On October 24, 1997, Purchaser announced that it had entered
into the Merger Agreement to acquire Merit for cash consideration of
approximately $458.3 million, subject to certain adjustments, pursuant to which
Merit will become a wholly-owned subsidiary of Purchaser (the "Merger"). In
connection with the Merger, Purchaser will issue the New Senior Subordinated
Notes and will enter into the New Credit Agreement with The Chase Manhattan Bank
("Chase"), an affiliate of Chase Securities Inc., and a group of other financial
institutions. Pursuant to the New Credit Agreement, Chase and such financial
institutions will, subject to the satisfaction of certain conditions, make
available to Purchaser senior secured credit facilities of up to $900 million.
Consummation of the Offer is subject to Purchaser's obtaining those funds.
Consummation of the Merger and the related financing arrangements would violate
certain covenants contained in the Indenture. In particular, the Merger and the
related financing arrangements would violate the covenants in the Indenture that
prohibit Purchaser from making investments in excess of certain amounts or
incurring additional indebtedness in excess of certain amounts. The Purchaser is
making this Offer and soliciting the Consents to, among other things, eliminate
the restrictions on consummating the Merger and the related financing
arrangements imposed by the Indenture. The issuance by Purchaser of New Senior
Subordinated Notes, the closing under the New Credit Agreement and the
consummation of the Merit Tender Offer (as hereinafter defined) and the Merger
are expected to occur on or prior to the Payment Date.
THE NOTES. The Notes were issued by Purchaser in 1994 in the aggregate
principal amount of $375,000,000, all of which remain outstanding as of the date
of this Offer. The Notes are unsecured senior subordinated obligations of
Purchaser that mature on April 15, 2004. Pursuant to the Indenture, the Notes
may be redeemed on or after April 15, 1999 at a price equal to 105.625% of the
principal amount outstanding, and at lesser prices in each succeeding year from
that date. Holders may obtain copies of the Indenture without charge from the
Information Agent.
2. CAPITALIZATION OF PURCHASER.
The following table sets forth the consolidated capitalization of Purchaser
and Merit at September 30, 1997 and on a pro forma basis to give effect to the
Merger, the issuance of the New Senior Subordinated Notes of Purchaser,
borrowings under the New Credit Agreement, consummation of a simultaneous tender
offer for all outstanding 11 1/2% Senior Subordinated Notes due 2005 of Merit
(the "Merit Tender Offer") and the repurchase of all of the Notes pursuant to
the Offer (collectively, the "Transactions").
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------
PURCHASER MERIT PRO FORMA
----------- --------- -----------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C>
Total Debt (including current maturities):
Existing Purchaser credit facilities.......................................... $0.0 -- --
Existing Merit credit facilities.............................................. -- $ 229.5 --
New Credit Agreement.......................................................... -- -- $ 762.8
11 1/4% Series A Senior Subordinated Notes due 2004........................... 375.0 -- --
11 1/2% Senior Subordinated Notes due 2005.................................... -- 100.0 --
New Senior Subordinated Notes due 2008........................................ -- -- 400.0
Other Debt...................................................................... 20.3 -- 20.9
----------- --------- -----------
Total Debt.................................................................. $395.3 $ 329.5 $ 1,183.7
Stockholders' Equity (Deficit).................................................. 158.3 (25.9) 214.4
----------- --------- -----------
Total Capitalization............................................................ $553.6 $ 303.6 $ 1,398.1
----------- --------- -----------
----------- --------- -----------
</TABLE>
6
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3. CERTAIN SIGNIFICANT CONSIDERATIONS.
THE FOLLOWING CONSIDERATIONS, IN ADDITION TO THE OTHER INFORMATION DESCRIBED
HEREIN, SHOULD BE CAREFULLY CONSIDERED BY EACH HOLDER OF NOTES BEFORE DECIDING
WHETHER TO TENDER NOTES PURSUANT TO THE OFFER AND DELIVER CONSENTS PURSUANT TO
THE SOLICITATION.
EFFECTS OF THE PROPOSED AMENDMENTS. If the Proposed Amendments become
operative, Notes that are not tendered and purchased pursuant to the Offer will
remain outstanding and will be subject to the terms of the Indenture as modified
by the Supplemental Indenture. As a result of the adoption of the Proposed
Amendments, substantially all the covenants contained in the Indenture will be
deleted and Holders of Notes not tendered will no longer be entitled to the
benefits of such covenants. The deletion of these covenants will permit
Purchaser and the Restricted Subsidiaries (as defined in the Indenture, the
"Subsidiaries") to take certain actions previously prohibited (such as incur
indebtedness, pay dividends or make other restricted payments, incur liens, or
make investments that would otherwise not have been permitted) that could
increase the credit risks with respect to Purchaser, adversely affect the market
price and credit rating of the remaining Notes or otherwise be adverse to the
interests of the Holders. See Section 4.
The New Credit Agreement and the indenture for the New Senior Subordinated
Notes will contain covenants that will restrict Purchaser's operations as long
as the New Credit Agreement remains in effect or any of the New Senior
Subordinated Notes remain outstanding. See "--Restrictive Financing Covenants."
Holders of Notes who do not tender their Notes pursuant to the Offer will
indirectly benefit from such covenants unless Purchaser obtains waivers of or
amendments to them. Purchaser may obtain such waivers or amendments without
regard to, or obtaining the consent of, the Holders of the Notes.
CONDITIONS TO THE CONSUMMATION OF THE OFFER AND THE SOLICITATION AND RELATED
RISKS. The consummation of the Offer and Solicitation are subject to the
satisfaction of several conditions. See Section 11. There can be no assurance
that such conditions will be met or that, in the event the Offer and the
Solicitation are not consummated, the market value and liquidity of the Notes
will not be materially adversely affected.
TREATMENT OF NOTES NOT TENDERED IN THE OFFER. From time to time in the
future, Purchaser may acquire Notes, if any, which are not tendered in response
to the Offer through open market purchases, privately negotiated transactions,
tender offers, exchange offers or otherwise, upon such terms and at such prices
as it may determine, which may differ materially from the terms of the Offer.
There can be no assurance as to which, if any, of these alternatives (or
combinations thereof) Purchaser will choose to pursue in the future.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS. As a result of the
Transactions, Purchaser will be highly leveraged, with indebtedness that is
substantial in relation to its stockholders' equity. As of September 30, 1997,
on a pro forma basis, Purchaser's aggregate outstanding indebtedness would have
been approximately $1.2 billion and Purchaser's stockholders' equity would have
been approximately $214 million as of the same date. The New Credit Agreement
and the indenture governing the New Senior Subordinated Notes will permit the
Company to incur or guarantee certain additional indebtedness, subject to
certain limitations.
Purchaser's high degree of leverage could have important consequences to
Holders who do not tender their Notes, including, but not limited to, the
following: (i) Purchaser'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
Purchaser's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness; (iii) Purchaser will be
substantially more leveraged than certain of its competitors, which might place
Purchaser at a competitive disadvantage; (iv) Purchaser may be hindered in its
ability to adjust rapidly to changing market conditions; and (v) Purchaser'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 structure applicable to Purchaser.
7
<PAGE>
Purchaser'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 Purchaser's control. These factors could include operating
difficulties, increased operating costs, the actions of competitors, regulatory
developments and delays in implementing strategic projects. Purchaser's ability
to meet its debt service and other obligations may depend in significant part on
the extent to which Purchaser can successfully implement its business strategy.
There can be no assurance the Purchaser will be able to implement its strategy
fully or that the anticipated results of its strategy will be realized.
If Purchaser's cash flow and capital resources are insufficient to fund its
debt service obligations, Purchaser 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 Purchaser'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 Purchaser to meet its scheduled debt service
obligations.
Purchaser's obligations under the New Credit Agreement will bear interest at
floating rates. As a result, an increase in interest rates could adversely
affect, among other things, Purchaser's ability to meet its debt service
obligations.
ADVERSE EFFECTS ON TRADING MARKETS. After the consummation of the Offer, it
is anticipated that the outstanding principal amount of Notes available for
trading will be significantly reduced. A debt security with a smaller
outstanding principal amount available for trading (a smaller "float") may
command a lower price than would a comparable debt security with a greater
float. Because the principal amount of Notes purchased pursuant to the Offer
will reduce the float, the liquidity and market price of the Notes may be
adversely affected. The reduced float may also tend to make the trading price of
the Notes not tendered, or not purchased pursuant to the Offer, more volatile.
The extent of the market for such Notes and the availability of price quotations
would depend upon the number of Holders of such Notes remaining, the interest in
maintaining a market in such Notes on the part of securities firms and other
factors. As a result, there can be no assurance that any trading market for the
Notes not tendered, or not purchased pursuant to the Offer, will exist after
consummation of the Offers.
HISTORY OF UNPROFITABLE OPERATIONS. Purchaser 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 a loss before cumulative effect of an accounting
change in fiscal 1996 and 1997 of $16.9 million and $13.9 million, respectively.
Purchaser 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. Purchaser's fiscal 1997 net income included a
loss of $35.9 million, net of taxes, relating to the Crescent transactions.
There can be no assurance that Purchaser's profitability will continue in future
periods.
RESTRICTIVE FINANCING COVENANTS. The New Credit Agreement and the indenture
for the New Senior Subordinated Notes will contain a number of covenants that
will restrict the operations of Purchaser and its subsidiaries. In addition, the
New Credit Agreement will require Purchaser to comply with specified financial
ratios and tests, including a minimum interest coverage ratio, a maximum
leverage ratio and a minimum net worth test. There can be no assurance that
Purchaser will be able to comply with such covenants, coverage ratios and tests
in the future. Purchaser's ability to comply with such covenants, coverage
ratios and tests may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants or restrictions could result in a default under the New Credit
Agreement that would permit the lenders thereto to declare all amounts
outstanding thereunder to be immediately due and payable, together with accrued
and unpaid interest and to prevent Purchaser from paying principal, premium,
interest or other amounts due on any or all of the Notes until
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the default is cured or all Senior Indebtedness is paid or satisfied in full.
Furthermore, the commitments of the lender under the New Credit Agreement to
make further extensions of credit thereunder could be terminated. If Purchaser
were unable to repay all amounts accelerated, the lenders could proceed against
the collateral securing Purchaser's obligations pursuant to the New Credit
Agreement. If the indebtedness outstanding pursuant to the New Credit Agreement
were to be accelerated, there can be no assurance that the assets of Purchaser
would be sufficient to repay such indebtedness and the other indebtedness of
Purchaser, including any Notes not tendered pursuant to the Offer.
RISK-BASED PRODUCTS. Revenues under risk-based contracts will be, following
the consummation of the Transactions, the primary source of Purchaser's revenue
from its managed behavioral care business. In order for such contracts to be
profitable, Purchaser must accurately estimate the rate of service utilization
by beneficiaries enrolled in programs managed by Purchaser and control the costs
of such services. There can be no assurance that Purchaser'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 Purchaser's control, will not
cause expenses associated with such contracts to exceed Purchaser's revenue for
such contracts. Purchaser will attempt to increase membership in its risk-based
products following the Merger. If Purchaser is successful in this regard,
Purchaser's exposure to potential losses from its risk-based products will also
be increased. Furthermore, certain of such contracts and certain state
regulations require Purchaser or certain of its subsidiaries to reserve a
specified amount of cash as financial assurance that it can meet its obligations
thereunder. As of September 30, 1997, on a pro forma basis, Purchaser would have
had cash reserves of $52.0 million pursuant to such requirements. Such amounts
will not be available to Purchaser for general corporate purposes. Furthermore,
certain state regulations restrict the ability of subsidiaries that offer
risk-based products to pay dividends to Purchaser.
RELIANCE ON CUSTOMER CONTRACTS. On a pro forma basis, following the
consummation of the Merger and certain other completed acquisitions, management
estimates that approximately 70% of Purchaser's revenue in fiscal 1997 would
have been derived from contracts with payors of behavioral healthcare benefits.
Purchaser'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 its 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. There can be no assurance that such contracts will be
extended or successfully negotiated 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 Purchaser. In addition, price competition in bidding for
contracts can significantly affect the financial terms of any new or
renegotiated contract. There can be no assurance that Purchaser's customers will
not reevaluate their contractual arrangements with Purchaser following the
consummation of the Transactions.
DEPENDENCE ON GOVERNMENT SPENDING FOR MANAGED HEALTHCARE; POSSIBLE IMPACT OF
HEALTHCARE REFORM. A significant portion of Purchaser'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 renegotiation and may limit the Purchaser's
ability to maintain or increase rates. Purchaser is unable to predict the impact
on Purchaser'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 Purchaser. Moreover, any reduction in government
spending for such programs could also have a material adverse effect on
Purchaser. In addition, Purchaser'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.
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These contracts generally can be terminated or modified by the customer if such
appropriations are not made. Finally, some of Purchaser's contracts with
federal, state and local governmental agencies, under both direct contract and
subcontract arrangements, require Purchaser 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.
Legislation has periodically been introduced at the State and federal level
providing for new regulatory programs and materially revising existing programs.
Any such legislation, if enacted, could materially adversely affect Purchaser.
Purchaser is unable to predict the impact on Purchaser's operations of future
regulations or legislation affecting government healthcare programs, or the
healthcare industry in general.
REGULATION. The managed healthcare industry and the provision of behavioral
healthcare services are subject to extensive and evolving state and federal
regulation. Purchaser is subject to certain state laws and regulations,
including those governing: (i) the licensing of insurance companies, HMOs,
prepaid limited health services organizations, 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
mental healthcare professionals. Purchaser's managed care operations are also
indirectly affected by regulations applicable to the establishment and operation
of behavioral healthcare clinics and facilities.
Purchaser believes its operations are structured to comply with applicable
laws and regulations, in all material respects, and that it has received, or is
in the process of applying for, all licenses and approvals material to the
operation of its business. In many states, entities that assume risk under
contracts with licensed insurance companies or HMOs have not been considered by
state regulators to be conducting an insurance or HMO business. As a result,
Purchaser 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 Purchaser operates will not adopt a similar view, thus requiring
Purchaser to obtain additional licenses. Such additional licensure might require
Purchaser to maintain minimum levels of deposits, net worth, capital, surplus or
reserves, or limit Purchaser's ability to pay dividends, make investments or
prepay indebtedness. The imposition of these additional licensure requirements
could increase Purchaser's cost of doing business or delay Purchaser's conduct
or expansion of its business.
In addition, utilization review and TPA activities conducted by Purchaser
are regulated by many states which impose requirements upon Purchaser that
increase its business costs. Purchaser believes that its TPA activities
performed for its self-insured employee benefit plan customers are exempt from
otherwise applicable state licensing or registration requirements based upon
federal preemption under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and has relied on this general principle in determining not
to seek licensure for certain of its activities in many states. Existing case
law is not uniform on the applicability of ERISA preemption with respect to
state regulation of utilization review or TPA activities. There can be no
assurance that additional licensure will not be required with respect to
utilization review or TPA activities in certain states.
State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which Purchaser's operations are subject have
broad discretionary powers. A regulatory agency or a court in states in which
Purchaser 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
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regulations apply to Purchaser differently than Purchaser 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 Purchaser's business
operations, delays in the expansion of Purchaser's business and lost business
opportunities, any of which, under certain circumstances, could have a material
adverse effect on Purchaser.
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 psychiatrist,
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.
Purchaser believes that its operations as currently conducted are in material
compliance with state laws prohibiting fee splitting or the practice of a
profession by an unlicensed entity, however, there can be no assurance that
Purchaser's existing operations and its contractual arrangements with
psychiatrists, psychologists and other healthcare professionals will not be
successfully challenged under such laws, or that the enforceability of such
contractual arrangements will not be limited. Purchaser 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 Purchaser 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 significantly increase
Purchaser's costs of assembling and administering provider networks and could,
therefore, have a material adverse effect on its operations.
Purchaser'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 Merger and certain other
completed acquisitions, Purchaser expects to be the largest provider of managed
behavioral healthcare services in the United States. Purchaser'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. As Purchaser implements the integration process, it may need to
implement enhanced operational, financial and informational systems and may
require additional employees and management, operational, financial and
informational resources. There can be no assurance that Purchaser will be able
to implement and maintain such operational, financial and informational systems
successfully or successfully obtain, integrate and utilize the required
employees and management, operational, financial and informational 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 Purchaser.
Furthermore, implementing such operational, financial and information systems or
obtaining such employees and management could reduce the cost savings Purchaser
expects to achieve.
HIGHLY COMPETITIVE INDUSTRY. The industry in which Purchaser conducts its
managed-care business is highly competitive. Purchaser competes with large
insurance companies, HMOs, PPOs, TPAs, EAPs, provider groups and other managed
care companies. Many of Purchaser's competitors are significantly larger and
have greater financial, marketing and other resources than Purchaser, and some
of Purchaser's competitors provide a broader range of services. Purchaser may
also encounter substantial competition in the future from new market entrants.
Many of Purchaser'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 Purchaser for
such services.
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SUBORDINATION OF FRANCHISE FEES. Purchaser owns a 50% equity interest in
CBHS, from which it receives certain franchise fees (the "Franchise Fees"). The
Franchise Fees represent a significant portion of Purchaser's earnings and cash
flows. The Franchise Fees payable to Purchaser by CBHS are subordinated in right
of payment to the $41.7 million annual base rent, 5% minimum escalator rent and,
in certain circumstances, certain additional rent due to Crescent. If CBHS
encounters a decline in earnings or financial difficulties, such amounts due
Crescent will be paid before any Franchise Fees are paid. The remainder of
CBHS's available cash will then be applied in such order of priority as CBHS may
determine, in the reasonable discretion of the CBHS governing board, to all
other operating expenses of CBHS, including the current and accumulated
Franchise Fees. Purchaser will be entitled to pursue all available remedies for
breach of the Master Franchise Agreement, except that Purchaser does not have
the right to take any action that could reasonably be expected to force CBHS
into bankruptcy or receivership.
Based on projections of fiscal 1998 operations prepared by management of
CBHS, Purchaser believes that CBHS will be unable to pay the full amount of the
Franchise Fees it is contractually obligated to pay Purchaser during fiscal
1998. Purchaser currently estimates that CBHS will be able to pay approximately
$58 to $68 million of the Franchise Fees in fiscal 1998, a $10 to $20 million
shortfall relative to amounts payable under the Master Franchise Agreement.
Purchaser no longer controls the operations of the CBHS psychiatric hospital
facilities. Accordingly, factors that Purchaser does not control will likely
influence the amount of the equity in the earnings of CBHS that Purchaser will
realize in the future. For example, CBHS may pursue acquisitions in markets
where it does not currently have a presence and in markets where it has existing
hospital operations. Furthermore, CBHS may consolidate services in selected
markets by closing additional facilities depending on market conditions and
evolving business strategies. If CBHS closes additional psychiatric hospitals,
it could result in charges to income for the costs attributable to the closure,
which would result in lower equity in earnings of CBHS for Purchaser.
PROFESSIONAL LIABILITY; INSURANCE. The management and administration of the
delivery of managed behavioral healthcare services, like other healthcare
services, entail significant risks of liability. Purchaser is regularly subject
to lawsuits alleging malpractice and related legal theories, some of which
involve situations in which participants in Purchaser's programs have committed
suicide. Purchaser 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 Purchaser's
third-party provider networks. Purchaser is subject to claims for the costs of
services denied. There can be no assurance that Purchaser'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 Purchaser in the future.
Purchaser 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 Purchaser is unable to secure
adequate insurance in the future, or if the insurance carried by Purchaser 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 Purchaser
will not be subject to a liability that could have a material adverse effect on
Purchaser.
LIMITED TRADING MARKET. In connection with the Offer, the listing of the
Notes on the NYSE will be terminated. Depending on, among other things, the
amount of Notes outstanding after the Offer, the liquidity, market value and
price volatility of Notes may be adversely affected by the consummation of the
Offer. To the extent a market continues to exist for the Notes after the Offer,
the Notes may trade at a discount compared to present trading prices depending
on prevailing interest rates, the market for securities with similar credit
features, the performance of Purchaser and other factors. There can be no
assurance that an active market in the Notes will continue to exist and no
assurance as to the prices at which the Notes may trade.
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Typically, a debt security with a smaller outstanding principal amount
available for trading (a smaller "float") commands a lower price than would a
comparable debt security with a larger float. Therefore, the market price for
Notes that are not tendered and accepted for purchase pursuant to the Offer may
be affected adversely to the extent that the principal amount of Notes purchased
pursuant to the Offer reduces the float. A reduced float may also make the
trading price of Notes that are not purchased in the Offer more volatile.
FRAUDULENT TRANSFER CONSIDERATIONS. If, in a bankruptcy or reorganization
case or a lawsuit by or on behalf of unpaid creditors of Purchaser, a court were
to find that, at the time the Notes are accepted for payment (a) Purchaser
purchased the Notes with the intent of hindering, delaying or defrauding current
or future creditors or (b)(i) Purchaser received less than reasonably equivalent
value or fair consideration for the purchase price of the Notes and (ii)
Purchaser (A) was insolvent or was rendered insolvent by reason of such
purchase, (B) was engaged, or about to engage, in a business or transaction for
which its assets constituted unreasonably small capital, (C) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured (as all of the foregoing terms are defined in or interpreted under
the relevant fraudulent transfer or conveyance statutes) or (D) was a defendant
in an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment the judgment is
unsatisfied), then such court could find that the payment to tendering Holders
involved the incurring of obligations or the transferring of interests in
property deemed under applicable law to be fraudulent as against creditors (a
"fraudulent conveyance"). To the extent such payment were deemed to be a
fraudulent conveyance, there is a risk that tendering Holders would be ordered
by a court to turn over to Purchaser's trustee in bankruptcy the consideration
paid to them for their Notes.
Separate and apart from any fraudulent conveyance attack, any payment made
to Holders in consideration for their Notes may also be subject to challenge as
a preference if such payment: (i) is made within ninety days prior to a
bankruptcy filing by Purchaser; (ii) is made when Purchaser is insolvent; and
(iii) permits the Holders to receive more than they otherwise might receive in a
liquidation of Purchaser pursuant to Chapter 7 of the United States Bankruptcy
Code. If such payment were deemed to be preference, such payment could be
recovered by Purchaser's trustee in bankruptcy and Holders would be restored to
their previous positions as unsecured creditors of Purchaser.
GUARANTEES. Following the consummation of the Offer, all Notes that are not
tendered, or that are not accepted for purchase pursuant to the Offer, will
continue to be guaranteed by the Guarantors (as defined in the Indenture). In
addition, following the consummation of the Merger, such Notes will be
guaranteed by Merit. The New Senior Subordinated Notes will not be guaranteed.
4. PROPOSED AMENDMENTS TO THE INDENTURE.
This section sets forth a brief description of the Proposed Amendments to
the Indenture for which Consents are being sought pursuant to the Solicitation.
The Proposed Amendments and the Delisting constitute a single proposal and a
tendering and consenting Holder must consent to the Proposed Amendments in their
entirety and the Delisting and may not consent selectively with respect to
certain of the Proposed Amendments or the Delisting. The Proposed Amendments
will be implemented in an amendment to the Indenture in the form set forth in
the Supplemental Indenture. Although the Supplemental Indenture will become
effective upon execution by Purchaser, the Guarantors and Trustee, the Proposed
Amendments will not become operative unless and until Notes are accepted for
purchase by Purchaser pursuant to the Offer. Thereafter, all Notes that are not
tendered, or that are not accepted for purchase pursuant to the Offer, will
remain outstanding, but will be subject to the terms of the Indenture as
modified by the Supplemental Indenture.
Pursuant to the terms of the Indenture, the Proposed Amendments require the
written consent of the Holders of at least 66 2/3% in aggregate principal amount
of the Notes outstanding.
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The valid tender by a Holder of Notes pursuant to the Offer on or prior to
the Consent Date will be deemed to constitute the giving of a Consent by such
Holder to the Proposed Amendments and the Delisting with respect to such Notes.
Purchaser is not soliciting and will not accept Consents from Holders who are
not tendering their Notes pursuant to the Offer.
The summaries of provisions of the Indenture set forth below are qualified
in their entirety by reference to the full and complete terms contained in the
Indenture. Capitalized terms used herein without definition have the same
meanings as set forth in the Indenture. Holders may obtain copies of the
Indenture without charge from the Information Agent.
The Proposed Amendments to the Indenture are as follows:
DELETION OF COVENANTS. The Proposed Amendments would delete in their
entireties (except as otherwise indicated) the following covenants and any
references thereto from the Indenture:
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Section 5.02 - SEC REPORTS. Requires Purchaser to furnish certain information to the
Trustee and the Holders and file such information with the SEC (regardless
of whether or not required by the rules and regulations of the SEC). The
final sentence of subsection (1), which requires Purchaser to comply with
Section 314(a) of the Trust Indenture Act of 1939, will not be deleted.
Section 5.03 - COMPLIANCE CERTIFICATES. Requires Purchaser to deliver to the Trustee (i)
an annual certificate of Purchaser stating whether Purchaser knows of any
default or event of default with respect to the Notes; (ii) an annual
certificate of the Company's independent certified public accountants
relating to their audit examination; and (iii) notification of the
occurrence of any default or event of default.
Section 5.04 - FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee, requires
Purchaser to execute and deliver such further instruments and do such
further acts as reasonably necessary or proper to carry out the purposes
of the Indenture.
Section 5.06 - LIMITATION ON RESTRICTED PAYMENTS. Restricts the ability of Purchaser and
the Subsidiaries to make Restricted Payments, including payment of
dividends on or purchases of the Purchaser's capital stock, purchases of
Subordinated Indebtedness or the making of investments.
Section 5.08 - LIMITATION ON ADDITIONAL INDEBTEDNESS. Restricts the ability of Purchaser
and the Subsidiaries to create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable for the payment of any
Indebtedness, unless the Purchaser is in compliance with certain financial
covenants, subject to certain exceptions.
Section 5.10 - LIMITATION ON SALE OF SUBSIDIARY SHARES. Restricts the ability of
Purchaser and the Subsidiaries to sell, pledge, hypothecate or otherwise
convey or dispose of any equity interests of a Subsidiary.
Section 5.11 - LIMITATION ON LIENS. Restricts the ability of Purchaser and the
Subsidiaries to create, incur, assume or suffer to exist any Liens upon
any of the property or assets of Purchaser and the Subsidiaries securing
any Indebtedness that is PARI PASSU with or subordinated in right of
payment to the Notes.
Section 5.12 - LIMITATION ON PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES.
Restricts the ability of Purchaser and the Subsidiaries to directly or
indirectly create or otherwise cause or permit to exist or become
effective any encumbrance or restriction on the ability of any Subsidiary
to make certain payments, including payment of dividends on or purchases
of any Subsidiaries' capital stock, purchases of Indebtedness, making
loans or advances, transferring properties or assets or execute a
guarantee of the Notes.
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Section 5.13 - LIMITATION ON TRANSACTIONS WITH AFFILIATES. Restricts the ability of
Purchaser and the Subsidiaries to enter into any transaction with any
affiliate of Purchaser (other than a Subsidiary of the Purchaser).
Section 5.16 - PAYMENT OF TAXES AND OTHER CLAIMS. Requires Purchaser to pay or discharge
before any penalty accrues thereon all taxes, assessments and governmental
charges levied or imposed upon Purchaser or any Subsidiary and all
material lawful claims for labor, materials and supplies which, if unpaid,
would by law become a Lien upon the property of Purchaser or any
Subsidiary.
Section 5.18 - MAINTENANCE OF PROPERTIES AND INSURANCE. Requires Purchaser to cause all
material properties owned by or leased to it or any Subsidiary and used in
the conduct of its or their business to be maintained and kept in normal
condition, repair and working order.
Section 5.21 - COVENANT TO COMPLY WITH SECURITIES LAWS UPON PURCHASE OF SECURITIES. In
connection with any offer to purchase or purchase of the Notes, requires
Purchaser to comply with Rule 13e-4 and Regulation 14E under the Exchange
Act and otherwise comply with all Federal and state securities laws and
regulations.
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AMENDMENT TO ARTICLE 6--SUCCESSOR CORPORATION. Section 6.01 provides that
Purchaser will not merge with or into, or transfer all or substantially all its
assets, subject to certain exceptions, including satisfaction of specified
consolidated net worth and consolidated interest coverage ratio tests. The
Proposed Amendments would delete such tests in their entirety. Section 6.02
provides that, subject to certain exceptions, no Subsidiary may merge with or
into any person or permit any party to merge with or into it. The Proposed
Amendments would delete Section 6.02 in its entirety.
AMENDMENT TO SECTION 7.01--EVENTS OF DEFAULT. Section 7.01 (iii) provides
for an event of default of the Notes upon the occurrence of a default by
Purchaser and the Subsidiaries under other indebtedness. Section 7.01 (vi)
provides for an event of default with respect to the Notes, if Purchaser or any
Subsidiary fails to pay any final judgment in excess of $10,000,000 rendered
against it. The Proposed Amendments would delete Sections 7.01 (iii) and (vi) in
their entirety.
AMENDMENT TO DEFINITIONS. The Proposed Amendments would delete certain
definitions from the Indenture when references to such definitions would be
eliminated as a result of the foregoing. In addition, the Proposed Amendments
would add a definition of "Senior Indebtedness" that would specifically include
indebtedness outstanding under the New Credit Agreement.
5. DELISTING OF NOTES FROM THE NYSE.
The Notes are listed and principally traded on the NYSE. On January 9, 1998,
the last full trading day on the NYSE prior to the announcement of the Offer,
the closing bid price per $100 principal amount of the Notes was $109.61.
HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE NOTES.
The rules of the NYSE state that, in the absence of special circumstances, a
security which is eligible for continued listing will not be removed from the
list upon request or application of the listing company unless the proposed
withdrawal from listing is approved by the securityholders of a substantial
percentage of the outstanding amount of the particular security, and such
withdrawal is not objected to by a substantial number of individual holders of
the particular security. In applying this rule, the NYSE, in the absence of
special circumstances, will consider approval of the proposed withdrawal from
listing by 66 2/3% of the outstanding security as constituting the requisite
approval by a substantial percentage.
The Delisting of the Notes will require the consent of Holders of at least
66 2/3% in aggregate principal amount of the Notes outstanding. The Delisting
and the Proposed Amendments constitute a single
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proposal and a tendering and consenting Holder must consent to the Delisting and
the Proposed Amendments in their entirety and may not consent selectively with
respect to the Delisting or the Proposed Amendments. Trading of the Notes on the
NYSE will not be terminated until the Notes have been accepted for purchase by
Purchaser pursuant to the Offer.
6. TERMS OF THE OFFER AND THE SOLICITATION.
Upon the terms and subject to the conditions of the Offer (including if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment), all Notes which are validly tendered in accordance with the
procedures set forth in Section 8 and not withdrawn (and which are accompanied
by validly delivered Consents that have not been revoked) in accordance with the
procedures set forth in Section 9 prior to the Expiration Date will be accepted
for purchase and paid for by Purchaser promptly after the Expiration Date.
Upon the terms and subject to the conditions set forth in this Statement and
in the accompanying Consent and Letter of Transmittal, Purchaser is also
soliciting Consents from Holders with respect to the Proposed Amendments and the
Delisting.
DETERMINATION OF OFFER CONSIDERATION. The Offer Consideration (including
the Consent Payment) for each Note being purchased pursuant to the Offer is
equal to the present value on the Payment Date of $1,056.25 per $1,000 principal
amount of Notes (the amount payable on April 15, 1999, which is the first date
on which the Notes are redeemable (the "Earliest Redemption Date")), determined
on the basis of a yield (the "Tender Offer Yield") to the Earliest Redemption
Date equal to the sum of (x) the yield on the 7% U.S. Treasury Note due April
15, 1999 (the "Reference Security"), as calculated by the Dealer Manager in
accordance with standard market practice, based on the bid price for such
Reference Security as of 2:00 p.m., New York City Time, on January 26, 1998, the
tenth (10th) business day immediately preceding the scheduled Expiration Date
(the "Price Determination Date"), as displayed on the Bloomberg Government
Pricing Monitor on "Page PX4" (the "Bloomberg Page") (or, if any relevant price
is not available on a timely basis on the Bloomberg Page or is manifestly
erroneous, such other recognized quotation source as the Dealer Manager shall
select in its sole discretion) plus (y) 30 basis points (the "Fixed Spread")
(such price being rounded to the nearest cent per $1,000 principal amount of
Notes), plus accrued and unpaid interest on the Notes to, but not including, the
Payment Date. In the event the Offer is extended for any period of time longer
than ten (10) business days from the previously scheduled Expiration Date, a new
Price Determination Date will be established. Payment of the Offer Consideration
for Notes validly tendered and accepted for payment shall be made on the Payment
Date. Holders of Notes tendered after the Consent Date will receive the Offer
Consideration less the Consent Payment (2% of the principal amount of each
Note).
Although the Tender Offer Yield on the applicable Reference Security on the
Price Determination Date will be determined only from the source noted above,
information regarding the closing yield for the Reference Security may also be
found in THE WALL STREET JOURNAL. The yield on the Reference Security for the
Notes as of 2:00 p.m., New York City time, on January 9, 1998 was 5.19%.
Accordingly, if such yield were determined to be the yield on the Reference
Security at the Price Determination Date, and February 12, 1998 were the Payment
Date for the Notes, the Tender Offer Yield, the Offer Consideration and the
Offer Consideration less the Consent Payment per $1,000 principal amount of
Notes would be 5.49%, $1,117.30 and $1,097.30, respectively. A hypothetical
illustration of the calculation of the Offer Consideration for the Notes
demonstrating the application of the assumptions and methodologies to be used in
pricing the Offer is set forth on Schedule II hereto.
If at any time following a Price Determination Date, Purchaser extends the
Offer for any period of not more than ten (10) business days, the Offer
Consideration for each Note tendered pursuant to the Offer on or prior to the
Consent Date or the Expiration Date, as applicable, shall remain the Offer
Consideration, as applicable, as determined on such Price Determination Date.
If, however, Purchaser extends the
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Offer for any period longer than ten (10) business days from the previously
scheduled Expiration Date based upon which such Price Determination Date has
been established, a new Price Determination Date shall be established (such new
Price Determination Date to be the tenth (10th) business day immediately
preceding the Expiration Date as so extended) and the Offer Consideration for
each Note tendered pursuant to the Offer on or prior to the Consent Date or the
Expiration Date, as applicable, shall be calculated based on the Tender Offer
Yield as of such new Price Determination Date. In either case, a Holder who
tenders Notes after the Consent Date will be entitled to receive, if Notes are
accepted for payment pursuant to the Offer, the Offer Consideration less the
Consent Payment for the Notes so tendered.
Before 9:00 a.m., New York City time, on the business day following the
Price Determination Date, Purchaser will publicly announce the pricing
information referred to above by press release to the Dow Jones News Service.
Prior to 2:00 p.m., New York City time, on the Price Determination Date,
Holders may obtain hypothetical quotes of the yield on the Reference Security
(calculated as of a then recent time) and the resulting hypothetical Offer
Consideration by contacting the Dealer Manager at its telephone number set forth
on the back cover of this Statement. After such time on the Price Determination
Date, Holders may ascertain the actual yield on the Reference Security as of the
Price Determination Date and the resulting actual Offer Consideration by
contacting the Dealer Manager at its telephone number set forth on the back
cover of this Statement.
Because the Offer Consideration prior to the Price Determination Date is
based on a fixed spread pricing formula that is linked to the yield on a
Reference Security, the actual amount of cash that will be received by a
tendering Holder pursuant to the Offer will be affected by changes in such yield
during the term of the Offer prior to such Price Determination Date. After the
Price Determination Date when the Offer Consideration is no longer linked to the
Reference Security, the actual amount of cash that will be received by a
tendering Holder pursuant to the Offer will be known and Holders will be able to
ascertain the Offer Consideration in the manner described above, unless the
Offer is extended for a period longer than ten (10) business days.
On the Payment Date, the Purchaser will pay each tendering Holder who
validly consented to the Proposed Amendments and the Delisting on or prior to
the Consent Date, as part of the Offer Consideration, a Consent Payment equal to
2% of the principal amount ($20 per $1,000 principal amount) of such Holder's
Notes for which Consents have been validly delivered and not validly revoked on
or prior to the Consent Date. If a Holder's Notes are not validly tendered and
the corresponding Consents are not validly delivered pursuant to the Offer and
Solicitation on or prior to the Consent Date, or such Holder's Notes and
Consents are withdrawn and revoked and not properly retendered and redelivered
at or prior to the Consent Date, such Holder will not receive that portion of
the Offer Consideration which constitutes the Consent Payment even though the
Proposed Amendments and the Delisting may be effective as to each of such
Holder's Notes that are not purchased in the Offer.
If the Notes are accepted for payment pursuant to the Offer, Holders who
validly tender their Notes and deliver Consents pursuant to the Offer on or
prior to the Consent Date will receive the Offer Consideration (which includes
the Consent Payment) plus accrued and unpaid interest up to, but not including,
the Payment Date. Holders who validly tender Notes and deliver Consents and do
not withdraw tenders of Notes pursuant to the Offer on or prior to the Consent
Date may not thereafter revoke such Consent after the Consent Date. Holders who
validly tender their Notes and deliver Consents after the Consent Date will
receive the Offer Consideration less the Consent Payment, plus accrued and
unpaid interest up to, but not including, the Payment Date.
HOLDERS MAY NOT DELIVER CONSENTS WITHOUT TENDERING THEIR NOTES IN THE OFFER,
AND MAY NOT REVOKE CONSENTS ON OR PRIOR TO THE CONSENT DATE WITHOUT WITHDRAWING
THE PREVIOUSLY TENDERED NOTES TO WHICH SUCH CONSENT RELATES. HOLDERS MAY NOT
WITHDRAW PREVIOUSLY TENDERED NOTES ON OR PRIOR TO THE CONSENT DATE
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WITHOUT REVOKING PREVIOUSLY DELIVERED CONSENTS TO WHICH SUCH TENDER RELATES.
CONSENTS MAY NOT BE REVOKED AND TENDERS OF NOTES MAY NOT BE WITHDRAWN AFTER THE
CONSENT DATE.
The Proposed Amendments require the receipt of the Requisite Consents,
defined as consents to the Proposed Amendments from the Holders of at least
66 2/3% in aggregate principal amount of the Notes outstanding. Although the
Supplemental Indenture reflecting the Proposed Amendments will become effective
upon execution by Purchaser, the Guarantors and the Trustee, the Proposed
Amendments will not become operative until the Notes have actually been accepted
for purchase by Purchaser.
The Delisting requires the receipt of the Delisting Consents, defined as
consents to the termination of the listing of the Notes on the NYSE from the
Holders of at least 66 2/3% in aggregate principal amount of Notes outstanding.
The Notes will not be delisted until they have actually been accepted for
purchase by Purchaser.
AFTER THE REQUISITE CONSENTS ARE RECEIVED AND THE PROPOSED AMENDMENTS HAVE
BECOME OPERATIVE, THE PROPOSED AMENDMENTS WILL BE EFFECTIVE AS TO ALL NOTES THAT
ARE NOT PURCHASED PURSUANT TO THE OFFER. CONSEQUENTLY, CONSUMMATION OF THE
OFFER, THE ADOPTION OF THE PROPOSED AMENDMENTS AND THE DELISTING MAY HAVE
ADVERSE CONSEQUENCES FOR HOLDERS WHO DO NOT VALIDLY TENDER NOTES PURSUANT TO THE
OFFER. SEE SECTION 3.
The Offer is conditioned upon, among other things, the satisfaction or
waiver of the Consent Condition, the Financing Condition, the Merit Tender Offer
Condition, the Merger Condition and the General Conditions. See Section 11. If
any condition to Purchaser's obligation to purchase Notes under the Offer is not
satisfied prior to the Expiration Date, Purchaser reserves the right (but shall
not be obligated) to (i) decline to purchase any of the Notes tendered and
terminate the Offer, (ii) waive such unsatisfied condition and purchase all
Notes validly tendered, (iii) extend the Offer and retain the Notes which have
been tendered during the period or periods for which the Offer is extended or
(iv) amend the Offer.
Purchaser expressly reserves the right, subject to the securities laws, at
any time or from time to time, regardless of whether or not any of the events
set forth in Section 11 shall have occurred or shall have been determined by
Purchaser to have occurred, (i) to extend the period of time during which the
Offer is open and thereby delay acceptance for payment of, and the payment for,
any Notes, by giving oral notice of such extension to the Depositary followed by
written notice of such extension to the Depositary, (ii) to extend the period of
time during which the Solicitation is open by giving oral notice of such
extension to the Depositary followed by written notice of such extension to the
Depositary, and (iii) to amend the Offer or the Solicitation in any other
respect by giving oral notice of such amendment to the Depositary. The rights
reserved by Purchaser in this paragraph are in addition to Purchaser's rights to
terminate the Offer described in Section 11. Any extension, amendment or
termination will be followed as promptly as practicable by public announcement
thereof, the announcement in the case of an extension to be issued no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Without limiting the manner in which Purchaser may
choose to make any public announcement, Purchaser currently intends to make
announcements by issuing a release to the Dow Jones News Service or by sending
written notice to each registered Holder of the Notes.
If Purchaser extends the Offer, or if (whether before or after any Notes
have been accepted for purchase) the purchase of or payment for Notes is delayed
or Purchaser is unable to pay for Notes pursuant to the Offer for any reason,
then, without prejudice to Purchaser's rights under the Offer, the Depositary
may retain tendered Notes on behalf of Purchaser, and such Notes may not be
withdrawn. However, the ability of Purchaser to delay the payment for Notes
which Purchaser has accepted for purchase is limited by Rule 14e-1(c) under the
Exchange Act, which requires that a bidder pay the consideration offered or
return the securities deposited by or on behalf of Holders of securities
promptly after the termination of withdrawal of a tender offer.
If Purchaser makes a material change in the terms of the Offer or the
information concerning the Offer or waives a material condition to such Offer,
Purchaser will disseminate additional Offer materials
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and extend such Offer to the extent required by law. If the Solicitation is
amended prior to the Consent Date in a manner determined by Purchaser to
constitute a material adverse change to the Holders, Purchaser promptly will
disclose such amendment and, if necessary, extend the Solicitation for a period
deemed by Purchaser to be adequate to permit Holders to withdraw their Notes and
revoke their Consents. See Section 9.
7. ACCEPTANCE FOR PURCHASE AND PAYMENT FOR NOTES; ACCEPTANCE OF CONSENTS.
Upon the terms and subject to the conditions of the Offer and the
Solicitation (including if the Offer or the Solicitation is extended or amended,
the terms and conditions of any such extension or amendment) and applicable law,
Purchaser will purchase, by accepting for payment, and will pay for, all Notes
validly tendered (and not withdrawn) and all Consents validly delivered on or
prior to the Consent Date (and not revoked) pursuant to the Offer and the
Solicitation promptly after the Expiration Date, such payments to be paid by the
deposit with the Depositary of the Offer Consideration (including the Consent
Payment, if applicable) plus accrued and unpaid interest up to, but not
including, the Payment Date in immediately available funds by Purchaser promptly
after the Expiration Date so that payment of the Offer Consideration (including
the Consent Payment, if applicable) may be made to tendering Holders on the
Payment Date. Purchaser expressly reserves the right, in Purchaser's sole
discretion, to delay acceptance for payment of or payment for Notes, subject to
Rule 14e-1(c) under the Exchange Act, in order to comply, in whole or in part,
with any applicable law. See Section 9. In all cases, payment by the Depositary
to Holders of Offer Consideration (including the Consent Payment, if applicable)
for Notes purchased pursuant to the Offer and Consents delivered on or prior to
the Consent Date, if applicable, will be made only after timely receipt by the
Depositary of (i) certificates representing such Notes or timely confirmation of
a book-entry transfer of such Notes into the Depositary's account at a
Book-Entry Transfer Facility pursuant to the procedures set forth in Section 8,
(ii) a properly completed and duly executed Consent and Letter of Transmittal
(or manually signed facsimile thereof) and (iii) any other documents required by
the Consent and Letter of Transmittal.
For purposes of the Solicitation, Consents received by the Depositary will
be deemed to have been accepted by Purchaser if, as and when Purchaser has given
written notice to the Trustee of the receipt by the Depositary of the Requisite
Consents and the Supplemental Indenture is executed by Purchaser, the Guarantors
and Trustee. For purposes of the Offer, tendered Notes will be deemed to have
been accepted for purchase if, as and when Purchaser has given oral or written
notice thereof to the Depositary. In all cases, payment for Notes purchased
pursuant to the Offer and Consents validly delivered and not revoked prior to
the Consent Date will be made by the Depositary, which will act as agent for
consenting and tendering Holders for the purpose of receiving payment from
Purchaser and transmitting such payment to tendering Holders. UNDER NO
CIRCUMSTANCE WILL INTEREST ON THE OFFER CONSIDERATION BE PAID BY PURCHASER BY
REASON OF ANY DELAY OF THE DEPOSITARY IN MAKING PAYMENT.
If any tendered Notes are not purchased pursuant to the Offer for any
reason, such Notes not purchased will be returned, without expense, to the
tendering Holder promptly (or, in the case of Notes tendered by book-entry
transfer into the Depositary's account at a Book-Entry Transfer Facility, such
Notes will be credited to the account maintained at such Book-Entry Transfer
Facility from which such Notes were delivered), unless otherwise requested by
such Holder under "Special Delivery Instructions" in the Consent and Letter of
Transmittal, promptly after the expiration or termination of the Offer.
Tendering Holders will not be obligated to pay brokerage fees or commissions
to the Dealer Manager or, except as set forth in Instruction 7 of the Consent
and Letter of Transmittal, transfer taxes on the purchase of Notes pursuant to
the Offer or the payment of the Consent Payment pursuant to the Solicitation.
Purchaser reserves the right to transfer or assign, in whole or in part, at
any time and from time to time, to one or more of its affiliates, the right to
purchase Notes tendered pursuant to the Offer, but any
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such transfer or assignment will not relieve Purchaser of its obligations under
the Offer or prejudice the rights of tendering Holders to receive payment for
Notes validly tendered and accepted for purchase pursuant to the Offer.
8. PROCEDURES FOR TENDERING NOTES AND DELIVERING CONSENTS.
HOLDERS WILL NOT BE ENTITLED TO RECEIVE THE OFFER CONSIDERATION (WHICH
INCLUDES THE CONSENT PAYMENT) UNLESS THEY BOTH TENDER THEIR NOTES PURSUANT TO
THE OFFER AND DELIVER CONSENTS TO THE PROPOSED AMENDMENTS AND THE DELISTING WITH
RESPECT TO SUCH NOTES ON OR PRIOR TO THE CONSENT DATE. HOLDERS WHO DESIRE TO
TENDER THEIR NOTES PURSUANT TO THE OFFER AND RECEIVE THE OFFER CONSIDERATION ARE
REQUIRED TO CONSENT TO THE PROPOSED AMENDMENTS AND THE DELISTING. HOLDERS WILL
NOT RECEIVE ANY SEPARATE CONSIDERATION IN RESPECT OF THEIR CONSENT TO THE
PROPOSED AMENDMENTS AND THE DELISTING (OTHER THAN THE CONSENT PAYMENT FOR
HOLDERS WHO TENDER PRIOR TO THE CONSENT DATE). HOLDERS OF NOTES TENDERED AFTER
THE CONSENT DATE WILL NOT RECEIVE THAT PORTION OF THE OFFER CONSIDERATION WHICH
CONSTITUTES THE CONSENT PAYMENT. HOLDERS MAY NOT CONSENT TO THE PROPOSED
AMENDMENTS AND THE DELISTING WITHOUT TENDERING THEIR NOTES PURSUANT TO THE
OFFER.
The method of delivery of Notes and Consents and Letters of Transmittal, any
required signature guarantees and all other required documents, including
delivery through DTC and any acceptance of an Agent's Message transmitted
through ATOP, is at the election and risk of the person tendering Notes and
delivering Consents and Letters of Transmittal and, except as otherwise provided
in the Consent and Letter of Transmittal, delivery will be deemed made only when
actually received by the Depositary. If delivery is by mail, it is suggested
that the Holder use properly insured, registered mail with return receipt
requested, and that the mailing be made sufficiently in advance of the Consent
Date or the Expiration Date, as applicable, to permit delivery to the Depositary
on or prior to such date.
TENDERS OF NOTES AND DELIVERY OF CONSENTS. The tender by a Holder of Notes
and delivery of Consents (and subsequent acceptance of such tender by Purchaser)
pursuant to one of the procedures set forth below will constitute an agreement
between such Holder and Purchaser in accordance with the terms and subject to
the conditions set forth herein, in the Consent and Letter of Transmittal and,
if applicable, in the Notice of Guaranteed Delivery.
The procedures by which Notes may be tendered and Consents may be given by
beneficial owners that are not Holders will depend upon the manner in which the
Notes are held.
TENDER OF NOTES HELD IN PHYSICAL FORM. For a Holder validly to tender Notes
held in physical form pursuant to the Offer (and deliver the related Consents),
a properly completed and duly executed Consent and Letter of Transmittal (or a
manually signed facsimile thereof), together with any signature guarantees and
any other documents required by the Instructions to the Consent and Letter of
Transmittal, must be received by the Depositary at its address set forth on the
back cover of this Statement and certificates representing such Notes must be
received by the Depositary at such address, prior to the Consent Date or the
Expiration Date, as applicable. A tender of Notes may also be effected through
the deposit of Notes with DTC and making book-entry delivery as described below;
however, a completed and executed Consent and Letter of Transmittal is still
required to effectuate the valid delivery of related Consents with respect to
such Notes. A Holder who desires to tender Notes and who cannot comply with the
procedures set forth herein for tender on a timely basis or whose Notes are not
immediately available must comply with the procedures for guaranteed delivery
set forth below. HOWEVER, THE GUARANTEED DELIVERY PROCEDURE SET FORTH BELOW MAY
NOT BE USED TO TENDER NOTES OR DELIVER CONSENTS ON OR PRIOR TO THE CONSENT DATE.
CONSENTS AND LETTERS OF TRANSMITTAL AND ANY NOTES TENDERED PURSUANT TO THE OFFER
SHOULD BE SENT ONLY TO THE DEPOSITARY, NOT TO PURCHASER, THE INFORMATION AGENT
OR THE DEALER MANAGER.
THE PROPER COMPLETION, EXECUTION AND DELIVERY OF A CONSENT AND LETTER OF
TRANSMITTAL BY A REGISTERED HOLDER WITH RESPECT TO NOTES WILL CONSTITUTE THE
GIVING OF A CONSENT BY SUCH HOLDER TO THE PROPOSED AMENDMENTS AND THE DELISTING
WITH RESPECT TO SUCH NOTES, AND NO SEPARATE CONSENT OR PROXY WILL BE REQUIRED.
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If the Notes are registered in the name of a person other than the signer of
a Consent and Letter of Transmittal, then, in order to tender such Notes
pursuant to the Offer, the Notes must be endorsed or accompanied by an
appropriate written instrument or instruments of transfer signed exactly as the
name or names of such Holder or Holders appear on the Notes, with the
signature(s) on the Notes or instruments of transfer guaranteed as provided
below. In the event such procedures are followed by a beneficial owner tendering
Notes, the Holder or Holders of such Notes must sign a valid proxy pursuant to
the Consent and Letter of Transmittal, because Notes may not be tendered without
also consenting to the Proposed Amendments and the Delisting, and only
registered Holders as of the date of delivery of the Consent and Letter of
Transmittal are entitled to deliver Consents.
TENDER OF NOTES HELD THROUGH A CUSTODIAN. Any beneficial owner whose Notes
are registered in the name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender Notes and deliver Consents should
contact such registered Holder promptly and instruct such Holder to tender Notes
and deliver Consents on such beneficial owner's behalf. A Letter of Instructions
is enclosed in the solicitation materials provided along with this Statement,
which may be used by a beneficial owner in this process to instruct the
registered Holder to tender Notes and deliver Consents. If such beneficial owner
wishes to tender such Notes and deliver Consents himself, such beneficial owner
must, prior to completing and executing the Consent and Letter of Transmittal
and delivering such Notes, either make appropriate arrangements to register
ownership of the Notes in such beneficial owner's name or follow the procedures
described in the immediately preceding paragraph. The transfer of record
ownership may take considerable time.
TENDER OF NOTES HELD THROUGH DTC. DTC has confirmed that the Offer is
eligible for ATOP. Accordingly, DTC participants may electronically transmit
their acceptance of the Offer by causing DTC to transfer Notes to the Depositary
in accordance with ATOP procedures for transfer (and thereby tender Notes),
followed by a properly completed and duly executed Consent and Letter of
Transmittal delivered to the Depositary to effectuate the delivery of the
related Consent. Upon receipt of such Holder's acceptance through ATOP, DTC will
send an Agent's Message to the Depositary. The term "Agent's Message" means a
message transmitted by DTC, received by the Depositary and forming part of the
Confirmation of book-entry transfer, which states that DTC has received an
express acknowledgment from the participant in DTC tendering Notes and
delivering Consents which are the subject of such confirmation of book-entry
transfer, that such participant has received and agreed to be bound by the terms
of the Consent and Letter of Transmittal and that Purchaser may enforce such
agreement against such participant. Delivery of tendered Notes must be made to
the Depositary pursuant to the book-entry delivery procedures set forth below or
the tendering DTC participant must comply with the guaranteed delivery
procedures set forth below but such guaranteed delivery procedures may only be
used for tenders of Notes after the Consent Date.
Except as provided below, unless the Notes being tendered are deposited with
the Depositary on or prior to the Consent Date or on or prior to the Expiration
Date, as the case may be (accompanied by a properly completed and duly executed
Consent and Letter of Transmittal), Purchaser may, at its option, treat such
tender as defective for purposes of the right to receive the Offer
Consideration. Payment for the Notes will be made only against deposit of the
tendered Notes and delivery of any other required documents.
Pursuant to authority granted by DTC, any DTC participant which has Notes
credited to its DTC account at any time (and thereby held of record by DTC's
nominee) may directly provide a Consent to the Proposed Amendments and the
Delisting as though it were the registered Holder by so completing, executing
and delivering the Consent and Letter of Transmittal.
BOOK-ENTRY DELIVERY PROCEDURES. The Depositary will establish accounts with
respect to the Notes at DTC and the Philadelphia Depository Trust Company
("Philadep") (each a "Book-Entry Transfer Facility" and collectively, the
"Book-Entry Transfer Facilities") for purposes of the Offer within two business
days
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after the date hereof, and any financial institution that is a participant in
either of the Book-Entry Transfer Facilities systems may make book-entry
delivery of the Notes by causing DTC or Philadep to transfer such Notes into the
Depositary's account in accordance with such Book-Entry Transfer Facility's
procedure for such transfer. Timely book-entry delivery of Notes pursuant to the
Offer, however, requires receipt of a confirmation of book-entry transfer prior
to the Consent Date or the Expiration Date, as the case may be. In addition,
although delivery of Notes may be effected through book-entry transfer into the
Depositary's account at a Book-Entry Transfer Facility, the Consent and Letter
of Transmittal (or a facsimile thereof), together with any required signature
guarantees and any other required documents, must, in any case, be delivered or
transmitted to and received by the Depositary at its address set forth on the
back cover of this Statement prior to the Consent Date or the Expiration Date,
as the case may be, in connection with the tender of such Notes. Tender will not
be deemed made until such documents are received by the Depositary. DELIVERY OF
DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE VALID DELIVERY
TO THE DEPOSITARY.
SIGNATURE GUARANTEES. Signatures on all Consents and Letters of Transmittal
must be guaranteed by a participant in the Security Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchange Medallion Program (each of the foregoing being referred to as a
"Medallion Signature Guarantor"), unless the Notes tendered thereby are tendered
(i) by a registered Holder of Notes (or by a participant in one of the
Book-Entry Transfer Facilities whose name appears on a security position listing
as the owner of such Notes) who has not completed either the box entitled
"Special Delivery Instructions" or "Special Issuance Instructions" on the
Consent and Letter of Transmittal or (ii) for the account of a member firm of a
registered national securities exchange, a member of the National Association of
Securities Dealers, Inc. ("NASD") or a commercial bank or trust company having
an office or correspondent in the United States (each of the foregoing being
referred to as an "Eligible Institution"). See Instruction 1 of the Consent and
Letter of Transmittal. If the Notes are registered in the name of a person other
than the signer of the Consent and Letter of Transmittal or if Notes not
accepted for purchase or not tendered are to be returned to a person other than
the registered Holder, then the signatures on the Consents and Letters of
Transmittal accompanying the tendered Notes must be guaranteed by a Medallion
Signature Guarantor as described above. See Instructions 1 and 5 of the Consent
and Letter of Transmittal.
MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. If a Holder desires to
tender Notes, but the certificates evidencing such Notes have been mutilated,
lost, stolen or destroyed, such Holder should contact the Trustee to receive
information about the procedures for obtaining replacement certificates for
Notes at the following address or telephone number: Marine Midland Bank, 140
Broadway, 12th Floor, New York, New York 10005, Attention: Corporate Trust
Department, Telephone No. (212) 658-6433.
GUARANTEED DELIVERY. If a Holder desires to tender Notes pursuant to the
Offer after the Consent Date and time will not permit the Consent and Letter of
Transmittal, certificates representing such Notes and all other required
documents to reach the Depositary, or the procedures for book-entry transfer
cannot be completed, prior to the Expiration Date, such Holder may nevertheless
tender such Notes if all the following conditions are satisfied:
(i) the tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by Purchaser herewith or an
Agent's Message with respect to guaranteed delivery that is accepted by
Purchaser, is received by the Depositary after the Consent Date and on or
prior to the Expiration Date, as provided below; and
(iii) the certificates of the tendered Notes, in proper form for
transfer (or confirmation of a book-entry transfer of such Notes, into the
Depositary's account at a Book-Entry Transfer Facility as described above),
together with a Consent and Letter of Transmittal (or a manually signed
facsimile
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thereof), properly completed and duly executed, with any required signature
guarantees and any other documents required by the Instructions to the
Consent and Letter of Transmittal, are received by the Depositary within two
New York Stock Exchange, Inc. trading days after the date of execution of
the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be sent by hand delivery, facsimile
transmission or mail to the Depositary and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed Delivery.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY PURCHASER BY REASON OF ANY
DELAY IN MAKING PAYMENT TO ANY PERSON RESULTING FROM SUCH PERSON'S USE OF THE
GUARANTEED DELIVERY PROCEDURES, AND THE OFFER CONSIDERATION FOR NOTES TENDERED
PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES WILL BE THE SAME AS THAT FOR
NOTES DELIVERED TO THE DEPOSITARY AFTER THE CONSENT DATE AND ON OR PRIOR TO THE
EXPIRATION DATE. HOLDERS SHOULD BE AWARE THAT, ON OR PRIOR TO THE CONSENT DATE,
TENDERS OF NOTES AND THE RELATED CONSENTS CANNOT BE DELIVERED USING THE
GUARANTEED DELIVERY PROCESS AND THAT USE OF THE GUARANTEED DELIVERY PROCESS
COULD RESULT IN A TENDER OF NOTES AND THE RELATED CONSENT BEING DEFECTIVE.
Notwithstanding any other provisions hereof, payment for Notes tendered and
accepted for purchase pursuant to the Offer will, in all cases, be made only
after timely receipt by the Depositary of such Notes (or confirmation of a
book-entry transfer of such Notes into the Depositary's account at a Book-Entry
Transfer Facility as described above), and a Consent and Letter of Transmittal
(or manually signed facsimile thereof) with respect to such Notes properly
completed and duly executed, with any required signature guarantees and any
other documents required by the Consent and Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE CONSENT AND LETTER OF TRANSMITTAL,
ANY REQUIRED SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING
DELIVERY THROUGH A BOOK-ENTRY TRANSFER FACILITY AND ANY ACCEPTANCE OR AGENT'S
MESSAGE TRANSMITTED THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE HOLDER
TENDERING NOTES AND DELIVERING A CONSENT AND LETTER OF TRANSMITTAL AND, EXCEPT
AS OTHERWISE PROVIDED IN THE CONSENT AND LETTER OF TRANSMITTAL, DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF SUCH DELIVERY IS
BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN
ADVANCE OF THE CONSENT DATE OR THE EXPIRATION DATE, AS THE CASE MAY BE, TO
PERMIT DELIVERY TO THE DEPOSITARY PRIOR TO SUCH DATE.
BACKUP FEDERAL INCOME TAX WITHHOLDING. To prevent backup U.S. Federal
income tax withholding, each tendering Holder of Notes must provide the
Depositary with such Holder's correct taxpayer identification number and certify
that such Holder is not subject to backup U.S. Federal income tax withholding by
completing the Substitute Form W-9 included in the Consent and Letter of
Transmittal. See Section 12.
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any tendered Notes or
delivered Consents pursuant to any of the procedures described above will be
determined by Purchaser, in Purchaser's sole discretion (whose determination
shall be final and binding). Purchaser reserves the absolute right, in its sole
discretion, subject to applicable law, to reject any or all tenders of Notes or
deliveries of Consents determined by it not to be in proper form or, in the case
of Notes, if the acceptance for payment of, or payment for, such Notes may, in
the opinion of Purchaser's counsel, be unlawful. Purchaser also reserves the
absolute right, in its sole discretion, subject to applicable law, to waive any
of the conditions of the Offer or the Solicitation or to waive any defect or
irregularity in any tender with respect to Notes or Consents of any particular
Holder, whether or not similar defects or irregularities are waived in the case
of other Holders. Purchaser's interpretation of the terms and conditions of the
Offer and the Solicitation (including the Consent and Letter of Transmittal and
the Instructions thereto) will be final and binding. None of Purchaser, the
Depositary, the Trustee or any other person will be under any duty to give
notification of any defects or irregularities in tenders or will incur any
liability for failure to give any such notification. If Purchaser waives its
right to reject a defective tender of Notes, the Holder will be entitled to the
Offer Consideration including the Consent Payment, if applicable.
23
<PAGE>
9. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS.
Notes tendered pursuant to the Offer may be withdrawn at any time prior to
the Consent Date (but not thereafter if the Purchaser accepts the Notes for
payment). A valid withdrawal of tendered Notes prior to the Consent Date will
constitute the concurrent valid revocation of such Holder's related Consent. In
order for a Holder to revoke a Consent, such Holder must withdraw the related
tendered Notes. Tendered Notes may not be withdrawn and delivered Consents may
not be revoked subsequent to the Consent Date. In addition, tenders of Notes may
be validly withdrawn if the Offer is terminated without any Notes being
purchased hereunder. In the event of a termination of the Offer, the Notes
tendered pursuant to the Offer will be promptly returned to the tendering
Holder.
For a withdrawal of a tender of Notes or revocation of a Consent to be
effective, a written or facsimile transmission notice of withdrawal or
revocation must be timely received by the Depositary at its address set forth on
the back cover of this Statement on or prior to the Consent Date. Any such
notice of withdrawal or revocation must (i) specify the name of the person who
tendered the Notes to be withdrawn or to which the revocation of Consents
relates, (ii) contain a description of the Notes to be withdrawn and identify
the certificate number or numbers shown on the particular certificates
evidencing such Notes (unless such Notes were tendered by book-entry transfer)
and the aggregate principal amount represented by such Notes, and (iii) be
signed by the Holder of such Notes in the same manner as the original signature
on the Consent and Letter of Transmittal by which such Notes were tendered
(including any required signature guarantees) or related Consent was given or be
accompanied by (x) documents of transfer sufficient to have the Trustee register
the transfer of the Notes into the name of the person withdrawing such Notes
and/or revoking such related Consent and (y) a properly completed irrevocable
proxy that authorized such person to effect such revocation on behalf of such
Holder. If the Notes to be withdrawn have been delivered or otherwise identified
to the Depositary, a properly completed and signed notice of withdrawal shall be
effective immediately upon receipt thereof even if physical release is not yet
effected. A withdrawal of Notes or revocation of Consents can only be
accomplished in accordance with the foregoing procedures.
ALL QUESTIONS AS TO THE FORM AND VALIDITY (INCLUDING TIME OF RECEIPT) OF
NOTICES OF WITHDRAWAL OR REVOCATION WILL BE DETERMINED BY PURCHASER, IN
PURCHASER'S SOLE DISCRETION (WHOSE DETERMINATION WILL BE FINAL AND BINDING).
NONE OF PURCHASER, THE DEPOSITARY, THE DEALER MANAGER, THE INFORMATION AGENT,
THE TRUSTEE OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF
ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF WITHDRAWAL OR REVOCATION OR INCUR
ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION.
Any Notes properly withdrawn or with respect to which Consents have been
properly revoked will be deemed to be not validly tendered for purposes of the
Offer. Withdrawn Notes may be retendered and revoked Consents may be redelivered
by following one of the procedures described in Section 8 at any time prior to
the Consent Date or the Expiration Date, as the case may be.
10. SOURCE AND AMOUNT OF FUNDS.
The total amount of funds required by Purchaser to purchase all of the Notes
pursuant to the Offer will be obtained from the issuance of New Senior
Subordinated Notes and/or from borrowings under the New Credit Agreement. See
Section 2.
11. CONDITIONS TO THE OFFER AND THE SOLICITATION.
Notwithstanding any other provisions of the Offer and the Solicitation and
in addition to (and not in limitation of) Purchaser's rights to extend and/or
amend the Offer and the Solicitation at any time in its sole discretion,
Purchaser shall not be required to accept for payment, purchase or pay for, and
may delay the acceptance for payment of, any tendered Notes, in each event
subject to Rule 14e-1(c) under the Exchange Act, and may terminate the Offer and
the Solicitation, if there shall not have been satisfied the following
conditions:
24
<PAGE>
The "Consent Condition" shall mean the receipt of the Requisite Consents
with respect to the Proposed Amendments and the Delisting and the execution by
Purchaser, the Guarantors and the Trustee of the Supplemental Indenture
implementing the Proposed Amendments.
The "Financing Condition" shall mean the receipt (on terms and conditions
satisfactory to Purchaser in its sole discretion) of proceeds from (i) the
issuance of the New Senior Subordinated Notes, (ii) borrowings under the New
Credit Agreement or (iii) such other credit facilities as Purchaser determines
are appropriate in an aggregate amount that is sufficient for Purchaser to
consummate the Offer. Although Purchaser believes, based on its current
financial condition, that the Financing Condition will be satisfied, there can
be no assurance that the Financing Condition will in fact be satisfied on the
Expiration Date.
The "Merit Tender Offer Condition" shall mean the consummation by Merit of
its offer to purchase any and all of its 11 1/2% Senior Subordinated Notes due
2005 (the "Merit Notes") and the elimination of substantially all the covenants
contained in the indenture relating to the Merit Notes, in each case in
accordance with the terms of Merit's Offer to Purchase and Consent Solicitation
Statement dated as of the date of this Statement, as amended or supplemented
from time to time. Although Purchaser believes that the Merit Tender Offer
Condition will be satisfied, there can be no assurance that the Merit Tender
Offer Condition will in fact be satisfied on the Expiration Date.
The "Merger Condition" shall mean the consummation of the Merger and the
receipt by Purchaser of all approvals or consents to the Merger from all
requisite governmental authorities. Although Purchaser believes that the Merger
Condition will be satisfied, there can be no assurance that the Merger Condition
will in fact be satisfied on the Expiration Date.
The "General Conditions" shall mean the conditions set forth below in
paragraphs (a) through (d). The General Conditions shall be deemed to have been
satisfied unless any of the following conditions shall occur on or prior to the
Expiration Date:
(a) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities in the United States
securities or financial markets, (ii) a material impairment in the trading
market for debt securities, (iii) a declaration of a banking moratorium or
any suspension of payments in respect of banks in the United States (whether
or not mandatory), (iv) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable likelihood of
affecting, the extension of credit by banks or other lending institutions in
the United States, (v) a commencement of a war, armed hostilities or other
national or international crisis involving the United States or (vi) any
significant adverse change in the United States securities or financial
markets generally or in the case of any of the foregoing existing on the
date hereof, a material acceleration or worsening thereof;
(b) there exists an order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction that shall have been enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the reasonable judgment of Purchaser, would or would be reasonably likely
to prohibit, prevent or materially restrict or delay consummation of the
Offer or the Solicitation or that is, or is reasonably likely to be,
materially adverse to the business, operations, properties, condition
(financial or otherwise), assets, liabilities or prospects of Purchaser or
its subsidiaries;
(c) there shall have been instituted or be pending any action or
proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, which
challenges the making of the Offer or the Solicitation or the Proposed
Amendments or the Delisting or is reasonably likely to directly or
indirectly prohibit, prevent, restrict or delay the consummation of the
Offer or the Solicitation or the Proposed Amendments or the Delisting or
otherwise adversely affect in any material manner the Offer, the
Solicitation or the Proposed Amendments or the Delisting; or
25
<PAGE>
(d) the Trustee under the Indenture shall have objected in any respect
to, or taken any action that would be reasonably likely to materially and
adversely affect the consummation of the Offer or the Solicitation or
Purchaser's ability to effect the Proposed Amendments, or shall have taken
any action that challenges the validity or effectiveness of the procedures
used by Purchaser in soliciting the Consents (including the form thereof) or
in the making of the Offer or the acceptance of the Notes or the Consents or
the payment for the Notes.
The foregoing conditions are for the sole benefit of Purchaser and may be
asserted by Purchaser regardless of the circumstances giving rise to any such
condition (including any action or inaction by Purchaser) and may be waived by
Purchaser, in whole or in part, at any time and from time to time, in the sole
discretion of Purchaser. The failure by Purchaser at any time to exercise any of
the foregoing rights will not be deemed a waiver of any other right and each
right will be deemed an ongoing right which may be asserted at any time and from
time to time.
12. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS.
THE FOLLOWING IS A GENERAL SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS OF THE SALE OF NOTES TO PURCHASER PURSUANT TO THE OFFER AND THE
RETENTION OF NOTES AFTER THE ADOPTION OF THE PROPOSED AMENDMENTS. THE DISCUSSION
IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"),
REGULATIONS PROMULGATED THEREUNDER (INCLUDING RECENTLY ISSUED REGULATIONS) AND
JUDICIAL DECISIONS AND ADMINISTRATIVE RULINGS, ALL OF WHICH ARE SUBJECT TO
CHANGE (POSSIBLY WITH RETROACTIVE EFFECT). THE FOLLOWING DOES NOT ADDRESS THE
U.S. FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS THAT MAY BE SUBJECT TO SPECIAL
RULES (E.G., FOREIGN HOLDERS, INSURANCE COMPANIES AND TAX-EXEMPT ORGANIZATIONS),
NOR DOES IT ADDRESS THE U.S. FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS WHO DO
NOT HOLD THE NOTES AS "CAPITAL ASSETS" WITHIN THE MEANING OF SECTION 1221 OF THE
CODE (GENERALLY, PROPERTY HELD FOR INVESTMENT).
The receipt of cash for Notes pursuant to the Offer will be a taxable
transaction for U.S. Federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. The tax
consequences of such receipt pursuant to the Offer may vary depending upon,
among other things, the particular circumstances of the Holder. In general, a
Holder who receives cash for Notes pursuant to the Offer will recognize gain or
loss, if any, for U.S. Federal income tax purposes equal to the difference
between the amount realized in exchange for the Notes sold (the amount of cash
received by such Holder less any cash received in respect of accrued and unpaid
interest on the Notes) and such Holder's adjusted tax basis in such Notes. A
Holder's adjusted tax basis for a Note generally is the price such Holder paid
for the Note increased by the market discount, if any, previously included in
such Holder's income and reduced (but not below zero) by any amortized premium.
Except as provided below, any gain or loss recognized on a sale of a Note will
give rise to capital gain or loss if the Note is held as a capital asset. A
Holder who has acquired a Note with market discount generally will be required
to treat a portion of any gain on a sale of the Note as ordinary income to the
extent of the market discount accrued to the date of the disposition, less any
accrued market discount income previously reported as ordinary income. Amounts
received by a Holder in respect of accrued interest on the Notes will be taxable
as ordinary income. If the Consent Payment is treated as a separate fee for
consenting to the Proposed Amendments, it is possible that such amount would be
taxable as ordinary income to such Holder (rather than as sale proceeds,
discussed above). The Purchaser intends to treat the Consent Payments for U.S.
Federal income tax purposes as additional cash paid in exchange for a Holder's
Note.
Although the matter is not free from doubt, the adoption of the Proposed
Amendments to the Indenture should not constitute a "significant modification"
in the terms of the Notes within the meaning of applicable United States
Department of Treasury regulations. Accordingly, for U.S. Federal income tax
purposes, the adoption of the Proposed Amendments should not result in a deemed
exchange of Notes by any Holder that does not sell in the Offer and should have
no U.S. Federal income tax consequences to such Holders. Even if the Proposed
Amendments were to constitute a deemed exchange of the Notes, Holders who do not
sell their Notes pursuant to the Offer should not recognize gain or loss on such
26
<PAGE>
deemed exchange since such deemed exchange should qualify as a tax-free
recapitalization. There can be no assurance, however, that the IRS would not
take a contrary view. If an exchange were deemed to have occurred and such
exchange did not qualify as a recapitalization, Holders who did not sell their
Notes would recognize gain or loss, if any, on such deemed exchange and would
have a new holding period for the Notes.
BACKUP FEDERAL INCOME TAX WITHHOLDING. In order to avoid backup
withholding, a Holder (other than exempt Holders which include, among others,
all corporations and certain foreign individuals and entities) whose tendered
Notes are accepted for purchase must provide the Depositary (as payer) with its
correct taxpayer identification number, which, in the case of a Holder who is an
individual, is his social security number, or otherwise establish a basis for
exemption from backup withholding. The Depositary will be required to file
information returns with the IRS reporting the gross proceeds of the Offer.
Exempt Holders are not subject to these backup withholding and reporting
requirements. To prevent backup withholding, each nonexempt Holder must provide
his correct taxpayer identification number by completing the Substitute Form W-9
included in the Consent and Letter of Transmittal, certifying that the taxpayer
identification number provided is correct (or that such Holder is awaiting a
taxpayer identification number) and that (i) the Holder is exempt from backup
withholding, (ii) the Holder has not been notified by the IRS that he is subject
to backup withholding as a result of failure to report all interest or dividends
or (iii) the IRS has notified the Holder that he is no longer subject to backup
withholding.
If the Depositary is not provided with the correct taxpayer identification
number and certificate of no loss of exemption from backup withholding or other
adequate basis for exemption, the Holder may be subject to a $50 penalty imposed
by the IRS, and gross proceeds of the Offer paid to the Holder may be subject to
a 31% backup withholding tax. Any amount withheld under these rules will be
creditable against the Holder's Federal income tax liability and, if withholding
results in an overpayment of taxes, a refund may be applied for.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. HOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
OFFER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM
TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS.
13. THE DEALER MANAGER, THE INFORMATION AGENT AND THE DEPOSITARY.
Chase Securities has been engaged to act as the Dealer Manager in connection
with the Offer and the Solicitation. In its capacity as Dealer Manager, Chase
Securities may contact Holders regarding the Offer and the Solicitation and may
request brokers, dealers, commercial banks, trust companies and other nominees
to forward the Statement and related materials to beneficial owners of the
Notes. At any given time, Chase Securities or its affiliates may trade Notes for
its own account or for the accounts of customers, and, accordingly, may hold a
long or short position in the Notes. Purchaser has agreed to indemnify the
Dealer Manager and its affiliates against certain liabilities, including
liabilities caused by, arising out of or in connection with the Offer, the
Solicitation or the engagement of Chase Securities as Dealer Manager. From time
to time, Chase Securities and its affiliates have performed investment banking
and commercial banking services for Purchaser. In addition, Chase Securities has
been engaged to act as an underwriter of, or placement agent for, the New Senior
Subordinated Notes, and Chase has agreed, subject to the satisfaction of certain
conditions, to make available to Purchaser senior secured credit facilities
pursuant to the New Credit Agreement.
Any Holder that has questions concerning the terms of the Offer or the
Solicitation may contact the Dealer Manager at its address and telephone number
set forth on the back cover page of this Statement.
Georgeson has been appointed as Information Agent for the Offer and the
Solicitation. Questions and requests for assistance or additional copies of this
Statement, the Consent and Letter of Transmittal or the Notice of Guaranteed
Delivery may be directed to the Information Agent at its address and telephone
27
<PAGE>
number set forth on the back cover page of this Statement. Holders of Notes may
also contact their broker, dealer, commercial bank or trust company for
assistance concerning the Offer or the Solicitation.
Marine Midland Bank, the Trustee under the Indenture, has been appointed as
Depositary for the Offer. The Solicitation, Consent and Letter of Transmittal
and all correspondence in connection with the Offer and the Solicitation should
be sent or delivered by each Holder or a beneficial owner's broker, dealer,
commercial bank, trust company or other nominee to the Depositary at the address
and telephone number set forth on the back cover of this Statement. Any Holder
or beneficial owner that has questions concerning the procedures for tendering
Notes or whose Notes have been mutilated, lost, stolen or destroyed should
contact the Depositary at the address and telephone number set forth on the back
cover of this Statement.
14. FEES AND EXPENSES.
The Dealer Manager will receive customary fees for its services in
connection with the Offer and the Solicitation. The Information Agent and the
Depositary will also receive reasonable and customary fees for their services
and reimbursement for their reasonable out-of-pocket expenses in connection
therewith. Brokerage houses and other custodians, nominees and fiduciaries will
be reimbursed for their reasonable out-of-pocket expenses incurred in forwarding
copies of this Statement and related documents to the beneficial owners of
Notes. All such fees and expenses will be paid by Purchaser.
15. MISCELLANEOUS.
Purchaser is not aware of any jurisdiction in which the making of the Offer
and the Solicitation is not in compliance with applicable law. If Purchaser
becomes aware of any jurisdiction in which the making of the Offer and the
Solicitation would not be in compliance with applicable law, Purchaser will make
a good faith effort to comply with any such law. If, after such good faith
effort, Purchaser cannot comply with any such law, the Offer and the
Solicitation will not be made to (nor will tenders of Notes and Consents be
accepted from or on behalf of) the Holders residing in such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF PURCHASER NOT CONTAINED IN THIS STATEMENT OR IN THE
CONSENT AND LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Manually signed, properly completed facsimile copies of the Consent and
Letter of Transmittal will be accepted. The Consent and Letter of Transmittal,
Notes and any other required documents should be sent or delivered by each
Holder or its broker, dealer, commercial bank or other nominee to the Depositary
at its address set forth on the back cover of this Statement.
28
<PAGE>
SCHEDULE I
FORMULA TO DETERMINE OFFER CONSIDERATION
<TABLE>
<S> <C> <C>
YLD = The Tender Offer Yield equals the sum of the Yield on the 7%
U.S. Treasury Note due April 15, 1999 (the "Reference
Security"), as calculated by the Dealer Manager in accordance
with standard market practice, based on the bid price for
such Reference Security as of 2:00 p.m., New York City time,
on the Price Determination Date, as displayed on the
Bloomberg Government Pricing Monitor on "Page PX4" (the
"Bloomberg Page") (or, if any relevant price is not available
on a timely basis on the Bloomberg Page or is manifestly
erroneous, such other recognized quotation source as the
Dealer Manager shall select in its sole discretion), plus 30
basis points, expressed as a decimal number.
CPN = the contractual rate of interest payable on a Note expressed
as a decimal number.
N = the number of semi-annual interest payments, based on the
Earliest Redemption Date, from (but not including) the
expected Payment Date to (and including) the Earliest
Redemption Date.
S = the number of days from and including the semi-annual
interest payment date immediately preceding the expected
Payment Date up to, but not including, the expected Payment
Date. The number of days is computed using the 30/360
day-count method.
exp = Exponentiate. The term to the left of "exp" is raised to the
power indicated by the term to the right of "exp."
CP = $20 per $1,000 principal amount per Note, which is equal to
the Consent Payment.
RV = the assumed redemption amount based, on the Earliest
Redemption Date, for each Note per $1,000 principal amount of
a Note (as rounded to the nearest one hundredth of one
percent).
Offer Consideration = the Offer Consideration of a Note per $1,000 principal amount
of a Note if tender is made on or prior to 5:00 p.m., New
York City time, on the Consent Date. The Offer Consideration
is rounded to the nearest cent.
Offer Consideration Less
Consent Payment = the applicable purchase price of a Note per $1,000 principal
amount of a Note if tender is made after 5:00 p.m. New York
City time, on the Consent Date.
Offer Consideration =
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
N
RV + S $1,000 (CPN/2) - $1,000 (CPN/2)(S/180)
(1 + YLD/2) exp (N - S/180) k=1 (1 + YLD/2) exp (k - S/180)
</TABLE>
<TABLE>
<S> <C> <C>
Offer Consideration Less
Consent Payment =
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
N
RV + S $1,000 (CPN/2) - $1,000 (CPN/2)(S/180) - CP
(1 + YLD/2) exp (N - S/180) k=1 (1 + YLD/2) exp (k - S/180)
</TABLE>
I-1
<PAGE>
SCHEDULE II
HYPOTHETICAL ILLUSTRATION OF OFFER CONSIDERATION
This Schedule provides a hypothetical illustration of the Offer
Consideration of the 11 1/4% Series A Senior Subordinated Notes due 2004 based
on hypothetical data, and should, therefore, be used solely for the purpose of
obtaining an understanding of the calculation of the Offer Consideraton, as
quoted at hypothetical rates and times, and should not be used or relied upon
for any other purpose:
<TABLE>
<S> <C> <C>
11 1/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2004
Earliest Redemption Date = April 15, 1999
Reference Security = 7% U.S. Treasury Note due April 15, 1999 as displayed
on the Bloomberg Government Pricing Monitor on "Page
PX4"
Fixed Spread = 0.30% (30 basis points)
EXAMPLE
Assumed Price Determination
Date and Time = 2:00 p.m., New York City time, on January 26, 1998
Assumed Payment Date = February 12, 1998
Assumed Reference Security
Yield as of Assumed Price
Determination Date and Time = 5.19%
Fixed Spread = 0.30%
YLD = .0549
CPN = .1125
N = 3
S = 117
RV = $1,056.25
CP = $20.00
Offer Consideration = $1,117.30
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
N
$1,056.25 + S $1,000 (.1125/2) - $1,000 (.1125/2)(117/180)
(1 + .0549/2) exp (3 - (1 + .0549/2) exp (k -
117/180) k=1 117/180)
</TABLE>
<TABLE>
<S> <C> <C>
Offer Consideration Less
Consent Payment = $1,097.30
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
N $1,000 (.1125/2)(117/180) -
$1,056.25 + S $1,000 (.1125/2) - $20.00
(1 + .0549/2) exp (3 - (1 + .0549/2) exp (k -
117/180) k=1 117/180)
</TABLE>
II-1
<PAGE>
THE DEPOSITARY FOR THE OFFER AND THE SOLICITATION IS:
MARINE MIDLAND BANK
<TABLE>
<S> <C>
BY MAIL OR BY HAND: BY FACSIMILE TRANSMISSION:
Marine Midland Bank (212) 658-2292
Corporate Trust Operations (For Eligible Institutions
140 Broadway - A Level Only)
New York, New York 10005-1180 Confirm by Telephone
(212) 658-5931
</TABLE>
Any questions or requests for assistance or additional copies of this
Statement, the Consent and Letter of Transmittal or the Notice of Guaranteed
Delivery may be directed to the Information Agent at the telephone numbers and
location listed below. You may also contact your broker, dealer, commercial bank
or trust company or nominee for assistance concerning the Offer and the
Solicitation.
THE INFORMATION AGENT IS:
ABCDEF
Wall Street Plaza
New York, New York 10005
BANKERS AND BROKERS CALL COLLECT:
(212) 440-9800
ALL OTHERS CALL TOLL-FREE:
(800) 223-2064
THE DEALER MANAGER FOR THE OFFER AND THE SOLICITATION AGENT FOR THE SOLICITATION
IS:
CHASE SECURITIES INC.
270 Park Avenue, 4th Floor
New York, New York 10017
Attention: Robert Berk
Telephone: (212) 270-1100 (collect)
<PAGE>
OFFER TO PURCHASE
AND CONSENT SOLICITATION STATEMENT
MERIT BEHAVIORAL CARE CORPORATION
OFFER TO PURCHASE FOR CASH
ANY AND ALL OUTSTANDING
11 1/2% SENIOR SUBORDINATED NOTES DUE 2005
AND SOLICITATION OF CONSENTS TO
PROPOSED AMENDMENTS OF RELATED INDENTURE
------------------------
Merit Behavioral Care Corporation, a Delaware corporation ("Purchaser"),
hereby offers to purchase for cash, upon the terms and subject to the conditions
set forth in this Offer to Purchase and Consent Solicitation Statement (as it
may be amended from time to time, the "Statement") and in the accompanying
Consent and Letter of Transmittal (the "Consent and Letter of Transmittal" and,
together with this Statement, the "Offer"), any and all of its outstanding
11 1/2% Senior Subordinated Notes due 2005 (the "Notes") from any and all
Holders (as defined in the Indenture relating to the Notes, the "Holders")
thereof, at a purchase price determined in the manner described herein by
reference to a fixed spread of 50 basis points over the yield to maturity of the
8 1/2% U.S. Treasury Note due November 15, 2000 (of which an amount equal to 2%
of the principal amount ($20 for each $1,000 principal amount) of each Note
purchased shall constitute a consent payment (the "Consent Payment") that will
only be paid for Notes validly tendered (and not withdrawn) on or prior to the
Consent Date) (the "Offer Consideration"). Holders who validly tender their
Notes pursuant to the Offer on or prior to the Consent Date will receive the
Offer Consideration (which includes the Consent Payment), whereas Holders who
validly tender their Notes thereafter will receive an amount equal to the Offer
Consideration less the Consent Payment. In each case, Holders will also receive
accrued and unpaid interest on the Notes up to, but not including, the Payment
Date (as hereinafter defined).
The Offer Consideration (including the Consent Payment) for Notes tendered
pursuant to the Offer shall be the price (calculated as described in Schedule I
to this Statement) equal to the present value on the Payment Date of $1,057.50
per $1,000 principal amount of Notes (the amount payable on November 15, 2000,
which is the first date on which the notes are redeemable (the " Earliest
Redemption Date")), determined on the basis of a yield (the "Tender Offer
Yield") to the Earliest Redemption Date equal to the sum of (x) the yield on the
8 1/2% U.S. Treasury Note due November 15, 2000 (the "Reference Security"), as
calculated by the Dealer Manager in accordance with standard market practice,
based on the bid price for such security as of 2:00 p.m., New York City Time, on
January 26, 1998, the tenth business day immediately preceding the scheduled
Expiration Date (the "Price Determination Date"), as displayed on the Bloomberg
Government Pricing Monitor on "Page PX5" (the "Bloomberg Page") (or, if any
relevant price is not available on a timely basis on the Bloomberg Page or is
manifestly erroneous, such other recognized quotation source as the Dealer
Manager shall elect in its sole discretion) plus (y) 50 basis points (the "Fixed
Spread") (such price being rounded to the nearest cent per $1,000 principal
amount of Notes). In the event the Offer is extended for any period of time
longer than ten (10) business days from the previously scheduled Expiration
Date, a new Price Determination Date will be established.
(CONTINUED ON FOLLOWING PAGE)
THE SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY,
JANUARY 26, 1998 IF ON SUCH DATE PURCHASER HAS RECEIVED THE REQUISITE CONSENTS
(AS HEREINAFTER DEFINED) OR THE FIRST DATE THEREAFTER THAT PURCHASER RECEIVES
THE REQUISITE CONSENTS FROM HOLDERS OF THE NOTES UNLESS EXTENDED (SUCH DATE, AS
THE SAME MAY BE AMENDED, THE "CONSENT DATE"). THE OFFER WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, FEBRUARY 9, 1998 UNLESS EXTENDED (SUCH
DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). HOLDERS WHO DESIRE TO
RECEIVE THE OFFER CONSIDERATION (WHICH INCLUDES THE CONSENT PAYMENT) MUST
VALIDLY TENDER (AND NOT WITHDRAW) THEIR NOTES ON OR PRIOR TO THE CONSENT DATE.
HOLDERS WHO TENDER THEIR NOTES AFTER THE CONSENT DATE WILL RECEIVE THE OFFER
CONSIDERATION LESS THE CONSENT PAYMENT. CONSENTS MAY BE REVOKED AND TENDERS OF
NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE CONSENT DATE.
------------------------
THE DEALER MANAGER FOR THE OFFER AND THE SOLICITATION AGENT FOR THE SOLICITATION
IS:
CHASE SECURITIES INC.
January 12, 1998
<PAGE>
(COVER PAGE CONTINUED)
In conjunction with the Offer, Purchaser hereby solicits (the
"Solicitation") consents (the "Consents") of Holders to certain proposed
amendments (the "Proposed Amendments") to the Indenture, dated as of November
22, 1995, as supplemented (the "Indenture"), by and among Purchaser and Marine
Midland Bank, as trustee (the "Trustee"), pursuant to which the Notes were
issued, to, among other things, eliminate substantially all the covenants
contained in the Indenture. The Proposed Amendments require the Consent of the
Holders of at least a majority in aggregate principal amount of the Notes
outstanding (the "Requisite Consents"). The Proposed Amendments will be
implemented by a supplemental indenture (the "Supplemental Indenture"), which is
expected to be executed promptly following receipt of the Requisite Consents.
Although the Supplemental Indenture reflecting the Proposed Amendments will
become effective upon execution by Purchaser and the Trustee, the Proposed
Amendments will not become operative until Notes are accepted for purchase by
Purchaser pursuant to the Offer, which is expected to occur promptly following
the Expiration Date. See Sections 4 and 6.
NOTWITHSTANDING ANY OTHER PROVISION OF THE OFFER OR THE SOLICITATION,
PURCHASER'S OBLIGATION TO ACCEPT FOR PURCHASE, AND TO PAY FOR, NOTES VALIDLY
TENDERED PURSUANT TO THE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE SECTION 10.
If the Offer is consummated and the Proposed Amendments become operative,
Notes that are not tendered, or are not accepted for purchase pursuant to the
Offer, will remain outstanding, but will be subject to the terms of the
Indenture as modified by the Supplemental Indenture. If a Holder does not
properly tender Notes pursuant to the Offer on or prior to the Consent Date, or
Consents either are not properly delivered or are revoked and not properly
redelivered, on or prior to the Consent Date, such Holder will not receive the
Consent Payment, even though the Proposed Amendments will be effective as to all
Notes. As a result of the adoption of the Proposed Amendments, Holders of such
outstanding Notes will not be entitled to the benefit of substantially all the
covenants presently contained in the Indenture. In addition, if the Offer is
consummated, the trading market for Notes not properly tendered pursuant to the
Offer is likely to be significantly limited. Consequently, the consummation of
the Offer and the adoption of the Proposed Amendments may have adverse
consequences for Holders who do not validly tender Notes pursuant to the Offer.
See Section 3.
If the Notes are accepted for payment pursuant to the Offer, Holders who
validly tender Notes pursuant to the Offer on or prior to the Consent Date and
do not withdraw such tender or revoke such Consent on or prior to the Consent
Date will receive the Offer Consideration (which includes the Consent Payment).
Holders who validly tender Notes and deliver Consents pursuant to the Offer on
or prior to the Consent Date may not revoke such tender of Notes or Consent
after the Consent Date. Holders who validly tender their Notes and deliver
Consents after the Consent Date and on or prior to the Expiration Date will
receive the Offer Consideration less the Consent Payment.
Upon the terms and subject to the conditions of the Offer and the
Solicitation (including, if the Offer or the Solicitation is extended or
amended, the terms and conditions of any such extension or amendment) and
applicable law, Purchaser will (i) purchase, by accepting for payment, and will
pay for, all Notes validly tendered on or prior to the Expiration Date (and not
withdrawn) pursuant to the Offer and (ii) pay for all Consents validly delivered
on or prior to the Consent Date (and not revoked) pursuant to the Solicitation,
in each case promptly after the Expiration Date (the "Payment Date").
HOLDERS WHO TENDER NOTES PURSUANT TO THE OFFER ARE OBLIGATED TO CONSENT TO
THE PROPOSED AMENDMENTS. PURSUANT TO THE TERMS OF THE CONSENT AND LETTER OF
TRANSMITTAL, THE COMPLETION, EXECUTION AND DELIVERY THEREOF BY A HOLDER IN
CONNECTION WITH THE TENDER OF NOTES WILL BE DEEMED TO CONSTITUTE THE CONSENT
WITH RESPECT TO THE NOTES TENDERED. HOLDERS MAY NOT DELIVER CONSENTS WITHOUT
TENDERING THEIR NOTES PURSUANT TO THE OFFER AND MAY NOT REVOKE CONSENTS WITHOUT
WITHDRAWING THE PREVIOUSLY TENDERED NOTES TO WHICH SUCH CONSENTS RELATE.
In the event that the Offer and the Solicitation are withdrawn or otherwise
not completed, the Offer Consideration (including the Consent Payment) will not
be paid or become payable to Holders who have validly tendered their Notes and
delivered Consents in connection with the Offer and the Solicitation. In any
such event, the Notes previously tendered pursuant to the Offer will be promptly
returned to the tendering Holder and the Proposed Amendments will not become
operative.
ii
<PAGE>
(COVER PAGE CONTINUED)
CERTAIN OFFER AND SOLICITATION MATTERS
Tenders of Notes may be withdrawn at any time prior to the Consent Date.
Tenders of Notes may also be withdrawn if the Offer is terminated without any
Notes being purchased thereunder or as otherwise provided herein. For a
withdrawal of a tendered Note to be valid, such withdrawal must comply with the
procedures set forth in Section 8 hereof. A valid withdrawal of tendered Notes
prior to the Consent Date shall be deemed a revocation of the related Consent.
In the event of a termination of the Offer, the Notes tendered pursuant to the
Offer will be returned to the tendering Holders promptly. If Purchaser makes a
material change in the terms of the Offer or the information concerning the
Offer or waives a material condition of the Offer, Purchaser will disseminate
additional Offer materials and extend such Offer to the extent required by law.
Other than as set forth herein, once tendered, Notes may not be withdrawn after
the Consent Date. See Section 8.
Consents may be revoked at any time prior to the Consent Date, but a valid
revocation of a Consent will be deemed a withdrawal of the tendered Notes. For a
revocation of a Consent to be valid, such revocation must comply with the
procedures set forth in Section 8 hereof. If, prior to the Consent Date, the
Solicitation is amended in a manner determined by Purchaser, in its sole
discretion, to constitute a material adverse change to the Holders, Purchaser
promptly will disclose such amendment and may, if appropriate, extend the
Solicitation for a period deemed by Purchaser to be adequate to permit Holders
to properly deliver or revoke their Consents. In addition, Purchaser may, if it
deems appropriate, extend the Solicitation for any other reason. Other than as
set forth herein, once delivered, Consents may not be revoked after the Consent
Date. See Section 8.
NOTWITHSTANDING ANY OTHER PROVISION OF THE OFFER OR THE SOLICITATION,
PURCHASER'S OBLIGATION TO ACCEPT FOR PURCHASE, AND TO PAY FOR, NOTES VALIDLY
TENDERED PURSUANT TO THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THE
SATISFACTION OR WAIVER OF (I) THE CONSENT CONDITION (AS HEREINAFTER DEFINED),
(II) THE FINANCING CONDITION (AS HEREINAFTER DEFINED), (III) THE PARENT TENDER
OFFER CONDITION (AS HEREINAFTER DEFINED), (IV) THE MERGER CONDITION (AS
HEREINAFTER DEFINED) AND (V) THE GENERAL CONDITIONS (AS HEREINAFTER DEFINED).
PURCHASER, IN ITS SOLE DISCRETION, MAY WAIVE ANY OF THE CONDITIONS OF THE OFFER,
IN WHOLE OR IN PART, AT ANY TIME AND FROM TIME TO TIME. SEE SECTIONS 3 AND 10.
From time to time in the future, Parent, Purchaser or any of their
subsidiaries may acquire any Notes that are not tendered pursuant to the Offer
(through open market purchases, privately negotiated transactions, tender
offers, exchange offers or otherwise), upon such terms and at such prices as
they may determine, which may be more or less than the price to be paid pursuant
to the Offer and could be for cash or other consideration. There can be no
assurance as to which, if any, of these alternatives (or combinations thereof)
Parent, Purchaser or any of their subsidiaries will choose to pursue in the
future.
PURCHASER RESERVES THE RIGHT TO WAIVE ANY AND ALL CONDITIONS TO THE OFFER OR
THE SOLICITATION AND TO ACCEPT FOR PURCHASE ANY NOTE TENDERED PURSUANT TO THE
OFFER, WHETHER OR NOT THE REQUISITE CONSENTS TO THE PROPOSED AMENDMENTS ARE
RECEIVED. SUBJECT TO COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND THE TERMS
SET FORTH IN THIS STATEMENT, PURCHASER RESERVES THE RIGHT TO EXTEND OR TERMINATE
THE OFFER AND THE SOLICITATION, OR TO OTHERWISE AMEND THE OFFER AND THE
SOLICITATION IN ANY RESPECT.
THIS STATEMENT HAS NOT BEEN FILED WITH OR REVIEWED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY OF ANY COUNTRY, NOR HAS ANY SUCH
COMMISSION OR AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND MAY BE A CRIMINAL OFFENSE.
SEE "CERTAIN SIGNIFICANT CONSIDERATIONS" AND "CERTAIN U.S. FEDERAL INCOME
TAX CONSIDERATIONS" FOR DISCUSSIONS OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
IN EVALUATING THE OFFER AND THE SOLICITATION.
iii
<PAGE>
(COVER PAGE CONTINUED)
IMPORTANT
Any Holder desiring to tender Notes and consent to the Proposed Amendments
should either (a) in the case of a Holder who holds physical certificates
evidencing such Notes, complete and sign the Consent and Letter of Transmittal
(or a manually signed facsimile thereof) in accordance with the Instructions to
the Consent and Letter of Transmittal, have the signature thereon guaranteed (if
required by Instruction 1 to the Consent and Letter of Transmittal) and deliver
it, together with certificates evidencing such Notes being tendered and any
other required documents to Bankers Trust Company ("Bankers Trust"), as
depositary (the "Depositary"), at its address set forth on the back cover of
this Statement or (b) in the case of a beneficial owner who holds Notes in
book-entry form, request its broker, dealer, commercial bank, trust company or
other nominee to effect the transaction for such Holder. Beneficial owners whose
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee must contact such broker, dealer, commercial bank,
trust company or other nominee if they desire to tender Notes and deliver
Consents with respect to Notes so registered. See Section 7.
Any Holder who desires to tender Notes and whose Notes are not immediately
available, or who cannot complete the procedure set forth herein for tender on a
timely basis, may tender such Notes by following the procedures for guaranteed
delivery set forth in Section 7. The procedures for guaranteed delivery of Notes
may not be used to deliver Consents prior to the Consent Date.
The Depository Trust Company ("DTC") has confirmed that the Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Offer by
causing DTC to transfer Notes to the Depositary in accordance with ATOP
procedures for transfer. DTC will then send an Agent's Message (as defined in
Section 7) to the Depositary. Notwithstanding the tender of Notes by a Holder
pursuant to ATOP, in order to validly deliver a Consent with respect to Notes
transferred pursuant to ATOP on or prior to the Consent Date (and thereby make a
valid tender of such Notes), DTC participants using ATOP must also properly
complete and execute the Consent and Letter of Transmittal and timely deliver it
to the Depositary. See Section 7.
Consents and Letters of Transmittal, the Notes and any other required
documents should be sent to the Depositary only, and the method of delivery of
such documents to the Depositary is at the election and risk of the Holder
tendering such Notes and delivering such Consent and Letter of Transmittal and
any other required documents. Questions and requests for assistance may be
directed to Georgeson & Company Inc. ("Georgeson"), the information agent (the
"Information Agent"), or Chase Securities Inc. ("Chase Securities"), the dealer
manager (the "Dealer Manager"), at their respective addresses and telephone
numbers set forth on the back cover of this Statement. Additional copies of this
Statement, the Consent and Letter of Transmittal, the Notice of Guaranteed
Delivery and other related materials may be obtained from the Information Agent.
Any Holder whose Notes have been mutilated, lost, stolen or destroyed should
contact the Trustee at its address and telephone number set forth in Section 7
for further instructions.
THIS STATEMENT CONSTITUTES NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION
OF CONSENTS IN ANY JURISDICTION IN WHICH, OR TO OR FROM ANY PERSON TO OR FROM
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION UNDER APPLICABLE
SECURITIES OR BLUE SKY LAWS. THE DELIVERY OF THIS STATEMENT SHALL NOT UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN ANY ATTACHMENTS HERETO OR IN
THE AFFAIRS OF PURCHASER OR ANY OF ITS SUBSIDIARIES SINCE THE DATE HEREOF.
NONE OF PURCHASER, THE DEALER MANAGER, THE TRUSTEE, THE DEPOSITARY OR THE
INFORMATION AGENT MAKE ANY RECOMMENDATION AS TO WHETHER HOLDERS SHOULD TENDER
NOTES PURSUANT TO THE OFFER AND DELIVER CONSENTS TO THE PROPOSED AMENDMENTS.
iv
<PAGE>
(COVER PAGE CONTINUED)
All information concerning Parent (as hereinafter defined) that is contained
herein (i) has been provided by Parent or (ii) is based on publicly available
information of Parent.
Certain of the statements in the Statement including, without limitation,
statements regarding acquisition opportunities, revenue growth and future
transactions constitute forward-looking statements contemplated under the
Private Securities Litigation Reform Act of 1995. Risk factors such as the
ability to successfully complete and integrate acquisitions and the degree of
new product success could prevent Parent and Purchaser from achieving their
objectives. For a more complete discussion of these and other risks, please see
"Certain Significant Considerations" and Parent's and Purchaser's Annual Reports
on Form 10-K for the year ended September 30, 1997.
v
<PAGE>
AVAILABLE INFORMATION
Purchaser and Magellan Health Services, Inc. ("Parent") are subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such information may be obtained from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the SEC's home page on the Internet at
http:/www.sec.gov.
INCORPORATION BY REFERENCE
The following document filed by Purchaser with the SEC is incorporated
herein by reference and shall be deemed to be a part hereof:
1. Annual Report of Purchaser on Form 10-K for the year ended September 30,
1997.
The following document filed by Parent with the SEC is incorporated herein
by reference and shall be deemed to be a part hereof:
1. Annual Report of Parent on Form 10-K for the year ended September 30,
1997.
All documents and reports filed by Purchaser and Parent with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Statement and prior to the termination of the Offer shall be deemed
incorporated herein by reference and shall be deemed to be a part hereof from
the date of filing of such documents and reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Statement to the extent
that a statement contained herein or in any subsequently filed document or
report that also is or is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Statement.
Purchaser will provide without charge, upon written or oral request, to each
person to whom a copy of this Statement is delivered, a copy of any of the
documents of Purchaser (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference) incorporated by reference
herein. Request for documents incorporated by reference herein should be
directed to Mr. John A. Budnick, Chief Financial Officer, Merit Behavioral Care
Corporation, One Maynard Drive, Park Ridge, New Jersey 07656, (201) 391-8700.
The documents may also be accessed electronically by means of the SEC's home
page on the Internet at http:/www.sec.gov.
Parent will provide without charge, upon written or oral request, to each
person to whom a copy of this Statement is delivered, a copy of any of the
documents of Parent (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference) incorporated by reference herein.
Request for documents incorporated by reference herein should be directed to Mr.
Kevin Helmintoller, Vice President - Investor Relations, Magellan Health
Services, Inc., 3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326,
(404) 841-9200. The documents may also be accessed electronically by means of
the SEC's home page on the Internet at http:/www.sec.gov.
No person has been authorized to give any information or to make any
representation not contained in this Statement or the Consent and Letter of
Transmittal and, if given or made, such information or representation may not be
relied upon as having been authorized by Purchaser, the Dealer Manager, the
Depositary or the Information Agent. Neither the delivery of this Statement nor
any purchase hereunder shall, under any circumstance, create any implication
that the information herein is correct as of any time subsequent to the date
hereof, or that there has been no change in the affairs of Purchaser or Parent
as of such date.
vi
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY.................................................................................................... 1
1. CERTAIN INFORMATION CONCERNING PURCHASER, PARENT, THE MERGER AND THE NOTES............................. 5
2. CAPITALIZATION OF PARENT............................................................................... 6
3. CERTAIN SIGNIFICANT CONSIDERATIONS..................................................................... 7
4. PROPOSED AMENDMENTS TO THE INDENTURE................................................................... 15
5. TERMS OF THE OFFER AND THE SOLICITATION................................................................ 17
6. ACCEPTANCE FOR PURCHASE AND PAYMENT FOR NOTES; ACCEPTANCE OF CONSENTS.................................. 20
7. PROCEDURES FOR TENDERING NOTES AND DELIVERING CONSENTS................................................. 21
8. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS....................................................... 24
9. SOURCE AND AMOUNT OF FUNDS............................................................................. 25
10. CONDITIONS TO THE OFFER AND THE SOLICITATION........................................................... 25
11. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS......................................................... 27
12. THE DEALER MANAGER, THE INFORMATION AGENT AND THE DEPOSITARY........................................... 28
13. FEES AND EXPENSES...................................................................................... 29
14. MISCELLANEOUS.......................................................................................... 29
SCHEDULE I : FORMULA TO DETERMINE OFFER CONSIDERATION...................................................... I-1
SCHEDULE II: HYPOTHETICAL ILLUSTRATION OF OFFER CONSIDERATION.............................................. II-1
</TABLE>
vii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS STATEMENT
AND THE CONSENT AND LETTER OF TRANSMITTAL. CAPITALIZED TERMS HAVE THE MEANINGS
ASSIGNED TO THEM ELSEWHERE IN THIS STATEMENT.
<TABLE>
<S> <C>
Purchaser:................... Merit Behavioral Care Corporation, a Delaware corporation,
is a managed behavioral healthcare company.
Parent:...................... Magellan Health Services, Inc., a Delaware corporation, is
one of the nation's largest providers of managed behavioral
healthcare services.
The Notes:................... The Offer and the Solicitation are being made with respect
to the Purchaser's 11 1/2% Senior Subordinated Notes due
2005.
The Merger:.................. On October 24, 1997, Parent announced that it had entered
into a definitive agreement (the "Merger Agreement") to
acquire Purchaser for cash consideration of approximately
$458.3 million, subject to certain adjustments, pursuant to
which Purchaser will become a wholly-owned subsidiary of
Parent (the "Merger"). Consummation of the Merger and the
related financing arrangements would violate certain
covenants contained in the Indenture. In particular, the
Merger and the related financing arrangements would violate
the covenants in the Indenture that prohibit Purchaser from
incurring additional indebtedness in excess of certain
amounts. The Purchaser is making this Offer and soliciting
the Consents to eliminate, among other things, the
restrictions imposed by the Indenture on consummating the
Merger and the related financing arrangements.
The Offer:................... Purchaser is offering to purchase any and all of the
outstanding Notes.
The Solicitation:............ As a condition to consummation of the Offer, Purchaser is
also seeking Consents from Holders to the Proposed
Amendments to the Indenture.
Offer Consideration:......... The Offer Consideration (including the Consent Payment) for
Notes tendered pursuant to the Offer shall be the price
(calculated as described in Schedule I to this Statement)
equal to the present value on the Payment Date of $1,057.50
per $1,000 principal amount of Notes (the amount payable on
November 15, 2000, which is the first date on which the
Notes are redeemable (the "Earliest Redemption Date")),
determined on the basis of a yield (the "Tender Offer
Yield") to the Earliest Redemption Date equal to the sum of
(x) the yield on the 8 1/2% U.S. Treasury Note due November
15, 2000 (the "Reference Security"), as calculated by the
Dealer Manager in accordance with standard market practice,
based on the bid price for such security as of 2:00 p.m.,
New York City Time, on January 26, 1998, the tenth business
day immediately preceding the scheduled Expiration Date (the
"Price Determination Date"), as displayed on the Bloomberg
Government Pricing Monitor on "Page PX5" (the "Bloomberg
Page") (or, if any relevant price is not available on a
timely basis on the Bloomberg Page or is manifestly
erroneous, such other recognized quotation source as the
Dealer Manager shall elect in its sole discretion) plus (y)
50 basis points (the "Fixed Spread") (such price being
rounded to the nearest cent per $1,000 principal
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
amount of Notes), plus accrued and unpaid interest on the
Notes to, but not including, the Payment Date. In the event
the Offer is extended for any period of time longer than ten
(10) business days from the previously scheduled Expiration
Date, a new Price Determination Date will be established.
Holders of Notes tendered after the Consent Date will
receive the Offer Consideration less 2% of the principal
amount of each Note (the "Consent Payment").
Requisite Consents:.......... Approval of the Proposed Amendments to the Indenture
requires the Consent of the Holders of at least a majority
in aggregate principal amount of the Notes outstanding.
Effectiveness of Proposed
Amendments:................ The Supplemental Indenture implementing the Proposed
Amendments will be executed promptly following receipt of
the Requisite Consents. The Proposed Amendments, however,
will not become operative until Purchaser has accepted for
purchase all Notes validly tendered (and not withdrawn)
pursuant to the Offer. See Section 6. If the Proposed
Amendments become operative, all persons who continue to
hold Notes thereafter will be subject to the provisions of
the Indenture as amended by the Proposed Amendments.
Tender of Notes and Delivery
of Consents:............... Upon the terms of the Offer and the Solicitation and upon
satisfaction or waiver of the conditions thereto, Purchaser
will accept for purchase Notes validly tendered on or prior
to the Expiration Date (and not properly withdrawn). Holders
who validly tender their Notes and deliver their Consents on
or prior to the Consent Date (and do not withdraw such
tender or revoke such Consent) will be entitled to receive
the Offer Consideration (which includes the Consent Payment)
plus accrued and unpaid interest up to, but not including,
the Payment Date. Holders that validly tender their Notes
and deliver their Consents after the Consent Date but on or
prior to the Expiration Date will be entitled to receive the
Offer Consideration less the Consent Payment, plus accrued
and unpaid interest up to, but not including, the Payment
Date. Payment for Notes validly tendered and accepted for
payment will be made by deposit of such amounts, as
applicable, with the Depositary who will act as agent for
the tendering and consenting Holders for the purpose of
receiving payments from Purchaser and transmitting such
payments to the tendering and consenting Holders. Such
payments are expected to be made on the Payment Date,
promptly following the Expiration Date. See Sections 5 and
6.
Proposed Amendments:......... The Proposed Amendments would (i) delete Section 3.5 (Asset
Sale Offer); (ii) delete the following covenants contained
in the Indenture: Sections 4.3 (Limitation on Restricted
Payments), 4.4 (Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock), 4.5 (Corporate Existence),
4.6 (Payment of Taxes and Other Claims), 4.7 (Maintenance of
Properties and Insurance), 4.8 (Compliance Certificates;
Notice of Default), 4.9 (Compliance with Laws), 4.10(a)
through 4.10(d) (Reports), 4.12 (Limitation on Transactions
with Affiliates), 4.13 (Dividends and Other Payment
Restrictions Affecting
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Subsidiaries), 4.14 (Limitation on Liens), 4.15 (Change of
Control), 4.16 (Limitation on Asset Sales) and 4.17
(Limitation on Incurrence of Senior Subordinated Debt);
(iii) delete the subsection of Section 5.1 (Merger,
Consolidation and Sale of Assets) that contains a fixed
charge coverage ratio test in connection with permitted
mergers and asset transfers; (iv) delete the events of
default contained in Section 6.1 relating to
cross-acceleration with respect to debt instruments and
final judgments against Purchaser or its subsidiaries and
(v) delete and amend certain definitions contained in the
Indenture, as appropriate.
Source of Funds.............. Assuming 100% of the outstanding principal amount of the
Notes is tendered and accepted for payment and assuming a
Price Determination Date as described on Schedule II,
approximately $120 million will be required to pay the Offer
Consideration in connection with the Offer and the
Solicitation. Such funds will be obtained by Purchaser from
borrowings under Parent's new $900 million senior secured
credit agreement (the "New Credit Agreement"), which will
provide for borrowings by certain subsidiaries of Parent.
See Section 9.
Conditions to the Offer:..... Purchaser's obligation to accept for purchase and to pay for
the Notes validly tendered pursuant to the Offer is subject
to and conditioned upon satisfaction of: (i) the Consent
Condition, (ii) the Financing Condition, (iii) the Parent
Tender Offer Condition; (iv) the Merger Condition and (v)
the General Conditions. See Section 10.
Consent Date:................ The Solicitation will expire at 5:00 p.m., New York City
time, on Monday, January 26, 1998, if on such date Purchaser
has received the Requisite Consents, or on the first date
thereafter that Purchaser receives the Requisite Consents,
unless extended. The Supplemental Indenture will be executed
promptly following the receipt of the Requisite Consents.
Expiration Date:............. The Offer will expire at 12:00 midnight, New York City time,
on Monday, February 9, 1998, unless extended.
Payment Date:................ Payments will be made promptly following the Expiration
Date.
Procedure for Tendering Notes
and Delivering Consents:... Any Holder desiring to tender Notes and deliver Consents to
the Proposed Amendments should (a) in the case of a Holder
who holds physical certificates evidencing such Notes,
complete and sign the Consent and Letter of Transmittal (or
a manually signed facsimile thereof) in accordance with the
Instructions to the Consent and Letter of Transmittal, have
the signature thereon guaranteed (if required by Instruction
1 to the Consent and Letter of Transmittal) and deliver it,
together with certificates evidencing such Notes being
tendered and any other required documents to the Depositary
at its address set forth on the back cover of this Statement
or (b) in the case of a beneficial owner who holds Notes in
book-entry form, request its broker, dealer, commercial
bank, trust company or other nominee to effect the
transaction for such Holder. A Holder who desires to tender
Notes after the Consent Date but cannot comply with the
delivery requirements may tender such Notes by following the
procedures set
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
forth herein for guaranteed delivery. See Section 7. DTC
participants may electronically transmit their acceptance of
the Offer by causing DTC to transfer Notes to the Depositary
in accordance with ATOP procedures for transfer. DTC will
then send an Agent's Message (as defined in Section 7) to
the Depositary. Notwithstanding the tender of Notes by a
Holder pursuant to ATOP, in order to validly deliver a
Consent with respect to Notes transferred pursuant to ATOP
on or prior to the Consent Date (and thereby make a valid
tender of such Notes), DTC participants using ATOP must also
properly complete and execute the Consent and Letter of
Transmittal and timely deliver it to the Depositary.
Revocation of Consents:...... Consents may be revoked at any time prior to the Consent
Date upon compliance with the procedures described herein
but are thereafter irrevocable. A valid revocation of a
Consent will be deemed a withdrawal of tendered Notes. See
Section 8.
Withdrawal of Tenders of
Notes:..................... Tenders of Notes may be withdrawn at any time prior to the
Consent Date upon compliance with the procedures described
herein but are thereafter irrevocable. Tenders of Notes may
also be withdrawn if the Offer is terminated without any
Notes being purchased hereunder. A valid withdrawal of
tendered Notes prior to the Consent Date will be deemed a
revocation of the related Consent. See Section 8.
Certain Significant
Considerations:............ See Section 3 for a discussion of certain factors that
should be considered in evaluating the Offer and the
Solicitation.
Certain Tax Considerations... Holders of Notes should consider certain U.S. Federal income
tax consequences of the Offer and the Solicitation. See
Section 11.
Untendered Notes............. Notes not tendered and purchased pursuant to the Offer will
remain outstanding. If the Requisite Consents are received
and the Proposed Amendments become operative pursuant to the
Supplemental Indenture, such Notes will not have the benefit
of the restrictive covenants that will be eliminated from
the Indenture by the Proposed Amendments. In addition, as a
result of the consummation of the Offer, the aggregate
principal amount of the Notes that are outstanding will be
significantly reduced, which may adversely affect the
liquidity and, consequently, the market price for the Notes,
if any, that remain outstanding after consummation of the
Offer. See Section 3.
Dealer Manager:.............. Chase Securities is serving as Dealer Manager in connection
with the Offer and the Solicitation. Its address and
telephone number are set forth on the back cover of this
Statement.
Depositary:.................. Bankers Trust is serving as Depositary in connection with
the Offer and the Solicitation. Its addresses and telephone
numbers are set forth on the back cover of this Statement.
Information Agent:........... Georgeson is serving as Information Agent in connection with
the Offer and the Solicitation. Its address and telephone
number are set forth on the back cover of this Statement.
</TABLE>
4
<PAGE>
TO HOLDERS OF THE 11 1/2% SENIOR SUBORDINATED NOTES DUE 2005 OF
MERIT BEHAVIORAL CARE CORPORATION
THIS STATEMENT AND THE RELATED CONSENT AND LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE
WITH RESPECT TO THE OFFER AND THE SOLICITATION.
1. CERTAIN INFORMATION CONCERNING PURCHASER, PARENT, THE MERGER
AND THE NOTES.
PURCHASER. Purchaser is one of the leading managed behavioral healthcare
companies in the United States, arranging for the provision of a full spectrum
of behavioral healthcare services to approximately 21 million people nationwide.
Purchaser provides managed behavioral healthcare services through a systematic
clinical approach with the objective of diagnosing problems promptly and
designing treatment plans to ensure that patients receive the appropriate level
of care in an efficient and cost-effective manner. Purchaser manages behavioral
healthcare programs across all segments of the healthcare industry, including
health maintenance organizations ("HMOs"), Blue Cross/Blue Shield organizations
and other insurance companies, corporations and labor unions, federal, state and
local governmental agencies, and various state Medicaid programs.
Purchaser's professional care managers coordinate and manage the delivery of
behavioral healthcare treatment services through Purchaser'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 Purchaser's extensive 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). Purchaser
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, Purchaser 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 Purchaser 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, Purchaser provides
assessment services to employees and dependants of its customers, and if
required, referral services to the appropriate behavioral healthcare service
provider. Under ASO products, Purchaser provides services such as utilization
review, claims administration and network management. Purchaser does not assume
the responsibility for the cost of providing healthcare services pursuant to its
ASO products.
Purchaser was incorporated in 1993 under the laws of the State of Delaware.
Unless the context otherwise requires, references to Purchaser include Merit
Behavioral Care Corporation and its subsidiaries. Purchaser's principal
executive offices are located at One Maynard Drive, Park Ridge, New Jersey
07656, and its telephone number is (201) 391-8700.
PARENT. Parent believes it is one of the nation's largest providers of
managed behavioral healthcare services, offering a broad array of cost-effective
managed behavioral healthcare products. Following the Merger, Parent will have
over 56 million covered lives under managed behavioral healthcare contracts and
will manage behavioral healthcare programs for over 4,000 customers. Through its
current network of over 33,000 providers and 2,000 treatment facilities, Parent
manages behavioral healthcare programs for Blue Cross/Blue Shield organizations,
HMOs and other insurance companies, corporations, federal, state and local
government agencies, labor unions and various state Medicaid programs. Parent
believes it will have the largest and most comprehensive behavioral healthcare
provider network in the United States as a result of the Merger. In addition to
Parent's behavioral healthcare products, Parent offers specialty products
related to the management of certain chronic conditions. Parent also offers a
broad continuum of behavioral healthcare services through National Mentor, Inc.,
its wholly-owned public sector provider, to
5
<PAGE>
approximately 2,800 individuals who receive healthcare benefits funded by state
and local governmental agencies. Furthermore, Parent 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 Parent and an affiliate of Crescent Real Estate
Equities Limited Partnership ("Crescent") each own a 50% equity interest.
Parent is currently in discussions with Crescent Operating, Inc., an
affiliate of Crescent ("COI") regarding the purchase by COI of the franchise
operations and all or part of Parent's interest in CBHS. The cash proceeds
received by Parent upon the consummation of any such transaction would be used
to repay indebtedness. However, there can be no assurance that a definitive
agreement will be executed or that such transaction will occur.
Parent was incorporated in 1969 under the laws of the State of Delaware.
Unless the context otherwise requires, references to Parent include Magellan
Health Services, Inc. and its subsidiaries. Parent'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.
THE MERGER. On October 24, 1997, Parent announced that it had entered into
the Merger Agreement to acquire Purchaser for cash consideration of
approximately $458.3 million, subject to certain adjustments, pursuant to which
Purchaser will become a wholly-owned subsidiary of Parent (the "Merger"). In
connection with the Merger, Parent will issue the New Senior Subordinated Notes
(as hereinafter defined) and will enter into the New Credit Agreement with The
Chase Manhattan Bank ("Chase"), an affiliate of Chase Securities Inc., and a
group of other financial institutions. Pursuant to the New Credit Agreement,
Chase and such financial institutions will, subject to the satisfaction of
certain conditions, make available to Parent and Purchaser senior secured credit
facilities of up to $900 million. Consummation of the Offer is subject to
Purchaser's obtaining those funds. Consummation of the Merger and the related
financing arrangements would result in events of default under the Indenture.
The Purchaser is making this Offer and soliciting the Consents to, among other
things, eliminate the restrictions on consummating the Merger and the related
financing arrangements imposed by the Indenture. The issuance by Parent of New
Senior Subordinated Notes, the closing under the New Credit Agreement and the
consummation of the Parent Tender Offer (as hereinafter defined) and the Merger
are expected to occur on or prior to the Payment Date.
THE NOTES. The Notes were issued by Purchaser in 1995 in the aggregate
principal amount of $100,000,000, all of which remain outstanding as of the date
of this Offer. The Notes are unsecured senior subordinated obligations of
Purchaser that mature on November 15, 2005. Pursuant to the Indenture, the Notes
may be redeemed on or after November 15, 2000 at a price equal to 105.75% of the
principal amount outstanding, and at lesser prices in each succeeding year from
that date. Holders may obtain copies of the Indenture without charge from the
Information Agent.
2. CAPITALIZATION OF PARENT.
The following table sets forth the consolidated capitalization of Parent at
September 30, 1997 and on a pro forma basis to give effect to the Merger, the
issuance by Parent of a new series of Senior Subordinated Notes due 2008 (the
"New Senior Subordinated Notes"), borrowings under the New Credit Agreement,
consummation of a simultaneous tender offer for all outstanding 11 1/4% Series A
Senior Subordinated Notes due 2004 of Parent (the "Parent Tender Offer") and the
repurchase of all of the Notes pursuant to the Offer (collectively, the
"Transactions").
6
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------
PURCHASER PARENT PRO FORMA
----------- --------- -----------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C>
Total Debt (including current maturities):
Existing Purchaser credit facilities.......................................... $ 229.5 -- --
Existing Parent credit facilities............................................. -- $0.0 --
New Credit Agreement.......................................................... -- -- 762.8
11 1/4% Series A Senior Subordinated Notes due 2004........................... -- 375.0 --
11 1/2% Senior Subordinated Notes due 2005.................................... 100.0 -- --
New Senior Subordinated Notes due 2008........................................ -- -- 400.0
Other Debt...................................................................... -- 20.3 20.9
----------- --------- -----------
Total Debt.................................................................. $ 329.5 $395.3 $1,183.7
Stockholders' Equity (Deficit).................................................. (25.9) 158.3 214.4
----------- --------- -----------
Total Capitalization............................................................ $ 303.6 $553.6 $1,398.1
----------- --------- -----------
----------- --------- -----------
</TABLE>
3. CERTAIN SIGNIFICANT CONSIDERATIONS.
THE FOLLOWING CONSIDERATIONS, IN ADDITION TO THE OTHER INFORMATION DESCRIBED
HEREIN, SHOULD BE CAREFULLY CONSIDERED BY EACH HOLDER OF NOTES BEFORE DECIDING
WHETHER TO TENDER NOTES PURSUANT TO THE OFFER AND DELIVER CONSENTS PURSUANT TO
THE SOLICITATION.
EFFECTS OF THE PROPOSED AMENDMENTS. If the Proposed Amendments become
operative, Notes that are not tendered and purchased pursuant to the Offer will
remain outstanding and will be subject to the terms of the Indenture as modified
by the Supplemental Indenture. As a result of the adoption of the Proposed
Amendments, substantially all the covenants contained in the Indenture will be
deleted and Holders of Notes not tendered will no longer be entitled to the
benefits of such covenants. The deletion of these covenants will permit
Purchaser and the Restricted Subsidiaries (as defined in the Indenture, the
"Subsidiaries") to take certain actions previously prohibited (such as incur
indebtedness, pay dividends or make other restricted payments, incur liens, or
make investments that would otherwise not have been permitted) that could
increase the credit risks with respect to Purchaser, adversely affect the market
price and credit rating of the remaining Notes or otherwise be adverse to the
interests of the Holders. See Section 4.
The New Credit Agreement and the indenture for the New Senior Subordinated
Notes will contain covenants that will restrict Parent's and its subsidiaries'
(including Purchaser's) operations as long as the New Credit Agreement remains
in effect or any of the New Senior Subordinated Notes remain outstanding. See
"--Restrictive Financing Covenants." Holders of Notes who do not tender their
Notes pursuant to the Offer will indirectly benefit from such covenants unless
Parent obtains waivers of or amendments to them. Parent may obtain such waivers
or amendments without regard to, or obtaining the consent of, the Holders of the
Notes.
CONDITIONS TO THE CONSUMMATION OF THE OFFER AND THE SOLICITATION AND RELATED
RISKS. The consummation of the Offer and Solicitation are subject to the
satisfaction of several conditions. See Section 10. There can be no assurance
that such conditions will be met or that, in the event the Offer and the
Solicitation are not consummated, the market value and liquidity of the Notes
will not be materially adversely affected.
TREATMENT OF NOTES NOT TENDERED IN THE OFFER. From time to time in the
future, Parent or Purchaser may acquire Notes, if any, which are not tendered in
response to the Offer through open market purchases, privately negotiated
transactions, tender offers, exchange offers or otherwise, upon such terms and
at such prices as it may determine, which may differ materially from the terms
of the Offer. There can be no assurance as to which, if any, of these
alternatives (or combinations thereof) Parent or Purchaser will choose to pursue
in the future.
7
<PAGE>
SUBSTANTIAL LEVERAGE, DEBT SERVICE AND INTANGIBLES After the Merger,
Purchaser and Parent will continue to be highly leveraged with indebtedness that
is substantial in relation to its consolidated stockholders' equity. Further,
upon consummation of the Merger, Purchaser will be required to guarantee
Parent's repayment of amounts advanced to Parent pursuant to the New Credit
Agreement, which amount is expected to be $762.8 million on a pro forma basis,
and Parent's 11 1/4% Series A Senior Subordinated Notes that are not tendered
pursuant to a simultaneous tender offer. Purchaser's guarantee of amounts
advanced to Parent pursuant to the New Credit Agreement will be senior
indebtedness (as defined in the Indenture, "Senior Indebtedness") with respect
to the Notes that are not tendered pursuant to the Offer. Purchaser may incur
additional indebtedness in the future, subject to limitations to be imposed by
the New Credit Agreement.
The degree to which Purchaser will be leveraged following the Offer could
have important consequences to holders of the Notes, including, but not limited
to, the following: (i) a substantial portion of Purchaser's cash flow from
operations will be required to be dedicated to debt service and will not be
available for other purposes; (ii) Purchaser's ability to obtain additional
financing in the future could be limited; (iii) certain of Purchaser's
borrowings under the New Credit Agreement will be at variable rates of interest,
which could result in higher interest expense in the event of increases in
interest rates; and (iv) the New Credit Agreement will contain financial and
restrictive covenants that will limit the ability of Purchaser to, among other
things, borrow additional funds, dispose of assets or pay cash dividends.
Failure by Purchaser to comply with such covenants could result in an event of
default which, if not cured or waived, could have a material adverse effect on
Purchaser. In addition, a substantial portion of Purchaser's assets consist of
intangible assets representing goodwill and other identified intangibles
relating to acquired businesses. Purchaser believes the value represented by
goodwill and other identified intangibles will be realized through the future
contribution of cash flow to Purchaser from acquired businesses; however, there
can be no assurance that such projected cash flow contributions will be
realized.
HISTORY OF UNPROFITABLE OPERATIONS. Parent 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. Purchaser experienced a loss before cumulative effect of an
accounting change in fiscal 1996 and 1997 of $16.9 million and $13.9 million,
respectively. Parent 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. Parent's fiscal 1997 net income included
a loss of $35.9 million, net of taxes, relating to the Crescent transactions.
There can be no assurance that Parent's or Purchaser's profitability will
continue in future periods.
DEFICIT IN STOCKHOLDERS' EQUITY. As of September 30, 1997, Purchaser had a
stockholders' deficit of $25.9 million. The degree to which Purchaser continues
to have low or negative net worth after consummation of the Merger could affect,
among other things, the ability of Purchaser to obtain additional financing in
the future.
SUBORDINATION. The Notes are general unsecured obligations of Purchaser and
are subordinated in right of payment to all Senior Indebtedness of Purchaser
(which will include all indebtedness of Parent and Purchaser under the New
Credit Agreement.) Further, upon consummation of the Merger, Purchaser will be
required to guarantee Parent's repayment of amounts advanced to Parent pursuant
to the New Credit Agreement, which amount is expected to be $762.8 million on a
pro forma basis. Purchaser's guarantee of amounts advanced to Parent pursuant to
the New Credit Agreement will be Senior Indebtedness with respect to the Notes
that are not tendered pursuant to the Offer. In the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of Purchaser or
upon a default in payment with respect to, or the acceleration of, or if a
judicial proceeding is pending with respect to any default under, any Senior
Indebtedness, any creditors who are holders of Senior Indebtedness must be paid
in full
8
<PAGE>
before a holder of Notes may be paid. Accordingly, there may be insufficient
assets remaining after such payments to pay principal of or interest on the
Notes.
HOLDING COMPANY STRUCTURE. Purchaser is currently, and expects to be
following the Merger, a holding company that conducts substantially all of its
business operations through its subsidiaries; therefore, the Notes are
effectively subordinated to all existing and future liabilities (including trade
payables) of Purchaser's subsidiaries. Consequently, Purchaser's operating cash
flow and its ability to service its indebtedness, including the Notes, is
dependent upon the cash flow of its subsidiaries and the payment of funds by
such subsidiaries to Purchaser in the form of loans, dividends or otherwise.
Purchaser's subsidiaries are separate and distinct legal entities apart from
Purchaser and will have no obligation, contingent or otherwise, to pay any
amounts due with respect to the Notes or to make any funds available therefor.
As of September 30, 1997, Purchaser's subsidiaries had aggregate liabilities of
$144.6 million. In addition, the Notes are obligations of Purchaser exclusively
and are not guaranteed by any of its subsidiaries and will not be guaranteed by
Parent. The indebtedness of Parent to be outstanding pursuant to the New Credit
Agreement will be fully guaranteed by each of Parent's direct and indirect
domestic subsidiaries (including Purchaser and substantially all its
subsidiaries), with certain exceptions largely related to regulatory
requirements. The guarantee obligations of Purchaser and its subsidiaries will
be secured by security interests in, or liens on, substantially all tangible and
intangible assets of Purchaser and its subsidiaries (excluding real property).
The lenders pursuant to the New Credit Agreement will have a direct claim
against the assets of Purchaser's subsidiaries that will not be available to
holders of Notes not tendered pursuant to the Offer. Furthermore, certain
amounts of cash deposited or held by Purchaser and its subsidiaries pursuant to
customer contracts or as required by applicable regulatory requirements are not
available to Purchaser without prior approval.
RESTRICTIVE FINANCING COVENANTS. The New Credit Agreement and the indenture
for the New Senior Subordinated Notes will contain a number of covenants that
will restrict the operations of Parent and its subsidiaries (including
Purchaser). In addition, the New Credit Agreement will require Parent (on a
consolidated basis) to comply with specified financial ratios and tests,
including a minimum interest coverage ratio, a maximum leverage ratio and a
minimum net worth test. There can be no assurance that Parent will be able to
comply with such covenants, coverage ratios and tests in the future. Parent's
ability to comply with such covenants, coverage ratios and tests may be affected
by events beyond its control, including prevailing economic, financial and
industry conditions. The breach of any such covenants or restrictions could
result in a default under the New Credit Agreement that would permit the lenders
thereto to declare all amounts outstanding thereunder (including borrowings by
Purchaser) to be immediately due and payable, together with accrued and unpaid
interest, and to prevent Parent from paying principal, premium, interest or
other amounts due on any or all of the Notes until the default is cured or all
Senior Indebtedness is paid or satisfied in full. Furthermore, the commitments
of the lender under the New Credit Agreement to make further extensions of
credit thereunder could be terminated. If Parent or Purchaser are unable to
repay all amounts accelerated, the lenders could proceed against the collateral
securing Parent's and Purchaser's obligations pursuant to the New Credit
Agreement. If the indebtedness outstanding pursuant to the New Credit Agreement
were to be accelerated, there can be no assurance that the assets of Parent or
Purchaser would be sufficient to repay such indebtedness and the other
indebtedness of Parent or Purchaser, including any Notes not tendered pursuant
to the Offer.
RISK-BASED PRODUCTS. Revenues under risk-based contracts will be, following
the consummation of the Merger, the primary source of Purchaser's revenue,
accounting for approximately 77% of Purchaser's total revenue in fiscal 1997. In
order for such contracts to be profitable, Purchaser must accurately estimate
the rate of service utilization by beneficiaries enrolled in programs managed by
Purchaser and control the costs of such services. There can be no assurance that
Purchaser'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 Purchaser's control, will not cause expenses associated with such
9
<PAGE>
contracts to exceed Purchaser's revenue for such contracts. Purchaser will
attempt to increase membership in its risk-based products following the Merger.
If Purchaser is successful in this regard, Purchaser's exposure to potential
losses from its risk-based products will also be increased. Furthermore, certain
of such contracts and certain state regulations require Purchaser or certain of
its subsidiaries to reserve a specified amount of cash as financial assurance
that it can meet its obligations thereunder. As of September 30, 1997, Purchaser
had established cash reserves and investments of $51.3 million pursuant to such
requirements. Such amounts will not be available to Purchaser for general
corporate purposes.
RELIANCE ON CUSTOMER CONTRACTS. Substantially all of Purchaser's revenue is
derived from contracts with payors of behavioral healthcare benefits.
Purchaser's managed care contracts typically have terms of one to five 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 its 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. Purchaser's ten largest managed behavioral healthcare
customers had 37 contracts with Purchaser which accounted for approximately 54%
of Purchaser's revenue for fiscal 1997. One such contract accounted for 12% of
Purchaser's operating revenue for fiscal 1997. 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 Purchaser. In addition, price
competition in bidding for contracts can significantly affect the financial
terms of any new or renegotiated contract. There can be no assurance that
Purchaser's customers will not reevaluate their contractual arrangements with
Purchaser following the consummation of the Merger.
DEPENDENCE ON GOVERNMENT SPENDING FOR MANAGED HEALTHCARE; NEW
LEGISLATION. A significant portion of Purchaser's 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 renegotiation and may limit Purchaser's ability to maintain
or increase rates. Purchaser is unable to predict the impact on Purchaser's
operations of future regulations or legislation affecting the 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 Purchaser. Moreover, any reduction in government spending for
such programs could also have a material adverse effect on Purchaser. In
addition, Purchaser'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 Purchaser's contracts with federal, state and local
governmental agencies, under both direct contract and subcontract arrangements,
require Purchaser 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 some cases, particularly in the
area of Medicaid carve-out programs, government payors have structured their
behavioral health benefits programs to limit the profits that managed care
vendors may generate under the contracts with such government payors.
Legislation has periodically been introduced at the state and federal level
providing for new regulatory programs and materially revising existing programs.
Any such legislation, if enacted, could materially adversely affect Purchaser.
Purchaser is unable to predict the impact on Purchaser's operations of future
regulations or legislation affecting government healthcare programs, or the
healthcare industry in general.
10
<PAGE>
REGULATION. The managed healthcare industry and the provision of behavioral
healthcare services are subject to extensive and evolving state and federal
regulation. Purchaser is subject to certain state laws and regulations,
including those governing: (i) the licensing of insurance companies, HMOs,
prepaid limited health services organizations, preferred provider organizations
("PPOs"), third-party administrators ("TPAs") and companies engaged in
utilization review; (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 mental
healthcare professionals; (iii) the establishment and operation of behavioral
healthcare programs, clinics and facilities and (iv) the provision of services
to beneficiaries of federal and state funded healthcare programs, such as
Medicaid.
Purchaser believes its operations are structured to comply with applicable
laws and regulations, in all material respects, and that it has received, or is
in the process of applying for, all licenses and approvals material to the
operation of its business. However, state regulatory agencies responsible for
the administration and enforcement of the laws and regulations to which
Purchaser's operations are subject have broad discretionary powers. A regulatory
agency or a court in states in which Purchaser 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 Purchaser differently than Purchaser 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 Purchaser's business operations, delays in the
expansion of Purchaser's business and lost business opportunities, any of which,
under certain circumstances, could have a material adverse effect on Purchaser.
In many states, entities that assume risk under contracts with licensed
insurance companies or HMOs are not required to be licensed as an insurer or
HMO. As a result, Purchaser 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 Purchaser operates will not adopt a similar view, thus
requiring Purchaser to obtain additional licenses. Such additional licensure
might require Purchaser to maintain minimum levels of deposits, net worth,
capital, surplus or reserves, or limit Purchaser's ability to pay dividends,
make investments or repay indebtedness. The imposition of these additional
licensure requirements could increase Purchaser's cost of doing business or
delay Purchaser's conduct or expansion of its business. In addition, utilization
review and TPA activities conducted by Purchaser are regulated by many states,
which impose requirements upon Purchaser that increase its business costs. In
particular, Purchaser believes that its TPA activities performed for its
self-insured employee benefit plan customers are exempt from otherwise
applicable state licensing or registration requirements based upon federal
preemption under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and has relied on this general principle in determining not to seek
licensure for certain of its activities in many states. Existing case law is not
uniform on the applicability of ERISA preemption with respect to state
regulation of 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.
Several states in which Purchaser does business have also adopted, or are
expected to adopt, "any willing provider" laws. Such laws typically impose upon
insurance companies, 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. To management's
knowledge, Purchaser is not subject to such laws in any states in which it
currently does business, although it has undertaken to comply with any willing
provider contracting requirements at the request of certain customers. In
addition, Purchaser could become subject to such laws in the future if they are
adopted by states in which Purchaser is licensed as an insurance company, HMO or
similar entity, or if Purchaser's customers become subject to such laws.
Compliance with any willing provider laws could significantly increase
Purchaser's costs of contracting with providers and have a material adverse
effect on its operations. Several states in which
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Purchaser operates have also enacted legislation that more directly regulates
the manner in which insurers, HMOs and utilization review companies deliver
their services and process claims for benefits, including in some cases
establishing independent review boards for the denial of services. There can be
no assurance that such laws will not materially increase the cost to Purchaser
of delivering services through increasing the rate of utilization of covered
services.
The provision of behavioral healthcare treatment services by psychiatrists,
psychologists and other providers is subject to state regulation with respect to
the practice of licensed healthcare professionals, limitations on the ability of
business corporations to directly provide, control or exercise excessive
influence over the services of licensed healthcare professionals, and
limitations on fee-splitting and payments for referrals. Although under
Purchaser's programs all direct clinical services other than brief counseling
services typically are provided by licensed professionals who are staff
providers employed by or under contract with one of the professional
corporations providing services exclusively for Purchaser, or are network
providers under independent contractor arrangements with Purchaser, state
regulatory authorities or courts may in certain instances determine that these
relationships between Purchaser and such professional corporations are
unenforceable. Purchaser 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. Further, in contrast to certain states,
regulators in several states in which Purchaser does business have adopted
policies that require HMOs or, in some instances, insurance companies, to
contract directly with licensed healthcare providers, entities or provider
groups for the provision of treatment services, rather than with unlicensed
intermediary companies. In such states, Purchaser's customary model of
contracting directly with its customers may need to be modified. Purchaser does
not expect any required changes to have a material adverse effect on its
operations.
Purchaser is also generally affected directly by regulations applicable to
the operation of healthcare programs, clinics and facilities. In some instances,
state laws require ownership of clinics or facilities by licensed practitioners
or individuals (rather than corporations). In such cases, Purchaser maintains
its relationship with the clinic or facility other than through direct
shareholder status. If Purchaser's relationships with the licensed clinics or
facilities are deemed to be improper, changes in Purchaser's operations in the
affected states could be required. Such restrictions could have a material
adverse effect on the Purchaser.
Further, as noted above, certain of Purchaser's services are subject to the
provisions of ERISA. In some circumstances, and under certain customer
contracts, Purchaser may be expressly named as a "fiduciary" under ERISA, or be
deemed to have assumed duties that make it an ERISA fiduciary, and thus be
required to carry out its operations in a manner that complies with ERISA
requirements. Purchaser believes that it complies with ERISA requirements in all
material respects, and that continuing ERISA compliance efforts will not have a
material adverse effect on Purchaser.
Purchaser provides and may in the future provide services to some program
beneficiaries who are also beneficiaries of the Medicaid program, the Medicare
program, other government sponsored healthcare programs, such as CHAMPUS, or the
Federal Employees Health Benefits Program. Purchaser's compensation for services
provided to such beneficiaries has historically been governed by the contracts
with its customers having government program recipients, as applicable, enrolled
in their healthcare benefits plans. The compensation received by Purchaser for
such services under its private customer contracts generally has not been
affected by Medicaid or Medicaid fee schedules or similar cost containment
measures; however, Purchaser's provision of services to Medicaid beneficiaries,
or beneficiaries of other government sponsored healthcare plans, through direct
contracts with federal, state or local government agencies, is affected by such
measures, and there can be no assurance that future legislation will not
materially adversely affect Purchaser's compensation for services provided to
beneficiaries of government sponsored healthcare programs under contracts with
either government agencies or HMOs or other similar entities.
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The provision of services to beneficiaries of federally funded healthcare
programs may also subject Purchaser to various federal "fraud and abuse" laws,
including "anti-kickback" and "physician self-referral" laws. Similar state laws
could also govern the provision of services to beneficiaries of state funded
healthcare programs such as Medicaid. The federal anti-kickback laws prohibit
the knowing and willful solicitation, receipt or offering of any remuneration or
consideration, directly or indirectly, to induce or in exchange for referrals of
patients or for the ordering of services covered by federally funded healthcare
programs (excluding the Federal Employees Health Benefits Program) and state
funded healthcare programs, including Medicaid. The federal physician
self-referral laws impose restrictions on physician referrals of patients for
certain designated healthcare services to certain entities with which the
physician or any immediate family member has a compensation or investment or
ownership interest, and prevents the entity in question from lawfully being
reimbursed under the Medicaid and Medicare program for patients improperly
referred to it. Thus, these laws could impair Purchaser's ability to enter into
certain types of arrangements with physicians or other healthcare providers.
Certain state self-referral laws might apply to other types of providers as well
as a broader class of payors. With respect to its non-governmental operations,
Purchaser may be subject to similar laws and regulations in a number of states,
and proposed federal legislation would expand the scope of some or all of the
fraud and abuse restrictions to cover many private payors of healthcare
benefits. Penalties for violating existing fraud and abuse laws include civil
monetary penalties, criminal sanctions and exclusion from participation in the
Medicaid and Medicare programs. Purchaser believes that its existing operations
comply with such state and federal laws and regulations based on their current
interpretation and enforcement; however, because the fraud and abuse laws,
particularly anti-kickback provisions, have been broadly construed to prohibit
transactions in which any purpose of the transaction violates the law, many
transactions potentially could be held to be improper. Uncertainty as to the
scope and application of such laws continues; therefore, there can be no
assurance that future regulatory and enforcement actions will not result in an
interpretation of these laws and regulations that would require Purchaser to
materially change its operations or contractual relationships in order to remain
in compliance therewith.
INTEGRATION OF OPERATIONS. As a result of the Merger and certain other
completed acquisitions, Parent expects to be the largest provider of managed
behavioral healthcare services in the United States. Parent'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. As
Parent implements the integration process, it may need to implement enhanced
operational, financial and informational systems and may require additional
employees and management, operational, financial and informational resources.
There can be no assurance that Parent will be able to implement and maintain
such operational, financial and informational systems successfully or
successfully obtain, integrate and utilize the required employees and
management, operational, financial and informational 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 Parent and Purchaser.
Furthermore, implementing such operational, financial and information systems or
obtaining such employees and management could reduce the cost savings Parent
expects to achieve.
HIGHLY COMPETITIVE INDUSTRY. The industry in which Purchaser conducts its
business is highly competitive. Purchaser competes with large insurance
companies, HMOs, PPOs, TPAs, provider groups and other managed care companies.
Many of Purchaser's competitors are significantly larger and have greater
financial, marketing and other resources than Purchaser, and some of Purchaser's
competitors provide a broader range of services. Purchaser may also encounter
substantial competition in the future from new market entrants. Many of
Purchaser'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 Purchaser for such services.
PROFESSIONAL LIABILITY; INSURANCE. The provision, management and
administration of the delivery of managed behavioral healthcare services, like
other healthcare services, entail significant risks of liability.
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Purchaser is regularly subject to lawsuits alleging malpractice and related
legal theories, some of which involve situations in which participants in
Purchaser's programs have committed suicide. Purchaser 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 Purchaser's third-party provider networks. Purchaser is subject
to claims for the costs of services denied and claims, such as malpractice
claims, arising from acts or omissions of healthcare professionals participating
in Purchaser's managed behavioral healthcare programs. There can be no assurance
that Purchaser'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 Purchaser in the future.
Purchaser 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 Purchaser is unable to secure
adequate insurance in the future, or if the insurance carried by Purchaser 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 Purchaser
will not be subject to a liability that could have a material adverse effect on
Purchaser.
LIMITED TRADING MARKET. Depending on, among other things, the amount of
Notes outstanding after the Offer, the liquidity, market value and price
volatility of Notes may be adversely affected by the consummation of the Offer.
To the extent a market continues to exist for the Notes after the Offer, the
Notes may trade at a discount compared to present trading prices depending on
prevailing interest rates, the market for securities with similar credit
features, the performance of Purchaser and other factors. There can be no
assurance that an active market in the Notes will continue to exist and no
assurance as to the prices at which the Notes may trade.
Typically, a debt security with a smaller outstanding principal amount
available for trading (a smaller "float") commands a lower price than would a
comparable debt security with a larger float. Therefore, the market price for
Notes that are not tendered and accepted for purchase pursuant to the Offer may
be affected adversely to the extent that the principal amount of Notes purchased
pursuant to the Offer reduces the float. A reduced float may also make the
trading price of Notes that are not purchased in the Offer more volatile.
FRAUDULENT TRANSFER CONSIDERATIONS. If, in a bankruptcy or reorganization
case or a lawsuit by or on behalf of unpaid creditors of Purchaser, a court were
to find that, at the time the Notes are accepted for payment (a) Purchaser
purchased the Notes with the intent of hindering, delaying or defrauding current
or future creditors or (b)(i) Purchaser received less than reasonably equivalent
value or fair consideration for the purchase price of the Notes and (ii)
Purchaser (A) was insolvent or was rendered insolvent by reason of such
purchase, (B) was engaged, or about to engage, in a business or transaction for
which its assets constituted unreasonably small capital, (C) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured (as all of the foregoing terms are defined in or interpreted under
the relevant fraudulent transfer or conveyance statutes) or (D) was a defendant
in an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment the judgment is
unsatisfied), then such court could find that the payment to tendering Holders
involved the incurring of obligations or the transferring of interests in
property deemed under applicable law to be fraudulent as against creditors (a
"fraudulent conveyance"). To the extent such payment were deemed to be a
fraudulent conveyance, there is a risk that tendering Holders would be ordered
by a court to turn over to Purchaser's trustee in bankruptcy the consideration
paid to them for their Notes.
Separate and apart from any fraudulent conveyance attack, any payment made
to Holders in consideration for their Notes may also be subject to challenge as
a preference if such payment: (i) is made within ninety days prior to a
bankruptcy filing by Purchaser; (ii) is made when Purchaser is insolvent; and
(iii) permits the Holders to receive more than they otherwise might receive in a
liquidation of Purchaser pursuant to Chapter 7 of the United States Bankruptcy
Code. If such payment were deemed to be preference, such payment could be
recovered by Purchaser's trustee in bankruptcy and Holders would be restored to
their previous positions as unsecured creditors of Purchaser.
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4. PROPOSED AMENDMENTS TO THE INDENTURE.
This section sets forth a brief description of the Proposed Amendments to
the Indenture for which Consents are being sought pursuant to the Solicitation.
The Proposed Amendments constitute a single proposal and a tendering and
consenting Holder must consent to the Proposed Amendments in their entirety and
may not consent selectively with respect to certain of the Proposed Amendments.
The Proposed Amendments will be implemented in an amendment to the Indenture in
the form set forth in the Supplemental Indenture. Although the Supplemental
Indenture will become effective upon execution by Purchaser and Trustee, the
Proposed Amendments will not become operative unless and until Notes are
accepted for purchase by Purchaser pursuant to the Offer. Thereafter, all Notes
that are not tendered, or that are not accepted for purchase pursuant to the
Offer, will remain outstanding, but will be subject to the terms of the
Indenture as modified by the Supplemental Indenture.
Pursuant to the terms of the Indenture, the Proposed Amendments require the
written consent of the Holders of at least a majority in aggregate principal
amount of the Notes outstanding.
The valid tender by a Holder of Notes pursuant to the Offer on or prior to
the Consent Date will be deemed to constitute the giving of a Consent by such
Holder to the Proposed Amendments with respect to such Notes. Purchaser is not
soliciting and will not accept Consents from Holders who are not tendering their
Notes pursuant to the Offer.
The summaries of provisions of the Indenture set forth below are qualified
in their entirety by reference to the full and complete terms contained in the
Indenture. Capitalized terms used herein without definition have the same
meanings as set forth in the Indenture. Holders may obtain copies of the
Indenture without charge from the Information Agent.
The Proposed Amendments to the Indenture are as follows:
DELETION OF SECTION 3.5--ASSET SALE OFFER. Section 3.5 requires Purchaser,
in certain situations, to offer to repurchase the Notes following an asset sale.
The Proposed Amendments would delete Section 3.5 in its entirety.
DELETION OF COVENANTS. The Proposed Amendments would delete in their
entireties the following covenants and any references thereto from the
Indenture:
<TABLE>
<S> <C> <C>
Section 4.3 - LIMITATION ON RESTRICTED PAYMENTS. Restricts the ability of Purchaser and
the Subsidiaries to make Restricted Payments, including payment of
dividends on or purchases of Purchaser's capital stock, making investments
or the payment of subordinated debt.
Section 4.4 - LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED
STOCK. Restricts the ability of Purchaser and the Subsidiaries to create,
incur, issue, assume, guarantee or otherwise become directly or indirectly
liable for the payment of any Indebtedness or any shares of Disqualified
Stock, unless Purchaser is in compliance with certain financial covenants.
Section 4.5 - CORPORATE EXISTENCE. With some exceptions, requires Purchaser to preserve
and keep in full force and effect its corporate existence and the
corporate, partnership, limited liability or other existence of each
Subsidiary.
Section 4.6 - PAYMENT OF TAXES AND OTHER CLAIMS. Requires Purchaser to pay or discharge
all material taxes, assessments and governmental charges levied or imposed
upon Purchaser or any Subsidiary and all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a material liability or
Lien upon the property of Purchaser or any Subsidiary, before any of such
charges become delinquent.
</TABLE>
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<TABLE>
<S> <C> <C>
Section 4.7 - MAINTENANCE OF PROPERTIES AND INSURANCE. With some exceptions, requires
Purchaser (a) to cause all material properties owned by or leased to it or
any Subsidiary and necessary to the conduct of its or their business to be
improved or maintained and kept in normal condition, repair and working
order and (b) to maintain, and cause the Subsidiaries to maintain,
insurance as are customarily carried by similar businesses of similar size.
Section 4.8 - COMPLIANCE CERTIFICATES; NOTICE OF DEFAULT. Requires Purchaser to deliver
to the Trustee (i) an annual certificate of Purchaser stating that a review
of the activities of Purchaser and its Subsidiaries has been made and, to
the best knowledge of the officer signing such certificate, Purchaser has
kept, observed, performed and fulfilled, and has caused each Subsidiary to
keep, observe, perform and fulfill each and every covenant in the Indenture
and no default or event of default with respect to the Notes occurred
during the year and (ii) notification of the occurrence of any default or
event of default.
Section 4.9 - COMPLIANCE WITH LAWS. With certain exceptions, requires Purchaser to
comply, and cause the Subsidiaries to comply, with all applicable rules in
respect of the conduct of their respective businesses and the ownership of
their respective properties.
Section 4.10 - REPORTS. Subsections (a) through (d) require Purchaser to furnish certain
information to the Holders and file such information with the SEC
(regardless of whether or not required by the rules and regulations of the
SEC). Subsection (e), which requires Purchaser to comply with Section
314(a) of the Trust Indenture Act of 1939, will not be deleted.
Section 4.12 - LIMITATION ON TRANSACTIONS WITH AFFILIATES. Restricts the ability of
Purchaser and the Subsidiaries to enter into any transaction with any
affiliate of Purchaser involving aggregate consideration in excess of $5.0
million (other than a Subsidiary of Purchaser).
Section 4.13 - DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. Restricts
the ability of Purchaser and the Subsidiaries to directly or indirectly
create or otherwise cause to become effective any consensual encumbrance or
consensual restriction on the ability of any Subsidiary to make certain
payments, including payment of dividends on or purchases of any
Subsidiaries' capital stock, payment of Indebtedness, making loans or
advances, or selling, leasing or transferring properties or assets.
Section 4.14 - LIMITATION ON LIENS. Restricts the ability of Purchaser and the
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien that secures obligations under any subordinated indebtedness
on any asset or property of Purchaser and the Subsidiaries, or any income
or profits therefrom, or assign or convey any right to receive income
therefrom, unless the Notes are equally and ratably secured with such
obligations.
Section 4.15 - CHANGE OF CONTROL. Requires Purchaser to offer to purchase all or any part
of the Notes following a Change of Control.
Section 4.16 - LIMITATION ON ASSET SALES. Restricts the ability of Purchaser and the
Subsidiaries to cause, make or suffer to exist an Asset Sale unless the
consideration received equals a minimum amount as set forth in the
Indenture.
Section 4.17 - LIMITATION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. Restricts the ability
of Purchaser to, directly or indirectly, incur any Indebtedness that is
subordinate in right of payment to any Indebtedness of Purchaser unless
such Indebtedness is PARI PASSU or subordinate in right of payment to the
Notes.
</TABLE>
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AMENDMENT TO SECTION 5.1--MERGER, CONSOLIDATION AND SALE OF ASSETS. Section
5.1 provides that Purchaser will not merge with or into, or transfer all or
substantially all its assets, subject to certain exceptions, including
satisfaction of a specified fixed charge coverage ratio. The Proposed Amendments
would delete the fixed charge coverage ratio test in its entirety.
AMENDMENT TO SECTION 6.1--EVENTS OF DEFAULT. Section 6.1(d) provides for an
event of default of the Notes upon the occurrence of any default by Purchaser or
the Subsidiaries with respect to other indebtedness. Section 6.1(e) provides for
an event of default with respect to the Notes, if Purchaser or any Subsidiary
fails to pay any final judgment in excess of $10 million rendered against it.
The Proposed Amendments would delete Sections 6.1(d) and (e) in their entirety.
AMENDMENT TO DEFINITIONS. The Proposed Amendments would delete certain
definitions from the Indenture when references to such definitions would be
eliminated as a result of the foregoing.
5. TERMS OF THE OFFER AND THE SOLICITATION.
Upon the terms and subject to the conditions of the Offer (including if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment), all Notes which are validly tendered in accordance with the
procedures set forth in Section 7 and not withdrawn (and which are accompanied
by validly delivered Consents that have not been revoked) in accordance with the
procedures set forth in Section 8 prior to the Expiration Date will be accepted
for purchase and paid for by Purchaser promptly after the Expiration Date.
Upon the terms and subject to the conditions set forth in this Statement and
in the accompanying Consent and Letter of Transmittal, Purchaser is also
soliciting Consents from Holders with respect to the Proposed Amendments.
DETERMINATION OF OFFER CONSIDERATION. The Offer Consideration (including
the Consent Payment) for each Note being purchased pursuant to the Offer is
equal to the present value on the Payment Date of $1,057.50 per $1,000 principal
amount of Notes (the amount payable on November 15, 2000, which is the first
date on which the Notes are redeemable (the "Earliest Redemption Date")),
determined on the basis of a yield (the "Tender Offer Yield") to the Earliest
Redemption Date equal to the sum of (x) the yield on the 8 1/2% U.S. Treasury
Note due November 15, 2000 (the "Reference Security"), as calculated by the
Dealer Manager in accordance with standard market practice, based on the bid
price for such Reference Security as of 2:00 p.m., New York City Time, on
January 26, 1998, the tenth (10th) business day immediately preceding the
scheduled Expiration Date (the "Price Determination Date"), as displayed on the
Bloomberg Government Pricing Monitor on "Page PX5" (the "Bloomberg Page") (or,
if any relevant price is not available on a timely basis on the Bloomberg Page
or is manifestly erroneous, such other recognized quotation source as the Dealer
Manager shall select in its sole discretion) plus (y) 50 basis points, (the
"Fixed Spread") (such price being rounded to the nearest cent per $1,000
principal amount of Notes), plus accrued and unpaid interest on the Notes to,
but not including, the Payment Date. In the event the Offer is extended for any
period of time longer than ten (10) business days from the previously scheduled
Expiration Date, a new Price Determination Date will be established. Payment of
the Offer Consideration for Notes validly tendered and accepted for payment
shall be made on the Payment Date. Holders of Notes tendered after the Consent
Date will receive the Offer Consideration less the Consent Payment (2% of the
principal amount of each Note).
Although the Tender Offer Yield on the applicable Reference Security on the
Price Determination Date will be determined only from the source noted above,
information regarding the closing yield for the Reference Security may also be
found in THE WALL STREET JOURNAL. The yield on the Reference Security for the
Notes as of 2:00 p.m., New York City time, on January 9, 1998 was 5.22%.
Accordingly, if such yield were determined to be the yield on the Reference
Security at the Price Determination Date, and February 12, 1998 were the Payment
Date for the Notes, the Tender Offer Yield, the Offer Consideration and the
Offer Consideration less the Consent Payment per $1,000 principal amount of
Notes would be 5.72%, $1,194.59 and $1,174.59, respectively. A hypothetical
illustration of the calculation of the Offer
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Consideration for the Notes demonstrating the application of the assumptions and
methodologies to be used in pricing the Offer is set forth on Schedule II
hereto.
If at any time following a Price Determination Date, Purchaser extends the
Offer for any period of not more than ten (10) business days, the Offer
Consideration for each Note tendered pursuant to the Offer on or prior to the
Consent Date or the Expiration Date, as applicable, shall remain the Offer
Consideration, as applicable, as determined on such Price Determination Date.
If, however, Purchaser extends the Offer for any period longer than ten (10)
business days from the previously scheduled Expiration Date based upon which
such Price Determination Date has been established, a new Price Determination
Date shall be established (such new Price Determination Date to be the tenth
(10th) business day immediately preceding the Expiration Date as so extended)
and the Offer Consideration for each Note tendered pursuant to the Offer on or
prior to the Consent Date or the Expiration Date, as applicable, shall be
calculated based on the Tender Offer Yield as of such new Price Determination
Date. In either case, a Holder who tenders Notes after the Consent Date will be
entitled to receive, if Notes are accepted for payment pursuant to the Offer,
the Offer Consideration less the Consent Payment for the Notes so tendered.
Before 9:00 a.m., New York City time, on the business day following the
Price Determination Date, Purchaser will publicly announce the pricing
information referred to above by press release to the Dow Jones News Service.
Prior to 2:00 p.m., New York City time, on the Price Determination Date,
Holders may obtain hypothetical quotes of the yield on the Reference Security
(calculated as of a then recent time) and the resulting hypothetical Offer
Consideration by contacting the Dealer Manager at its telephone number set forth
on the back cover of this Statement. After such time on the Price Determination
Date, Holders may ascertain the actual yield on the Reference Security as of the
Price Determination Date and the resulting actual Offer Consideration by
contacting the Dealer Manager at its telephone number set forth on the back
cover of this Statement.
Because the Offer Consideration prior to the Price Determination Date is
based on a fixed spread pricing formula that is linked to the yield on a
Reference Security, the actual amount of cash that will be received by a
tendering Holder pursuant to the Offer will be affected by changes in such yield
during the term of the Offer prior to such Price Determination Date. After the
Price Determination Date when the Offer Consideration is no longer linked to the
Reference Security, the actual amount of cash that will be received by a
tendering Holder pursuant to the Offer will be known and Holders will be able to
ascertain the Offer Consideration in the manner described above, unless the
Offer is extended for a period longer than ten (10) business days.
On the Payment Date, the Purchaser will pay each tendering Holder who
validly consented to the Proposed Amendments on or prior to the Consent Date, as
part of the Offer Consideration, a Consent Payment equal to 2% of the principal
amount ($20 per $1,000 principal amount) of such Holder's Notes for which
Consents have been validly delivered and not validly revoked on or prior to the
Consent Date. If a Holder's Notes are not validly tendered and the corresponding
Consents are not validly delivered pursuant to the Offer and Solicitation on or
prior to the Consent Date, or such Holder's Notes and Consents are withdrawn and
revoked and not properly retendered and redelivered at or prior to the Consent
Date, such Holder will not receive that portion of the Offer Consideration which
constitutes the Consent Payment even though the Proposed Amendments may be
effective as to each of such Holder's Notes that are not purchased in the Offer.
If the Notes are accepted for payment pursuant to the Offer, Holders who
validly tender their Notes and deliver Consents pursuant to the Offer on or
prior to the Consent Date will receive the Offer Consideration (which includes
the Consent Payment) plus accrued and unpaid interest up to, but not including,
the Payment Date. Holders who validly tender Notes and deliver Consents and do
not withdraw tenders of Notes pursuant to the Offer on or prior to the Consent
Date may not thereafter revoke such Consent after the Consent Date. Holders who
validly tender their Notes and deliver Consents after the
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Consent Date will receive the Offer Consideration less the Consent Payment plus
accrued and unpaid interest up to, but not including, the Payment Date.
HOLDERS MAY NOT DELIVER CONSENTS WITHOUT TENDERING THEIR NOTES IN THE OFFER,
AND MAY NOT REVOKE CONSENTS ON OR PRIOR TO THE CONSENT DATE WITHOUT WITHDRAWING
THE PREVIOUSLY TENDERED NOTES TO WHICH SUCH CONSENT RELATES. HOLDERS MAY NOT
WITHDRAW PREVIOUSLY TENDERED NOTES ON OR PRIOR TO THE CONSENT DATE WITHOUT
REVOKING PREVIOUSLY DELIVERED CONSENTS TO WHICH SUCH TENDER RELATES. CONSENTS
MAY NOT BE REVOKED AND TENDERS OF NOTES MAY NOT BE WITHDRAWN AFTER THE CONSENT
DATE.
The Proposed Amendments require the receipt of the Requisite Consents,
defined as consents to the Proposed Amendments from the Holders of at least a
majority in aggregate principal amount of the Notes outstanding. Although the
Supplemental Indenture reflecting the Proposed Amendments will become effective
upon execution by Purchaser and the Trustee, the Proposed Amendments will not
become operative until the Notes have actually been accepted for purchase by
Purchaser.
AFTER THE REQUISITE CONSENTS ARE RECEIVED AND THE PROPOSED AMENDMENTS HAVE
BECOME OPERATIVE, THE PROPOSED AMENDMENTS WILL BE EFFECTIVE AS TO ALL NOTES THAT
ARE NOT PURCHASED PURSUANT TO THE OFFER. CONSEQUENTLY, CONSUMMATION OF THE OFFER
AND THE ADOPTION OF THE PROPOSED AMENDMENTS MAY HAVE ADVERSE CONSEQUENCES FOR
HOLDERS WHO DO NOT VALIDLY TENDER NOTES PURSUANT TO THE OFFER. SEE SECTION 3.
The Offer is conditioned upon, among other things, the satisfaction or
waiver of the Consent Condition, the Financing Condition, the Parent Tender
Offer Condition, the Merger Condition and the General Conditions. See Section
10. If any condition to Purchaser's obligation to purchase Notes under the Offer
is not satisfied prior to the Expiration Date, Purchaser reserves the right (but
shall not be obligated) to (i) decline to purchase any of the Notes tendered and
terminate the Offer, (ii) waive such unsatisfied condition, and purchase all
Notes validly tendered, (iii) extend the Offer and retain the Notes which have
been tendered during the period or periods for which the Offer is extended or
(iv) amend the Offer.
Purchaser expressly reserves the right, subject to the securities laws, at
any time or from time to time, regardless of whether or not any of the events
set forth in Section 10 shall have occurred or shall have been determined by
Purchaser to have occurred, (i) to extend the period of time during which the
Offer is open and thereby delay acceptance for payment of, and the payment for,
any Notes, by giving oral notice of such extension to the Depositary followed by
written notice of such extension to the Depositary, (ii) to extend the period of
time during which the Solicitation is open by giving oral notice of such
extension to the Depositary followed by written notice of such extension to the
Depositary, and (iii) to amend the Offer or the Solicitation in any other
respect by giving oral notice of such amendment to the Depositary. The rights
reserved by Purchaser in this paragraph are in addition to Purchaser's rights to
terminate the Offer described in Section 10. Any extension, amendment or
termination will be followed as promptly as practicable by public announcement
thereof, the announcement in the case of an extension to be issued no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Without limiting the manner in which Purchaser may
choose to make any public announcement, Purchaser currently intends to make
announcements by issuing a release to the Dow Jones News Service or by sending
written notice to each registered Holder of the Notes.
If Purchaser extends the Offer, or if (whether before or after any Notes
have been accepted for purchase) the purchase of or payment for Notes is delayed
or Purchaser is unable to pay for Notes pursuant to the Offer for any reason,
then, without prejudice to Purchaser's rights under the Offer, the Depositary
may retain tendered Notes on behalf of Purchaser, and such Notes may not be
withdrawn. However, the ability of Purchaser to delay the payment for Notes
which Purchaser has accepted for purchase is limited by Rule 14e-1(c) under the
Exchange Act, which requires that a bidder pay the consideration offered or
return the securities deposited by or on behalf of Holders of securities
promptly after the termination of withdrawal of a tender offer.
If Purchaser makes a material change in the terms of the Offer or the
information concerning the Offer or waives a material condition to such Offer,
Purchaser will disseminate additional Offer materials and extend such Offer to
the extent required by law. If the Solicitation is amended prior to the Consent
Date in a manner determined by Purchaser to constitute a material adverse change
to the Holders,
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Purchaser promptly will disclose such amendment and, if necessary, extend the
Solicitation for a period deemed by Purchaser to be adequate to permit Holders
to withdraw their Notes and revoke their Consents. See Section 8.
6. ACCEPTANCE FOR PURCHASE AND PAYMENT FOR NOTES; ACCEPTANCE OF CONSENTS.
Upon the terms and subject to the conditions of the Offer and the
Solicitation (including if the Offer or the Solicitation is extended or amended,
the terms and conditions of any such extension or amendment) and applicable law,
Purchaser will purchase, by accepting for payment, and will pay for, all Notes
validly tendered (and not withdrawn) and all Consents validly delivered on or
prior to the Consent Date (and not revoked) pursuant to the Offer and the
Solicitation promptly after the Expiration Date, such payments to be paid by the
deposit with the Depositary of the Offer Consideration (including the Consent
Payment, if applicable) plus accrued and unpaid interest up to, but not
including, the Payment Date in immediately available funds by Purchaser promptly
after the Expiration Date so that payment of the Offer Consideration (including
the Consent Payment, if applicable) may be made to tendering Holders on the
Payment Date. Purchaser expressly reserves the right, in Purchaser's sole
discretion, to delay acceptance for payment of or payment for Notes, subject to
Rule 14e-1(c) under the Exchange Act, in order to comply, in whole or in part,
with any applicable law. See Section 8. In all cases, payment by the Depositary
to Holders of Offer Consideration (including the Consent Payment, if applicable)
for Notes purchased pursuant to the Offer and Consents delivered on or prior to
the Consent Date, if applicable, will be made only after timely receipt by the
Depositary of (i) certificates representing such Notes or timely confirmation of
a book-entry transfer of such Notes into the Depositary's account at a
Book-Entry Transfer Facility (as hereinafter defined) pursuant to the procedures
set forth in Section 7, (ii) a properly completed and duly executed Consent and
Letter of Transmittal (or manually signed facsimile thereof) and (iii) any other
documents required by the Consent and Letter of Transmittal.
For purposes of the Solicitation, Consents received by the Depositary will
be deemed to have been accepted by Purchaser if, as and when Purchaser has given
written notice to the Trustee of the receipt by the Depositary of the Requisite
Consents and the Supplemental Indenture is executed by Purchaser and Trustee.
For purposes of the Offer, tendered Notes will be deemed to have been accepted
for purchase if, as and when Purchaser has given oral or written notice thereof
to the Depositary. In all cases, payment for Notes purchased pursuant to the
Offer and Consents validly delivered and not revoked prior to the Consent Date
will be made by the Depositary, which will act as agent for consenting and
tendering Holders for the purpose of receiving payment from Purchaser and
transmitting such payment to tendering Holders. UNDER NO CIRCUMSTANCE WILL
INTEREST ON THE OFFER CONSIDERATION BE PAID BY PURCHASER BY REASON OF ANY DELAY
OF THE DEPOSITARY IN MAKING PAYMENT.
If any tendered Notes are not purchased pursuant to the Offer for any
reason, such Notes not purchased will be returned, without expense, to the
tendering Holder promptly (or, in the case of Notes tendered by book-entry
transfer into the Depositary's account at a Book-Entry Transfer Facility, such
Notes will be credited to the account maintained at such Book-Entry Transfer
Facility from which such Notes were delivered), unless otherwise requested by
such Holder under "Special Delivery Instructions" in the Consent and Letter of
Transmittal, promptly after the expiration or termination of the Offer.
Tendering Holders will not be obligated to pay brokerage fees or commissions
to the Dealer Manager or, except as set forth in Instruction 7 of the Consent
and Letter of Transmittal, transfer taxes on the purchase of Notes pursuant to
the Offer or the payment of the Consent Payment pursuant to the Solicitation.
Purchaser reserves the right to transfer or assign, in whole or in part, at
any time and from time to time, to one or more of its affiliates, the right to
purchase Notes tendered pursuant to the Offer, but any such transfer or
assignment will not relieve Purchaser of its obligations under the Offer or
prejudice the rights of tendering Holders to receive payment for Notes validly
tendered and accepted for purchase pursuant to the Offer.
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7. PROCEDURES FOR TENDERING NOTES AND DELIVERING CONSENTS.
HOLDERS WILL NOT BE ENTITLED TO RECEIVE THE OFFER CONSIDERATION (WHICH
INCLUDES THE CONSENT PAYMENT) UNLESS THEY BOTH TENDER THEIR NOTES PURSUANT TO
THE OFFER AND DELIVER CONSENTS TO THE PROPOSED AMENDMENTS WITH RESPECT TO SUCH
NOTES ON OR PRIOR TO THE CONSENT DATE. HOLDERS WHO DESIRE TO TENDER THEIR NOTES
PURSUANT TO THE OFFER AND RECEIVE THE OFFER CONSIDERATION ARE REQUIRED TO
CONSENT TO THE PROPOSED AMENDMENTS. HOLDERS WILL NOT RECEIVE ANY SEPARATE
CONSIDERATION IN RESPECT OF THEIR CONSENT TO THE PROPOSED AMENDMENTS (OTHER THAN
THE CONSENT PAYMENT FOR HOLDERS WHO TENDER PRIOR TO THE CONSENT DATE). HOLDERS
OF NOTES TENDERED AFTER THE CONSENT DATE WILL NOT RECEIVE THAT PORTION OF THE
OFFER CONSIDERATION WHICH CONSTITUTES THE CONSENT PAYMENT. HOLDERS MAY NOT
CONSENT TO THE PROPOSED AMENDMENTS WITHOUT TENDERING THEIR NOTES PURSUANT TO THE
OFFER.
The method of delivery of Notes and Consents and Letters of Transmittal, any
required signature guarantees and all other required documents, including
delivery through DTC and any acceptance of an Agent's Message transmitted
through ATOP, is at the election and risk of the person tendering Notes and
delivering Consents and Letters of Transmittal and, except as otherwise provided
in the Consent and Letter of Transmittal, delivery will be deemed made only when
actually received by the Depositary. If delivery is by mail, it is suggested
that the Holder use properly insured, registered mail with return receipt
requested, and that the mailing be made sufficiently in advance of the Consent
Date or the Expiration Date, as applicable, to permit delivery to the Depositary
on or prior to such date.
TENDERS OF NOTES AND DELIVERY OF CONSENTS. The tender by a Holder of Notes
and delivery of Consents (and subsequent acceptance of such tender by Purchaser)
pursuant to one of the procedures set forth below will constitute an agreement
between such Holder and Purchaser in accordance with the terms and subject to
the conditions set forth herein, in the Consent and Letter of Transmittal and,
if applicable, in the Notice of Guaranteed Delivery.
The procedures by which Notes may be tendered and Consents may be given by
beneficial owners that are not Holders will depend upon the manner in which the
Notes are held.
TENDER OF NOTES HELD IN PHYSICAL FORM. For a Holder validly to tender Notes
held in physical form pursuant to the Offer (and deliver the related Consents),
a properly completed and duly executed Consent and Letter of Transmittal (or a
manually signed facsimile thereof), together with any signature guarantees and
any other documents required by the Instructions to the Consent and Letter of
Transmittal, must be received by the Depositary at its address set forth on the
back cover of this Statement and certificates representing such Notes must be
received by the Depositary at such address, prior to the Consent Date or the
Expiration Date, as applicable. A tender of Notes may also be effected through
the deposit of Notes with DTC and making book-entry delivery as described below;
however, a completed and executed Consent and Letter of Transmittal is still
required to effectuate the valid delivery of related Consents with respect to
such Notes. A Holder who desires to tender Notes and who cannot comply with the
procedures set forth herein for tender on a timely basis or whose Notes are not
immediately available must comply with the procedures for guaranteed delivery
set forth below. HOWEVER, THE GUARANTEED DELIVERY PROCEDURE SET FORTH BELOW MAY
NOT BE USED TO TENDER NOTES OR DELIVER CONSENTS ON OR PRIOR TO THE CONSENT DATE.
CONSENTS AND LETTERS OF TRANSMITTAL AND ANY NOTES TENDERED PURSUANT TO THE OFFER
SHOULD BE SENT ONLY TO THE DEPOSITARY, NOT TO PURCHASER, THE INFORMATION AGENT
OR THE DEALER MANAGER.
THE PROPER COMPLETION, EXECUTION AND DELIVERY OF A CONSENT AND LETTER OF
TRANSMITTAL BY A REGISTERED HOLDER WITH RESPECT TO NOTES WILL CONSTITUTE THE
GIVING OF A CONSENT BY SUCH HOLDER TO THE PROPOSED AMENDMENTS WITH RESPECT TO
SUCH NOTES, AND NO SEPARATE CONSENT OR PROXY WILL BE REQUIRED.
If the Notes are registered in the name of a person other than the signer of
a Consent and Letter of Transmittal, then, in order to tender such Notes
pursuant to the Offer, the Notes must be endorsed or accompanied by an
appropriate written instrument or instruments of transfer signed exactly as the
name or names of such Holder or Holders appear on the Notes, with the
signature(s) on the Notes or instruments
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of transfer guaranteed as provided below. In the event such procedures are
followed by a beneficial owner tendering Notes, the Holder or Holders of such
Notes must sign a valid proxy pursuant to the Consent and Letter of Transmittal,
because Notes may not be tendered without also consenting to the Proposed
Amendments, and only registered Holders as of the date of delivery of the
Consent and Letter of Transmittal are entitled to deliver Consents.
TENDER OF NOTES HELD THROUGH A CUSTODIAN. Any beneficial owner whose Notes
are registered in the name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender Notes and deliver Consents should
contact such registered Holder promptly and instruct such Holder to tender Notes
and deliver Consents on such beneficial owner's behalf. A Letter of Instructions
is enclosed in the solicitation materials provided along with this Statement,
which may be used by a beneficial owner in this process to instruct the
registered Holder to tender Notes and deliver Consents. If such beneficial owner
wishes to tender such Notes and deliver Consents himself, such beneficial owner
must, prior to completing and executing the Consent and Letter of Transmittal
and delivering such Notes, either make appropriate arrangements to register
ownership of the Notes in such beneficial owner's name or follow the procedures
described in the immediately preceding paragraph. The transfer of record
ownership may take considerable time.
TENDER OF NOTES HELD THROUGH DTC. DTC has confirmed that the Offer is
eligible for ATOP. Accordingly, DTC participants may electronically transmit
their acceptance of the Offer by causing DTC to transfer Notes to the Depositary
in accordance with ATOP procedures for transfer (and thereby tender Notes),
followed by a properly completed and duly executed Consent and Letter of
Transmittal delivered to the Depositary to effectuate the delivery of the
related Consent. Upon receipt of such Holder's acceptance through ATOP, DTC will
send an Agent's Message to the Depositary. The term "Agent's Message" means a
message transmitted by DTC, received by the Depositary and forming part of the
Confirmation of book-entry transfer, which states that DTC has received an
express acknowledgment from the participant in DTC tendering Notes and
delivering Consents which are the subject of such confirmation of book-entry
transfer, that such participant has received and agreed to be bound by the terms
of the Consent and Letter of Transmittal and that Purchaser may enforce such
agreement against such participant. Delivery of tendered Notes must be made to
the Depositary pursuant to the book-entry delivery procedures set forth below or
the tendering DTC participant must comply with the guaranteed delivery
procedures set forth below but such guaranteed delivery procedures may only be
used for tenders of Notes after the Consent Date.
Except as provided below, unless the Notes being tendered are deposited with
the Depositary on or prior to the Consent Date or on or prior to the Expiration
Date, as the case may be (accompanied by a properly completed and duly executed
Consent and Letter of Transmittal), Purchaser may, at its option, treat such
tender as defective for purposes of the right to receive the Offer
Consideration. Payment for the Notes will be made only against deposit of the
tendered Notes and delivery of any other required documents.
Pursuant to authority granted by DTC, any DTC participant which has Notes
credited to its DTC account at any time (and thereby held of record by DTC's
nominee) may directly provide a Consent to the Proposed Amendments as though it
were the registered Holder by so completing, executing and delivering the
Consent and Letter of Transmittal.
BOOK-ENTRY DELIVERY PROCEDURES. The Depositary will establish accounts with
respect to the Notes at DTC and the Philadelphia Depository Trust Company
("Philadep") (each a "Book-Entry Transfer Facility" and collectively, the
"Book-Entry Transfer Facilities") for purposes of the Offer within two business
days after the date hereof, and any financial institution that is a participant
in either of the Book-Entry Transfer Facilities systems may make book-entry
delivery of the Notes by causing DTC or Philadep to transfer such Notes into the
Depositary's account in accordance with such Book-Entry Transfer Facility's
procedure for such transfer. Timely book-entry delivery of Notes pursuant to the
Offer, however, requires receipt of a
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confirmation of book-entry transfer prior to the Consent Date or the Expiration
Date, as the case may be. In addition, although delivery of Notes may be
effected through book-entry transfer into the Depositary's account at a
Book-Entry Transfer Facility, the Consent and Letter of Transmittal (or a
facsimile thereof), together with any required signature guarantees and any
other required documents, must, in any case, be delivered or transmitted to and
received by the Depositary at its address set forth on the back cover of this
Statement prior to the Consent Date or the Expiration Date, as the case may be,
in connection with the tender of such Notes. Tender will not be deemed made
until such documents are received by the Depositary. DELIVERY OF DOCUMENTS TO A
BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE VALID DELIVERY TO THE
DEPOSITARY.
SIGNATURE GUARANTEES. Signatures on all Consents and Letters of Transmittal
must be guaranteed by a participant in the Security Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchange Medallion Program (each of the foregoing being referred to as a
"Medallion Signature Guarantor"), unless the Notes tendered thereby are tendered
(i) by a registered Holder of Notes (or by a participant in one of the
Book-Entry Transfer Facilities whose name appears on a security position listing
as the owner of such Notes) who has not completed either the box entitled
"Special Delivery Instructions" or "Special Issuance Instructions" on the
Consent and Letter of Transmittal or (ii) for the account of a member firm of a
registered national securities exchange, a member of the National Association of
Securities Dealers, Inc. ("NASD") or a commercial bank or trust company having
an office or correspondent in the United States (each of the foregoing being
referred to as an "Eligible Institution"). See Instruction 1 of the Consent and
Letter of Transmittal. If the Notes are registered in the name of a person other
than the signer of the Consent and Letter of Transmittal or if Notes not
accepted for purchase or not tendered are to be returned to a person other than
the registered Holder, then the signatures on the Consents and Letters of
Transmittal accompanying the tendered Notes must be guaranteed by a Medallion
Signature Guarantor as described above. See Instructions 1 and 5 of the Consent
and Letter of Transmittal.
MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. If a Holder desires to
tender Notes, but the certificates evidencing such Notes have been mutilated,
lost, stolen or destroyed, such Holder should contact the Trustee to receive
information about the procedures for obtaining replacement certificates for
Notes at the following address or telephone number: Marine Midland Bank, 140
Broadway, 12th Floor, New York, New York 10005, Attention: Corporate Trust
Department, Telephone No. (212) 658-6433.
GUARANTEED DELIVERY. If a Holder desires to tender Notes pursuant to the
Offer after the Consent Date and time will not permit the Consent and Letter of
Transmittal, certificates representing such Notes and all other required
documents to reach the Depositary, or the procedures for book-entry transfer
cannot be completed, prior to the Expiration Date, such Holder may nevertheless
tender such Notes if all the following conditions are satisfied:
(i) the tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by Purchaser herewith or an
Agent's Message with respect to guaranteed delivery that is accepted by
Purchaser, is received by the Depositary after the Consent Date and on or
prior to the Expiration Date, as provided below; and
(iii) the certificates of the tendered Notes, in proper form for
transfer (or confirmation of a book-entry transfer of such Notes, into the
Depositary's account at a Book-Entry Transfer Facility as described above),
together with a Consent and Letter of Transmittal (or a manually signed
facsimile thereof), properly completed and duly executed, with any required
signature guarantees and any other documents required by the Instructions to
the Consent and Letter of Transmittal are received by the Depositary within
two New York Stock Exchange, Inc. trading days after the date of execution
of the Notice of Guaranteed Delivery.
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The Notice of Guaranteed Delivery may be sent by hand delivery, facsimile
transmission or mail to the Depositary and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed Delivery.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY PURCHASER BY REASON OF ANY
DELAY IN MAKING PAYMENT TO ANY PERSON RESULTING FROM SUCH PERSON'S USE OF THE
GUARANTEED DELIVERY PROCEDURES, AND THE OFFER CONSIDERATION FOR NOTES TENDERED
PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES WILL BE THE SAME AS THAT FOR
NOTES DELIVERED TO THE DEPOSITARY AFTER THE CONSENT DATE AND ON OR PRIOR TO THE
EXPIRATION DATE. HOLDERS SHOULD BE AWARE THAT, ON OR PRIOR TO THE CONSENT DATE,
TENDERS OF NOTES AND THE RELATED CONSENTS CANNOT BE DELIVERED USING THE
GUARANTEED DELIVERY PROCESS AND THAT USE OF THE GUARANTEED DELIVERY PROCESS
COULD RESULT IN A TENDER OF NOTES AND THE RELATED CONSENT BEING DEFECTIVE.
Notwithstanding any other provisions hereof, payment for Notes tendered and
accepted for purchase pursuant to the Offer will, in all cases, be made only
after timely receipt by the Depositary of such Notes (or confirmation of a
book-entry transfer of such Notes into the Depositary's account at a Book-Entry
Transfer Facility as described above), and a Consent and Letter of Transmittal
(or manually signed facsimile thereof) with respect to such Notes properly
completed and duly executed, with any required signature guarantees and any
other documents required by the Consent and Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE CONSENT AND LETTER OF TRANSMITTAL,
ANY REQUIRED SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING
DELIVERY THROUGH A BOOK-ENTRY TRANSFER FACILITY AND ANY ACCEPTANCE OR AGENT'S
MESSAGE TRANSMITTED THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE HOLDER
TENDERING NOTES AND DELIVERING A CONSENT AND LETTER OF TRANSMITTAL AND, EXCEPT
AS OTHERWISE PROVIDED IN THE CONSENT AND LETTER OF TRANSMITTAL, DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF SUCH DELIVERY IS
BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN
ADVANCE OF THE CONSENT DATE OR THE EXPIRATION DATE, AS THE CASE MAY BE, TO
PERMIT DELIVERY TO THE DEPOSITARY PRIOR TO SUCH DATE.
BACKUP FEDERAL INCOME TAX WITHHOLDING. To prevent backup U.S. Federal
income tax withholding, each tendering Holder of Notes must provide the
Depositary with such Holder's correct taxpayer identification number and certify
that such Holder is not subject to backup U.S. Federal income tax withholding by
completing the Substitute Form W-9 included in the Consent and Letter of
Transmittal. See Section 11.
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any tendered Notes or
delivered Consents pursuant to any of the procedures described above will be
determined by Purchaser, in Purchaser's sole discretion (whose determination
shall be final and binding). Purchaser reserves the absolute right, in its sole
discretion, subject to applicable law, to reject any and all tenders of Notes or
deliveries of Consents determined by it not to be in proper form or, in the case
of Notes, if the acceptance for payment of, or payment for, such Notes may, in
the opinion of Purchaser's counsel, be unlawful. Purchaser also reserves the
absolute right, in its sole discretion, subject to applicable law, to waive any
of the conditions of the Offer or the Solicitation or to waive any defect or
irregularity in any tender with respect to Notes or Consents of any particular
Holder, whether or not similar defects or irregularities are waived in the case
of other Holders. Purchaser's interpretation of the terms and conditions of the
Offer and the Solicitation (including the Consent and Letter of Transmittal and
the Instructions thereto) will be final and binding. None of Purchaser, the
Depositary, the Trustee or any other person will be under any duty to give
notification of any defects or irregularities in tenders or will incur any
liability for failure to give any such notification. If Purchaser waives its
right to reject a defective tender of Notes, the Holder will be entitled to the
Offer Consideration including the Consent Payment, if applicable.
8. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS.
Notes tendered pursuant to the Offer may be withdrawn at any time prior to
the Consent Date (but not thereafter if the Purchaser accepts the Notes for
payment). A valid withdrawal of tendered Notes prior
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to the Consent Date will constitute the concurrent valid revocation of such
Holder's related Consent. In order for a Holder to revoke a Consent, such Holder
must withdraw the related tendered Notes. Tendered Notes may not be withdrawn
and delivered Consents may not be revoked subsequent to the Consent Date. In
addition, tenders of Notes may be validly withdrawn if the Offer is terminated
without any Notes being purchased hereunder. In the event of a termination of
the Offer, the Notes tendered pursuant to the Offer will be promptly returned to
the tendering Holder.
For a withdrawal of a tender of Notes or revocation of a Consent to be
effective, a written or facsimile transmission notice of withdrawal or
revocation must be timely received by the Depositary at its address set forth on
the back cover of this Statement on or prior to the Consent Date. Any such
notice of withdrawal or revocation must (i) specify the name of the person who
tendered the Notes to be withdrawn or to which the revocation of Consents
relates, (ii) contain a description of the Notes to be withdrawn and identify
the certificate number or numbers shown on the particular certificates
evidencing such Notes (unless such Notes were tendered by book-entry transfer)
and the aggregate principal amount represented by such Notes, and (iii) be
signed by the Holder of such Notes in the same manner as the original signature
on the Consent and Letter of Transmittal by which such Notes were tendered
(including any required signature guarantees) or related Consent was given or be
accompanied by (x) documents of transfer sufficient to have the Trustee register
the transfer of the Notes into the name of the person withdrawing such Notes
and/or revoking such related Consent and (y) a properly completed irrevocable
proxy that authorized such person to effect such revocation on behalf of such
Holder. If the Notes to be withdrawn have been delivered or otherwise identified
to the Depositary, a properly completed and signed notice of withdrawal shall be
effective immediately upon receipt thereof even if physical release is not yet
effected. A withdrawal of Notes or revocation of Consents can only be
accomplished in accordance with the foregoing procedures.
ALL QUESTIONS AS TO THE FORM AND VALIDITY (INCLUDING TIME OF RECEIPT) OF
NOTICES OF WITHDRAWAL OR REVOCATION WILL BE DETERMINED BY PURCHASER, IN
PURCHASER'S SOLE DISCRETION (WHOSE DETERMINATION WILL BE FINAL AND BINDING).
NONE OF PURCHASER, THE DEPOSITARY, THE DEALER MANAGER, THE INFORMATION AGENT,
THE TRUSTEE OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF
ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF WITHDRAWAL OR REVOCATION OR INCUR
ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION.
Any Notes properly withdrawn or with respect to which Consents have been
properly revoked will be deemed to be not validly tendered for purposes of the
Offer. Withdrawn Notes may be retendered and revoked Consents may be redelivered
by following one of the procedures described in Section 7 at any time prior to
the Consent Date or the Expiration Date, as the case may be.
9. SOURCE AND AMOUNT OF FUNDS.
The total amount of funds required by Purchaser to purchase all of the Notes
pursuant to the Offer will be obtained from borrowings under the New Credit
Agreement. See Section 2.
10. CONDITIONS TO THE OFFER AND THE SOLICITATION.
Notwithstanding any other provisions of the Offer and the Solicitation and
in addition to (and not in limitation of) Purchaser's rights to extend and/or
amend the Offer and the Solicitation at any time in its sole discretion,
Purchaser shall not be required to accept for payment, purchase or pay for, and
may delay the acceptance for payment of, any tendered Notes, in each event
subject to Rule 14e-1(c) under the Exchange Act, and may terminate the Offer and
the Solicitation, if there shall not have been satisfied the following
conditions:
The "Consent Condition" shall mean the receipt of the Requisite Consents
with respect to the Proposed Amendments and the execution by Purchaser and the
Trustee of the Supplemental Indenture implementing the Proposed Amendments.
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The "Financing Condition" shall mean the receipt (on terms and conditions
satisfactory to Parent in its sole discretion) (i) by Parent of proceeds from
the issuance of the New Senior Subordinated Notes and (ii) by Purchaser of
borrowings under the New Credit Agreement or such other credit facilities as
Parent determines are appropriate in an aggregate amount that is sufficient for
Purchaser to consummate the Offer. Although Purchaser believes, based on its
current financial condition, that the Financing Condition will be satisfied,
there can be no assurance that the Financing Condition will in fact be satisfied
on the Expiration Date.
The "Parent Tender Offer Condition" shall mean the consummation by Parent of
its offer to purchase any or all of its 11 1/4% Series A Senior Subordinated
Notes due 2004 (the "Parent Notes") and the elimination of substantially all the
covenants contained in the indenture relating to the Parent Notes, in each case
in accordance with the terms of Parent's Offer to Purchase and Consent
Solicitation Statement dated as of the date of this Statement, as amended or
supplemented from time to time. Although Purchaser believes that the Parent
Tender Offer Condition will be satisfied, there can be no assurance that the
Parent Tender Offer Condition will in fact be satisfied on the Expiration Date.
The "Merger Condition" shall mean the consummation of the Merger and the
receipt by Parent of all approvals or consents to the Merger from all requisite
governmental authorities. Although Purchaser believes that the Merger Condition
will be satisfied, there can be no assurance that the Merger Condition will in
fact be satisfied on the Expiration Date.
The "General Conditions" shall mean the conditions set forth below in
paragraphs (a) through (d). The General Conditions shall be deemed to have been
satisfied unless any of the following conditions shall occur on or prior to the
Expiration Date:
(a) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities in the United States
securities or financial markets, (ii) a material impairment in the trading
market for debt securities, (iii) a declaration of a banking moratorium or
any suspension of payments in respect of banks in the United States (whether
or not mandatory), (iv) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable likelihood of
affecting, the extension of credit by banks or other lending institutions in
the United States, (v) a commencement of a war, armed hostilities or other
national or international crisis involving the United States or (vi) any
significant adverse change in the United States securities or financial
markets generally or in the case of any of the foregoing existing on the
date hereof, a material acceleration or worsening thereof;
(b) there exists an order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction that shall have been enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the reasonable judgment of Purchaser, would or would be reasonably likely
to prohibit, prevent or materially restrict or delay consummation of the
Offer or the Solicitation or that is, or is reasonably likely to be,
materially adverse to the business, operations, properties, condition
(financial or otherwise), assets, liabilities or prospects of Purchaser or
its subsidiaries;
(c) there shall have been instituted or be pending any action or
proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, which
challenges the making of the Offer or the Solicitation or the Proposed
Amendments or is reasonably likely to directly or indirectly prohibit,
prevent, restrict or delay the consummation of the Offer or the Solicitation
or the Proposed Amendments or otherwise adversely affect in any material
manner the Offer, the Solicitation or the Proposed Amendments; or
(d) the Trustee under the Indenture shall have objected in any respect
to, or taken any action that would be reasonably likely to materially and
adversely affect the consummation of the Offer or the Solicitation or
Purchaser's ability to effect the Proposed Amendments, or shall have taken
any
26
<PAGE>
action that challenges the validity or effectiveness of the procedures used
by Purchaser in soliciting the Consents (including the form thereof) or in
the making of the Offer or the acceptance of the Notes or the Consents or
the payment for the Notes.
The foregoing conditions are for the sole benefit of Purchaser and may be
asserted by Purchaser regardless of the circumstances giving rise to any such
condition (including any action or inaction by Purchaser) and may be waived by
Purchaser, in whole or in part, at any time and from time to time, in the sole
discretion of Purchaser. The failure by Purchaser at any time to exercise any of
the foregoing rights will not be deemed a waiver of any other right and each
right will be deemed an ongoing right which may be asserted at any time and from
time to time.
11. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS.
THE FOLLOWING IS A GENERAL SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS OF THE SALE OF NOTES TO PURCHASER PURSUANT TO THE OFFER AND THE
RETENTION OF NOTES AFTER THE ADOPTION OF THE PROPOSED AMENDMENTS. THE DISCUSSION
IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"),
REGULATIONS PROMULGATED THEREUNDER (INCLUDING RECENTLY ISSUED REGULATIONS) AND
JUDICIAL DECISIONS AND ADMINISTRATIVE RULINGS, ALL OF WHICH ARE SUBJECT TO
CHANGE (POSSIBLY WITH RETROACTIVE EFFECT). THE FOLLOWING DOES NOT ADDRESS THE
U.S. FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS THAT MAY BE SUBJECT TO SPECIAL
RULES (E.G., FOREIGN HOLDERS, INSURANCE COMPANIES AND TAX-EXEMPT ORGANIZATIONS),
NOR DOES IT ADDRESS THE U.S. FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS WHO DO
NOT HOLD THE NOTES AS "CAPITAL ASSETS" WITHIN THE MEANING OF SECTION 1221 OF THE
CODE (GENERALLY, PROPERTY HELD FOR INVESTMENT).
The receipt of cash for Notes pursuant to the Offer will be a taxable
transaction for U.S. Federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. The tax
consequences of such receipt pursuant to the Offer may vary depending upon,
among other things, the particular circumstances of the Holder. In general, a
Holder who receives cash for Notes pursuant to the Offer will recognize gain or
loss, if any, for U.S. Federal income tax purposes equal to the difference
between the amount realized in exchange for the Notes sold (the amount of cash
received by such Holder less any cash received in respect of accrued and unpaid
interest on the Notes) and such Holder's adjusted tax basis in such Notes. A
Holder's adjusted tax basis for a Note generally is the price such Holder paid
for the Note increased by the market discount, if any, previously included in
such Holder's income and reduced (but not below zero) by any amortized premium.
Except as provided below, any gain or loss recognized on a sale of a Note will
give rise to capital gain or loss if the Note is held as a capital asset. A
Holder who has acquired a Note with market discount generally will be required
to treat a portion of any gain on a sale of the Note as ordinary income to the
extent of the market discount accrued to the date of the disposition, less any
accrued market discount income previously reported as ordinary income. Amounts
received by a Holder in respect of accrued interest on the Notes will be taxable
as ordinary income. If the Consent Payment is treated as a separate fee for
consenting to the Proposed Amendments, it is possible that such amount would be
taxable as ordinary income to such Holder (rather than as sale proceeds,
discussed above). The Purchaser intends to treat the Consent Payments for U.S.
Federal income tax purposes as additional cash paid in exchange for a Holder's
Note.
Although the matter is not free from doubt, the adoption of the Proposed
Amendments to the Indenture should not constitute a "significant modification"
in the terms of the Notes within the meaning of applicable United States
Department of Treasury regulations. Accordingly, for U.S. Federal income tax
purposes, the adoption of the Proposed Amendments should not result in a deemed
exchange of Notes by any Holder that does not sell in the Offer and should have
no U.S. Federal income tax consequences to such Holders. Even if the Proposed
Amendments were to constitute a deemed exchange of the Notes, Holders who do not
sell their Notes pursuant to the Offer should not recognize gain or loss on such
deemed exchange since such deemed exchange should qualify as a tax-free
recapitalization. There can be no assurance, however, that the IRS would not
take a contrary view. If an exchange were deemed to have occurred and such
exchange did not qualify as a recapitalization, Holders who did not sell their
Notes
27
<PAGE>
would recognize gain or loss, if any, on such deemed exchange and would have a
new holding period for the Notes.
BACKUP FEDERAL INCOME TAX WITHHOLDING. In order to avoid backup
withholding, a Holder (other than exempt Holders which include, among others,
all corporations and certain foreign individuals and entities) whose tendered
Notes are accepted for purchase must provide the Depositary (as payer) with its
correct taxpayer identification number, which, in the case of a Holder who is an
individual, is his social security number, or otherwise establish a basis for
exemption from backup withholding. The Depositary will be required to file
information returns with the IRS reporting the gross proceeds of the Offer.
Exempt Holders are not subject to these backup withholding and reporting
requirements. To prevent backup withholding, each nonexempt Holder must provide
his correct taxpayer identification number by completing the Substitute Form W-9
included in the Consent and Letter of Transmittal, certifying that the taxpayer
identification number provided is correct (or that such Holder is awaiting a
taxpayer identification number) and that (i) the Holder is exempt from backup
withholding, (ii) the Holder has not been notified by the IRS that he is subject
to backup withholding as a result of failure to report all interest or dividends
or (iii) the IRS has notified the Holder that he is no longer subject to backup
withholding.
If the Depositary is not provided with the correct taxpayer identification
number and certificate of no loss of exemption from backup withholding or other
adequate basis for exemption, the Holder may be subject to a $50 penalty imposed
by the IRS, and gross proceeds of the Offer paid to the Holder may be subject to
a 31% backup withholding tax. Any amount withheld under these rules will be
creditable against the Holder's Federal income tax liability and, if withholding
results in an overpayment of taxes, a refund may be applied for.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. HOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
OFFER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM
TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS.
12. THE DEALER MANAGER, THE INFORMATION AGENT AND THE DEPOSITARY.
Chase Securities has been engaged to act as the Dealer Manager in connection
with the Offer and the Solicitation. In its capacity as Dealer Manager, Chase
Securities may contact Holders regarding the Offer and the Solicitation and may
request brokers, dealers, commercial banks, trust companies and other nominees
to forward the Statement and related materials to beneficial owners of the
Notes. At any given time, Chase Securities or its affiliates may trade Notes for
its own account or for the accounts of customers, and, accordingly, may hold a
long or short position in the Notes. Purchaser has agreed to indemnify the
Dealer Manager and its affiliates against certain liabilities, including
liabilities caused by, arising out of or in connection with the Offer, the
Solicitation or the engagement of Chase Securities as Dealer Manager. From time
to time, Chase Securities and its affiliates have performed investment banking
and commercial banking services for Purchaser. In addition, Chase Securities has
been engaged to act as an underwriter of, or Placement Agent for, the New Senior
Subordinated Notes, and Chase has agreed, subject to the satisfaction of certain
conditions to make available to Parent and its subsidiaries senior secured
credit facilities pursuant to the New Credit Agreement.
Any Holder that has questions concerning the terms of the Offer or the
Solicitation may contact the Dealer Manager at its address and telephone number
set forth on the back cover page of this Statement.
Georgeson has been appointed as Information Agent for the Offer and the
Solicitation. Questions and requests for assistance or additional copies of this
Statement, the Consent and Letter of Transmittal or the Notice of Guaranteed
Delivery may be directed to the Information Agent at its address and telephone
number set forth on the back cover page of this Statement. Holders of Notes may
also contact their broker, dealer, commercial bank or trust company for
assistance concerning the Offer or the Solicitation.
28
<PAGE>
Bankers Trust has been appointed as Depositary for the Offer. The
Solicitation, Consent and Letter of Transmittal and all correspondence in
connection with the Offer and the Solicitation should be sent or delivered by
each Holder or a beneficial owner's broker, dealer, commercial bank, trust
company or other nominee to the Depositary at the address and telephone number
set forth on the back cover of this Statement. Any Holder or beneficial owner
that has questions concerning the procedures for tendering Notes or whose Notes
have been mutilated, lost, stolen or destroyed should contact the Depositary at
the address and telephone number set forth on the back cover of this Statement.
13. FEES AND EXPENSES.
The Dealer Manager will receive customary fees for its services in
connection with the Offer and the Solicitation. The Information Agent and the
Depositary will also receive reasonable and customary fees for their services
and reimbursement for their reasonable out-of-pocket expenses in connection
therewith. Brokerage houses and other custodians, nominees and fiduciaries will
be reimbursed for their reasonable out-of-pocket expenses incurred in forwarding
copies of this Statement and related documents to the beneficial owners of
Notes. All such fees and expenses will be paid by Purchaser.
14. MISCELLANEOUS.
Purchaser is not aware of any jurisdiction in which the making of the Offer
and the Solicitation is not in compliance with applicable law. If Purchaser
becomes aware of any jurisdiction in which the making of the Offer and the
Solicitation would not be in compliance with applicable law, Purchaser will make
a good faith effort to comply with any such law. If, after such good faith
effort, Purchaser cannot comply with any such law, the Offer and the
Solicitation will not be made to (nor will tenders of Notes and Consents be
accepted from or on behalf of) the Holders residing in such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF PURCHASER NOT CONTAINED IN THIS STATEMENT OR IN THE
CONSENT AND LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Manually signed, properly completed facsimile copies of the Consent and
Letter of Transmittal will be accepted. The Consent and Letter of Transmittal,
Notes and any other required documents should be sent or delivered by each
Holder or its broker, dealer, commercial bank or other nominee to the Depositary
at its addresses set forth on the backcover of this Statement.
29
<PAGE>
SCHEDULE I
FORMULA TO DETERMINE OFFER CONSIDERATION
<TABLE>
<S> <C> <C>
YLD = The Tender Offer Yield equals the sum of the Yield on the
8 1/2% U.S. Treasury Note due November 15, 2000 (the
"Reference Security"), as calculated by the Dealer Manager in
accordance with standard market practice, based on the bid
price for such Reference Security as of 2:00 p.m., New York
City time, on the Price Determination Date, as displayed on
the Bloomberg Government Pricing Monitor on "Page PX5" (the
"Bloomberg Page") (or, if any relevant price is not available
on a timely basis on the Bloomberg Page or is manifestly
erroneous, such other recognized quotation source as the
Dealer Manager shall select in its sole discretion), plus 50
basis points, expressed as a decimal number.
CPN = the contractual rate of interest payable on a Note expressed
as a decimal number.
N = the number of semi-annual interest payments, based on the
Earliest Redemption Date, from (but not including) the
expected Payment Date to (and including) the Earliest
Redemption Date.
S = the number of days from and including the semi-annual
interest payment date immediately preceding the expected
Payment Date up to, but not including, the expected Payment
Date. The number of days is computed using the 30/360
day-count method.
exp = Exponentiate. The term to the left of "exp" is raised to the
power indicated by the term to the right of "exp."
CP = $20 per $1,000 principal amount per Note, which is equal to
the Consent Payment.
RV = the assumed redemption amount based, on the Earliest
Redemption Date, for each Note per $1,000 principal amount of
a Note (as rounded to the nearest one hundredth of one
percent).
Offer Consideration = the Offer Consideration of a Note per $1,000 principal amount
of a Note if tender is made on or prior to 5:00 p.m., New
York City time, on the Consent Date. The Offer Consideration
is rounded to the nearest cent.
Offer Consideration Less
Consent Payment = the applicable purchase price of a Note per $1,000 principal
amount of a Note if tender is made after 5:00 p.m. New York
City time, on the Consent Date.
Offer Consideration =
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
N
RV + S $1,000 (CPN/2) - $1,000 (CPN/2)(S/180)
(1 + YLD/2) exp (N - S/180) k=1 (1 + YLD/2) exp (k - S/180)
</TABLE>
<TABLE>
<S> <C> <C>
Offer Consideration Less
Consent Payment =
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
N
RV + S $1,000 (CPN/2) - $1,000 (CPN/2)(S/180) - CP
(1 + YLD/2) exp (N - S/180) k=1 (1 + YLD/2) exp (k - S/180)
</TABLE>
I-1
<PAGE>
SCHEDULE II
HYPOTHETICAL ILLUSTRATION OF OFFER CONSIDERATION
This Schedule provides a hypothetical illustration of the Offer
Consideration of the 11 1/2% Senior Subordinated Notes due 2005 based on
hypothetical data, and should, therefore, be used solely for the purpose of
obtaining an understanding of the calculation of the Offer Consideraton, as
quoted at hypothetical rates and times, and should not be used or relied upon
for any other purpose:
<TABLE>
<S> <C> <C>
11 1/2% SENIOR SUBORDINATED NOTES DUE 2005
Earliest Redemption Date = November 15, 2000
Reference Security = 8 1/2% U.S. Treasury Note due November 15, 2000 as
displayed on the Bloomberg Government Pricing Monitor
on "Page PX5"
Fixed Spread = 0.50% (50 basis points)
EXAMPLE
Assumed Price Determination
Date and Time = 2:00 p.m., New York City time, on January 26, 1998
Assumed Payment Date = February 12, 1998
Assumed Reference Security
Yield as of Assumed Price
Determination Date and Time = 5.22%
Fixed Spread = 0.50%
YLD = .0572
CPN = .1150
N = 6
S = 87
RV = $1,057.50
CP = $20.00
Offer Consideration = $1,194.59
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
$1,057.50 N $1,000 (.1150/2)
(1 + .0572/2) exp (6 - + S (1 + .0572/2) exp (k - - $1,000 (.1150/2)(87/180)
87/180) k=1 87/180)
</TABLE>
<TABLE>
<S> <C> <C>
Offer Consideration Less
Consent Payment = $1,174.59
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
$1,057.50 N $1,000 (.1150/2) $1,000 (.1150/2)(87/180) -
(1 + .0572/2) exp (6 - + S (1 + .0572/2) exp (k - - $20.00
87/180) k=1 87/180)
</TABLE>
II-1
<PAGE>
THE DEPOSITARY FOR THE OFFER AND THE SOLICITATION IS:
BANKERS TRUST COMPANY
<TABLE>
<S> <C> <C>
BY MAIL: BY HAND: BY OVERNIGHT MAIL OR
COURIER:
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust & Corporate Trust &
P.O. Box 292737 Agency Group Agency Group
Nashville, TN 37229-2737 Receipt & Delivery Window Reorganization Unit
123 Washington Street, 1st 648 Grassmere Park Road
Floor Nashville, TN 37211
New York, NY 10006
FOR INFORMATION CALL:
(800) 735-7777
Confirm: (615) 835-3572
Facsimile: (615) 835-3701
</TABLE>
Any questions or requests for assistance or additional copies of this
Statement, the Consent and Letter of Transmittal or the Notice of Guaranteed
Delivery may be directed to the Information Agent at the telephone numbers and
location listed below. You may also contact your broker, dealer, commercial bank
or trust company or nominee for assistance concerning the Offer and the
Solicitation.
THE INFORMATION AGENT IS:
ABCDEF
Wall Street Plaza
New York, New York 10005
BANKERS AND BROKERS CALL COLLECT:
(212) 440-9800
ALL OTHERS CALL TOLL-FREE:
(800) 223-2064
THE DEALER MANAGER FOR THE OFFER AND THE SOLICITATION AGENT FOR THE SOLICITATION
IS:
CHASE SECURITIES INC.
270 Park Avenue, 4th Floor
New York, New York 10017
Attention: Robert Berk
Telephone: (212) 270-1100 (collect)
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
1998 STOCK OPTION PLAN
1. Purpose. The purpose of the Magellan Health Services, Inc. 1998
Stock Option Plan is to motivate and retain officers and other key employees
and designated consultants of Magellan Health Services, Inc. and its
Subsidiaries who have major responsibility for the attainment of the primary
long-term performance goals of Magellan Health Services, Inc.
2. Definitions. The following terms shall have the following meanings:
"Board" means the Board of Directors of the Corporation.
"Change in Control" means the effective date of the occurrence of one or
more of the following events: (i) the sale, lease, transfer or other
disposition, in one or more related transactions, of all or substantially
all of the Corporation's assets to any person or related group of persons,
including a "group" as such term is used in Section 13(d)(3) of the Exchange
Act, (ii) the merger or consolidation of the Corporation with or into
another corporation, the merger of another corporation into the Corporation
or any other transaction, to the extent that the stockholders of the
Corporation immediately prior to any such transaction hold less than 50
percent of the total voting power or of the voting stock of the surviving
corporation resulting from any such transaction, (iii) any person or related
group of persons, including a "group" as such term is used in Section
13(d)(3) of the Exchange Act, whether such person or group of persons is a
stockholder of the Corporation, holds 30 percent or more of the voting power
or of the voting stock of the Corporation, or (iv) the liquidation or
dissolution of the Corporation. Notwithstanding any provisions hereof to
the contrary, the term Change in Control shall not be construed to apply to
any transaction occurring on or after December 1, 1997 that involves the sale
of all or substantially all of the assets used by the Corporation or by one
or more of its affiliates in the hospital franchise business.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules promulgated thereunder.
"Committee" means a committee of two or more members of the Board
constituted and empowered by the Board to administer the Plan in accordance
with its terms.
"Corporation" means Magellan Health Services, Inc., a Delaware
corporation.
"Director" means a member of the Board.
"Disability" means a physical or mental condition under which the
Participant qualifies for (or will qualify for after expiration of a waiting
period) disability benefits under the long-term
1
<PAGE>
disability plan of the Corporation or a Subsidiary that employs such
Participant (or would have so qualified if the Participant had been an
employee of the Corporation or a Subsidiary).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means: (1) if the Stock is listed on a national
securities exchange (as such term is defined by the Exchange Act) or is
traded on the Nasdaq National Market System on the date of award or other
determination, the price equal to the mean between the high and low sales
prices of a share of Stock on said national securities exchange or on said
Nasdaq National Market System on that date (or if no shares of the Stock are
traded on that date but there were shares traded on dates within a reasonable
period both before and after such date, the Fair Market Value shall be the
weighted average of the means between the high and low sales prices of the
Stock on the nearest date before and the nearest date after that date on
which shares of the Stock are traded); (2) if the Stock is traded both on a
national securities exchange and in the over-the-counter market, the Fair
Market Value shall be determined by the prices on the national securities
exchange; and (3) if the Stock is not listed for trading on a national
securities exchange and is not traded on the Nasdaq National Market System or
otherwise in the over-the-counter market, then the Committee shall determine
the Fair Market Value of the Stock from time to time in its sole discretion.
"Option" means an Option granted pursuant to Section 6.
"Participant" means an employee of or a consultant to the Corporation or
any of its Subsidiaries who is selected to participate in the Plan in
accordance with Section 4.
"Plan" means the Magellan Health Services, Inc. 1998 Stock Option Plan,
as amended.
"Stock" means the common stock, par value $0.25 per share, of the
Corporation.
"Stock Option Agreement" means the written agreement or instrument that
sets forth the terms of an Option granted to a Participant under this Plan.
"Subsidiary" means any corporation, as defined in Section 7701 of the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder, of which the Corporation, at the time, directly or indirectly,
owns 50% or more of the outstanding securities having ordinary voting power
to elect directors (other than securities having voting power only by reason
of a contingency).
3. Administration. The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee, acting in its absolute
discretion, shall exercise such powers and take such action as expressly
called for under this Plan and, further, shall have the
2
<PAGE>
power to interpret the Plan, to determine the terms of each Stock Option
Agreement (subject to the provisions of the Plan) and (subject to Section 18
and Rule 16b-3 under the Exchange Act, if applicable) to take such other
action in the administration and operation of this Plan as the Committee
deems equitable under the circumstances. All actions of the Committee shall
be binding on the Corporation, on each affected Participant and on each other
person directly or indirectly affected by such action. No member of the
Board shall serve as a member of the Committee unless such member is a
"non-employee director" within the meaning of Rule 16b-3 under the Exchange
Act. The Committee shall have the right to delegate to the chief executive
officer of the Corporation the authority to select Participants and to grant
Options (except with respect to any person who, with respect to the last
completed fiscal year of the Corporation, has been designated by the
Corporation as a named executive officer of the Corporation, as that term is
defined in Item 402(a)(3) of Regulation S-K, issued by the Securities and
Exchange Commission), subject to any review, approval or notification
required by the Committee or as otherwise may be required by law.
4. Participation. Participants in the Plan shall be limited to those
officers and employees of or consultants to the Corporation or any of its
Subsidiaries who have been selected to participate in the Plan.
5. Maximum Number of Shares Subject to Options. Subject to the
provisions of Section 9, there shall be 1,000,000 shares of Stock reserved
for use under this Plan, and such shares of Stock shall be reserved to the
extent that the Committee and the Board deems appropriate from authorized but
unissued shares of Stock or from shares of Stock which have been reacquired
by the Corporation. Any shares of Stock subject to any Option which are not
purchased after the cancellation, expiration, exchange or forfeiture of such
Option shall again become available for use under this Plan. All authorized
and unissued shares issued upon exercise of Options under the Plan shall be
fully paid and nonassessable shares.
6. Grant of Options. The Committee, acting in its absolute
discretion, shall have the right to grant Options to Participants under this
Plan from time to time; provided, that the maximum number of shares of Stock
issuable upon exercise of Options shall not exceed 1,000,000, subject to
adjustment as provided in Section 9. No Option shall be granted after
December 31, 2001. The maximum number of shares of Stock that may be covered
by Options granted to any Participant under the Plan shall not exceed
500,000, subject to adjustment as provided in Section 9.
7. Terms and Conditions of Options. Options granted pursuant to the
Plan shall be evidenced by Stock Option Agreements in such form as the
Committee from time to time shall approve, including any such terms and
conditions not inconsistent with the provisions set forth in the Plan as the
Committee may determine; provided, that such Stock Option Agreements and the
Options granted shall comply with and be subject to the following terms and
conditions:
3
<PAGE>
(a) Employment. Each Participant shall agree to remain in the
employ of or to serve as a consultant to and, in either such capacity, to
render services to the Corporation or a Subsidiary thereof for such period as
the may be required in the Stock Option Agreement; provided, that such
agreement shall not impose upon the Corporation or any Subsidiary thereof any
obligation to retain the Participant in its employ or as a consultant for any
period.
(b) Number of Shares. Each Stock Option Agreement shall state the
total number of shares of Stock to which it pertains.
(c) Exercise Price. The exercise price per share for Options
generally shall be Fair Market Value of the Stock on the date of grant,
subject to adjustment as contemplated by Section 9; provided, that the
Committee or the chief executive officer (pursuant to a delegation under
Section 3 hereof), acting in its or his sole discretion, may elect to grant
Options with an exercise price per share below the Fair Market Value of the
Stock on the date of grant.
(d) Medium and Time of Payment. The exercise price shall be
payable upon the exercise of the Option, or as provided in Section 7(e) if
the Corporation adopts a broker-directed cashless exercise/resale procedure,
in each case in an amount equal to the number of shares then being purchased
times the per share exercise price. Payment shall be in cash.
In addition to the payment of the purchase price of the shares of Stock
then being purchased, a Participant shall also, pursuant to Section 16, pay
to the Corporation or otherwise provide for payment of an amount equal to the
amount, if any, which the Corporation at the time of exercise is required to
withhold under the income tax withholding provisions of the Code and other
applicable income tax laws.
(e) Method of Exercise. All Options shall be exercised (i) by
written notice directed to the Secretary of the Corporation at its principal
place of business, accompanied by payment of the option exercise price, in
accordance with the foregoing subsection (d), for the number of shares
specified in the notice of exercise and by any documents required by Section
14, or (ii) by complying with the exercise and other provisions of any
broker-directed cashless exercise/resale procedure adopted by the Corporation
and approved by the Committee, and by delivery of any documents required by
Section 14. The Corporation shall make delivery of such shares within a
reasonable period of time or in accordance with applicable provisions of any
such broker-directed cashless exercise/resale procedure; provided, that if
any law or regulation requires the Corporation to take any action (including
but not limited to the filing of a registration statement under the
Securities Act of 1933 and causing such registration statement to become
effective) with respect to the shares specified in such notice before their
issuance, then the date of delivery of such shares shall be extended for the
period necessary to take such action.
4
<PAGE>
(f) Term of Options. Except as otherwise specifically provided in
the Plan, the terms of all Options shall commence on the date of grant and
shall expire not later than December 31, 2008.
(g) Exercise of Options. Options are exercisable only to the
extent they are vested as provided in the Stock Option Agreement. After
Options have vested in accordance with the terms of the Stock Option
Agreement, such Options are exercisable at any time, in whole or in part
during their terms if the Participant is at the time of exercise employed by
or a consultant to the Company or a Subsidiary. If a Participant's
employment or consulting relationship with the Corporation or any Subsidiary
is terminated for any reason other than death or disability, the vested
portion of each Option held by such Participant on the date of such
termination may be exercised (1) for six (6) months following the date of
such termination, or (2) if longer, for such period of time as may be set
forth in the Stock Option Agreement (but not in either case after expiration
of the term of the Option). In the event of the death or Disability of a
Participant, the vested portion of each Option held by such Participant on
the date of such event may be exercised (1) for 12 months of the date of such
event, or (2) if longer, for such period of time as may be set forth in the
Stock Option Agreement (but not in either case after the expiration of the
term of the Option).
In the event of the death of a Participant, the vested portion of each
Option previously held by such Participant may be exercised within the time
set forth above by the executor, other legal representative or, if none, by
the heir or legatee of such Participant.
(h) Adjustments Upon Changes in Capitalization. Upon a change in
capitalization pursuant to Section 9, the number of shares covered by an
Option and the per share option exercise price shall be adjusted in
accordance with the provisions of Section 9.
(i) Transferability. No Option shall be assignable or
transferable by the Participant except by will or by the laws of descent and
distribution. The designation of a beneficiary shall not constitute a
transfer; and, during the lifetime of a Participant, all Options held by such
Participant shall be exercisable only by him or by his lawful representative
in the event of his incapacity.
(j) Rights as a Stockholder. A Participant shall have no rights
as a stockholder with respect to shares covered by his Option until the date
of the issuance of the shares to him and only after such shares are fully
paid. Unless specified in Section 9, no adjustment will be made for
dividends or other rights for which the record date is prior to the date of
such issuance.
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<PAGE>
(k) Miscellaneous Provisions. The Stock Option Agreements
authorized under the Plan may contain such other provisions not inconsistent
with the terms of this Plan as the Committee shall deem advisable.
8. Vesting. Options granted under this Plan shall be exercisable only
to the extent such Options have become vested pursuant to this Section 8. An
Option shall vest either (1) at the rate of 33 1/3 percent of the shares
covered by the Option on each of the first three anniversary dates of the
grant of the Option if the Participant is an employee of or a consultant to
the Company or a Subsidiary on such dates, or (2) on such other terms and
conditions as may be set forth in the Stock Option Agreement.
9. Change in Capitalization. If the Stock should, as a result of a
stock split or stock dividend, combination of shares, recapitalization or
other change in the capital structure of the Corporation or exchange of Stock
for other securities by reclassification or otherwise, be increased or
decreased or changed into, or exchanged for, a different number or kind of
shares or other securities of the Corporation, or any other corporation, then
the number of shares covered by Options, the number and kind of shares which
thereafter may be distributed or issued under the Plan and the per share
option price of Options shall be appropriately adjusted consistent with such
change in such manner as the Committee may deem equitable to prevent dilution
of or increase in the rights granted to, or available for, Participants.
10. Fractional Shares. In the event that any provision of this Plan or
a Stock Option Agreement would create a right to acquire a fractional share
of Stock, such fractional share shall be disregarded.
11. Successor Corporation. If the Corporation is merged or
consolidated with another corporation or other legal entity and the
Corporation is not the surviving corporation or legal entity, or in the event
all or substantially all of the assets or common stock of the Corporation is
acquired by another corporation or legal entity, or in the case of a
dissolution, reorganization or liquidation of the Corporation, the Board, or
the board of directors or governing body of any corporation or other legal
entity assuming the obligations of the Corporation hereunder, shall either:
(i) make appropriate provision for the preservation of Participants' rights
under the Plan in any agreement or plan it may enter into or adopt to effect
any of the foregoing transactions; or (ii) upon written notice to each
Participant, provide that all Options, whether or not vested, may be
exercised within thirty days of the date of such notice and if not so
exercised, shall be terminated.
12. Change in Control. Notwithstanding any provisions in the Plan to
the contrary, in the event of a Change in Control, any unvested and
outstanding Options awarded to Participants under the Plan prior to such
Change in Control automatically shall become fully vested and exercisable in
accordance with the terms thereof.
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<PAGE>
13. Non-Alienation of Benefits. Except insofar as applicable law
otherwise may require, (i) no Options, rights or interest of Participants or
Stock deliverable to any Participant at any time under the Plan shall be
subject in any manner to alienation by anticipation, sale, transfer,
assignment, bankruptcy, pledge, attachment, charge or encumbrance of any
kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach,
charge or otherwise encumber any such amount, whether presently or thereafter
payable, shall be void; and (ii) to the fullest extent permitted by law, the
Plan shall in no manner be liable for, or subject to, claims, liens,
attachments or other like proceedings or the debts, liabilities, contracts,
engagements or torts of any Participant or beneficiary. Nothing in this
Section 13 shall prevent a Participant's rights and interests under the Plan
from being transferred by will or by the laws of descent and distribution;
provided, that no transfer by will or by the laws of descent and distribution
shall be effective to bind the Corporation unless the Committee or its
designee shall have been furnished before or after the death of such
Participant with a copy of such will or such other evidence as the Committee
may deem necessary to establish the validity of the transfer.
14. Listing and Qualification of Shares. The Corporation, in its
discretion, may postpone the issuance or delivery of shares of Stock until
completion of any stock exchange listing, or other qualification or
registration of such shares under any state or federal law, rule or
regulation, as the Corporation may consider appropriate, and may require any
Participant to make such representations, including, but not limited to, a
written representation that the shares are to be acquired for investment and
not for resale or with a view to the distribution thereof, and to furnish
such information as it may consider appropriate in connection with the
issuance or delivery of the shares in compliance with applicable law, rules
and regulations. The Corporation may cause a legend or legends to be placed
on such certificates to make appropriate reference to such representation and
to restrict transfer in the absence of compliance with applicable federal or
state securities laws.
15. No Claim or Right Under the Plan. No employee of the Corporation
or any Subsidiary shall at any time have the right to be selected as a
Participant in the Plan nor, having been selected as a Participant and
granted an Option, to be granted any additional Option. Neither the action
of the Corporation in establishing the Plan, nor any action taken by it or by
the Board or the Committee thereunder, nor any provision of the Plan, nor
participation in the Plan, shall be construed to give, and does not give, to
any person the right to be retained in the employ of the Corporation or any
Subsidiary, or interfere in any way with the right of the Corporation or any
Subsidiary to discharge or terminate any person at any time without regard to
the effect such discharge or termination may have upon such person's rights,
if any, under the Plan.
16. Taxes. The Corporation may make such provisions and take such
steps as it may deem necessary or appropriate for the withholding of all
federal, state, local and other taxes required by law to be withheld with
respect to Options under the Plan, including, but not limited
7
<PAGE>
to, (i) deducting the amount required to be withheld from salary or any other
amount then or thereafter payable to a Participant, beneficiary or legal
representative, (ii) requiring a Participant, beneficiary or legal
representative to pay to the Corporation the amount required to be withheld
as a condition of releasing the Stock, or (iii) complying with applicable
provisions of any broker-directed cashless exercise/resale procedure adopted
by the Corporation pursuant to Section 7(e).
17. No Liability of Directors. No member of the Board or the Committee
shall be personally liable by reason of any contract or other instrument
executed by such member on his behalf in his capacity as a member of the
Board or Committee, nor for any mistake of judgment made in good faith, and
the Corporation shall indemnify and hold harmless each employee, officer and
Director, to whom any duty or power relating to the administration or
interpretation of the Plan may be allocated or delegated, against any cost or
expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of the Board) arising out of any act
or omission to act in connection with the Plan to the fullest extent
permitted or required by the Corporation's governing instruments and, in
addition, to the fullest extent of any applicable insurance policy purchased
by the Corporation.
18. Other Plans. Nothing contained in the Plan is intended to amend,
modify or rescind any previously approved compensation plans or programs
entered into by the Corporation or its Subsidiaries. The Plan shall be
construed to be in addition to any and all such plans or programs. No award
of Options under the Plan shall be construed as compensation under any other
executive compensation or employee benefit plan of the Corporation or any of
its Subsidiaries, except as specifically provided in any such plan or as
otherwise provided by the Committee. The adoption of the Plan by the Board
shall not be construed as creating any limitations on the power or authority
of the Board to adopt such additional compensation or incentive arrangements
as the Board may deem necessary or desirable.
19. Amendment or Termination. This Plan may be amended by the Board
from time to time to the extent that the Board deems necessary or
appropriate; provided, no such amendment shall be made absent the approval of
the stockholders of the Corporation: (1) if stockholder approval of such
amendment is required for continued compliance with Rule 16b-3 of the
Exchange Act, or (2) if stockholder approval of such amendment is required by
any other applicable laws or regulations or by the rules of any stock
exchange as long as the Stock is listed for trading on such exchange. The
Committee also may suspend the granting of Options under this Plan at any
time and may terminate this Plan at any time; provided, the Corporation shall
not have the right to modify, amend or cancel any Option granted before such
suspension or termination unless (1) the Participant consents in writing to
such modification, amendment or cancellation or (2) there is a dissolution or
liquidation of the Corporation or a transaction described in Section 11 of
this Plan.
20. Captions. The captions preceding the sections of the Plan have
been inserted solely as a matter of convenience and shall not, in any manner,
define or limit the scope or intent of any provisions of the Plan.
21. Governing Law. The Plan and all rights thereunder shall be
governed by, and construed in accordance with, the laws of the State of
Georgia, without reference to the principles of conflicts of law thereof.
8
<PAGE>
22. Expenses. All expenses of administering the Plan shall be borne by
the Corporation.
23. Effective Date. The Plan shall be effective as of the date of its
adoption by the Board, subject to approval of this Plan by the stockholders
of the Corporation after the date of its adoption.
9
<PAGE>
[LETTERHEAD]
May 7, 1997
Mr. John J. Wider, Jr.
10482 Fair Oaks
Columbia, MD 21044
Dear John:
On behalf of Green Spring Health Services, Inc., I am pleased to offer you the
position of Executive Vice President and Chief Operating Officer reporting
directly to me. The salary accompanying this position is $240,000 annually.
Additionally, you will receive a $40,000 sign-on bonus. You will receive $30,000
of the signing bonus with your first paycheck and the remaining $10,000 three
months later. We will also provide you with a $1,000 per month car allowance. We
will pay for any storage of furniture and any relocation reimbursement you may
owe to your previous employer. The combined amount for storage and relocation
will not exceed $50,000. We are willing to pay this amount to either you or your
current employer.
Additionally, you will participate in the Short-Term Incentive Program. Target
funding for this grade 28 position is 25% of the $233,372 mid-point with the
potential of increasing to 56.25%, based on individual and financial
performance. (The Short-Term Incentive Program is reviewed yearly and may be
revised as the business environment dictates.) We will guarantee that during
your first 12 months of employment, you will receive $85,000 in short-term
incentive. You will receive the guaranteed amount in two separate payments.
First, as part of our normal Short-Term Incentive Program, you will receive a
short-term incentive for fiscal year 1997 that will be paid upon the
finalization of the 1997 bonuses around November or December 1997. You will
receive the balance of your short-term incentive guarantee 12 months after you
begin employment.
Annually, you will receive 23 days of Paid Time Off, (PTO). This amount will be
prorated for 1997, based on your date of hire. Employees participate in a
benefits program called Flexible Compensation. The program includes Medical,
Dental, Vision, Prescription Drug, Life Insurance, Disability, Paid Time Off and
Flexible Spending Accounts. Benefits begin on the first of the month following
thirty days of employment. A benefits summary is attached for your review.
Medical insurance will start on the first day of the month following thirty days
of employment. Through your current employer, you have 60 days to elect COBRA
retroactively. Many employees defer the decision to elect COBRA coverage until
the end of that 60 day period. At that time, your coverage with Green Spring
will have begun. In the event you need to access your health insurance prior to
your Green Spring insurance becoming effective, you may elect COBRA.
As a member of Green Spring's executive management team, you will be issued
25,000 stock options with your participation in the Magellan Stock Options
Program. The strike price of the stock will be determined upon your arrival.
Last years program provided for a four year vesting period. We anticipate that
your options will be issued through the new program which we believe will have a
three year vesting period. You will also be eligible for future grants of
additional options.
Green Spring also offers a 401(k) and 401(k) Plus Plan that you may participate
in on January 1, 1998. Through this program, you may defer up to 12% (currently,
highly compensated employees are limited to 6% for discrimination testing
purposes) and receive a 3% match, based upon 50% of your contribution up to 6%.
A 401(k) Plus company contribution of 2%- 4% of salary is also made based on
year-end profitability.
Finally, in the event of involuntary separation of employment, Green Spring will
provide you with twelve months of salary and some benefits continuation through
the Transition Support Program.
It is a pleasure to offer you this opportunity at Green Spring Health Services.
I hope that you will find this offer agreeable. If so, please sign and return
this letter by Monday, May 12, 1997. I look forward to you joining the Green
Spring team. If you have any questions, please call me at (410) 964-1007.
Sincerely, Agreed :
/s/Henry Harbin, M.D. /s/John J. Wider, Jr. 5/12/97
- --------------------- --------------------- ----------
Henry Harbin, M.D. Signature Date
President, CEO
<PAGE>
Exhibit 10 (ba)
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and effective this 12th day of March, 1997, by and
between GREEN SPRING HEALTH SERVICES, INC., a Delaware corporation (hereinafter
"Employer") and Clarissa C. Marques (hereinafter "Employee").
WITNESSETH:
WHEREAS, Employee currently serves in the capacity of Chief Clinical Officer.
WHEREAS, it is the intention of the parties hereto to set out the terms and
conditions of the employment and the rights and duties of Employee in fulfilling
the capacity of Chief Clinical Officer for Employer.
NOW, THEREFORE, in consideration of the mutual promises of the parties and the
mutual benefits they will gain by the performance thereof, all in accordance
with the provisions hereinafter set forth, it is agreed by and between the
parties hereto as follows:
1. (a) Effective as of the date hereof Employer confirms the
employment of Employee and Employee agrees to continue to be employed by
Employer and to continue to serve as the Chief Clinical Officer of Employer, or
any other mutually agreed upon position or title pursuant to the terms of this
Agreement.
(b) This Agreement shall not be construed as a break in
service for purposes of those benefit plans contemplated in paragraph 2(c) below
and any time of service accrued by Employee as of the date of this Agreement for
purposes of determining the level or extent of such benefits in accordance with
the terms of any such benefit plan shall be credited to Employee.
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(c) The term of this employment shall commence on the date
hereof and shall terminate on the last day of the calendar month in which occurs
the third (3rd) anniversary of the date hereof ("Initial Term"). After the
Initial Term, this Agreement shall automatically renew for a one year period and
for subsequent one year periods thereafter unless one party presents to the
other party written notice of intent to terminate the Agreement at least ninety
(90) calendar days prior to the applicable expiration date of this Agreement.
2. (a) Subject to Paragraph 3 (b) below, during the term of this
Agreement Employer shall pay Employee a base salary, the amount of which shall
be fixed from time to time by the President, CEO of Green Spring Health
Services, provided in no event shall the base salary be less than the annual
base salary Employee was receiving on the effective date of this Agreement,
unless all Green Spring Health Services officers are required to accept similar
reductions.
(b) All payments of compensation shall be subject to all
lawful deductions such as Federal Withholding Taxes and FICA; and
(c) In addition to the compensation payable to Employee as
provided by subparagraph 2(a) above, Employee shall be entitled to fringe
benefits and incentive compensation similar to those provided to all other
similarly situated employees.
3. (a) During the term of this employment Employee shall:
(i) hold the title of Chief Clinical Officer; and
2
<PAGE>
(ii) generally perform the duties on behalf of
Employer that she performs as of the date hereof and such other duties which may
be required commensurate with Employee's professional ability and
qualifications.
(b) During the term of this employment, if Employer and
Employee mutually agree to a change in the duties and/or title of Employee, then
and in that event the parties shall to the extent necessary and appropriately
modify the terms of this Agreement, including, if such modification requires, an
adjustment to the salary and/or fringe benefits.
4. (a) Employee agrees:
(i) not to disclose any trade or secret data or
any other proprietary or confidential information acquired during employment by
Employer or its subsidiary, successor or affiliated companies, during employment
or after the termination of employment or retirement, except with the prior
permission of Employer, unless said information becomes generally available to
the public or becomes available to Employee on a non-confidential basis from a
source other than Employer;
(ii) not to interfere with the employment of any
other employee of Employer or its subsidiary, successor or affiliated companies,
or urge, induce or solicit other employees to leave Employer or its subsidiary,
successor or affiliated companies;
(iii) during the term of employment with Employer and
for a period of two (2) years following employment termination, not to solicit
the business of, contract with, or become employed by any entity (including any
subsidiary, successor or affiliated company of such entity) with which Employer
or its subsidiary, successor or affiliated companies has contracts or had
contracts within the two (2) years period prior to termination, unless agreed to
in advance in writing by Employer; and
3
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(iv) during the term of employment and for six
(6) months after the termination of employment engage, directly or indirectly,
or through any corporations or associations in any business, enterprise or
employment which is directly competitive (including but not limited to the
following activities: mental health and/or substance abuse managed care
including utilization management, network management and EAP) with Employer or
its subsidiary, successor or affiliated companies in any state or territory,
including the District of Columbia where Employer or its subsidiary, successor
or affiliated companies do business at the time of Employee's termination of
employment.
(b) Paragraph 4 (a) (iii) and 4 (a) (iv) shall not be
binding on Employee if Employee has completed the Initial Term or any renewal
periods set forth in Paragraph 1 and Employee is not offered continued
employment with Employer, or if Employee is offered continued employment upon
renewal but with a substantial reduction in Employee's duties or
responsibilities, or if Employee's employment is terminated pursuant to
paragraph 8 earlier than the expiration of the Initial Term or, if this
Agreement is renewed, earlier than the expiration of the renewal period.
5. In the event of the occurrence of any of the following,
Employee's employment shall terminate immediately and Employer's sole obligation
to Employee shall be the payment of any salary, bonus and benefits accrued
through the date of such termination:
(a) the death of Employee; or
(b) the disability of Employee as defined by Paragraph 6
hereinbelow; or
(c) the default by Employee as defined by Paragraph 7
hereinbelow.
4
<PAGE>
Notwithstanding the foregoing, if the letter agreement dated February 2, 1995,
("Letter Agreement") duly signed by Employer and Employee is in effect at the
time of a termination pursuant to this paragraph 5, the Letter Agreement shall
not be affected by such termination unless and only to the extent the terms of
such Letter Agreement expressly so states.
6. For purposes of this Agreement, the term disability means that
Employee is substantially unable to discharge her responsibilities to Employer
and its affiliates by reason of physical or mental illness or incapacity,
whether arising out of sickness, accident or otherwise, and shall be evidenced
by the written determination of a qualified medical doctor acceptable to
Employer, which determination shall specify the date and time when such
disability commenced and that it has continued uninterrupted for a period of at
least one hundred eighty (180) days.
7. For purposes of the Letter Agreement, the term "For-Cause" and
for purposes of this Agreement, the term default mean that Employee has:
(a) by intentional actions refused to perform her duties
for Employer as provided by paragraph 3 above. In the event that Employer
determines that Employee has intentionally failed to perform her duties for
Employer as provided in paragraph 3, Employer shall notify Employee in writing
of the reasons for its determination and shall provide Employee a reasonable
period in which to either contest the determination or to correct the defects in
performance; or
(b) breached or otherwise failed to comply with the
provisions of paragraph 4 above; or
5
<PAGE>
(c) committed an act of dishonesty, fraud,
misrepresentation or other acts of moral turpitude which in the reasonable
opinion of the President, CEO causes he/she to conclude that the continuation of
employment is not in the best interest of Employer.
8. In the event Employer shall terminate for any reason other
than as set forth in paragraph 5 above the Employment of Employee earlier than
the expiration of the Initial Term or, in the event the parties agree to renew
the Agreement, earlier than the expiration of any renewal period, or Employer
shall change the location of Employee's primary base or employment from
Columbia, Maryland vicinity without Employee's consent, such termination shall
be deemed to be "without cause" and Employee shall be entitled to all
compensation set forth in paragraph 2 (a), and benefits under paragraph 2 (c) to
the extent allowable under the terms of such benefit plans, for the remaining
balance of the Initial Term or renewal period, as the case may be, without any
condition or restriction other than as expressly set forth in the Agreement.
This shall constitute Employer's sole obligation to Employee in the event of a
termination pursuant to this paragraph 8. This provision shall not apply if the
Employee's termination occurs as a result of the expiration of the Initial Term
or any renewal period without renewal by the parties.
Notwithstanding the foregoing, if the Letter Agreement duly signed by Employer
and Employee is in effect at the time of a termination pursuant to this
paragraph 8, the Letter Agreement shall not be affected by such termination
unless and only to the extent the terms of such Letter Agreement expressly so
states.
9. All notices required hereunder shall be in writing and either
delivered by hand delivery or by certified mail, postage prepaid, return receipt
requested. Notices to Employer shall be addressed as follows: Green Spring
Health Services, Inc., Suite 500, 5585 Sterrett Place, Columbia, Maryland 21044.
Attention: President/CEO, with a copy to: General Counsel c/o Green Spring
Health Services, Inc.,
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<PAGE>
Suite 500, 5585 Sterrett Place, Columbia, Maryland 21044; and notices to
Employee shall be addressed to the then last known address of Employee as
reflected on the records of Employer.
10. This Agreement shall be binding upon Employee, and Employer
and its successors and assigns. Employee shall not assign any part of her rights
and/or duties under this Agreement, unless Employer agrees thereto in writing.
11. This instrument contains the entire Agreement of the parties.
It may not be changed orally but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
12. This Agreement has been executed in and shall be governed by
the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day
and year first above written.
EMPLOYEE: GREEN SPRING HEALTH SERVICES, INC.
/s/Clarissa C. Marques By: /s/Henry Harbin
- ------------------------------- ------------------------
CLARISSA C. MARQUES Henry Harbin
E.V.P., CCO President, CEO
3-12-97
WITNESS:
/s/Kathleen McNeal 3/14/97 /s/Joyce Fitch
- ------------------------------- ------------------------
Kathleen McNeal Joyce Fitch
7
<PAGE>
LETTERHEAD
EXHIBIT 10(BB)
May 2, 1995
Clarissa Marques, Ph.D.
Sr. Vice President,
Chief Clinical Operations
Green Spring Health Services, Inc.
5565 Sterrett Place, Suite 500
Columbia, Maryland 21044
Dear Clarissa:
Green Spring's Board of Directors places great value on your leadership and your
continuing commitment to the success of our company. We have taken the action
described below to demonstrate our desire for you to have a long and rewarding
career with Green Spring. This letter constitutes an agreement (the
"Agreement") between you and Green Spring Health Services (the "Company") to
provide a benefit to you at retirement based on your continued employment with
the Company until retirement or employment termination, as defined herein. This
Agreement is entered into in consideration of (i) your past contribution to the
Company and the value created by your efforts, (ii) the desire of the Board of
Directors to encourage continued employment with the Company until your
retirement, (iii) the expected contribution that you will make to the
profitability of the Company.
The terms and conditions of this Agreement are as follows:
1. It is the intent of the Board and the Company that you shall be
provided with a lump-sum dollar amount, or equivalent annual annuity
payment, in an amount as determined by the Board at the time of
payment, at the time of your retirement or termination from the
Company, as defined below. The amount of the payment shall be as
specified below.
2. The amount of the payment shall be:
a. $750,000 if the average Earnings Before Interest and Taxes (EBIT
as defined below) over your employment period exceeds 10 percent
of Shareowners' Investment, as defined below.
b. $500,000 if the average EBIT over your employment period is 10
percent or less of Shareowners' Investment.
<PAGE>
Clarissa Marques May 2, 1995
Page 2
In each of the above cases, the amount of the payment shall be
reduced by any payments to you, as determined from the date of this
Agreement until your employment termination or retirement, from
amounts earned under the grant of PARs, or other long-term
incentive payments, for any plan approved by the Board of Directors.
3. Retirement shall be defined as termination of employment from the
Company on or after age 60 years. If termination occurs prior to age
60, then the payment will be based on the conditions of termination,
as defined below.
4. If you voluntarily terminate your employment with the Company, or the
Board terminates your employment For-Cause, as it is defined in your
employment contract (or in the Company's long-term incentive plan,
e.g., the Performance Appreciation Right's Plan), then there shall be
no payment other than any payments received under the long-term
incentive plan of the Company.
5. If your employment is terminated as a result of death, disability
(as defined in your employment contact or the Company's
retirement income plan), or at the request of the Board of
Directors, then the payment shall be as defined in paragraph 2
above at the time of termination.
6. Earnings Before Interest and Taxes shall be as defined in the
Company's long-term incentive plan, except that it shall include
any accruals, under GAAP accounting, for the Company's long-term
incentive plan.
7. Shareowners' Investment shall be defined as equal to the book
value of the Green Spring Health Services as determined by
purchase accounting as of April 30, 1994 adjusted for
acquisitions at cost as determined by the Board of Directors of
the Company.
8. If you so elect at the time of retirement or termination, the benefit
payment may be in the form of an annual annuity payment. Such annuity
amount will be determined by the Board of Directors at the time of
request and reflect actuarial considerations or the cost of providing
the annuity if provided by a third-party. You may select the type of
annuity, e.g., single or joint-and-survivor, to meet your needs at the
time of the payment.
9. This Agreement shall be binding upon the Company, its successors and
assigns, and shall insure to the benefit of you and your personal
representative and/or executor. Each and every payment required
hereunder shall be made as provided herein without regard to your
personal state at the time of required payment, except for annuity
payments where the amount is dependent on your death.
<PAGE>
Clarissa Marques May 2, 1995
Page 3
We trust that this Agreement connotes the importance the Board and Company
places on your continued involvement with the success of Green Spring. You have
contributed immensely to its founding and development and we trust that you will
see fit to continue this contribution to corporate performance and success in
the future.
Sincerely,
/s/ Henry T. Harbin, M.D.
- -------------------------------
Henry T. Harbin, M.D.
President and Chief Executive Officer
DS/mhm
cc: Don Sacco
<PAGE>
EXHIBIT 10(BF)
INDENTURE SUPPLEMENT NO. 20
THIS INDENTURE SUPPLEMENT NO. 20, dated as of January 26, 1998 (this
"Supplemental Indenture"), by and between Magellan Health Services, Inc., a
Delaware corporation ("Magellan"), the guarantors set forth on the signature
pages hereto (the "Guarantors") and Marine Midland Bank, as trustee (the
"Trustee"), under that certain Indenture described below.
W I T N E S S E T H:
WHEREAS, Magellan and the Guarantors have heretofore executed and
delivered to the Trustee that certain Indenture, dated as of May 2, 1994 (the
"Indenture"), setting forth the terms and provisions of $375,000,000
aggregate principal amount of Magellan's 11-1/4% Series A Senior Subordinated
Notes due 2004 (the "Notes"); and
WHEREAS, in connection with Magellan's proposed acquisition of Merit
Behavioral Care Corporation ("Merit") through a merger of Merit with a
wholly-owned subsidiary of Magellan, Magellan is making a cash tender offer
(the "Offer") to purchase the Notes and is soliciting consents (the
"Solicitation") to certain amendments to the Indenture (the "Amendments")
(all as described in the Offer to Purchase and Consent Solicitation Statement
dated January 12, 1998 (the "Offer to Purchase and Consent Solicitation"));
and
WHEREAS, Section 10.02 of the Indenture provides that Magellan, the
Guarantors and the Trustee may amend or supplement the Indenture with the
written consent of holders of at least 66-2/3% in aggregate principal amount
of the Notes at the time outstanding; and
WHEREAS, written consents to the Amendments have been delivered to the
Trustee by holders of at least 66-2/3% in aggregate principal amount of the
Notes outstanding;
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, THAT THIS SUPPLEMENTAL
INDENTURE WITNESSETH:
That Magellan, the Guarantors and the Trustee in consideration of the
premises and of the sum of TEN DOLLARS ($10.00), lawful money of the United
States of America, to the Trustee paid by Magellan and the Guarantors, at or
before the execution and delivery of this Supplemental Indenture, and for
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, DO HEREBY
AGREE AS FOLLOWS:
Section One. Definitions. For purposes of this Supplemental Indenture,
all capitalized terms not otherwise defined herein shall be defined as set
forth in the Indenture, unless the context otherwise clearly requires.
Section Two. Amendment to Table of Contents. The Table of Contents to
the Indenture is hereby amended by deleting the following and inserting in
lieu thereof the notation "[deleted]":
<PAGE>
(1) the words "Compliance Certificates" appearing therein under the
heading Article 5, Section 5.03;
(2) the words "Further Instruments and Acts" appearing therein under
the heading Article 5, Section 5.04;
(3) the words "Limitation on Restricted Payments" appearing therein
under the heading Article 5, Section 5.06;
(4) the words "Limitation on Additional Indebtedness" appearing therein
under the heading Article 5, Section 5.08;
(5) the words "Limitation on Sale of Subsidiary Shares" appearing
therein under the heading Article 5, Section 5.10;
(6) the words "Limitation on Liens" appearing therein under the heading
Article 5, Section 5.11;
(7) the words "Limitation on Payment Restrictions Affecting Restricted
Subsidiaries" appearing therein under the heading Article 5, Section 5.12;
(8) the words "Limitation on Transactions with Affiliates" appearing
therein under the heading Article 5, Section 5.13;
(9) the words "Payment of Taxes and Other Claims" appearing therein
under the heading Article 5, Section 5.16;
(10) the words "Maintenance of Properties and Insurance" appearing
therein under the heading Article 5, Section 5.18; and
(11) the words "Covenant to Comply with Securities Laws Upon Purchase of
Securities" appearing therein under the heading Article 5, Section 5.21.
Section Three. Amendment to Article 5. Article 5 is hereby amended as
follows:
(1) Section 5.02 is amended by deleting the section following the
caption "SECTION 5.02", except for the last sentence of Section 5.02(1), and
inserting in lieu thereof the notation "[intentionally omitted]";
(2) Section 5.03 is amended by deleting the section following the
caption "SECTION 5.03" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
2
<PAGE>
(3) Section 5.04 is amended by deleting the section following the
caption "SECTION 5.04" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(4) Section 5.06 is amended by deleting the section following the
caption "SECTION 5.06" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(5) Section 5.08 is amended by deleting the section following the
caption "SECTION 5.08" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(6) Section 5.10 is amended by deleting the section following the
caption "SECTION 5.10" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(7) Section 5.11 is amended by deleting the paragraph following the
caption "SECTION 5.11" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(8) Section 5.12 is amended by deleting the paragraph following the
caption "SECTION 5.12" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(9) Section 5.13 is amended by deleting the paragraph following the
caption "SECTION 5.13" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(10) Section 5.16 is amended by deleting the paragraph following the
caption "SECTION 5.16" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]";
(11) Section 5.18 is amended by deleting the section following the
caption "SECTION 5.18" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]"; and
(12) Section 5.21 is amended by deleting the section following the
caption "SECTION 5.21" in its entirety and inserting in lieu thereof the
notation "[intentionally omitted]".
Section Four. Amendment to Article 6. Article 6 is hereby amended by
deleting subsections 6.01(iii) and 6.01(iv) and Section 6.02 in their
entirety and inserting in lieu thereof the notation "[intentionally omitted]";
Section Five. Amendment to Section 7.01. Section 7.01 is hereby
amended by deleting subsections 7.01(iii) and 7.01(vi) in their entirety and
inserting in lieu thereof the notation "[intentionally omitted]";
3
<PAGE>
Section Six. Definitions.
(a) Section 1.01 is hereby amended by deleting any defined terms that
are no longer used in the Indenture pursuant to this Supplemental Indenture.
(b) Section 1.01 is hereby further amended by deleting the definition
of "New Credit Agreement" in its entirety and in its place inserting the
following new defined term and accompanying definition:
"New Credit Agreement" means collectively (a) the Credit
Agreement dated on or about the date of acceptance for purchase of the
Securities pursuant to the Offer to Purchase and Consent Solicitation
Statement of Magellan Health Services, Inc. dated January 12, 1998,
among the Company, certain Subsidiaries of the Company, The Chase
Manhattan Bank, as Administrative Agent, and the "Lenders" that are
parties thereto, and (b) each note, guaranty, pledge agreement,
mortgage, security agreement and other instrument and document from
time to time entered into pursuant to or in respect of such Credit
Agreement or any guaranty, as each such Credit Agreement and other
document may be amended, restated, supplemented, extended, renewed and
otherwise modified from time to time.
(c) The definition of "Senior Indebtedness," set forth as the second
paragraph of Section 11.01, is hereby deleted in its entirety and in its
place is inserted the following:
For purposes of this Indenture, including without limitation this
Section 11.01, "Senior Indebtedness" means the principal of and premium, if
any, and interest on (such interest on Senior Indebtedness, wherever referred
to in this Indenture, being deemed to include interest accruing after the
filing of a petition initiating any proceeding pursuant to any bankruptcy law
in accordance with and at the rate (including any rate applicable upon any
default or event of default, to the extent lawful) specified in any document
evidencing the Senior Indebtedness, whether or not the claim for such
interest is allowed as a claim after such filing in any proceeding under such
bankruptcy law) and other amounts (including, but not limited to, fees,
expenses, reimbursement obligations in respect of letters of credit and
indemnities) due or payable from time to time on or in connection with any
Indebtedness of the Company or any of its Restricted Subsidiaries which is
incurred (i) under the New Credit Agreement or any replacement or substitute
facility or facilities thereof (provided that Indebtedness under the New
Credit Agreement or any replacement or substitute facility or facilities,
including unused commitments, shall not at any time exceed $900,000,000 in
aggregate outstanding principal amount (including the available undrawn
amount of any letters of credit issued under the New Credit Agreement or any
replacement or substitute facility or facilities thereof)); (ii) Indebtedness
of the Company and its Restricted Subsidiaries which Indebtedness was in
existence on the Closing Date; (iii) Indebtedness created, incurred, issued,
assumed or guaranteed in exchange for or the proceeds of which are used to
extend, refinance, renew, replace, substitute or refund Indebtedness
permitted
4
<PAGE>
by clause (ii) above (the "Refinancing Indebtedness"); provided, however,
that (A) the principal amount of such Refinancing Indebtedness shall not
exceed the principal amount of Indebtedness (including unused commitments) so
extended, refinanced, renewed, replaced, substituted or refunded (plus costs
of issuance), (B) such Refinancing Indebtedness ranks, relative to the
Securities, no more senior than the Indebtedness being refinanced thereby,
(C) such Refinancing Indebtedness bears interest at a market rate, and (D)
such Refinancing Indebtedness (1) shall have an Average Life equal to or
greater than the Average Life of the Indebtedness being extended, refinanced,
renewed, replaced, substituted or refunded or (2) shall not have a scheduled
maturity, principal repayment, sinking fund payment or mandatory redemption
on or prior to the maturity of the Securities; (iv) Indebtedness arising from
guarantees, letters of credit, and bid or performance bonds securing any
obligations of the Company or any Restricted Subsidiary incurred in the
ordinary course of business; (v) Indebtedness for borrowed money denominated
in foreign currencies not to exceed an aggregate principal amount at any time
equal to the equivalent in such foreign currencies of $5,000,000 in U.S.
dollars; (vi) Capital Lease Obligations in an aggregate amount outstanding at
any time not to exceed 5% of the Company's Consolidated Net Assets; (vii)
Guarantees of any Senior Indebtedness; (viii) Indebtedness other than, and in
addition to, that permitted pursuant to the foregoing clauses (i) through
(vii) provided that the aggregate outstanding amount of such other additional
Indebtedness pursuant to this clause (viii) does not at any time exceed
$50,000,000, all or any portion of which Indebtedness, notwithstanding clause
(i) above, may be incurred pursuant to the New Credit Agreement or any
replacement or substitute facility or facilities thereof; and (ix) directly
or indirectly, any Indebtedness other than, and in addition to, that
permitted pursuant to the foregoing clauses (i) through (viii) where, after
giving pro forma effect to the incurrence of such other additional
Indebtedness pursuant to this clause (ix) and the application of any of the
proceeds therefrom to repay Indebtedness, the Consolidated Interest Coverage
Ratio of the Company for the four fiscal quarters ending immediately prior to
the date such additional Indebtedness is created, incurred, issued, assumed
or guaranteed will be at least 2.25, provided that such calculation shall
give pro forma effect to the acquisition of any Person, business, property or
assets made since the first day of such four fiscal quarter period as if such
acquisition had occurred at the beginning of such four quarter period; in
each case that are outstanding on the Closing Date or thereafter created,
incurred or assumed, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the Securities. Notwithstanding anything to the contrary
in the foregoing, Senior Indebtedness shall not include (a) any Indebtedness
of the Company to any of its Subsidiaries or other Affiliates, (b) any
Indebtedness incurred after the Closing Date that is contractually
subordinated in right of payment to any Senior Indebtedness, and (c) amounts
owed (except to banks and other financial institutions) for goods, materials
or services purchased in the ordinary course of business or for compensation
to employees.
Section Seven. Trust Indenture Act. Notwithstanding the provisions of
this Supplemental Indenture, Magellan agrees to comply with the provisions of
the Trust Indenture
5
<PAGE>
Act of 1939 (the "TIA"), including Section 314(a) of the TIA which requires
Magellan, among other things, to provide to the Trustee (i) copies of the
annual reports and other information which Magellan is required to provide to
the Commission pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 and (ii) to provide to the Trustee annual compliance
certificates as to Magellan's compliance with all conditions and covenants
contained in the Indenture.
Section Eight. Effective Date. This Supplemental Indenture is dated as
of the 26th day of January, 1998 but the Amendments set forth herein shall be
operative only upon, and simultaneously with, and shall have no force and
effect prior to, the acceptance for purchase and payment of the Notes
tendered pursuant to the Offer.
Section Nine. Other Provisions.
(a) Trust Indenture Act Controls. If any provision of this
Supplemental Indenture limits, qualifies or conflicts with the duties imposed
by TIA Section 318(c), the imposed duties shall control.
(b) Acceptance by Trustee. The Trustee hereby accepts the trusts in
this Supplemental Indenture declared and provided upon the terms and
conditions set forth in the Indenture. The Trustee shall not be responsible
in any manner whatsoever for the validity or sufficiency of this Supplemental
Indenture or the due execution hereof by the Company or for or in respect of
the recitals and statements contained herein, all of which recitals and
statements are made solely by the Company.
(c) Notice to Securityholders. After the Amendments become effective,
the Company shall mail to the holders of the Notes a notice briefly
describing such Amendments.
(d) Governing Law. This Supplemental Indenture shall be governed by
and construed in accordance with the laws of the State of New York.
(e) Successors. All agreements of the Company in this Supplemental
Indenture shall bind its successors. All agreements of the Trustee in this
Supplemental Indenture shall bind its successors.
(f) Duplicate Originals. The parties may sign any number of copies of
this Supplemental Indenture. Each signed copy shall be an original, but all
of them together represent the same agreement.
(g) Separability. In case any provision in this Supplemental Indenture
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
6
<PAGE>
(h) Headings, Etc. The Article and Section headings of this
Supplemental Indenture have been inserted for convenience of reference only,
are not to be considered a part hereof, and shall not in any way modify or
restrict any of the terms and provisions hereof. Except as expressly
provided herein and notwithstanding the elimination of certain Sections of
this Indenture as set forth herein, all references to Sections in the
Indenture shall remain unchanged.
(i) Benefits of Supplemental Indenture. Nothing in this Supplemental
Indenture, express or implied, shall give to any Person, other than the
parties hereto and their successors hereunder, any Paying Agent and the
holders of the Notes, any benefit or any legal or equitable right, remedy or
claim under this Supplemental Indenture.
7
<PAGE>
IN WITNESS WHEREOF, Magellan has caused this Supplemental Indenture to
be executed in its corporate name and attested by its authorized officer,
each Guarantor has caused this Supplemental Indenture to be executed in its
corporate name and attested by its authorized officer and the Trustee has
caused this Supplemental Indenture to be executed in its corporate name and
attested by its authorized officer, as of this 26th day of January, 1998.
MAGELLAN HEALTH SERVICES, INC.
By: /s/ James R. Bedenbaugh
-----------------------------
James R. Bedenbaugh
Vice President and Treasurer
Attest:
/s/ Charlotte A. Sanford
- ------------------------------
Charlotte A. Sanford
Assistant Treasurer
THE GUARANTORS LISTED ON EXHIBIT A
ATTACHED HERETO
By: /s/ Charlotte A. Sanford
------------------------------
Charlotte A. Sanford
Treasurer or as Director
for each of the Guarantors
Attest:
- ------------------------------
Name:
Title:
8
<PAGE>
THE GUARANTORS LISTED ON EXHIBIT B
ATTACHED HERETO
By: /s/ James R. Bedenbaugh
------------------------------
James R. Bedenbaugh
Treasurer
for each of the Guarantors
Attest:
- ------------------------------
Name:
Title:
Attest:
- ------------------------------
Name:
Title:
MARINE MIDLAND BANK, as Trustee
By: /s/ Frank J. Godino
------------------------------
Frank J. Godino
Assistant Corporate Trust Officer
Attest:
- ------------------------------
Name:
Title:
9
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes,
minority interest and extraordinary items ($ 37,746) ($ 57,459) ($ 53,705) $ 64,238 $ 23,095
--------- --------- --------- --------- ---------
Less:
Minority interest in earnings of
certain consolidated subsidiaries 0 0 (187) 2,015 1,418
Equity in undistributed earnings of
certain unconsolidated subsidiaries 0 0 0 (1,200) (5,568)
--------- --------- --------- --------- ---------
0 0 (187) 815 (4,150)
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority interest and
extraordinary items as adjusted (37,746) (57,459) (53,518) 63,423 27,245
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fixed Charges:
Magellan Health Services, Inc. and Consolidated
Subsidiaries:
Interest on indebtedness 77,691 43,794 58,980 58,548 55,484
Minority interest in fixed charges of
certain consolidated subsidiaries 0 0 0 (128) (120)
Portion of rents representative of interest
expense 3,847 4,381 6,704 6,422 7,026
--------- --------- --------- --------- ---------
81,538 48,175 65,684 64,842 62,391
Unconsolidated Subsidiaries:
Interest on indebtedness 0 0 0 0 912
Portion of rents representative of
interest expense 0 0 0 0 3,340
Preferred dividend requirement 0 0 0 0 0
--------- --------- --------- --------- ---------
0 0 0 0 4,252
--------- --------- --------- --------- ---------
Total Fixed Charges 81,538 48,175 65,684 64,842 66,643
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio Computation:
Earnings (37,746) (57,459) (53,518) 63,423 27,245
Fixed Charges 81,538 48,175 65,684 64,842 66,643
--------- --------- --------- --------- ---------
Earnings before fixed charges 43,792 (9,284) 12,166 128,265 93,888
Fixed Charges 81,538 48,175 65,684 64,842 66,643
--------- --------- --------- --------- ---------
Ratio of earnings (deficiency) to
fixed charges (37,746) (57,459) (53,518) 1.98 1.41
</TABLE>
MAGELLAN HEALTH SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Excluding CBHS Transactions
--------------------------------------
Three Months ended Fiscal Year ended Three Months ended
December 31, 1997 September 30, 1997 December 31, 1997
------------------ ------------------- -------------------
<S> <C> <C> <C>
Income (loss) before income taxes,
minority interest and extraordinary items $ 17,507 $ 54,167 $ 9,835
Less:
Minority interest in earnings of
certain consolidated subsidiaries 342 1,387 342
Equity in undistributed earnings of
certain unconsolidated subsidiaries (634) 0 0
------------------ ------------------- -------------------
(292) 1,387 342
------------------ ------------------- -------------------
Income (loss) before income taxes, minority interest and
extraordinary items as adjusted 17,799 52,780 9,493
------------------ ------------------- -------------------
------------------ ------------------- -------------------
Fixed Charges:
Magellan Health Services, Inc. and Consolidated
Subsidiaries:
Interest on indebtedness 11,573 108,635 27,285
Minority interest in fixed charges of
certain consolidated subsidiaries (22) 624 (22)
Portion of rents representative of interest
expense 1,696 16,028 3,385
------------------ ------------------- -------------------
13,247 125,287 30,648
Unconsolidated Subsidiaries:
Interest on indebtedness 702 2,612 702
Portion of rents representative of
interest expense 2,760 10,784 2,760
Preferred dividend requirement 451 0 451
------------------ ------------------- -------------------
3,913 13,396 3,913
------------------ ------------------- -------------------
Total Fixed Charges 17,160 138,683 34,561
------------------ ------------------- -------------------
------------------ ------------------- -------------------
Ratio Computation:
Earnings 17,799 52,780 9,493
Fixed Charges 17,160 138,683 34,561
------------------ ------------------- -------------------
Earnings before fixed charges 34,959 191,463 44,054
Fixed Charges 17,160 138,683 34,561
------------------ ------------------- -------------------
Ratio of earnings (deficiency) to
fixed charges 2.04 1.38 1.27
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Including CBHS Transactions
--------------------------------------
Fiscal Year ended Three Months ended
September 30, 1997 December 31, 1997
------------------- -----------------
<S> <C> <C>
Income (loss) before income taxes,
minority interest and extraordinary items $ 26,566 $ 8,941
Less:
Minority interest in earnings of
certain consolidated subsidiaries 0 0
Equity in undistributed earnings of
certain unconsolidated subsidiaries 0 0
------------------- -----------------
0 0
Income (loss) before income taxes, minority interest and
extraordinary items as adjusted 26,566 8,941
------------------- -----------------
------------------- -----------------
Fixed Charges:
Magellan Health Services, Inc. and Consolidated
Subsidiaries:
Interest on indebtedness 87,494 21,959
Minority interest in fixed charges of
certain consolidated subsidiaries 0 0
Portion of rents representative of interest
expense 15,718 3,338
------------------- -----------------
103,212 25,297
------------------- -----------------
------------------- -----------------
Unconsolidated Subsidiaries:
Interest on indebtedness 0 0
Portion of rents representative of
interest expense 0 0
Preferred dividend requirement 0 0
------------------- -----------------
0 0
------------------- -----------------
Total Fixed Charges 103,212 25,297
------------------- -----------------
------------------- -----------------
Ratio Computation:
Earnings 26,566 8,941
Fixed Charges 103,212 25,297
------------------- -----------------
Earnings before fixed charges 129,778 34,238
Fixed Charges 103,212 25,297
------------------- -----------------
Ratio of earnings (deficiency) to
fixed charges 1.26 1.35
</TABLE>
<PAGE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated November 14, 1997 on the audited consolidated financial statements
and schedule of Magellan Health Services, Inc. and subsidiaries and to all
references to our Firm included in or made a part of this Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 30, 1998
<PAGE>
EXHIBIT 23(B)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Magellan Health
Services, Inc. on Form S-4 of our report dated November 14, 1997, appearing in
the Prospectus, which is part of this Registration Statement. 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 such
Prospectus.
/s/ Deloitte & Touche LLP
New York, New York
March 31, 1998
<PAGE>
EXHIBIT 23(C)
We consent to the inclusion of our report dated February 7, 1997, except as
to note 10 which is as of February 27, 1997, with respect to the balance sheets
of Human Affairs International, Incorporated as of December 31, 1995 and 1996,
and the related statements of income, stockholder's equity, and cash flows for
the years then ended, which report appears in Form S-4 of Magellan Health
Services, Inc. dated April 1, 1998, and to the reference to our firm under the
heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Salt Lake City, Utah
March 31, 1998
<PAGE>
EXHIBIT 23(D)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated November 14, 1997 on the audited consolidated financial statements
and schedule of Charter Behavioral Health Systems, LLC and subsidiaries and to
all references to our Firm included in or made a part of this Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 30, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
-----------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
-----------------
Marine Midland Bank
(Exact name of trustee as specified in its charter)
<TABLE>
<S> <C>
New York 16-1057879
(Jurisdiction of incorporation (I.R.S. Employer
or organization if not a U.S. Identification No.)
national bank)
140 Broadway, New York, N.Y. 10005-1180
(212) 658-1000 (Zip Code)
(Address of principal executive offices)
</TABLE>
Charles E. Bauer
Vice President
Marine Midland Bank
140 Broadway
New York, New York 10005-1180
Tel: (212) 658-1792
(Name, address and telephone number of agent for service)
Magellan Health Services, Inc.
(Exact name of obligor as specified in its charter)
<TABLE>
<S> <C>
Delaware 58-1076937
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3414 Peachtree Road, N.E. 8060
Suite 1400 (Primary Standard Industrial
Atlanta, Georgia, 30326 Classification Code Number)
(404) 841-9200
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)
</TABLE>
9% Series A Senior Subordinated Notes Due 2008
(Title of Indenture Securities)
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to which it
is subject.
State of New York Banking Department.
Federal Deposit Insurance Corporation, Washington, D.C.
Board of Governors of the Federal Reserve System, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
NONE
<PAGE>
ITEM 16. LIST OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C> <C> <C>
T1A(i) * - Copy of the Organization Certificate of Marine
Midland Bank.
T1A(ii) * - Certificate of the State of New York Banking
Department dated December 31, 1993 as to the
authority of Marine Midland Bank to commence
business.
T1A(iii) - Not applicable.
T1A(iv) * - Copy of the existing By-Laws of Marine Midland Bank
as adopted on January 20, 1994.
T1A(v) - Not applicable.
T1A(vi) * - Consent of Marine Midland Bank required by Section
321(b) of the Trust Indenture Act of 1939.
T1A(vii) - Copy of the latest report of condition of the trustee
(December 31, 1997), published pursuant to law or the
requirement of its supervisory or examining
authority.
T1A(viii) - Not applicable.
T1A(ix) - Not applicable.
</TABLE>
- ------------------------
* Exhibits previously filed with the Securities and Exchange Commission with
Registration No. 33-53693 and incorporated herein by reference thereto.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, Marine Midland Bank, a banking corporation and trust company organized
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York on the 9th day of
March 1998.
MARINE MIDLAND BANK
By: /s/ Frank J. Godino
------------------------------
Frank J. Godino
Vice President
<PAGE>
Exhibit T1A (vii)
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Federal Financial Institutions Examination Council Expires March 31, 2000
- ---------------------------------------------------------------------------
Please refer to page i,
Table of Contents, for / 1 /
the required disclosure
of estimated burden.
- ---------------------------------------------------------------------------
Consolidated Reports of Condition and Income for
A Bank With Domestic and Foreign Offices-- FFIEC 031
Report at the close of business December 31,
1997
This report is required by law; 12 U.S.C. Section 324 (State member
banks); 12 U.S.C. Section 1817 (State nonmember banks); and 12
U.S.C. Section 161 (National banks).
NOTE: The Reports of Condition and Income must be signed
by an authorized officer and the Report of Condition must be
attested to by not less than two directors (trustees) for State
nonmember banks and three directors for State member and
National Banks.
I, Gerald A. Ronning, Executive VP & Controller
---------------------------------------------------
Name and Title of Officer Authorized to Sign Report
of the named bank do hereby declare that these Reports of
Condition and Income (including the supporting schedules)
have been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and
are true to the best of my knowledge and believe.
/s/ Gerald A. Ronning
---------------------------------------------------
Signature of Officer Authorized to Sign Report
1/26/98
---------------------------------------------------
Date of Signature
SUBMISSION OF REPORTS
Each Bank must prepare its Reports of Condition and Income
either:
(a) in automated formand then file the computer data file
directly with the banking agencies' collection agent,
Electronic Data System Corporation (EDS), by modem or
computer diskette; or
(971231)
-----------
(RCRI 9999)
This report form is to be filed by banks with branches and
consolidated subsidiaries in U.S. territories and possessions,
Edge or Agreement subsidiaries, foreign branches, consoli-
dated foreign subsidiaries, or International Banking Facilities.
The Reports of Condition and Income are to be prepared in
accordance with Federal regulatory authority instructions.
We, the undersigned directors (trustees), attest to the
correctness of this Report of Condition (including the
supporting schedules) and declare that it has been examined
by us and to the best of our knowledge and belief has been
prepared in conformance with the instructions issued by the
appropriate Federal regulatory authority and is true and
correct.
/s/ Malcolm Burnett
- -------------------------------------------------------
Director (Trustee)
/s/ Bernard J. Kennedy
- -------------------------------------------------------
Director (Trustee)
/s/ Sal H. Alfiero
- -------------------------------------------------------
Director (Trustee)
(b) in hard-copy (paper) form and arrange for another party to
convert the paper report to automated for. That party (if
other than EDS) must transmit the bank's computer data
file to EDS
To fulfill the signature and attestation requirement for the
Reports of Condition and Income for this report date, attach
this signature page to the hard-copy of the completed report
that the bank places in its files.
- ----------------------------------------------------------------------------
FDIC Certificate Number /0/0/5/8/9/
-----------
(RCRI 9030)
<PAGE>
REPORT OF CONDITION
Consolidating domestic and foreign subsidiaries of the
Marine Midland Bank of Buffalo
Name of Bank City
in the state of New York, at the close of business
December 31, 1997
ASSETS
Thousands
of dollars
<TABLE>
<S> <C>
Cash and balances due from depository
institutions:
Noninterest-bearing balances currency and coin................................ $ 928,754
Interest-bearing balances..................................................... 2,571,410
Held-to-maturity securities................................................... 0
Available-for-sale securities................................................. 3,968,837
Federal funds sold and securities purchased under agreements to resell.......... 497,992
Loans and lease financing receivables:
Loans and leases net of unearned income....................................... 21,550,115
LESS: Allowance for loan and lease losses..................................... 407,355
LESS: Allocated transfer risk reserve......................................... 0
Loans and lease, net of unearned income, allowance, and reserve............... 21,142,760
Trading assets................................................................ 979,454
Premises and fixed assets (including capitalized leases)...................... 225,646
Other real estate owned......................................................... 8,092
Investments in unconsolidated subsidiaries and associated companies............. 0
Customers' liability to this bank on acceptances outstanding.................... 24,795
Intangible assets............................................................... 479,713
Other assets.................................................................... 488,168
Total assets.................................................................... 31,315,621
</TABLE>
<PAGE>
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices........................................................... 20,072,724
Noninterest-bearing........................................................... 4,090,858
Interest-bearing.............................................................. 15,981,866
In foreign offices, Edge, and Agreement subsidiaries, and IBFs.................. 3,834,827
Noninterest-bearing........................................................... 0
Interest-bearing.............................................................. 3,834,827
Federal funds purchased and securities sold under agreements to repurchase...... 2,007,482
Demand notes issued to the U.S. Treasury........................................ 192,186
Trading Liabilities............................................................. 215,748
Other borrowed money:
With a remaining maturity of one year or less................................. 1,402,449
With a remaining maturity of more than one year through three years........... 63,601
With a remaining maturity of more than three years............................ 61,707
Bank's liability on acceptances executed and outstanding........................ 24,795
Subordinated notes and debentures............................................... 497,774
Other liabilities............................................................... 719,423
Total liabilities............................................................... 29,092,716
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................... 0
Common Stock.................................................................... 205,000
Surplus......................................................................... 1,984,326
Undivided profits and capital reserves.......................................... 8,678
Net unrealized holding gains (losses) on available-for-sale securities.......... 24,901
Cumulative foreign currency translation adjustments............................. 0
Total equity capital............................................................ 2,222,905
Total liabilities, limited-life preferred stock, and equity capital............. 31,315,621
</TABLE>
<PAGE>
LETTER OF TRANSMITTAL
MAGELLAN HEALTH SERVICES, INC.
OFFER TO EXCHANGE ITS 9% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING
9% SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON [ ], 1998,
UNLESS THE OFFER IS EXTENDED.
To Marine Midland Bank
(THE "EXCHANGE AGENT")
<TABLE>
<CAPTION>
BY MAIL, BY OVERNIGHT COURIER OR BY FACSIMILE:
BY HAND: (For Eligible Institutions Only)
Marine Midland Bank (212) 658-2292
140 Broadway, Level A CONFIRM BY TELEPHONE:
New York, New York, 10005-1180 (212) 658-5931
Attention: Corporate Trust Operations
<S> <C>
FOR INFORMATION CALL:
(800) 662-9844
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt of the Prospectus dated
[ ], 1998 (the "Prospectus") of Magellan Health Services, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's offer (the "Exchange Offer") to exchange
$1,000 principal amount of its 9% Series A Senior Subordinated Notes due 2008
(the "New Notes") that have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
the Prospectus is a part, for each $1,000 principal amount of its outstanding 9%
Senior Subordinated Notes due 2008 (the "Old Notes"). The term "Expiration Date"
shall mean 5:00 p.m., New York City time, on [ ], 1998, unless the
Company, in its sole discretion, extends the Exchange Offer, in which case the
term shall mean the latest date and time to which the Exchange Offer is
extended. Capitalized terms used but not defined herein have the meaning given
to them in the Prospectus.
This Letter of Transmittal is to be used by holders of Old Notes if (i)
tender of the Old Notes is to be made by book-entry transfer to the Exchange
Agent's account at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in the Prospectus under the
caption "The Exchange Offer -- Procedures for Tendering" by any financial
institution that is a participant in the Book-Entry Transfer Facility and whose
name appears on a security position listing as the owner of Old Notes (such
participants, acting on behalf of holders, are referred to herein, together with
such holders, as "Acting Holders") or (ii) tender of the Old Notes is to be made
according to the guaranteed delivery procedures described in the Prospectus
under the caption "The Exchange Offer -- Guaranteed Delivery
<PAGE>
Procedures." See Instruction 2. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this letter in its entirety.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ____________________________________________
Account Number: ___________________________________________________________
Transaction Code Number: __________________________________________________
Principal Amount of Tendered Old Notes: ___________________________________
If Holders desire to tender Old Notes pursuant to the Exchange Offer and (i)
time will not permit this Letter of Transmittal or other required documents to
reach the Exchange Agent prior to the Expiration Date, or (ii) the procedures
for book-entry transfer cannot be completed prior to the Expiration Date, such
Holders may effect a tender of such Old Notes in accordance with the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures." See Instruction 2 below.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING (SEE INSTRUCTION 2):
Name of Registered or Acting Holder(s): ___________________________________
Window Ticket No. (if any): _______________________________________________
Date of Execution of Notice of Guaranteed Delivery: _______________________
Name of Eligible Institution
that Guaranteed Delivery: _____________________________________________________
If Delivered by Book-Entry Transfer,
the Account Number: ___________________________________________________________
Transaction Code Number: __________________________________________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: _____________________________________________________________________
Address: __________________________________________________________________
__________________________________________________________________
Attention: ________________________________________________________________
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
Subject to, and effective upon, acceptance for exchange of the Old Notes
tendered herewith in accordance with the terms and conditions of the Exchange
Offer, the Holder hereby sells, assigns and transfers to the Company all right,
title and interest in and to all of the Old Notes that are being tendered for
exchange hereby, and hereby irrevocably constitutes and appoints the Exchange
Agent the true and lawful agent and attorney-in-fact of the Holder with respect
to such securities, with full power of substitution (such power of attorney
being deemed to be an irrevocable power coupled with an interest), to (i)
deliver Old Notes tendered hereby or transfer ownership of such securities on
the account books maintained by DTC together, in either such case, with the
accompanying evidences of transfer and authority, to the Company upon the
receipt by the Exchange Agent, as the Holder's agent, of the consideration
therefor pursuant to the Exchange Offer, and (ii) receive all benefits and
otherwise exercise all rights of beneficial ownership of such Old Notes.
THE HOLDER HEREBY REPRESENTS AND WARRANTS THAT THE HOLDER HAS FULL POWER AND
AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD NOTES TENDERED
HEREBY AND TO ACQUIRE THE NEW NOTES ISSUABLE UPON THE EXCHANGE OF SUCH OLD
NOTES, THAT THE EXCHANGE AGENT, AS AGENT OF THE COMPANY, WILL ACQUIRE GOOD AND
UNENCUMBERED TITLE TO SUCH TENDERED OLD NOTES, FREE AND CLEAR OF ALL LIENS,
RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THE OLD NOTES TENDERED HEREBY ARE
NOT SUBJECT TO ANY ADVERSE CLAIM OR ENCUMBRANCE WHEN THE SAME ARE ACCEPTED BY
THE COMPANY. THE HOLDER WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL
DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR
DESIRABLE TO COMPLETE THE EXCHANGE, SALE, ASSIGNMENT AND TRANSFER OF THE OLD
NOTES TENDERED HEREBY.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the Holder, and any
obligation of the Holder hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the Holder. Except as stated in the
Prospectus, this tender is irrevocable.
A tender of Old Notes pursuant to the procedures described in the Prospectus
and in the instructions hereto will constitute the Holder's acceptance of the
terms and conditions of the Exchange Offer and a binding agreement between the
tendering Holder of Old Notes and the Company upon the terms and subject to the
conditions of the Exchange Offer. The Holder recognizes that, under certain
circumstances set forth in the Prospectus, the Company may not be required to
accept any of the Old Notes tendered for exchange hereby.
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE HOLDER
IS DEEMED TO REPRESENT AND AGREE, AND HEREBY REPRESENTS AND AGREES, THAT (I) IT
IS ACQUIRING NEW NOTES ISSUABLE IN EXCHANGE THEREFOR IN THE ORDINARY COURSE OF
ITS BUSINESS, (II) UNLESS IT IS A BROKER-DEALER REFERRED TO IN THE NEXT
SENTENCE, IT IS NOT PARTICIPATING IN AND DOES NOT INTEND TO PARTICIPATE IN AND
HAS NO ARRANGEMENT WITH ANY PERSON TO PARTICIPATE IN A PUBLIC DISTRIBUTION OF
THE NEW NOTES, (III) THE HOLDER IS NOT AN AFFILIATE OF THE COMPANY WITHIN THE
MEANING OF RULE 405 UNDER THE SECURITIES ACT AND (IV) IF IT IS SUCH AN AFFILIATE
IT MUST COMPLY WITH THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE
SECURITIES ACT IN CONNECTION WITH ANY RESALE OF THE NEW NOTES. EACH HOLDER WHO
IS A PARTICIPATING BROKER-DEALER (AS DEFINED IN THE PROSPECTUS) HOLDING OLD
NOTES ACQUIRED FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES THAT WILL RECEIVE NEW NOTES IN EXCHANGE FOR SUCH OLD NOTES PURSUANT
TO THE EXCHANGE OFFER FURTHER REPRESENTS AND AGREES THAT IT WILL DELIVER A
PROSPECTUS (WHICH MAY BE THE PROSPECTUS) IN CONNECTION WITH ANY RESALE OF SUCH
NEW NOTES DURING THE PERIOD
<PAGE>
REQUIRED BY THE SECURITIES ACT. BY ACKNOWLEDGING THAT IT WILL DELIVER AND BY
DELIVERING A PROSPECTUS, A PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO
ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT.
<PAGE>
HOLDER SIGN HERE
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
(Signature(s) of Owner(s))
Dated
- --------------------------------------------------------------------------------
Holder's Telephone Number
- -----------------------------------------------------------------
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on Old
Notes. If signature is by an attorney, executor, administrator, trustee,
guardian or others acting in a fiduciary capacity, please set forth full title
and see Instruction 5.)
SIGNATURE(S) GUARANTEED
(SEE INSTRUCTION 1)
- --------------------------------------------------------------------------------
(Firm -- Please Print)
- --------------------------------------------------------------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Date)
BOX 1
SPECIAL REGISTRATION INSTRUCTIONS
(See Instruction 5)
To be completed ONLY if New Notes issued in exchange for Old Notes accepted for
exchange are to be issued in the name of someone other than the undersigned.
Issue New Notes to:
Name __________________________________________________________________________
(Please Print)
Address _______________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
(Tax Identification or Social Security Number)
BOX 2
SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 5)
To be completed ONLY if or New Notes issued in exchange for Old Notes accepted
for exchange are to be sent to someone other than the undersigned, or to the
undersigned at an address other than that shown above.
Deliver certificate(s) to:
Name __________________________________________________________________________
(Please Print)
Address _______________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
(Tax Identification or Social Security Number)
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL OR BOOK-ENTRY CONFIRMATIONS. A
confirmation of book-entry transfer into the Exchange Agent's account with the
Book-Entry Transfer Facility for tendered Old Notes, as well as a properly
completed and duly executed copy of this Letter of Transmittal (or facsimile
thereof), a Substitute Form W-9 (or facsimile thereof) and any other documents
required by this Letter of Transmittal must be received by the Exchange Agent at
its address set forth herein prior to the Expiration Date. The method of
delivery of all required documents is at the election and risk of the tendering
Holder and delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. Instead of delivery by mail, it is
recommended that the Holder use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. Neither the
Company nor the Exchange Agent is under an obligation to notify any tendering
Holder of the Company's acceptance of tendered Old Notes prior to the Closing of
the Exchange Offer.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Old
Notes but who cannot comply with the procedures for book-entry transfer prior to
the Expiration Date or deliver the Letter of Transmittal and any other documents
required by the Letter of Transmittal to the Exchange Agent or who cannot
complete the procedures for book-entry transfer prior to the Expiration Date
must tender their Old Notes according to the guaranteed delivery procedures set
forth below. Pursuant to such procedures:
(i) such tender must be made by or through a firm which is a member firm
of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., or is a commercial bank or trust company having
an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (an "Eligible Institution");
(ii) prior to the Expiration Date, the Exchange Agent must have received
from the holder and the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or
hand delivery) setting forth the name and address of the Holder and the
principal amount of tendered Old Notes and stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof), together with a confirmation of book-entry transfer into
the Exchange Agent's account with the Book-Entry Transfer Facility for Old
Notes and any other required documents will be deposited by the Eligible
Institution with the Exchange Agent; and
(iii) such properly completed and executed Letter of Transmittal (or
facsimile thereof) and a confirmation of book-entry transfer into the
Exchange Agent's account with the Book-Entry Transfer Facility for Old Notes
and all other documents required by the Letter of Transmittal must be
received by the Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date.
Any holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery relating to such Old Notes prior to the
Expiration Date. Failure to complete the guaranteed delivery procedures outlined
above will not, of itself, affect the validity or effect a revocation of any
Letter of Transmittal form properly completed and executed by a Holder who
attempted to use the guaranteed delivery process.
3. TENDER BY HOLDER. Only a holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial owner of Old Notes who is not the
registered holder and who wishes to tender should arrange with such holder to
execute and deliver this Letter of Transmittal on such owner's behalf.
4. SIGNATURES ON THE LETTER OF TRANSMITTAL; GUARANTEE OF SIGNATURES. The
signature on this Letter of Transmittal must correspond with the name as it
appears on the security position listing as the owner of the Old Notes.
<PAGE>
If any of the tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any tendered
Old Notes are held in different names on several Old Notes, it will be necessary
to complete, sign and submit as many separate copies of the Letter of
Transmittal documents as there are names in which tendered Old Notes are held.
If this Letter of Transmittal is signed by the registered holder and New
Notes are to be issued and any untendered or unaccepted principal amount of Old
Notes are to be reissued or returned to the registered holder, then the
registered holder need not and should not provide a separate bond power. In any
other case, the registered holder must transmit a properly completed separate
bond power with this Letter of Transmittal (in either case, with respect to a
participant in the Book-Entry Transfer Facility whose name appears on a security
position listing as the owner of Old Notes, exactly as the name of the
participant appears on such security position listings), with the signature on
the bond power guaranteed by an Eligible Institution unless such bond powers are
signed by an Eligible Institution.
If this Letter of Transmittal or any bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with this Letter of Transmittal.
No signature guarantee is required if (i) this Letter of Transmittal is
signed by a participant in the Book-Entry Transfer Facility whose name appears
on a security position listing as the owner of the tendered Old Notes and the
New Notes or Old Notes not tendered or not accepted are to be deposited to such
participant's account at the Book-Entry Transfer Facility and neither the
"Special Delivery Instructions" (Box 2) nor the "Special Registration
Instructions" (Box 1) has been completed, or (ii) such Old Notes are tendered
for the account of an Eligible Institution. In all other cases, all signatures
on this Letter of Transmittal must be guaranteed by an Eligible Institution.
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders
should indicate, in the applicable box, the account at the Book-Entry Transfer
Facility to which the New Notes and/or substitute Old Notes for principal
amounts not tendered or not accepted for exchange are to be sent (or deposited)
if different from the name and address or account of the person signing this
Letter of Transmittal. In the case of issuance in a different name, the employer
identification number or social security number of the person named must also be
indicated and the tendering holders should complete the applicable box.
If no such instructions are given, the New Notes (and any Old Notes not
tendered or not accepted) will be deposited at such registered owner's account
at the Book-Entry Transfer Facility.
6. SECURITY TRANSFER TAXES. The Company will pay all security transfer
taxes, if any, applicable to the exchange of Old Notes tendered and accepted
pursuant to the Exchange Offer.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a
holder of any Old Notes which are accepted for exchange must provide the Company
(as payor) with its correct taxpayer identification number ("TIN"), which, in
the case of a holder who is an individual, is his or her social security number.
If the Company is not provided with the correct TIN, the holder may be subject
to a $50 penalty imposed by Internal Revenue Service. (If withholding results in
an over-payment of taxes, a refund may be obtained.) Certain holders (including,
among others, all corporations and certain foreign individuals) are not subject
to these backup withholding and reporting requirements. See the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Old Notes are registered in more than one name or are not in the name of
<PAGE>
the actual owner, see the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for information on which TIN to
report.
The Company reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Company's obligation regarding backup
withholding.
8. VALIDITY OF TENDERS. All questions as to the validity, form,
eligibility (including time of receipt), acceptance of tendered Old Notes and
withdrawal of tendered Old Notes will be determined by the Company, in its sole
discretion, which determination will be final and binding. The Company reserves
the absolute right to reject any and all Old Notes not properly tendered or any
Old Notes, the Company's acceptance of which would, in the opinion of counsel
for the Company, be unlawful. The Company also reserves the right to waive any
defects or irregularities in or conditions of tenders of Old Notes. The
interpretation of the terms and conditions of the Exchange Offer (including this
Letter of Transmittal and the instructions hereto) by the Company shall be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Old Notes,
but shall not incur any liability for failure to give such notification.
9. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive or modify specified conditions in the Exchange Offer in the case of any
tendered Old Notes.
10. NO CONDITIONAL TENDER. No alternative, conditional, irregular or
contingent tender of Old Notes on transmittal of this Letter of Transmittal will
be accepted.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
12. ACCEPTANCES OF TENDERED OLD NOTES AND ISSUANCE OF NEW NOTES; RETURN OF
OLD NOTES. Subject to the terms and conditions of the Exchange Offer, the
Company will accept for exchange all validly tendered Old Notes as soon as
practicable after the Expiration Date and will issue New Notes therefor as soon
as practicable thereafter. For purposes of the Exchange Offer, the Company shall
be deemed to have accepted tendered Old Notes when, as and if the Company has
given written or oral notice thereof to the Exchange Agent. If any tendered Old
Notes are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Old Notes will be credited to the undersigned's account at the
Book-Entry Transfer Facility designated above or at a different address as may
be indicated under "Special Delivery Instructions."
13. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer -- Withdrawal of Tenders."
<PAGE>
<TABLE>
<S> <C> <C>
PAYER'S NAME:
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN THE Social Security Number
FORM W-9 BOX AT RIGHT AND CERTIFY BY SIGNING AND OR
DATING BELOW. Employer Identification Number
DEPARTMENT OF THE TREASURY PART 2 -- CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
INTERNAL REVENUE SERVICE PAYER'S (1) The number shown on this form is my correct Taxpayer Identification Number
REQUEST FOR TAXPAYER (or I am waiting for a number to be issued for me) and
IDENTIFICATION NUMBER ("TIN") (2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
(the "IRS") that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the IRS has notified me that I am
no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS--YOU MUST CROSS OUT ITEM (2) ABOVE IF YOU HAVE BEEN
NOTIFIED BY THE IRS THAT YOU ARE CURRENTLY SUBJECT TO BACKUP WITHHOLDING BECAUSE
OF UNDER REPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN. HOWEVER, IF AFTER
BEING NOTIFIED BY THE IRS THAT YOU WERE SUBJECT TO BACKUP WITHHOLDING YOU
RECEIVED ANOTHER NOTIFICATION FROM THE IRS THAT YOU ARE NO LONGER SUBJECT TO
BACKUP WITHHOLDING, DO NOT CROSS OUT SUCH ITEM (2).
PART 3 / / Check this box if you have not been issued a TIN and have applied for
one or intend to apply for one in the near future.
SIGNATURE ___________________________________________ Date: ____________ , 199_
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY CASH PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
sixty (60) days 31% of all reportable payments made to me thereafter will be
withheld until I provide a number.
Signature: ____________________________________________ Date: _________ , 199_
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GUIDE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the number
to give the payer.
<TABLE>
<S> <C>
- --------------------------------------------- ---------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF--
- --------------------------------------------- ---------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint account) The actual owner of the account or, if
combined funds, any one of the individuals(1)
3. Custodian account of a minor (Uniform The minor(2)
Gift to Minors Act)
4. (a) The usual revocable savings trust The grantor-trustee(1)
account (grantor is also trustee)
(b) So-called trust account that is not a The actual owner(1)
legal or valid trust under State law
5. Sole proprietorship account The owner(3)
- --------------------------------------------- ---------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER IDENTIFICATION NUMBER OF--
- --------------------------------------------- ---------------------------------------------
6. A valid trust, estate, or pension trust The legal entity (Do not furnish the
identifying number of the personal
representative or trustee unless the legal
entity itself is not designated in the
account title.)(4)
7. Corporate account The corporation
8. Religious, charitable, or educational The organization
organization account
9. Partnership
10. Association, club or other tax-exempt The partnership
organization
11. A broker or registered nominee The organization
12. Account with the Department of The broker or nominee
Agriculture in the name of a public The public entity
entity (such as a State or local
government, school district, or prison)
that receives agricultural program
payments
</TABLE>
- ------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the name of the owner. You may also enter your business name. You may
use your Social Security Number of Employer Identification Number.
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
<PAGE>
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on broker transactions
include the following:
-A corporation.
-A financial institution.
-An organization exempt from tax under section 501(a), or an individual
retirement plan.
-The United States or any agency or instrumentality thereof.
-A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
-A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
-An international organization or any agency, or instrumentality thereof.
-A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
-A real estate investment trust.
-A common trust fund operated by a bank under section 584(a).
-An entity registered at all times under the Investment Company Act of 1940.
-A foreign central bank of issue.
Payments of dividends not generally subject to backup withholding include
the following:
-Payments to nonresident aliens subject to withholding under section 1441.
-Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
-Payments of patronage dividends where the amount received is not paid in
money.
-Payments made by certain foreign organizations.
Exempt payees described above should file Substitute Form W-9 to avoid
possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM,
SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER.
PRIVACY ACT NOTICE -- Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER -- If you fail
to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING -- If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION -- Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE
INTERNAL REVENUE SERVICE.
<PAGE>
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
MAGELLAN HEALTH SERVICES, INC.
9% SENIOR SUBORDINATED NOTES DUE 2008
This form must be used by a holder of the 9% Senior Subordinated Notes due
2008 (the "Old Notes") of Magellan Health Services, Inc. (the "Company") who
wishes to tender Old Notes to the Exchange Agent pursuant to the guaranteed
delivery procedures described in "The Exchange Offer -- Guaranteed Delivery
Procedures" of the Prospectus dated [ ], 1998 (the "Prospectus") and
in Instruction 2 to the Letter of Transmittal. Any holder who wishes to tender
Old Notes pursuant to such guaranteed delivery procedures must ensure that the
Exchange Agent receives this Notice of Guaranteed Delivery prior to the
Expiration Date of the Exchange Offer. Capitalized terms not defined herein have
the meanings ascribed to them in the Prospectus or the Letter of Transmittal.
To: Marine Midland Bank, Exchange Agent
<TABLE>
<CAPTION>
BY MAIL, BY OVERNIGHT COURIER OR BY FACSIMILE:
BY HAND: (For Eligible Institutions Only)
Marine Midland Bank (212) 658-2292
140 Broadway, Level A CONFIRM BY TELEPHONE:
New York, New York, 10005-1180 (212) 658-5931
Attention: Corporate Trust Operations
<S> <C>
FOR INFORMATION CALL:
(800) 662-9844
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE
WILL NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes specified below pursuant to the guaranteed delivery procedures set
forth in the Prospectus and in Instruction 2 of the Letter of Transmittal. The
undersigned hereby tenders the Old Notes listed below:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED
- -------------------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SIGN HERE
Name of Registered or Acting Holder: ___________________________________________
Signature(s): __________________________________________________________________
Name(s) (please print): ________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
Telephone number: ______________________________________________________________
Date: __________________________________________________________________________
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of the Letter of Transmittal
(or facsimile thereof), together with confirmation of the book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility described in the Prospectus under the caption "The Exchange Offer --
Guaranteed Delivery Procedures" and in the Letter of Transmittal and any other
required documents, all by 5:00 p.m., New York City time, on the third New York
Stock Exchange trading day following the Expiration Date.
SIGN HERE
Name of firm: __________________________________________________________________
Authorized signature: __________________________________________________________
Name (please print): ___________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Telephone number: ______________________________________________________________
Date: __________________________________________________________________________
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at its address set forth herein prior to the Expiration Date. The
method of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and risk of the holder, and
the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. Instead of delivery by mail, it is recommended
that the holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure timely delivery. For a description
of the guaranteed delivery procedures, see Instruction 2 of the Letter of
Transmittal.
<PAGE>
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. The signature on this
Notice of Guaranteed Delivery must correspond with the name shown on the
security position listing as the owner of the Old Notes.
If this Notice of Guaranteed Delivery is signed by a person other than a
participant of the Book-Entry Transfer Facility, this Notice of Guaranteed
Delivery must be accompanied by appropriate bond powers, signed as the name of
the participant shown on the Book-Entry Transfer Facility's security position
listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in fiduciary or representative capacity, such person should so
indicate when signing, and unless waived by the Company, submit with the Letter
of Transmittal evidence satisfactory to the Company of such person's authority
to so act.
3. REQUESTS FOR ASSISTANCE OF ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
<PAGE>
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
MAGELLAN HEALTH SERVICES, INC.
9% SENIOR SUBORDINATED NOTES DUE 2008
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus, dated
[ ], 1998 (the "Prospectus") of Magellan Health Services, Inc., a
Delaware corporation (the "Company"), and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the 9% Senior Subordinated Notes due 2008 (the
"Old Notes") held by you for the account of the undersigned.
The aggregate principal amount of the Old Notes held by you for the account
of the undersigned is (fill in amount): $ of the 9% Senior
Subordinated Notes due 2008.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
/ / TO TENDER the following Old Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF OLD NOTES TO BE TENDERED, IF
ANY):
$ of the 9% Senior Subordinated Notes due 2008.
/ / NOT TO TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representation and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that (i) the
undersigned's principal residence is in the state of (FILL IN STATE) ,
(ii) the undersigned is acquiring the Company's 9% Series A Senior Subordinated
Notes due 2008 (the "New Notes") in the ordinary course of business of the
undersigned, (iii) the undersigned is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate in a public distribution (within the meaning of the Securities Act)
of the New Notes, (iv) the undersigned acknowledges that any person
participating in the Exchange Offer for the purpose of making a public
distribution of the New Notes must, in the absence of an exemption therefrom,
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the New
Notes acquired by such person and cannot rely on the position of the Staff of
the Securities and Exchange Commission set forth in no-action letters that are
discussed in the section of the Prospectus entitled "The Exchange Offer --
Resales of the New Notes" and that failure to comply with such requirements in
such instance could result in the undersigned or such person incurring liability
under the Securities Act for which the undersigned is not indemnified by the
Company and (v) the undersigned is not an "affiliate," as defined in Rule 405 of
the Securities Act of the Company, or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable to it; (b) to agree, on behalf of the
undersigned, as set forth in the Letter of Transmittal, including, without
limitation, to agree that if the undersigned is a broker or dealer registered as
such pursuant to Section 15 of the Exchange Act that will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making or other trading activities that it will deliver a copy of the
Prospectus in connection with any resale by it of such New Notes; and (c) to
take such other action as necessary under the Prospectus or the Letter of
Transmittal to effect the valid tender of such Old Notes.
- --------------------------------------------------------------------------------
SIGN HERE
Name of beneficial owner(s): _________________________________________________
Signature(s): ________________________________________________________________
Name (PLEASE PRINT): _________________________________________________________
Address: _____________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Telephone number: ____________________________________________________________
Taxpayer Identification or Social Security Number: ___________________________
Date: ________________________________________________________________________
- --------------------------------------------------------------------------------
<PAGE>
[ ] , 1998
Marine Midland Bank
Corporate Trust Operations
140 Broadway, Level A
New York, New York 10005-1180
Ladies and Gentlemen:
Magellan Health Services, Inc., a Delaware corporation (the
"Company"), is offering to issue, upon the terms and subject to the
conditions set forth in the Prospectus dated as of the date hereof (the
"Prospectus"), and the related Letter of Transmittal (which together
constitute the "Offer"), $1,000 principal amount of the Company's 9% Series A
Senior Subordinated Notes due 2008 which have been registered under the
Securities Act of 1933, as amended (the "New Notes"), in exchange for each
outstanding $1,000 principal amount of its unregistered 9% Senior
Subordinated Notes due 2008 (the "Old Notes"). The New Notes will be issued
only in minimum denominations of $1,000 and integral multiples thereof to
each tendering holder of Old Notes whose Old Notes are accepted by the
Company for exchange in the Offer.
You are hereby appointed and authorized to act as agent for the
Company (the "Exchange Agent") to effectuate the exchange of Old Notes for
New Notes, on the terms and subject to the conditions of this agreement (the
"Agreement"). In that connection, you acknowledge receipt of the following
documents:
(i) the Prospectus;
(ii) the Letter of Transmittal to be used by the registered
holders of the Old Notes;
(iii) Instruction to Registered Holder and/or Book-Entry
Transfer Facility Participant from Owner; and
(iv) Notice of Guaranteed Delivery, to be used by any
registered holder of the Old Notes when the Old Notes are
not immediately available for delivery to you or time
will not permit a Letter of Transmittal and the
accompanying documents to reach you prior to the
expiration of the Offer.
<PAGE>
The Offer shall expire at the time and on the date specified in the
Prospectus (the "Initial Expiration Date") or at any subsequent time and date
to which the Company may extend the Offer. The later of the Initial
Expiration Date and the latest time and date to which the Offer is so
extended is referred to herein as "Expiration Date."
You are hereby requested, and you hereby agree, to act as follows:
1. You are to accept, subject to any withdrawal rights as
described in the Prospectus, Old Notes that are accompanied by the Letter of
Transmittal (or a manually signed facsimile thereof), properly completed and
duly executed in accordance with the instructions thereon and any requisite
collateral documents and all other instruments and communications submitted
to you in connection with the Offer and to hold the same upon the terms and
conditions set forth in this Agreement.
2. You are to examine the Letters of Transmittal, the Old Notes,
and the other documents delivered or mailed to you by or on behalf of the
holders of the Old Notes as soon as practicable after receipt by you to
ascertain whether (i) the Letters of Transmittal are properly completed and
duly executed in accordance with the instructions set forth therein, (ii) the
Old Notes have otherwise been properly tendered and (iii), if applicable, the
other documents are properly completed and duly executed. You need not pass
on the legal sufficiency of any signature or verify any signature guarantee.
3. In the event any Letter of Transmittal or other document has
been improperly executed or completed or any of the Old Notes are not in
proper form or have been improperly tendered, or if some other irregularity
in connection with the delivery of Old Notes by a registered holder thereof
exists, you shall promptly report such information to the Company and you are
authorized, upon consultation with the Company and its counsel, to endeavor
to take such lawful action as may be necessary to cause such irregularity to
be corrected. You are authorized to request from any person tendering Old
Notes such additional documents or undertakings as you may deem appropriate.
All questions as to the form of all documents and the validity, form,
eligibility (including time of receipt), acceptance and withdrawal of
tendered Old Notes will be determined by the Company, in its sole discretion,
whose determinations will be final and binding. The Company reserves the
absolute right to reject any or all tenders that are not in proper form or
the acceptance of any particular Old Notes that would, in the opinion of the
Company's counsel, be unlawful. Subject to applicable law, the Company also
reserves the absolute right to waive any of the conditions of the Offer or
any defect or irregularity in the tender of any Old Notes, and the Company's
interpretation of the terms and conditions of the Offer (including the Letter
of Transmittal and the instructions set forth therein) will be final and
binding. No tender of Old Notes will be deemed to have been properly made
until all defects and irregularities have been cured or waived as determined
by the Company in its sole discretion.
4. Tenders of Old Notes shall be made only as set forth in the
Prospectus and the Letter of Transmittal, and Old Notes shall be considered
properly tendered to you only when:
2
<PAGE>
(a) a properly completed and duly executed Letter of
Transmittal (or a manually signed facsimile thereof), with any required
signature guarantee and any other required documents, are received by you at
one of your addresses set forth in the Prospectus or in the Letter of
Transmittal and Old Notes are received by you at one of such addresses; or a
properly completed and duly executed Notice of Guaranteed Delivery
substantially in the form provided by the Company, with an appropriate
guarantee of signature and delivery from an Eligible Guarantor Institution
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), is received by you at or prior to the
Expiration Date. For purposes of this Agreement, an "Eligible Guarantor
Institution" within the meaning of Rule 17Ad-15 under the Exchange Act shall
mean a member of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States. The Notice
of Guaranteed Delivery may be delivered to you by hand or transmitted by
telegram, facsimile transmission or letter;
(b) Old Notes (in respect of which there has been delivered
to you prior to the Expiration Date a properly completed and duly executed
Notice of Guaranteed Delivery) in proper form for transfer together with a
properly completed and duly executed Letter of Transmittal (or a manually
signed facsimile thereof), and any other required documents, are received by
you within five (5) trading days of The New York Stock Exchange, Inc. after
the date of execution of such Notice of Guaranteed Delivery; and
(c) the adequacy of the items relating to Old Notes, and the
Letters of Transmittal therefor and any Notice of Guaranteed Delivery has
been favorably passed upon by the Company as above provided.
Notwithstanding the provisions of the preceding paragraph, Old Notes
that the Company otherwise shall approve as having been properly tendered shall
be considered to be properly tendered for all purposes of the Offer.
5. (a) A tendering holder of Old Notes may withdraw tendered Old
Notes in accordance with the procedures set forth in the Prospectus at any
time on or prior to a 5:00 p.m. New York City time on the Expiration Date, in
which event, except as may be otherwise specified in the holder's notice of
withdrawal, all items in your possession that shall have been received from
such holder with respect to those Old Notes shall be promptly returned to or
upon the order of the holder and the Old Notes covered by those items shall
no longer be considered to be properly tendered.
(b) A withdrawal of tender of Old Notes may not be rescinded
and any Old Notes withdrawn will thereafter be deemed not validly tendered
for purposes of the Offer, provided, however, that withdrawn Old Notes may be
retendered by again following one of the procedures therefor described in the
Prospectus at any time on or prior to the Expiration Date.
3
<PAGE>
(c) All questions as to the validity (including time of
receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding.
6. You are to record and to hold all tenders received by you and
to promptly notify by telephone (with confirmation by facsimile transmission)
Ms. Charlotte A. Sanford of the Company (phone: (404) 814-5740; fax: (404)
814-5796), on a weekly basis during any week that you receive any new
tenders, or more frequently if so requested by the Company, as to the total
number of Old Notes tendered during such week or other period and the
cumulative numbers with respect to the Old Notes tendered and not withdrawn
through the time of such notice. Each weekly report should indicate
separately the number of Old Notes represented by (i) certificates and (ii)
Notices of Guaranteed Delivery actually received by you through the time of
the report. In addition, you will also provide, and cooperate in making
available to the Company, such other information as it may reasonably request
upon oral request made from time to time. Your cooperation shall include,
without limitation, the granting by you to the Company, and such other
persons as it may reasonably request, of access to those persons on your
staff who are responsible for receiving tenders of Old Notes in order to
insure that immediately prior to the Expiration Date, the Company shall have
received information in sufficient detail to enable it to decide whether to
extend the Expiration Date of the Offer.
7. Each Letter of Transmittal, Old Note, Notice of Guaranteed
Delivery and any other documents received by you in connection with the Offer
shall be stamped by you to show the date and time of receipt and if
defective, the date and time the last defect was waived by the Company or
cured. Each Letter of Transmittal and Old Note that is accepted by the
Company shall be retained in your possession until the Expiration Date. As
promptly as practicable thereafter, you will deliver by registered mail with
proper insurance those items, together with all properly tendered and
cancelled Old Notes, to Magellan Health Services, Inc., Attention: Ms.
Charlotte A. Sanford, Vice President and Assistant Treasurer.
8. You are to satisfy requests of brokers, dealers, commercial
banks, trust companies and other persons for copies of the documents and
other materials specified in items (i) through (iv) of the introduction to
this Agreement. You are not authorized to offer any concessions or to pay
any commissions to any brokers, banks or other persons or to engage or to
utilize any persons to solicit tenders.
9. You are to follow up and to act upon all amendments,
modifications or supplements to these instructions, and upon any further
information in connection with the terms of the Offer, which may be given to
you by the Company, including instructions with respect to any extension or
of the modification of the Offer and the cancellation of the Offer.
10. No exchange shall be made as to any Old Notes until you
physically receive a certificate or certificates representing those Old
Notes, a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) and any other required documents.
4
<PAGE>
11. For performing your services hereunder, you shall be entitled
to receive from the Company a fee in accordance with Exhibit A attached
hereto. You shall also be reimbursed by the Company for all reasonable
counsel fees, if any, that you may incur in connection with the performance
of your duties hereunder.
12. As Exchange Agent hereunder, you:
(a) shall not have duties or obligations other than those
specifically set forth herein or as may subsequently be agreed to by you and
the Company;
(b) shall not be obligated to take any legal action hereunder
that might in your reasonable judgment involve any expense or liability
unless you have been furnished with reasonable indemnification;
(c) may rely on and shall be protected in acting upon any
certificate, instrument, opinion, notice, letter, facsimile transmission,
telex, telegram or other document or any security delivered to you and
reasonably believed by you to be genuine and to have been signed by the
proper party or parties;
(d) may rely on and shall be protected in acting upon the
terms and conditions of (i) this Agreement, (ii) the documents relating to
the Offer, (iii) any instructions given to you orally or in writing by the
Company by Ms. Charlotte A. Sanford, Vice President and Assistant Secretary
of the Company with respect to any matter relating to your activities as
Exchange Agent covered by this Agreement; and (iv) as to any matter not
covered by any of the foregoing, your usual and customary practice when
acting as an exchange agent; and
(e) may consult with counsel satisfactory to you (including
counsel to the Company), and the opinion of such counsel shall be full and
complete authorization and protection with respect to any action taken,
suffered, or omitted by you hereunder in good faith and in accordance with
the opinion of such counsel.
13. You undertake the duties and obligations imposed herein upon
the following additional terms and conditions:
(a) you shall perform your duties and obligations hereunder
as a fiduciary of the Company acting with due care; and
(b) except as set forth in paragraph 3 of the introduction to
this Agreement, you shall not be under any responsibility in respect of the
validity or sufficiency of any Letter of Transmittal, certificate for Old Notes
or Notice of Guaranteed Delivery.
5
<PAGE>
14. You are not authorized to make any recommendation on behalf of
the Company as to whether a holder of Old Notes of the Company should or
should not tender his securities.
15. All New Notes shall be forwarded by you to the persons at the
addresses so indicated in the Letter of Transmittal by (i) first-class mail
under a blanket surety bond protecting you and the Company from loss or
liability arising out of the non-receipt or non-delivery of such certificate,
or (ii) registered mail, insured separately for the replacement value of such
certificates.
16. The Company covenants and agrees to reimburse, indemnify and
hold you harmless against any costs, expenses (including reasonable expenses
of your legal counsel), losses or damages which, without negligence, willful
misconduct or bad faith on your part or arising out of or attributable
thereto, may be paid, incurred or suffered by you or to which you may become
subject by reason of or as a result of the administration of your duties
hereunder or by reason of or as a result of your compliance with the
instructions set forth herein or with any written or oral instructions
delivered to you pursuant hereto, or liability resulting from your actions as
Exchange Agent pursuant hereto, including any claims against you by any
holder tendering Old Notes for exchange. The Company shall be entitled to
participate at its own expense in the defense, and if the Company so elects
at any time after receipt of such notice, the Company shall assume the
defense of any suit brought to enforce any such claim. In the event that the
Company assumes the defense of any such suit, the Company shall not be liable
for the fees and expenses of any additional counsel thereafter retained by
you, unless in the reasonable judgment of the Company's counsel it is
advisable for you to be represented by separate counsel. In no case shall
the Company be liable under this indemnity with respect to any claim or
action against you, unless the Company shall be notified by you, by letter or
by cable or telex confirmed by letter, of the written assertion of a claim
against you or of any action commenced against you, promptly after you shall
have received any such written assertion of a claim or shall have been served
with a summons or other first legal process giving information as to the
nature and basis of an action, but failure so to notify the Company shall not
relieve the Company from any liability which it may have otherwise than on
account of this indemnity, except to the extent the Company is materially
prejudiced or forfeits substantial rights and defenses by reason of such
failure.
17. You hereby acknowledge receipt of each of the documents listed
in items (i) through (iv) of the introduction to this Agreement and further
acknowledge that you have examined the same. Any inconsistency between this
Agreement on the one hand and the Prospectus and Letter of Transmittal, as
they may from time to time be amended, on the other, shall be resolved in
favor of and governed by the latter, except with respect to the duties,
liabilities and indemnification of you as Exchange Agent.
18. In the event that any of the terms of the Offer are amended,
the Company shall give you prompt written notice thereof describing such
amendment. The parties shall
6
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amend this Agreement to the extent necessary to reflect any material changes
to the terms hereof caused by any amendment of the Offer.
19. You may resign at any time on 30 days' prior written notice
thereof delivered to the Company. Promptly after receipt of your written
notice, the Company shall take such action as may be necessary to appoint a
successor Exchange Agent. If within 30 days of such written notice no
successor Exchange Agent has been appointed, you or any party to this
Agreement may petition any court having jurisdiction for the appointment of a
successor Exchange Agent. Your resignation shall not be effective until a
successor Exchange Agent has been appointed. Upon the effectiveness of your
resignation, you shall turn over to the successor all property held by you as
Exchange Agent hereunder upon presentation to you of evidence of appointment
of such successor and its acceptance thereof.
20. Upon the later of (a) the completion of your duties pursuant
to this Agreement, or (b) [ ], 1998 (as such date may be extended by
written agreement between you and the Company) your designation as Exchange
Agent and your obligations hereunder will terminate provided that your
rights under Paragraphs 11, 12 and 16 above and your liabilities under this
Agreement for acts or omissions theretofore occurring shall survive the
termination of your appointment. Notwithstanding the foregoing, it is
understood that if, during the period of thirty (30) days following the
termination of your obligations hereunder pursuant to this paragraph 20, you
receive any Letters of Transmittal (or functional equivalent thereof), you
shall return the same together with all enclosures to the party from whom
such documents were received and shall be reimbursed by the Company for your
fees and expenses in connection therewith. In addition, notwithstanding the
termination of this Agreement, you shall preserve, and shall provide the
Company access to, all records pertaining to the Offer and shall permit it to
make reproductions of same, at its expense during normal business hours, for
a period of five (5) years following the termination of this Agreement.
21. This Agreement is effective as of the date hereof and is
binding upon and inures to the benefit of the parties' respective successors.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without regard to the conflicts of law
principles of such State.
22. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same document.
