<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-6639
------------------------
MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-1076937
---------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3414 PEACHTREE ROAD, N.E.
SUITE 1400
ATLANTA, GEORGIA 30326
---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(404) 841-9200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares of the registrant's common stock outstanding as of
April 30, 1999 was 31,777,788.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
PART I--FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets--
September 30, 1998 and March 31, 1999............................................................... 1
Condensed Consolidated Statements of Operations--
For the Three Months and the Six Months ended March 31, 1998 and 1999............................... 2
Condensed Consolidated Statements of Cash Flows--
For the Six Months ended March 31, 1998 and 1999.................................................... 3
Notes to Condensed Consolidated Financial Statements.................................................. 4
Management's Discussion and Analysis of Financial Condition and Results of Operations................. 19
PART II--OTHER INFORMATION:
Item 6.--Exhibits and Reports on Form 8-K............................................................. 34
Signatures............................................................................................ 35
</TABLE>
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I--FINANCIAL INFORMATION
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 92,050 $ 54,824
Accounts receivable, net............................................................. 174,846 169,679
Restricted cash and investments...................................................... 89,212 116,122
Refundable income taxes.............................................................. 4,939 --
Other current assets................................................................. 38,677 26,420
------------- ---------
Total current assets............................................................... 399,724 367,045
Assets restricted for settlement of unpaid claims and other liabilities................ 37,910 32,857
Property and equipment, net of accumulated depreciation of $60,100 at September 30,
1998, and $66,163 at March 31, 1999.................................................. 177,169 156,160
Deferred income taxes.................................................................. 97,386 103,089
Investments in unconsolidated subsidiaries............................................. 11,066 32,864
Other long-term assets................................................................. 35,415 17,944
Goodwill, net.......................................................................... 992,431 1,064,818
Other intangible assets, net........................................................... 165,189 156,334
------------- ---------
$ 1,916,290 $1,931,111
------------- ---------
------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 42,873 $ 29,748
Accrued liabilities.................................................................. 193,530 227,549
Medical claims payable............................................................... 195,330 205,318
Income taxes payable................................................................. -- 781
Current maturities of long-term debt and capital lease obligations................... 23,033 31,400
------------- ---------
Total current liabilities.......................................................... 454,766 494,796
Long-term debt and capital lease obligations........................................... 1,202,613 1,196,472
Reserve for unpaid claims.............................................................. 30,280 25,627
Deferred credits and other long-term liabilities....................................... 14,011 16,221
Minority interest...................................................................... 26,985 2,137
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value
Authorized--10,000 shares
Issued and outstanding--none....................................................... -- --
Common stock, par value $0.25 per share
Authorized--80,000 shares
Issued and outstanding--33,898 shares at September 30, 1998 and 34,067 shares at
March 31, 1999.................................................................... 8,476 8,516
Other stockholders' equity:
Additional paid-in capital......................................................... 349,651 350,774
Accumulated deficit................................................................ (149,238) (141,100)
Warrants outstanding............................................................... 25,050 25,050
Common stock in treasury, 2,289 shares at September 30, 1998 and March 31, 1999.... (44,309) (44,309)
Cumulative foreign currency adjustments included in comprehensive income........... (1,995) (3,073)
------------- ---------
Total stockholders' equity....................................................... 187,635 195,858
------------- ---------
$ 1,916,290 $1,931,111
------------- ---------
------------- ---------
</TABLE>
The accompanying notes to Condensed Consolidated Financial Statements
are an integral part of these balance sheets.
1
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
---------- ---------- ---------- ----------
Net revenue...................................................... $ 370,953 $ 497,315 $ 583,324 $ 960,458
---------- ---------- ---------- ----------
Costs and expenses:
Salaries, cost of care and other operating expenses............ 325,123 447,643 497,454 860,859
Equity in (earnings) losses of unconsolidated subsidiaries..... 4,375 (7,427) 16,497 (12,409)
Depreciation and amortization.................................. 12,956 18,963 19,925 37,354
Interest, net.................................................. 17,526 24,209 24,927 48,318
Stock option expense (credit).................................. 420 6 (3,539) 18
Managed care integration costs................................. 11,074 2,119 11,074 3,869
Special charges................................................ 49 2,252 49 2,274
---------- ---------- ---------- ----------
371,523 487,765 566,387 940,283
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes, minority
interest and extraordinary item................................ (570) 9,550 16,937 20,175
Provision for income taxes....................................... 630 5,627 7,633 11,664
---------- ---------- ---------- ----------
Income (loss) before minority interest and extraordinary item.... (1,200) 3,923 9,304 8,511
Minority interest................................................ 1,092 (34) 3,968 373
---------- ---------- ---------- ----------
Income (loss) before extraordinary item.......................... (2,292) 3,957 5,336 8,138
Extraordinary item--net loss on early extinguishments of debt
(net of income tax benefit of $22,010)......................... (33,015) -- (33,015) --
---------- ---------- ---------- ----------
Net income (loss)................................................ (35,307) 3,957 (27,679) 8,138
Unrealized foreign currency translation loss..................... (269) (706) (171) (1,797)
Benefit from income taxes related to unrealized foreign currency
translation loss............................................... (107) (283) (68) (719)
---------- ---------- ---------- ----------
(162) (423) (103) (1,078)
---------- ---------- ---------- ----------
Comprehensive income (loss)...................................... $ (35,469) $ 3,534 $ (27,782) $ 7,060
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average number of common shares outstanding--basic............... 31,012 31,741 29,995 31,676
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average number of common shares outstanding--diluted............. 31,012 31,751 30,587 31,697
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) per common share--basic:
Income (loss) before extraordinary item.......................... $ (0.07) $ 0.12 $ 0.18 $ 0.26
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Extraordinary loss on early extinguishments of debt.............. $ (1.06) $ -- $ (1.10) $ --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss)................................................ $ (1.14) $ 0.12 $ (0.92) $ 0.26
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) per common share--diluted:
Income (loss) before extraordinary item.......................... $ (0.07) $ 0.12 $ 0.17 $ 0.26
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Extraordinary loss on early extinguishments of debt.............. $ (1.06) $ -- $ (1.08) $ --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss)................................................ $ (1.14) $ 0.12 $ (0.90) $ 0.26
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
MARCH 31,
----------------------
<S> <C> <C>
1998 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................................... $ (27,679) $ 8,138
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................................... 19,925 37,354
Equity in (earnings) losses of unconsolidated subsidiaries......................... 16,497 (12,409)
Stock option expense (credit)...................................................... (3,539) 18
Non-cash interest expense.......................................................... 1,110 1,885
Loss on sale of assets............................................................. 49 289
Impairment of long-lived assets.................................................... 2,160 --
Extraordinary loss on early extinguishments of debt................................ 55,025 --
Cash flows from changes in assets and liabilities, net of effects from sales and
acquisitions of businesses:
Accounts receivable, net......................................................... (8,933) (4,056)
Other assets..................................................................... (7,644) 6,785
Restricted cash and investments.................................................. (5,295) (26,910)
Accounts payable and other accrued liabilities................................... (45,137) 8,780
Medical claims payable........................................................... 19,662 3,685
Reserve for unpaid claims........................................................ (12,815) (4,653)
Income taxes payable and deferred income taxes................................... (23,275) 12,595
Other liabilities................................................................ (4,126) 5
Minority interest, net of dividends paid......................................... 2,705 1,145
Other............................................................................ (1,026) (1,220)
---------- ----------
Total adjustments.............................................................. 5,343 23,293
---------- ----------
Net cash provided by (used in) operating activities.......................... (22,336) 31,431
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................... (13,467) (26,131)
Acquisitions and investments in businesses, net of cash acquired and
return of escrowed funds............................................................. (988,943) (55,596)
Conversion of joint ventures from consolidation to equity method....................... -- (21,092)
Distributions received from unconsolidated subsidiaries................................ -- 15,150
Decrease in assets restricted for settlement of unpaid claims.......................... 18,007 8,844
Proceeds from sale of assets, net of transaction costs................................. 118 6,897
---------- ----------
Net cash used in investing activities................................................ (984,285) (71,928)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net of issuance costs.................................. 1,171,681 49,624
Payments on debt and capital lease obligations......................................... (425,433) (47,498)
Proceeds from exercise of stock options and warrants................................... 3,362 1,145
Purchases of treasury stock............................................................ (12,456) --
---------- ----------
Net cash provided by financing activities............................................ 737,154 3,271
---------- ----------
Net decrease in cash and cash equivalents................................................ (269,467) (37,226)
Cash and cash equivalents at beginning of period......................................... 372,878 92,050
---------- ----------
Cash and cash equivalents at end of period............................................... $ 103,411 $ 54,824
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation, have been included.
These financial statements should be read in conjunction with the audited
consolidated financial statements of Magellan Health Services, Inc. and
Subsidiaries ("Magellan" or the "Company") for the fiscal year ended September
30, 1998, included in the Company's Annual Report on Form 10-K, as amended. All
references to fiscal years contained herein refer to periods of twelve
consecutive months ending on September 30. Certain reclassifications have been
made to fiscal 1998 amounts to conform to fiscal 1999 presentation.
NOTE B--SUPPLEMENTAL CASH FLOW INFORMATION
Below is supplemental cash flow information related to the six months ended
March 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
Income taxes paid, net of refunds received.................................................. $ 8,095 $ (2,043)
--------- ---------
--------- ---------
Interest paid, net of amounts capitalized................................................... $ 40,747 $ 53,226
--------- ---------
--------- ---------
Non-cash transactions:
Fair value of common stock in treasury issued in connection with the Green Spring Minority
Stockholder Conversion (as defined)....................................................... $ 63,496 $ --
--------- ---------
--------- ---------
</TABLE>
4
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE C--LONG-TERM DEBT AND LEASES
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1998 and March 31, 1999 is as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- ------------
<S> <C> <C>
Credit Agreement:
Revolving Facility due through 2004.................................................. $ 40,000 $ 50,000
Term Loan Facility (7.3725% to 7.8725% at March 31, 1999) due through 2006........... 550,000 543,400
9.0% Senior Subordinated Notes due 2008.............................................. 625,000 625,000
6.0% to 11.5% mortgage and other notes payable through 2005.......................... 4,198 3,035
3.0% capital lease obligations due through 2014...................................... 6,448 6,437
------------- ------------
1,225,646 1,227,872
Less amounts due within one year..................................................... 23,033 31,400
------------- ------------
$ 1,202,613 $ 1,196,472
------------- ------------
------------- ------------
</TABLE>
NOTE D--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- ----------
<S> <C> <C>
Salaries, wages and other benefits..................................................... $ 23,893 $ 19,211
Interest............................................................................... 9,271 7,818
CHAMPUS adjustments.................................................................... 25,484 32,414
Other.................................................................................. 134,882 168,106
------------- ----------
$ 193,530 $ 227,549
------------- ----------
------------- ----------
</TABLE>
NOTE E--INCOME PER COMMON SHARE
The following table presents the components of average number of common
shares outstanding-- diluted (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
<S> <C> <C> <C> <C>
MARCH 31, MARCH 31,
-------------------- --------------------
<CAPTION>
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average number of common shares outstanding--basic......................... 31,012 31,741 29,995 31,676
Common stock equivalents--stock options.................................... -- 4 575 14
Common stock equivalents--warrants......................................... -- 6 17 7
--------- --------- --------- ---------
Average number of common shares outstanding--diluted....................... 31,012 31,751 30,587 31,697
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
5
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE E--INCOME PER COMMON SHARE (CONTINUED)
Options to purchase approximately 3,247,000 shares of common stock at $8.41
to $31.00 per share were outstanding during the six months ended March 31, 1999,
but were excluded from the calculation of average number of common shares
outstanding--diluted because the options' exercise prices were greater than the
average market price of the common shares underlying such options during the
period. Approximately 3,096,000 of these options, which expire between fiscal
2001 and 2009, were outstanding at March 31, 1999.
Warrants to purchase approximately 4,713,000 shares of common stock at
$26.15 to $38.70 per share were outstanding during the six months ended March
31, 1999, but were excluded from the calculation of average number of common
shares outstanding--diluted because the warrants' exercise prices were greater
than the average market price of the common shares underlying such warrants
during the period. All of the warrants, which expire between fiscal 2000 and
2009, were outstanding at March 31, 1999.
Common stock equivalents representing approximately 452,000 shares of common
stock were excluded from the calculation of average number of common shares
outstanding--diluted for the three months ended March 31, 1998, due to their
anti-dilutive nature as a result of the Company's loss for such period.
On November 17, 1998, the Company's Board of Directors approved the
repricing of stock options outstanding under the Company's existing stock option
plans and held by current directors and full-time employees (the "Stock Option
Repricing"). Each holder of 10,000 or more stock options who chose to
participate in the Stock Option Repricing was required to forfeit a percentage
of outstanding stock options depending upon such factors as level of employment
and number of options held.
In order to participate in the Stock Option Repricing: (i) members of the
Company's Board of Directors, including the Chief Executive Officer ("CEO"),
were required to forfeit 40% of their outstanding options; (ii) Named Executive
Officers (as defined by Securities and Exchange Commission Regulations) other
than the CEO were required to forfeit 30% of their outstanding options; (iii)
all other holders of 50,000 or more options were required to forfeit 25% of
their outstanding options; and (iv) all other holders of 10,000 to 49,999
options were required to forfeit 15% of their outstanding options.
The Stock Option Repricing was consummated on December 8, 1998, based on the
fair market value of the Company's common stock on such date. Approximately 1.7
million outstanding stock options were repriced to $8.41 and approximately 0.5
million outstanding stock options were forfeited as a result of the Stock Option
Repricing. Each participant in the Stock Option Repricing is precluded from
exercising repriced stock options until June 8, 1999.
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
CHOICE BEHAVIORAL HEALTH PARTNERSHIP. The Company is a 50% partner with
Value Options, Inc. in Choice Behavioral Health Partnership ("Choice"), a
general partnership. Choice is a managed behavioral healthcare company which
derives all of its revenues from a contract with the Civilian Health and Medical
Program of the Uniformed Services ("CHAMPUS"), and with TriCare, the successor
to CHAMPUS. The Company accounts for its investment in Choice using the equity
method.
6
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
A summary of financial information for the Company's investment in Choice is
as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Current assets................................................................ $ 22,974 $ 19,242
Property and equipment, net................................................... 345 288
------- -------
Total assets.............................................................. $ 23,319 $ 19,530
------- -------
------- -------
Current liabilities........................................................... $ 16,829 $ 12,972
Partners' capital............................................................. 6,490 6,558
------- -------
Total liabilities and partners' capital................................... $ 23,319 $ 19,530
------- -------
------- -------
Magellan investment........................................................... $ 3,245 $ 3,279
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
48 DAYS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Net revenue..................................................... $ 7,204 $ 13,166 $ 27,746
Operating expenses.............................................. 4,397 4,241 12,589
------ ------- -------
Net income...................................................... $ 2,807 $ 8,925 $ 15,157
------ ------- -------
------ ------- -------
Magellan equity income.......................................... $ 1,404 $ 4,463 $ 7,579
------ ------- -------
------ ------- -------
</TABLE>
The Company acquired its investment in Choice on February 12, 1998, as part
of the Merit (as defined) acquisition. Accordingly, statement of operations data
related to the three months ended March 31, 1998, represents only the results of
operations of Choice from February 12, 1998 through March 31, 1998.
PREMIER BEHAVIORAL SYSTEMS, LLC. The Company owns a 50% interest in Premier
Behavioral Systems, LLC ("Premier"). Premier was formed to manage behavioral
healthcare benefits for the State of Tennessee's TennCare program. The Company
accounts for its investment in Premier using the equity method. The Company's
investment in Premier at September 30, 1998 and March 31, 1999 was $5.8 million
and $8.5 million, respectively. The Company's equity in earnings (losses) of
Premier for the three months ended March 31, 1998 and 1999 was $0.3 million and
$1.9 million, respectively, and for the six months ended March 31, 1998 and 1999
was $(0.3) million and $2.6 million, respectively.
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC. The Company owned a 50% interest in
Charter Behavioral Health Systems, LLC ("CBHS") as of September 30, 1998 and
March 31, 1999. CBHS was formed on June 17, 1997, as a result of the Company's
sale of substantially all of the real estate used in its domestic psychiatric
hospital provider business to Crescent Real Estate Equities, L.P. ("Crescent")
(the "Crescent Transactions"). The Company accounts for its investment in CBHS
using the equity method.
7
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
A summary of financial information for CBHS is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- ----------
<S> <C> <C>
Current assets.................................................................... $ 147,119 $ 157,886
Property and equipment, net....................................................... 21,148 21,844
Other nonconcurrent assets........................................................ 8,871 8,842
------------- ----------
Total assets...................................................................... $ 177,138 $ 188,572
------------- ----------
------------- ----------
Current liabilities............................................................... $ 141,379 $ 177,913
Long-term debt.................................................................... 67,200 65,450
Other nonconcurrent liabilities................................................... 35,437 54,556
Members' deficit.................................................................. (66,878) (109,347)
------------- ----------
Total liabilities and members' deficit............................................ $ 177,138 $ 188,572
------------- ----------
------------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
---------- ---------- ---------- ----------
Net revenue................................................. $ 187,384 $ 191,605 $ 365,442 $ 373,826
---------- ---------- ---------- ----------
Crescent rent expense....................................... 14,032 14,051 28,018 28,108
Other operating expenses.................................... 186,246 190,941 371,924 383,174
Interest, net............................................... 1,305 1,426 2,675 3,014
---------- ---------- ---------- ----------
Net loss before preferred member distribution............... $ (14,199) $ (14,813) $ (37,175) $ (40,470)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Magellan's portion of net loss.............................. $ (7,100) $ -- $ (18,588) $ --
Intercompany loss elimination............................... 1,525 -- 1,525 --
---------- ---------- ---------- ----------
Magellan equity loss (2).................................... $ (5,575) $ -- $ (17,063) $ --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash provided by (used in) operating activities..................................... $ (9,517) $ 12,063
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(2) Note appears on page 9.
8
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
The Company's transactions with CBHS and related balances are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
--------- --------- --------- ---------
Franchise fee revenue (2).......................................... $ 16,525 $ -- $ 36,100 $ --
Costs:
Accounts receivable collection fees................................ $ 560 $ 58 $ 1,614 $ 151
Hospital-based joint venture management fees....................... $ 1,853 $ 1,388 $ 3,483 $ 2,707
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- -----------
<S> <C> <C>
Due to CBHS, net (1).............................................................. $ 1,127 $ 6,293
------ -----------
------ -----------
Prepaid CHARTER call center management fees (3)................................... $ 2,953 $ 4,330
------ -----------
------ -----------
Net book value of leased property (4)............................................. $ 2,850 $ 7,250
------ -----------
------ -----------
</TABLE>
- ------------------------
(1) The nature of hospital accounts receivable billing and collection processes
has resulted in the Company and CBHS receiving remittances which belong to
the other party. Additionally, the Company and CBHS have established a
settlement and allocation process for the accounts receivable related to
those patients who were not yet discharged from their treatment on June 16,
1997. These and other events result in the amount presented as due to CBHS.
(2) Franchise fees due from CBHS were approximately $38.0 million and $80.0
million as of September 30, 1998, and March 31, 1999, respectively. CBHS'
independent public accountants' report on CBHS' financial statements for the
fiscal year ended September 30, 1998, makes reference to uncertainty
regarding CBHS' ability to continue as a going concern. The Company recorded
equity in loss of its investment in CBHS until all franchise fees due from
CBHS were reduced to $0 at September 30, 1998. The Company received no
franchise fee payments from CBHS and recorded no franchise fee revenue
related to CBHS during the six months ended March 31, 1999, due to
continuing uncertainties surrounding their collectibility. Cumulative equity
in losses of CBHS in excess of the Company's investment in CBHS of $4.9
million ($5.1 million loss during the fiscal year ended September 30, 1998;
$2.8 million and $0.2 million income during the three months and the six
months ended March 31, 1999, respectively) are not reflected in the
Company's financial statements at and for the three months and the six
months ended March 31, 1999, since the Company has no remaining obligation
or commitment to fund CBHS and has no guarantees outstanding for any CBHS
obligations.
(3) CBHS is responsible for funding substantially all of the operations of the
1-800-CHARTER call center, which is owned by the Company, under a management
agreement (the "Call Center Management Agreement") which was entered into on
December 22, 1997.
9
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
Under the Call Center Management Agreement, CBHS agreed to fund the
operations of the call center, with the exceptions of capital expenditures
and lease payments, for an initial term of eighteen months in exchange for
payment of approximately $5.9 million, which approximated the budgeted costs
for the call center over the term of the agreement. In December 1998, the
Call Center Management Agreement was extended for an additional twelve
months at a cost to the Company of approximately $3.3 million.
(4) CBHS leased two psychiatric hospital facilities (collectively, the "CBHS
Leaseholds") from the Company as of March 31, 1999. The CBHS Leaseholds were
acquired by the Company in connection with CBHS' acquisition of certain
businesses from Ramsay Health Care, Inc. on September 28, 1998. The Company
paid approximately $7.2 million for the CBHS Leaseholds ($2.8 million during
September 1998; $4.4 million during the six months ended March 31, 1999).
The purchase of the CBHS Leaseholds was funded primarily through
distributions received from the Provider JV's (as defined). The CBHS
Leaseholds are leased to CBHS for a 10-year lease term at an annual rent of
$0.7 million. The Company accounted for the purchase of the CBHS Leaseholds
as an investment in income producing property. Both the Company and CBHS
account for these leases as operating leases.
Under the terms of a letter agreement dated November 10, 1998, between the
Company and Crescent Real Estate Funding VII, L.P. ("Crescent Funding"),
Crescent Funding has agreed to purchase the CBHS Leaseholds from the
Company, at the contract acquisition cost paid by the Company, upon the sale
of certain other property owned by Crescent Funding and leased by CBHS at
March 31, 1999. Crescent Funding is an affiliate of both Crescent Operating,
Inc. ("COI"), the other 50% owner of CBHS, and Crescent, the lessor of the
majority of the properties in which CBHS conducts its business.
HOSPITAL-BASED JOINT VENTURES. The Company owns non-controlling interests
in five hospital-based joint ventures ("Provider JV's"). Generally, each member
of the joint venture leased and/or contributed certain assets in each respective
market to the joint venture with the Company becoming the managing partner or
member.
A summary of the Provider JV's is as follows:
<TABLE>
<CAPTION>
FORMATION OWNERSHIP
MARKET DATE PERCENTAGE MINORITY OWNER
- ------------------------------ ---------------- --------------- ----------------------------------------------
<S> <C> <C> <C>
Chicago, IL................... June, 1994 75% Naperville Health Ventures
Albuquerque, NM............... May, 1995 67% Columbia/HCA Healthcare Corporation
Raleigh, NC................... June, 1995 50% Columbia/HCA Healthcare Corporation
Lafayette, LA................. October, 1995 50% Columbia/HCA Healthcare Corporation
Anchorage, AK................. August, 1996 57% Columbia/HCA Healthcare Corporation
</TABLE>
The Provider JV's results of operations were included in the Company's
consolidated financial statements from inception, less minority interest,
through September 30, 1998. On October 1, 1998, the Provider JV's were converted
from consolidation to the equity method. See "Management's Discussion and
Analysis--Recent Accounting Pronouncements--EITF 96-16".
10
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
The Provider JV's, along with one 95% owned hospital-based joint venture
with approximately $20.0 million of net assets which is consolidated, have been
managed by CBHS for a fee equivalent to the Company's portion of their earnings
since June 17, 1997. Additionally, should the Company liquidate its interests in
any or all of these six hospital-based joint ventures, the majority of the net
proceeds received by the Company must be remitted to CBHS.
A summary of financial information for the Company's aggregate investment in
the Provider JV's is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
Current assets............................................................................... $ 22,275
Property and equipment, net.................................................................. 23,399
Other noncurrent assets...................................................................... 2,179
-------
Total assets................................................................................. $ 47,853
-------
-------
Current liabilities.......................................................................... $ 11,029
Owners' capital.............................................................................. 36,824
-------
Total liabilities and owners' capital........................................................ $ 47,853
-------
-------
Magellan investment.......................................................................... $ 19,336
-------
-------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Net revenue................................................................. $ 14,265 $ 29,110
Operating expenses.......................................................... 12,281 24,885
------- -------
Net income.................................................................. $ 1,984 $ 4,225
------- -------
------- -------
Magellan equity income...................................................... $ 1,165 $ 2,364
------- -------
------- -------
</TABLE>
11
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE G--ACQUISITIONS
MANAGED CARE ACQUISITIONS. During fiscal 1998, the Company acquired the
following businesses in its Behavioral Managed Healthcare ("Behavioral") and
Specialty Managed Healthcare ("Specialty") business segments (collectively, the
"Managed Care Acquisitions"):
<TABLE>
<CAPTION>
CONTRACT
PURCHASE
PRICE
ACQUIRED COMPANY SEGMENT ACQUISITION DATE (MILLIONS)
- ------------------------------------------------------ ------------ ---------------------- -----------
<S> <C> <C> <C>
Human Affairs International, Incorporated ("HAI")..... Behavioral December 4, 1997 $ 122.1(1)
Allied Health Group, Inc. ("Allied").................. Specialty December 5, 1997 $ 50.0(2)
Merit Behavioral Care Corporation ("Merit")........... Behavioral February 12, 1998 $ 750.0
</TABLE>
- ------------------------
(1) Excluding potential aggregate contingent consideration of up to $300.0
million (limited to $60.0 million for each of the five years from the
acquisition date). On March 26, 1999, the Company paid Aetna, Inc.
("Aetna"), the former owner of HAI, $60.0 million of additional
consideration for the purchase of HAI (the "Aetna Payment"). The Aetna
Payment was funded through borrowings on the Revolving Facility (as defined)
($50.0 million) and cash on hand ($10.0 million) and was recorded as
additional goodwill and identifiable intangible assets.
(2) Excluding $4.5 million of additional consideration paid during the quarter
ended December 31, 1998, which was recorded as additional goodwill.
The Company accounted for the Managed Care Acquisitions using the purchase
method of accounting.
GREEN SPRING MINORITY STOCKHOLDER CONVERSION. In January 1998, the minority
stockholders of Green Spring Health Services, Inc. ("Green Spring") converted
their collective 39% interest in Green Spring into an aggregate of 2,831,516
shares of the Company's common stock through exercise of an exchange option (the
"Green Spring Minority Stockholder Conversion"). Green Spring became a wholly
owned subsidiary of the Company as a result of the Green Spring Minority
Stockholder Conversion. The Company issued shares from treasury to effect the
Green Spring Minority Stockholder Conversion and accounted for it as a purchase
of minority interest at the fair value of consideration paid.
The following unaudited pro forma information for the quarter and the six
months ended March 31, 1998, has been prepared assuming the Managed Care
Acquisitions and the Green Spring Minority Stockholder Conversion occurred on
October 1, 1997. The unaudited pro forma information does not purport to be
indicative of the results that would have actually been obtained had such
transactions
12
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE G--ACQUISITIONS (CONTINUED)
occurred on October 1, 1997, or which may be attained in future periods (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Net revenue.................................................. $ 454,044 $ 882,316
-------------- --------------
-------------- --------------
Net income (1)(2)............................................ $ 1,327 $ 4,842
-------------- --------------
-------------- --------------
Income per common share--basic............................... $ 0.04 $ 0.15
-------------- --------------
-------------- --------------
Income per common share--diluted............................. $ 0.04 $ 0.15
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Excludes expected unrealized cost savings related to the Integration Plan
(as defined) and managed care integration costs.
(2) Excludes the extraordinary loss on early extinguishments of debt during the
three months and the six months ended March 31, 1998, that were directly
attributable to the consummation of the Merit acquisition.
NOTE H--CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks. The reserves for self-insured general and
professional liability losses, including loss adjustment expenses, are included
in "Reserve for unpaid claims" in the Company's balance sheet and are based on
actuarial estimates that are discounted at an average rate of 6% to their
present value based on the Company's historical claims experience adjusted for
current industry trends. The undiscounted amount of the reserve for unpaid
claims at September 30, 1998 and March 31, 1999, was approximately $34.6 million
and $28.8 million, respectively. The carrying amount of accrued medical
malpractice claims was $26.2 million and $25.4 million at September 30, 1998 and
March 31, 1999, respectively. The reserve for unpaid claims is adjusted
periodically, as such claims mature, to reflect changes in actuarial estimates
based on experience. During the six months ended March 31, 1998, the Company
recorded reductions in malpractice claim reserves of approximately $4.1 million
as a result of updated actuarial estimates. 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.
The healthcare industry is subject to numerous laws and regulations. The
subjects of such laws and regulations include but are not limited to, matters
such as licensure, accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare and Medicaid
fraud and abuse. Recently, government activity has increased with respect to
investigations and/or allegations concerning possible violations of fraud and
abuse and false claims statutes and/or regulations by
13
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE H--CONTINGENCIES (CONTINUED)
healthcare providers. Entities that are found to have violated these laws and
regulations may be excluded from participating in government healthcare
programs, subjected to fines or penalties or required to repay amounts received
from the government for previously billed patient services. The Office of the
Inspector General of the Department of Health and Human Services and the United
States Department of Justice and certain other governmental agencies are
currently conducting inquiries and/or investigations regarding the compliance by
the Company and certain of its subsidiaries and the compliance by CBHS and
certain of its subsidiaries with such laws and regulations. Certain of the
inquiries relate to the operations and business practices of the Company's
psychiatric provider operations prior to the consummation of the Crescent
Transactions. In addition, the Company is also subject to or party to
litigation, claims and civil suits relating to its operations and business
practices. In the opinion of management, the Company has recorded reserves that
are adequate to cover litigation, claims or assessments that have been or may be
asserted against the Company arising out of such litigation, civil suits and
governmental inquiries. Furthermore, management believes that the resolution of
such litigation, civil suits and governmental inquiries will not have a material
adverse effect on the Company's financial position or results of operations;
however, there can be no assurance in this regard.
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists, psychologists and 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"). The complaint (the "Stephens Case") alleges that the Defendants
violated Section I 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. On May 12, 1998, the District Court granted the Defendants'
motion to dismiss the complaint with prejudice. On May 27, 1998, the plaintiffs
filed a notice of appeal of the District Court's dismissal of their complaint
with the United States Second Circuit Court of Appeals. On November 16, 1998,
the Second Circuit court issued a Summary Order affirming the District Court's
decision. The plaintiffs have not filed a petition for rehearing, and the time
allotted for doing so has expired. In February 1999, the plaintiffs filed a
petition for writ of certiorari with the United States Supreme Court. The
Supreme Court denied that petition on April 19, 1999. This matter is now
concluded.
On May 26, 1998, the counsel representing the plaintiffs in the Stephens
Case filed an action in the United States District Court for the District of New
Jersey on behalf of a group of thirteen plaintiffs who also purport to represent
an uncertified class of psychiatrists, psychologists and clinical social
workers. This complaint alleges substantially the same violations of federal
antitrust laws by the Defendants. The Defendants believe the factual and legal
issues involved in this case are substantially similar to those
14
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE H--CONTINGENCIES (CONTINUED)
involved in the Stephens Case and intend to vigorously defend themselves in this
litigation. On August 28, 1998, the Defendants filed a joint motion requesting
that the case be: i) transferred to the Southern District of New York; ii)
alternatively, that all proceedings be stayed pending the Second Circuit's
determination of the Stephens Case appeal, given the RES JUDICATA effect of the
Stephens Case dismissal; and iii) if the Court proceeds with the case, that the
complaint be dismissed for failure to state a claim for substantially the same
reasons as in the Stephens Case. The plaintiffs have opposed this motion, which
was argued on November 23, 1998. At the conclusion of the November 23 hearing,
the Court ruled that the case should be transferred to the Southern District of
New York. The Defendants' motion to dismiss was deemed withdrawn without
prejudice to its resubmission in the Southern District. The plaintiffs did not
appeal the Court's transfer order to the United States District Court for the
District of New Jersey. On March 15, 1999, the Defendants filed a joint motion
to dismiss the case for substantially the same reasons as in the Stephens case.
The Company does not believe this matter will have a material adverse effect on
its financial position or results of operations.
The Company provides mental health and substance abuse services, as a
subcontractor, to beneficiaries of CHAMPUS. The fixed monthly amounts that the
Company receives for medical costs under CHAMPUS contracts are subject to
retroactive adjustment ("CHAMPUS Adjustments") based upon actual healthcare
utilization during the period known as the "data collection period". The Company
has recorded reserves of approximately $32.4 million as of March 31, 1999, for
CHAMPUS Adjustments.
While management believes that the present reserve for CHAMPUS Adjustments
is reasonable, ultimate settlement resulting from the adjustment and available
appeal process may vary from the amount provided.
NOTE I--MANAGED CARE INTEGRATION PLAN AND COSTS
INTEGRATION PLAN. During fiscal 1998, management committed the Company to a
plan to combine and integrate the operations of its Behavioral and Specialty
segments (the "Integration Plan"). The Integration Plan will result in the
elimination of duplicative functions and will standardize business practices and
information technology platforms.
The Integration Plan will result in the elimination of approximately 1,000
positions during fiscal 1998 and fiscal 1999. Approximately 510 employees had
been involuntarily terminated pursuant to the Integration Plan as of March 31,
1999. The Company has substantially completed involuntary terminations related
to the Integration Plan, and most of the remaining positions have been or will
be eliminated through normal attrition.
The employee groups of the Behavioral segment that are primarily affected
include executive management, finance, human resources, information systems and
legal personnel at the various corporate headquarters and regional offices and
credentialing, claims processing, contracting and marketing personnel at various
operating locations. The Company expects to complete its involuntarily
terminations by the end of fiscal 1999.
15
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE I--MANAGED CARE INTEGRATION PLAN AND COSTS (CONTINUED)
The Integration Plan has resulted in the closure and identified closure of
approximately 20 leased facilities during fiscal 1998 and 1999. The Company
expects the remaining office closures, if any, to be insignificant.
The Company initially recorded approximately $21.3 million of liabilities
related to the Integration Plan, of which $12.4 million was recorded as part of
the Merit purchase price allocation and $8.9 million was recorded in the
statement of operations under "Managed care integration costs" in fiscal 1998.
During the quarter ended March 31, 1999, the Company recorded adjustments of
approximately $0.1 million, net, to such liabilities, of which $(0.8) million
was recorded as part of the Merit purchase price allocation and $0.9 million was
recorded in the statement of operations under "Managed care integration costs."
The Company may record additional adjustments to such liabilities through the
remainder of fiscal 1999 depending on its ability to sublease closed offices and
upon determination of the final amount of the Company's severance obligations.
The following table provides a rollforward of liabilities resulting from the
Integration Plan (in thousands).
<TABLE>
<CAPTION>
BALANCE BALANCE
SEPTEMBER 30, MARCH 31,
TYPE OF COST 1998 ADJUSTMENTS PAYMENTS 1999
- -------------------------------------------------------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Employee termination benefits................................. $ 6,190 $ 1,103 $ (5,034) $ 2,259
Facility closing costs........................................ 7,475 (826) (799) 5,850
Other......................................................... 169 (169) -- --
------------- ------ ----------- -----------
$ 13,834 $ 108 $ (5,833) $ 8,109
------------- ------ ----------- -----------
------------- ------ ----------- -----------
</TABLE>
OTHER INTEGRATION COSTS. The Integration Plan will result in additional
incremental costs that must be expensed as incurred in accordance with Emerging
Issues Task Force Consensus 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)" that are not described above and certain
other charges. Other integration costs include, but are not limited to, outside
consultants, costs to relocate closed office contents and long-lived asset
impairments. Other integration costs are reflected in the statement of
operations under "Managed care integration costs".
During the quarter and the six months ended March 31, 1998, the Company
incurred approximately $4.5 million in other integration costs, including
long-lived asset impairments of approximately $2.2 million and outside
consulting costs of approximately $2.0 million. During the quarter and the six
months ended March 31, 1999, the Company incurred approximately $1.0 million and
$2.8 million in other integration costs, respectively, including outside
consulting costs of approximately $0.7 million and $1.5 million and employee and
office relocation costs of approximately $0.1 million and $0.5 million,
respectively.
NOTE J--BUSINESS SEGMENT INFORMATION
The Company operates through five reportable segments which are engaged in
various aspects of the healthcare industry. Intersegment sales and transfers
among these segments are not significant.
16
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE J--BUSINESS SEGMENT INFORMATION (CONTINUED)
The following tables summarize, for the periods indicated, net revenue and
Segment Profit (as defined) by business segment (in thousands):
<TABLE>
<CAPTION>
BEHAVIORAL SPECIALTY
MANAGED HUMAN MANAGED HEALTHCARE HEALTHCARE CORPORATE
HEALTHCARE SERVICES HEALTHCARE FRANCHISING PROVIDER OVERHEAD CONSOLIDATED
----------- --------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
Net revenue.......................... $ 243,173 $ 32,757 $ 45,326 $ 16,525 $ 33,172 $ -- $ 370,953
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss)................ $ 28,442 $ 2,977 $ 1,212 $ 8,246 $ 5,200 $ (4,622) $ 41,455
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 1999
Net revenue.......................... $ 382,360 $ 46,982 $ 50,361 $ 115 $ 17,497 $ -- $ 497,315
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss)................ $ 53,516 $ 5,527 $ 967 $ (1,648) $ 1,970 $ (3,233) $ 57,099
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
SIX MONTHS ENDED MARCH 31, 1998
Net revenue.......................... $ 362,384 $ 59,071 $ 59,433 $ 36,100 $ 66,336 $ -- $ 583,324
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss)................ $ 43,101 $ 5,274 $ 536 $ 14,091 $ 14,402 $ (8,031) $ 69,373
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
SIX MONTHS ENDED MARCH 31, 1999
Net revenue.......................... $ 738,911 $ 92,721 $ 91,402 $ 290 $ 37,134 $ -- $ 960,458
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss)................ $ 106,136 $ 10,814 $ 1,383 $ (2,968) $ 3,169 $ (6,526) $ 112,008
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
Total assets:
September 30, 1998................. $1,356,259 $ 119,356 $ 78,062 $ 1,941 $ 178,217 $ 182,455 $1,916,290
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
March 31, 1999..................... $1,442,527 $ 125,287 $ 77,643 $ 1,790 $ 140,341 $ 143,523 $1,931,111
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
</TABLE>
The following tables reconcile Segment Profit (as defined) to consolidated
income (loss) before provision for income taxes, minority interest and
extraordinary item (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
--------- --------- --------- ----------
Segment Profit....................................................... $ 41,455 $ 57,099 $ 69,373 $ 112,008
Depreciation and amortization........................................ (12,956) (18,963) (19,925) (37,354)
Interest, net........................................................ (17,526) (24,209) (24,927) (48,318)
Stock option (expense) credit........................................ (420) (6) 3,539 (18)
Managed care integration costs....................................... (11,074) (2,119) (11,074) (3,869)
Special charges...................................................... (49) (2,252) (49) (2,274)
--------- --------- --------- ----------
Income (loss) before provision for income taxes, minority interest
and extraordinary item............................................. $ (570) $ 9,550 $ 16,937 $ 20,175
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
17
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE K--SUBSEQUENT EVENT
On April 9, 1999, the Company sold its European psychiatric provider
operations to Investment AB Bure of Sweden for approximately $57.0 million
(before transaction costs of approximately $2.5 million). The Company received
approximately $49.6 million at closing and will receive approximately $7.4
million, the remainder of the sales proceeds which were placed in an
interest-bearing escrow account at closing, no later than May 31, 1999. The sale
will result in a non-recurring gain of approximately $29.0 million to $30.0
million before provision for income taxes.
The Company used approximately $31.2 million of the proceeds received at
closing to make a mandatory unscheduled principal payment on indebtedness
outstanding under the Term Loan Facility (as defined) on April 14, 1999. The
remaining proceeds received at closing were used to reduce borrowings
outstanding under the Revolving Facility (as defined). The Company will make an
additional mandatory unscheduled principal payment of approximately $7.0 million
on indebtedness outstanding under such Term Loan Facility within three business
days of receipt of the portion of the sales proceeds which were placed in escrow
at closing.
These transactions are more fully described in the Company's current report
on Form 8-K which was filed with the Securities and Exchange Commission on April
12, 1999.
18
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from the
Company's forward-looking statements are set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998. All
forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
cautionary statements set forth in the Company's Annual Report on Form 10-K, as
amended, for the fiscal year ended September 30, 1998.
OVERVIEW
The Company operates through five principal business segments which are
engaged in:
- THE BEHAVIORAL MANAGED HEALTHCARE BUSINESS. The Company's MAGELLAN
BEHAVIORAL HEALTH division coordinates and manages the delivery of
behavioral healthcare treatment services through its network of providers,
which includes psychiatrists, psychologists and other medical
professionals. The treatment services provided through these networks
include outpatient programs (such as counseling or therapy), intermediate
care programs (such as intensive outpatient programs and partial
hospitalization services), inpatient treatment and alternative care
services (such as residential treatment and home or community-based
programs). The Company provides these services primarily through: (i)
risk-based products, where the Company assumes all or a portion of the
responsibility for the cost of providing treatment services in exchange
for a fixed per member per month fee, (ii) administrative services only
("ASO") products, where the Company provides services such as utilization
review, claims administration or provider network management, (iii)
employee assistance programs ("EAPs") and (iv) products which combine
features of some or all of the Company's risk-based, ASO, or EAP products.
- THE HUMAN SERVICES BUSINESS. The Company provides various human services
through its National MENTOR subsidiary. These human services include
specialty home-based healthcare services provided through "mentor" homes
as well as residential and day treatment services for individuals with
acquired brain injuries and for individuals with mental retardation and
developmental disabilities.
- THE SPECIALTY MANAGED HEALTHCARE BUSINESS. The Company's MAGELLAN
SPECIALTY HEALTH division provides specialty risk-based and ASO services
to its customers, primarily insurance companies, through its physician
networks in the eastern United States. These networks include physicians
specializing in cardiology, oncology and diabetes.
- THE HEALTHCARE FRANCHISING BUSINESS. The Company's Charter Advantage, LLC
subsidiary franchises the "CHARTER" system of behavioral healthcare
primarily to psychiatric hospital facilities operated by CBHS. The Company
is currently seeking to divest its healthcare franchising business. See
"--Outlook--Liquidity and Capital Resources--Strategic Alternatives to
Reduce Long-term Debt and Improve Liquidity."
- THE HEALTHCARE PROVIDER BUSINESS. The Company's provider operations
included the ownership and operation of three psychiatric hospitals in
Europe during the six months ended March 31, 1999. The Company sold these
European psychiatric provider operations on April 9, 1999. See
"--Outlook--
19
<PAGE>
Results of Operations--Sale of European Psychiatric Provider Operations."
The Company's provider operations currently include: (i) its 50% interest
in CBHS, (ii) its interests in six hospital-based joint ventures and (iii)
its provider management business in Puerto Rico. The Company is currently
seeking to divest the remainder of its healthcare provider business. See
"--Outlook-- Liquidity and Capital Resources--Strategic Alternatives to
Reduce Long-term Debt and Improve Liquidity."
At March 31, 1999, the Company's MAGELLAN BEHAVIORAL HEALTH division, which
was formed primarily through acquisitions completed in fiscal 1996 (Green
Spring) and fiscal 1998 (HAI and Merit), managed the behavioral healthcare
benefits of approximately 64.3 million individuals; National MENTOR, which
acquired eight businesses in fiscal 1998 and fiscal 1999, provided
community-based services to approximately 6,330 individuals; and the Company's
MAGELLAN SPECIALTY HEALTH division, which was formed primarily through
acquisitions completed in fiscal 1997 (Care Management Resources, Inc.) and
fiscal 1998 (Allied) managed medical specialty benefits for approximately 4.0
million members of health plans.
20
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following tables summarize, for the periods indicated, operating results
by business segment (in thousands):
<TABLE>
<CAPTION>
BEHAVIORAL SPECIALTY
MANAGED HUMAN MANAGED HEALTHCARE HEALTHCARE CORPORATE
HEALTHCARE SERVICES HEALTHCARE FRANCHISING PROVIDER OVERHEAD CONSOLIDATED
----------- --------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
- ----------------------------------------------------
Net revenue............................ $ 243,173 $ 32,757 $ 45,326 $ 16,525 $ 33,172 $ -- $ 370,953
----------- --------- ----------- ----------- ----------- ----------- ------------
Salaries, cost of care and other
operating expenses................... 215,931 29,780 44,114 2,704 27,972 4,622 325,123
Equity in (earnings) losses of
unconsolidated subsidiaries.......... (1,200) -- -- 5,575 -- -- 4,375
----------- --------- ----------- ----------- ----------- ----------- ------------
214,731 29,780 44,114 8,279 27,972 4,622 329,498
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss) (1).............. $ 28,442 $ 2,977 $ 1,212 $ 8,246 $ 5,200 $ (4,622) $ 41,455
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 1999
- ----------------------------------------------------
Net revenue............................ $ 382,360 $ 46,982 $ 50,361 $ 115 $ 17,497 $ -- $ 497,315
----------- --------- ----------- ----------- ----------- ----------- ------------
Salaries, cost of care and other
operating expenses................... 335,106 41,455 49,394 1,763 16,692 3,233 447,643
Equity in earnings of unconsolidated
subsidiaries......................... (6,262) -- -- -- (1,165) -- (7,427)
----------- --------- ----------- ----------- ----------- ----------- ------------
328,844 41,455 49,394 1,763 15,527 3,233 440,216
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss) (1).............. $ 53,516 $ 5,527 $ 967 $ (1,648) $ 1,970 $ (3,233) $ 57,099
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
SIX MONTHS ENDED MARCH 31, 1998
- ---------------------------------------
Net revenue............................ $ 362,384 $ 59,071 $ 59,433 $ 36,100 $ 66,336 $ -- $ 583,324
----------- --------- ----------- ----------- ----------- ----------- ------------
Salaries, cost of care and other
operating expenses................... 319,849 53,797 58,897 4,946 51,934 8,031 497,454
Equity in (earnings) losses of
unconsolidated subsidiaries.......... (566) -- -- 17,063 -- -- 16,497
----------- --------- ----------- ----------- ----------- ----------- ------------
319,283 53,797 58,897 22,009 51,934 8,031 513,951
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss) (1).............. $ 43,101 $ 5,274 $ 536 $ 14,091 $ 14,402 $ (8,031) $ 69,373
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
SIX MONTHS ENDED MARCH 31, 1999
- ---------------------------------------
Net revenue............................ $ 738,911 $ 92,721 $ 91,402 $ 290 $ 37,134 $ -- $ 960,458
----------- --------- ----------- ----------- ----------- ----------- ------------
Salaries, cost of care and other
operating expenses................... 642,820 81,907 90,019 3,258 36,329 6,526 860,859
Equity in earnings of unconsolidated
subsidiaries......................... (10,045) -- -- -- (2,364) -- (12,409)
----------- --------- ----------- ----------- ----------- ----------- ------------
632,775 81,907 90,019 3,258 33,965 6,526 848,450
----------- --------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss) (1).............. $ 106,136 $ 10,814 $ 1,383 $ (2,968) $ 3,169 $ (6,526) $ 112,008
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
</TABLE>
- ------------------------
(1) The Company evaluates performance of its business segments based on profit
or loss from operations before depreciation and amortization, interest,
stock option expense (credit), managed care integration costs, special
charges, income taxes and minority interest ("Segment Profit"). See the
reconciliation of Segment Profit to consolidated income before provision for
income taxes, minority interest and
21
<PAGE>
extraordinary item included in Note J--"Business Segment Information" to the
Company's condensed consolidated financial statements set forth elsewhere
herein.
QUARTER ENDED MARCH 31, 1999, COMPARED TO THE SAME PERIOD IN FISCAL 1998
BEHAVIORAL MANAGED HEALTHCARE. Revenue increased 57.2% or $139.2 million,
to $382.4 million for the quarter ended March 31, 1999, from $243.2 million in
the same period in fiscal 1998. Salaries, cost of care and other operating
expenses increased 55.2%, or $119.2 million, to $335.1 million for the quarter
ended March 31, 1999, from $215.9 million in the same period in fiscal 1998.
Equity in earnings of unconsolidated subsidiaries increased $5.1 million to $6.3
million for the quarter ended March 31, 1999, from $1.2 million for the same
period in fiscal 1998. The increases resulted primarily from the acquisition of
Merit in fiscal 1998 and internal growth. Revenue and salaries, cost of care and
other operating expenses increased as a result of internal growth primarily from
the award of several new contracts in fiscal 1998 and 1999 and increased
enrollment related to the Company's existing health plan customers. Total
covered lives increased 6.3%, or 3.8 million to 64.3 million at March 31, 1999
from 60.5 million at March 31, 1998. The Company frequently records retroactive
customer settlements, which may be favorable or unfavorable, under its
commercial behavioral managed healthcare contracts. Revenue and segment profit
for the quarter ended March 31, 1999, reflect approximately $7.5 million of such
favorable settlements compared to favorable settlements of $0.7 million during
the same period in fiscal 1998. Equity in earnings of unconsolidated
subsidiaries also increased as a result of significant improvements in
negotiated rates and terms of the TennCare contract in fiscal 1998 and improved
performance at Choice. The increase in Segment Profit was also attributable to
reductions in general and administrative costs as a result of the Integration
Plan offset by an increase in bonus expense related to Magellan Behavioral
Health's short-term incentive plan of $3.9 million during the quarter ended
March 31, 1999.
HUMAN SERVICES. Revenue increased 43.3%, or $14.2 million, to $47.0 million
for the quarter ended March 31, 1999, from $32.8 million in the same period in
fiscal 1998. Salaries, cost of care and other operating expenses increased
39.3%, or $11.7 million, to $41.5 million for the quarter ended March 31, 1999
from $29.8 million in the same period in fiscal 1998. The increases were
attributable to acquisitions consummated in fiscal 1998 and fiscal 1999 and
internal growth. Placements in residential programs increased 22.6% to 3,800 at
March 31, 1999, compared to 3,100 at March 31, 1998. Total placements were 6,331
at March 31, 1999.
SPECIALTY MANAGED HEALTHCARE. Revenue increased 11.3%, or $5.1 million, to
$50.4 million for the quarter ended March 31, 1999, compared to $45.3 million in
the same period in fiscal 1998. Salaries, cost of care and other operating
expenses increased 12.0%, or $5.3 million, to $49.4 million for the quarter
ended March 31, 1999, compared to $44.1 million in the same period in fiscal
1998. The increase in revenue and salaries, cost of care and other operating
expenses was primarily related to a shift toward more risk-based business.
HEALTHCARE FRANCHISING. Revenue decreased to $0.1 million for the quarter
ended March 31, 1999, from $16.5 million in the same period in fiscal 1998.
Salaries, cost of care and other operating expenses decreased 33.3%, or $0.9
million, to $1.8 million for the quarter ended March 31, 1999, from $2.7 million
in the same period in fiscal 1998. Equity in loss of CBHS decreased to $0 for
the quarter ended March 31, 1999, from $5.6 million in the same period in fiscal
1998. The decrease in revenue resulted from uncertainties surrounding the
collectibility of franchise fees due from CBHS, for which no franchise fee
revenue was recognized during the quarter ended March 31, 1999, while $16.5
million of CBHS franchise revenue was recognized in the same period in fiscal
1998. The decrease in equity in loss of CBHS is attributable to the fact that
the Company had reduced its investment in CBHS to $0 at September 30, 1998, and
was no longer required to record its pro rata share of CBHS' loss for the
quarter ended March 31, 1999. See Note F--"Investments in Unconsolidated
Subsidiaries--Charter Behavioral Health Systems, LLC" to the Company's condensed
consolidated financial statements set forth elsewhere herein.
22
<PAGE>
HEALTHCARE PROVIDER. Revenue decreased 47.3%, or $15.7 million, to $17.5
million for the quarter ended March 31, 1999, from $33.2 million in the same
period in fiscal 1998. Salaries, cost of care and other operating expenses
decreased 40.4%, or $11.3 million, to $16.7 million for the quarter ended March
31, 1999 from $28.0 million in fiscal 1998. Equity in earnings of unconsolidated
subsidiaries increased to $1.2 million for the quarter ended March 31, 1999,
from $0 in the same period in fiscal 1998. These changes resulted primarily from
the conversion of five provider joint ventures from consolidation to the equity
method on October 1, 1998. See "--Recent Accounting Pronouncements--EITF 96-16".
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
46.2%, or $6.0 million, to $19.0 million for the quarter ended March 31, 1999,
from $13.0 million in the same period in fiscal 1998. The increase was primarily
attributable to depreciation and amortization resulting from the Merit
acquisition, depreciation related to recent capital expenditures and
amortization related to the Aetna Payment.
INTEREST, NET. Interest expense, net, increased 38.3%, or $6.7 million, to
$24.2 million for the quarter ended March 31, 1999, from $17.5 million in the
same period in fiscal 1998. The increase was primarily the result of interest
expense incurred on borrowings used to fund the Merit acquisition and related
transactions.
OTHER ITEMS. The Company recorded managed care integration costs of $2.1
million for the quarter ended March 31, 1999, compared to $11.1 million in the
same period in fiscal 1998. For a more complete discussion of managed care
integration costs, see Note I--"Managed Care Integration Plan and Costs" to the
Company's condensed consolidated financial statements set forth elsewhere
herein.
The Company recorded special charges, net, of $0.1 million during the
quarter and the six months ended March 31, 1998, for the net loss on the sale of
assets formerly used in its healthcare provider business. The Company recorded
special charges, net, of $2.3 million during the quarter and the six months
ended March 31, 1999, consisting primarily of executive severance of $0.9
million and the net loss of $1.4 million on the sale of assets formerly used in
its healthcare provider business.
Minority interest was immaterial for the quarter ended March 31, 1999,
compared to $1.1 million in the same period in fiscal 1998. This decrease
resulted primarily from the conversion of five provider joint ventures from
consolidation to the equity method (See "--Recent Accounting
Pronouncements--EITF 96-16") and from the Green Spring Minority Stockholder
Conversion in January 1998.
The Company recorded an extraordinary loss on early extinguishment of debt
of approximately $33.0 million, net of tax benefit, during the quarter ended
March 31, 1998, related primarily to financing the Merit acquisition.
SIX MONTHS ENDED MARCH 31, 1999, COMPARED TO THE SAME PERIOD IN FISCAL 1998
BEHAVIORAL MANAGED HEALTHCARE. Revenue increased 103.9% or $376.5 million,
to $738.9 million for the six months ended March 31, 1999, from $362.4 million
in the same period in fiscal 1998. Salaries, cost of care and other operating
expenses increased 101.0%, or $323.0 million, to $642.8 million for the six
months ended March 31, 1999, from $319.8 million in the same period in fiscal
1998. Equity in earnings of unconsolidated subsidiaries increased $9.4 million
to $10.0 million for the six months ended March 31, 1999, from $0.6 million for
the same period in fiscal 1998. The increases resulted primarily from the HAI
and Merit acquisitions and internal growth, as well as factors mentioned above
in the comparison of the quarter ended March 31, 1999 to the same period in
fiscal 1998.
HUMAN SERVICES. Revenue increased 56.9%, or $33.6 million, to $92.7 million
for the six months ended March 31, 1999, from $59.1 million in the same period
in fiscal 1998. Salaries, cost of care and other operating expenses increased
52.2%, or $28.1 million, to $81.9 million for the six months ended March 31,
1999 from $53.8 million in the same period in fiscal 1998. The increases
resulted primarily from the
23
<PAGE>
aforementioned factors for the quarter ended March 31, 1999 compared to the
quarter ended March 31, 1998.
SPECIALTY MANAGED HEALTHCARE. Revenue increased 53.9%, or $32.0 million, to
$91.4 million for the six months ended March 31, 1999, compared to $59.4 million
in the same period in fiscal 1998. Salaries, cost of care and other operating
expenses increased 52.8%, or $31.1 million, to $90.0 million for the six months
ended March 31, 1999, compared to $58.9 million in the same period in fiscal
1998. The increase in revenue and salaries, cost of care and other operating
expenses was primarily related to the Allied acquisition. Allied's revenues and
salaries, cost of care and other operating expenses were $91.0 million and $88.2
million, respectively, for the six months ended March 31, 1999, compared to
$59.1 million and $55.8 million, respectively, for the six months ended March
31, 1998.
HEALTHCARE FRANCHISING. Revenue decreased to $0.3 million for the six
months ended March 31, 1999, from $36.1 million in the same period in fiscal
1998. Salaries, cost of care and other operating expenses decreased 34.0%, or
$1.7 million, to $3.3 million for the six months ended March 31, 1999, from $5.0
million in the same period in fiscal 1998. Equity in loss of CBHS decreased to
$0 for the six months ended March 31, 1999, from $17.1 million in the same
period in fiscal 1998. The changes resulted primarily from the aforementioned
factors for the quarter ended March 31, 1999 compared to the quarter ended March
31, 1998. See Note F--"Investments in Unconsolidated Subsidiaries--Charter
Behavioral Health Systems, LLC" to the Company's condensed consolidated
financial statements set forth elsewhere herein.
HEALTHCARE PROVIDER. Revenue decreased 44.0%, or $29.2 million, to $37.1
million for the six months ended March 31, 1999, from $66.3 million in the same
period in fiscal 1998. Salaries, cost of care and other operating expenses
decreased 30.1%, or $15.6 million, to $36.3 million for the six months ended
March 31, 1999 from $51.9 million in fiscal 1998. Equity in earnings of
unconsolidated subsidiaries increased to $2.4 million for the six months ended
March 31, 1999, from $0 in the same period in fiscal 1998. These changes
resulted primarily from the conversion of five provider joint ventures from
consolidation to the equity method. See "--Recent Accounting
Pronouncements--EITF 96-16". During the six months ended March 31, 1998, the
Company recorded reductions of expenses of $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 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
87.9%, or $17.5 million, to $37.4 million for the six months ended March 31,
1999, from $19.9 million in the same period in fiscal 1998. The increase was
primarily attributable the aforementioned factors for the three months ended
March 31, 1999 compared to the same period in fiscal 1998.
INTEREST, NET. Interest expense, net, increased 94.0%, or $23.4 million, to
$48.3 million for the six months ended March 31, 1999, from $24.9 million in the
same period in fiscal 1998. The increase was primarily the result of interest
expense incurred on borrowings used to fund the Merit acquisition and related
transactions.
OTHER ITEMS. Stock option expense for the six months ended March 31, 1999,
was not material compared to a credit of $3.5 million in fiscal 1998 primarily
due to fluctuations in the market price of the Company's stock in fiscal 1998.
The Company recorded managed care integration costs of $3.9 million for the
six months ended March 31, 1999, compared to $11.1 million in the same period in
fiscal 1998. For a more complete
24
<PAGE>
discussion of managed care integration costs, see Note I--"Managed Care
Integration Plan and Costs" to the Company's condensed consolidated financial
statements set forth elsewhere herein.
The Company's effective income tax rate increased to 57.8% for the six
months ended March 31, 1999, compared to 45.1% in the same period in fiscal
1998. The increase was primarily attributable to the increase in non-deductible
goodwill amortization resulting from the Merit acquisition of $9.0 million for
the six months ended March 31, 1999, compared to $2.1 million for the same
period in fiscal 1998.
Minority interest decreased 90.0%, or $3.6 million, to $0.4 million,
compared to $4.0 million in the same period in fiscal 1998. This decrease
resulted primarily from the conversion of five provider joint ventures from
consolidation to the equity method (See "--Recent Accounting
Pronouncements--EITF 96-16") and from the Green Spring Minority Stockholder
Conversion in January 1998.
OUTLOOK--RESULTS OF OPERATIONS
SALE OF EUROPEAN PSYCHIATRIC PROVIDER OPERATIONS. On April 9, 1999, the
Company sold its European psychiatric provider operations. See Note K --
"Subsequent Event" to the Company's condensed consolidated financial statements
set forth elsewhere herein. The sale of the European psychiatric provider
operations would have reduced the Company's net income by approximately $1.6
million, or $.05 per diluted share, on a pro forma basis (assuming the sale was
consummated on October 1, 1997) for the fiscal year ended September 30, 1998.
IMPACT OF THE INTEGRATION PLAN ON RESULTS OF OPERATIONS. As of March 31,
1999, the Company had approximately 64.3 million covered lives under behavioral
managed healthcare contracts. The Company believes its behavioral managed
healthcare business segment has the leading market position in each of the major
product markets in which it competes, according to enrollment data reported in
the industry trade publication entitled "Managed Behavioral Health Market Share
in the United States 1997-1998" published by Open Minds, Gettysburg,
Pennsylania. The Company believes that the Merit acquisition created
opportunities for the Company to achieve significant cost savings in its
behavioral managed healthcare business. 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 in its behavioral managed healthcare business on an annual basis by
September 30, 1999. Such cost savings are measured relative to the combined
operating expenses of Green Spring, HAI and Merit prior to the Merit
acquisition. The Company spent approximately $4.1 million and $8.8 million
during the quarter and the six months ended March 31, 1999, respectively, and
expects to spend up to $6.0 million during the remainder of fiscal 1999 in
connection with achieving such cost savings.
The Company expects to record additional managed care integration costs
during future periods to the extent the integration of Green Spring, HAI and
Merit results in additional facility closures at HAI and Green Spring and for
integration costs incurred that benefit future periods. The full implementation
of the Integration Plan is expected to be completed by fiscal 2000.
BEHAVIORAL MANAGED HEALTHCARE RESULTS OF OPERATIONS. The Company's
behavioral managed healthcare Segment Profits are subject to significant
fluctuations on a quarterly basis. These potential earnings fluctuations may
result from: (i) changes in utilization levels by enrolled members of the
Company's risk-based contracts; (ii) performance-based contractual adjustments
to revenue, reflecting utilization results or other performance measures; (iii)
retroactive contractual adjustments under commercial contracts and CHAMPUS
contracts; (iv) retrospective membership adjustments; (v) timing of
implementation of new contracts and enrollment changes and (vi) pricing
adjustments upon long-term contract renewals.
The Company's contract with the State of Tennessee to manage the behavioral
healthcare benefits for the State's TennCare program ("TennCare Contract")
represented approximately 15% of the Company's
25
<PAGE>
behavioral managed care revenue and approximately 10% of the Company's
consolidated revenue in fiscal 1998. The TennCare Contract contains provisions
that limit the Company's profit, subject to the carryforward of losses incurred
in prior periods. The Company's profit under the TennCare Contract benefitted
from the carryforward of losses incurred in prior periods during the quarter and
the six months ended March 31, 1999. The Company's profit under the TennCare
Contract may be lower in future quarters as a result of these contract
provisions.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company's net cash provided by (used in)
operating activities was $(22.3) million and $31.4 million for the six months
ended March 31, 1998 and 1999, respectively. The increase in cash provided by
operating activities in fiscal 1999 compared to fiscal 1998 was primarily the
result of (i) reduction in income taxes paid, net of refunds received, of $10.1
million, (ii) reduction in payments of previously reserved claims of $8.2
million, (iii) increases in cash flows from operations as a result of the
Managed Care Acquisitions, offset by reductions in franchise fees collected from
CBHS of $26.1 million and (iv) increases in interest paid of $12.5 million.
INVESTING ACTIVITIES. Capital expenditures increased 93.3%, or $12.6
million, to $26.1 million for the six months ended March 31, 1999, compared to
$13.5 million in the same period in fiscal 1998. This increase was due primarily
to: i) capital expenditures at businesses acquired in fiscal 1998 and ii)
increased capital expenditures in the Company's Behavioral segment related to:
a) the Integration Plan (See Note I--"Managed Care Integration Plan and Costs"
to the Company's condensed consolidated financial statements set forth elsewhere
herein), and b) acceleration of capital expenditures related to year 2000
computer issues (See "--Potential Impact of Year 2000 Computer Issues").
The Company used $55.6 million of funds, net of cash acquired, during the
six months ended March 31, 1999 for acquisitions and investments in businesses,
which included (i) the Aetna Payment of $60.0 million, (ii) contingent
consideration paid to the former owners of Allied of $4.5 million and (iii)
other acquisitions and payments of transaction costs of $11.1 million offset by
the refund of the $20.0 million placed in escrow upon consummation of the Allied
Acquisition.
The Company utilized $988.9 million in funds, net of cash acquired, for
acquisitions and investments in businesses, including the Managed Care
Acquisitions, during the six months ended March 31, 1998.
The Company's condensed consolidated balance sheet at March 31, 1999,
reflects a reduction in cash and cash equivalents of $21.1 million from the
September 30, 1998 balance which is related to the conversion of several
subsidiaries from consolidation to the equity method. See "--Recent Accounting
Pronouncements--EITF 96-16". This reduction in cash and cash equivalents appears
as net cash used in investing activities in the Company's condensed consolidated
statement of cash flows for the six months ended March 31, 1999, but does not
represent an actual reduction of cash and cash equivalents at the affected
subsidiaries. Additionally, the Company received $15.2 million in distributions
from unconsolidated subsidiaries, including those referred to above, during the
six months ended March 31, 1999. See Note F--"Investments in Unconsolidated
Subsidiaries" to the Company's condensed consolidated financial statements set
forth elsewhere herein.
The Company received proceeds of approximately $6.9 million, net of
transaction costs, from the sale of assets formerly used in its healthcare
provider business during the six months ended March 31, 1999.
FINANCING ACTIVITIES. The Company repaid $7.5 million of debt obligations
outstanding during the six months ended March 31, 1999, including $6.6 million
of borrowings outstanding under the Term Loan Facilities (as defined).
Borrowings outstanding under the Revolving Facility (as defined) increased $10.0
million during the six months ended March 31, 1999 to $50.0 million as of March
31, 1999. As of March 31, 1999, the Company had $82.4 million of availability
under the Revolving Facility (as defined),
26
<PAGE>
excluding $17.6 million of availability reserved for certain letters of credit.
The Company was in compliance with all debt covenants as of March 31, 1999.
The Company repurchased approximately 545,000 shares of its common stock for
approximately $12.5 million during the six months ended March 31, 1998.
OUTLOOK-LIQUIDITY AND CAPITAL RESOURCES
DEBT SERVICE OBLIGATIONS. The interest payments on the Company's $625.0
million 9% Series A Senior Subordinated Notes due 2008 (the "Notes") and
interest and principal payments on indebtedness outstanding pursuant to the
Company's $700.0 million senior secured bank credit agreement (the "Credit
Agreement") represent significant liquidity requirements for the Company.
Borrowings under the 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 Credit Agreement include
$543.4 million under a term loan facility (the "Term Loan Facility") and up to
$150.0 million under a revolving facility (the "Revolving Facility"). During the
six months ended March 31, 1999, the Company was required to begin making
principal payments with respect to the Term Loan Facility. On April 14, 1999,
the Company used a portion of the proceeds from the sale of its European
psychiatric provider operations to make a mandatory unscheduled payment of
approximately $31.2 million on amounts outstanding under the Term Loan Facility.
See Note K--"Subsequent Event" to the Company's condensed consolidated financial
statements set forth elsewhere herein. The Company is required to repay the
principal amount of borrowings outstanding under the Term Loan Facility, after
effecting for the $31.2 million unscheduled payment referred to above, and the
principal amount of the Notes in the years and amounts set forth in the
following table (in millions):
<TABLE>
<CAPTION>
REMAINING
FISCAL YEAR PRINCIPAL AMOUNT
- ------------- -------------------
<S> <C>
1999....... $ 12.4
2000....... 30.5
2001....... 36.7
2002....... 46.6
2003....... 86.7
2004....... 147.6
2005....... 124.2
2006....... 27.5
2007....... --
2008....... $ 625.0
</TABLE>
In addition, any amounts outstanding under the Revolving Facility mature in
February 2004.
POTENTIAL PURCHASE PRICE ADJUSTMENTS. In December 1997, the Company
purchased HAI from Aetna for approximately $122.1 million, excluding transaction
costs. In addition, the Company incurred the obligation to make contingent
payments to Aetna which may total up to $60.0 million annually over the
five-year period subsequent to closing. The Company is obligated to make
contingent payments under two separate calculations as follows: In respect of
each Contract Year (as defined), the Company may be required to pay to Aetna the
"Tranche 1 Payments" (as defined) and the "Tranche 2 Payments" (as defined).
"Contract Year" means each of the twelve-month periods ending on the last day of
December in 1998, 1999, 2000, 2001, and 2002.
Upon the expiration of each Contract Year, the Tranche 1 Payment shall vest
with respect to such Contract Year in an amount equal to the product of (i) the
Tranche 1 Cumulative Incremental Members (as defined) for such Contract Year and
(ii) the Tranche 1 Multiplier (as defined) for such Contract Year. The vested
amount of Tranche 1 Payment shall be zero with respect to any Contract Year in
which the
27
<PAGE>
Tranche 1 Cumulative Incremental Members is a negative number. Furthermore, in
the event that the number of Tranche 1 Cumulative Incremental Members with
respect to any Contract Year is a negative number due to a decrease in the
number of Tranche 1 Cumulative Incremental Members for such Contract Year (as
compared to the immediately preceding Contract Year), Aetna will forfeit the
right to receive a certain portion (which may be none or all) of the vested and
unpaid amounts of the Tranche 1 Payment relating to preceding Contract Years.
"Tranche 1 Cumulative Incremental Members" means, with respect to any
Contract Year, (i) the number of Equivalent Members (as defined) serviced by the
Company during such Contract Year for Tranche 1 Members, minus (ii) (A) for each
Contract Year other than the initial Contract Year, the number of Equivalent
Members serviced by the Company for Tranche 1 Members during the immediately
preceding Contract Year or (B) for the initial Contract Year, the number of
Tranche 1 Members as of September 30, 1997, subject to certain upward
adjustments. There were 3,761,253 Tranche 1 Members for the initial Contract
Year, prior to such upward adjustments. "Tranche 1 Members" are members of
managed behavioral healthcare plans for whom the Company provides services in
any of specified categories of products or services. "Equivalent Members" for
any Contract Year equals the aggregate Member Months for which the Company
provides services to a designated category or categories of members during the
applicable Contract Year divided by 12. "Member Months" means, for each member,
the number of months for which the Company provides services and is compensated.
The "Tranche 1 Multiplier" is $80, $50, $40, $25, and $20 for the Contract Years
1998, 1999, 2000, 2001, and 2002, respectively.
For each Contract Year, the Company is obligated to pay to Aetna the lesser
of (i) the vested portion of the Tranche 1 Payment for such Contract Year and
the vested and unpaid amount relating to prior Contract Years as of the end of
the immediately preceding Contract Year and (ii) $25.0 million. To the extent
that the vested and unpaid portion of the Tranche 1 Payment exceeds $25.0
million, the Tranche 1 Payment remitted to Aetna shall be deemed to have been
paid first from any vested but unpaid amounts from previous Contract Years in
order from the earliest Contract Year for which vested amounts remain unpaid to
the most recent Contract Year at the time of such calculation. Except with
respect to the Contract Year ending in 2002, any vested but unpaid portion of
the Tranche 1 Payment shall be available for payment to Aetna in future Contract
Years, subject to certain exceptions. All vested but unpaid amounts of Tranche 1
Payments shall expire following the payment of the Tranche 1 Payment in respect
to the Contract Year ending in 2002, subject to certain exceptions. In no event
shall the aggregate Tranche 1 Payments to Aetna exceed $125.0 million.
Upon the expiration of each Contract Year, the Tranche 2 payment shall be an
amount equal to the lesser of: (a) (i) the product of (A) the Tranche 2
Cumulative Members (as defined) for such Contract Year and (B) the Tranche 2
Multiplier (as defined) applicable to such number of Tranche 2 Cumulative
Members, minus (ii) the aggregate of the Tranche 2 Payments paid to Aetna for
all previous Contract Years and (b) $35.0 million. The amount shall be zero with
respect to any Contract Year in which the Tranche 2 Cumulative Members is a
negative number.
"Tranche 2 Cumulative Members" means, with respect to any Contract Year, (i)
the Equivalent Members serviced by the Company during such Contract Year for
Tranche 2 Members, minus (ii) the Tranche 2 Members as of September 30, 1997,
subject to certain upward adjustments. There were 936,391 Tranche 2 Members
prior to such upward adjustments. "Tranche 2 Members" means Members for whom the
Company provides products or services in the HMO category. The "Tranche 2
Multiplier" with respect to each Contract Year is $65 in the event that the
Tranche 2 Cumulative Members are less than 2,100,000 and $70 if more than or
equal to 2,100,000.
For each Contract Year, the Company shall pay to Aetna the amount of Tranche
2 Payment payable for such Contract Year. All rights to receive Tranche 2
Payment shall expire following the payment of the Tranche 2 Payment in respect
to the Contract Year ending in 2002, subject to certain exceptions.
28
<PAGE>
Notwithstanding anything herein to the contrary, in no event shall the aggregate
Tranche 2 Payment to Aetna exceed $175.0 million, subject to certain exceptions.
The Company paid $60.0 million to Aetna for both the full Tranche 1 Payment
and the full Tranche 2 Payment for the Contract Year ended December 31, 1998, on
March 26, 1999. Accordingly, the Company recorded $60.0 million of goodwill and
other intangible assets related to the purchase of HAI during the six months
ended March 31, 1999. The Company borrowed $50.0 million under the Revolving
Facility to help meet this obligation.
In December, 1997 the Company purchased Allied for $70.0 million, excluding
transaction costs. The purchase price the Company originally paid for Allied
consisted of a $50.0 million payment to the former owners of Allied and a $20.0
million deposit into an interest-bearing escrow account and was subject to
increase or decrease based on the operating performance of Allied during the
three years following the closing. The Company was required to pay up to $60.0
million, of which $20.0 million would have been distributed from the escrow
account, during the three years following the closing of the Allied acquisition
if Allied's performance exceeded certain earnings targets.
During the quarter ended December 31, 1998, the Company and the former
owners of Allied amended the Allied purchase agreement (the "Allied
Amendments"). The Allied Amendments resulted in the following changes to the
original terms of the Allied purchase agreement:
- The original $20.0 million placed in escrow by the Company at the
consummation of the Allied acquisition, plus accrued interest, was repaid
to the Company. This $20.0 million was included in the $70.0 million
originally paid for Allied.
- The Company paid the former owners of Allied $4.5 million additional
consideration which was recorded as goodwill.
- The Company capped future obligations with respect to additional
contingent payments for the purchase of Allied at $3 million. The earnings
targets which must be met by Allied for this amount to be paid were
revised upwards as well.
By virtue of acquiring Merit, the Company may be required to make certain
contingent payments in fiscal 1999 to the former shareholders of CMG Health,
Inc. ("CMG"), which was acquired by Merit in September, 1997, based upon the
performance of three CMG customer contracts. No contingent consideration will be
payable to the former shareholders of CMG based on the performance of two of the
three CMG customer contracts at December 31, 1998. The Company may still be
required to pay contingent consideration to the former shareholders of CMG
depending on the financial performance of Choice. The payment of contingent
consideration to the former shareholders of CMG depends on the financial
performance of Choice from October 1, 1996 to June 30, 1997, which is subject to
a CHAMPUS Adjustment the Company expects to receive in fiscal 1999. Such
contingent payments are subject to an aggregate maximum of $23.5 million. The
Company has initiated legal proceedings against certain former owners of CMG
with respect to representations made by such former owners in conjunction with
Merit's acquisition of CMG. The amount and timing of contingent payments to CMG,
if any, are subject to the outcome of these proceedings.
REVOLVING FACILITY. 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. At March 31, 1999, the Company had
approximately $82.4 million of availability under the Revolving Facility. The
Company estimates that it will spend approximately $50.0 million for capital
expenditures in fiscal 1999. The majority of the Company's anticipated capital
expenditures relate to management information systems and related equipment. The
Company believes that the cash flows generated from its operations, together
with amounts available for borrowing under the Revolving Facility, should be
sufficient to fund its debt service requirements, anticipated capital
expenditures, contingent payments with respect to HAI and CMG, and other
investing and financing activities. The Company's future operating performance
and ability to service
29
<PAGE>
or refinance the Notes or to extend or refinance the indebtedness outstanding
pursuant to the 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.
RESTRICTIVE FINANCING COVENANTS. The Credit Agreement imposes restrictions
on the Company's ability to make capital expenditures, and both the Credit
Agreement and the indenture governing the Notes (the "Indenture") limit the
Company's ability to incur additional indebtedness. Such restrictions, together
with the highly leveraged financial condition of the Company, may limit the
Company's ability to respond to market opportunities. The covenants contained in
the 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.
STRATEGIC ALTERNATIVES TO REDUCE LONG-TERM DEBT AND IMPROVE LIQUIDITY. The
Company's sale of its European psychiatric provider operations in April 1999
represents another step in the Company's strategy of exiting its healthcare
provider and healthcare franchising business segments in order to reduce long-
term debt and improve liquidity. The Company is currently involved in
negotiations with various parties to divest its remaining provider and
franchising interests. There can be no assurance that the Company will be able
to divest its remaining provider and franchising interests or that the
divestiture of such interests would result in significant reductions of
long-term debt or improvements in liquidity.
The Company is also reviewing various strategic alternatives to improve its
capital structure and liquidity, including public or private capital
transactions. There can be no assurance that the Company will be able to
consummate any capital transaction that will improve its capital structure
and/or liquidity.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires all
nongovernmental entities to expense costs of start-up activities as those costs
are incurred. Start-up costs, as defined by SOP 98-5, include pre-operating
costs, pre-opening costs and organization costs.
SOP 98-5 becomes effective for financial statements for fiscal years
beginning after December 15, 1998. At adoption, a company must record a
cumulative effect of a change in accounting principle to write off any
unamortized start-up costs remaining on the balance sheet when SOP 98-5 is
adopted. Prior year financial statements cannot be restated. The Company adopted
SOP 98-5 effective October 1, 1998. The Company's adoption of SOP 98-5 had no
impact on its financial position or results of operations.
Emerging Issues Task Force Issue 96-16, "Investor's Accounting for an
Investee When the Investor Has a Majority of the Voting Interest but a Minority
Shareholder or Shareholders Have Certain Approval or Veto Rights" ("EITF 96-16")
supplements the guidance contained in AICPA Accounting Research Bulletin 51,
"Consolidated Financial Statements", and in Statement of Financial Accounting
Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries" ("ARB
51/FAS 94"), about the conditions under which the Company's consolidated
financial statements should include the financial position, results of
operations and cash flows of subsidiaries which are less than wholly-owned along
with those of the Company and its subsidiaries.
In general, ARB 51/FAS 94 requires consolidation of all majority-owned
subsidiaries except those for which control is temporary or does not rest with
the majority owner. Under the ARB 51/FAS 94 approach, instances of control not
resting with the majority owner were generally regarded to arise from such
events as the legal reorganization or bankruptcy of the majority-owned
subsidiary. EITF 96-16 expands the definition of instances in which control does
not rest with the majority owner to include those where
30
<PAGE>
significant approval or veto rights, other than those which are merely
protective of the minority shareholder's interest, are held by the minority
shareholder or shareholders ("Substantive Participating Rights"). Substantive
Participating Rights include, but are not limited to: i) selecting, terminating
and setting the compensation of management responsible for implementing the
majority-owned subsidiary's policies and procedures and ii) establishing
operating and capital decisions of the majority-owned subsidiary, including
budgets, in the ordinary course of business.
The provisions of EITF 96-16 apply to new investment agreements made after
July 24, 1997, and to existing agreements which are modified after such date.
The Company has made no new investments, and has modified no existing
investments, to which the provisions of EITF 96-16 would have applied.
In addition, the transition provisions of EITF 96-16 must be applied to
majority-owned subsidiaries previously consolidated under ARB 51/FAS 94 for
which the underlying agreements have not been modified in financial statements
issued for years ending after December 15, 1998 (fiscal 1999 for the Company).
The adoption of the transition provisions of EITF 96-16 on October 1, 1998 had
the following effect on the Company's consolidated financial position (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 1,
1998
-----------
<S> <C>
Increase (decrease) in:
Cash and cash equivalents......................................................... $ (21,092)
Other current assets.............................................................. (9,538)
Long-term assets.................................................................. (30,049)
Investment in unconsolidated subsidiaries......................................... 26,498
-----------
Total assets...................................................................... $ (34,181)
-----------
-----------
Current liabilities............................................................... $ (10,381)
Minority interest................................................................. (23,800)
-----------
Total liabilities................................................................. $ (34,181)
-----------
-----------
</TABLE>
POTENTIAL IMPACT OF YEAR 2000 COMPUTER ISSUES
OVERVIEW. The year 2000 computer problem is the inability of computer
systems which store dates by using the last two digits of the year (i.e. "98"
for "1998") to reliably recognize that dates after December 31, 1999 are later
than, and not before, 1999. For instance, the date January 1, 2000, may be
mistakenly interpreted as January 1, 1900, in calculations involving dates on
systems which are non-year 2000 compliant.
The Company relies on information technology ("IT") systems and other
systems and facilities such as telephones, building access control systems and
heating and ventilation equipment ("Embedded Systems") to conduct its business.
These systems are potentially vulnerable to year 2000 problems due to their use
of date information.
The Company also has business relationships with customers and health care
providers and other critical vendors who are themselves reliant on IT and
Embedded Systems to conduct their businesses.
STATE OF READINESS. The Company's IT systems are largely decentralized,
with each major operating unit having its own standards for systems which
include both purchased and internally-developed software. The Company's IT
hardware infrastructure is built mainly around mid-range computers and IBM
PC-compatible servers and desktop systems.
The Company's principal means of ensuring year 2000 readiness for purchased
software has been the replacement, upgrade or repair of non-compliant systems.
This replacement process would have been undertaken for business reasons
irrespective of the year 2000 problem; however, it would, more than likely,
31
<PAGE>
have been implemented over a longer period of time. The Company's
internally-developed software was either designed to be year 2000 ready from
inception or is in the process of being modified to be year 2000 ready.
Approximately 70% of the Company's mid-range IT hardware has been remediated to
a state of year 2000 readiness, with the remainder scheduled to be remediated by
the end of the third quarter of fiscal 1999. Most of the Company's non-compliant
IBM PC-compatible servers and desktops have been replaced, with the remainder
expected to be replaced by the end of fiscal 1999.
Additionally, the Company is in the process of integrating recently acquired
businesses and their associated IT systems. A primary focus of the integration
is on standardization of systems where possible, including ensuring the year
2000 readiness of the surviving systems.
Each of the Company's major operating units has a Chief Information Officer
who is responsible for ensuring that all year 2000 issues are addressed and
mitigated before any computational problems related to dates after December 31,
1999, occur.
The Company's plan for IT systems consists of several phases, primarily:
(i) Inventory--identifying all IT systems and the magnitude of year 2000
readiness risk of each according to its potential business impact;
(ii) Date assessment--identifying IT systems that use date functions and
assessing them for year 2000 functionality;
(iii) Remediation--reprogramming, replacing or upgrading where necessary,
inventoried items to ensure they are year 2000 ready; and
(iv) Testing and certification--testing the code modifications and new
inventory with other associated systems, including extensive date
testing and performing quality assurance testing to ensure successful
operation in the post-1999 environment.
The Company has substantially completed the inventory and assessment phases
for substantially all of its IT systems. The Company's IT systems are currently
in the remediation and testing and certification phases. The Company plans to
complete the remediation, testing and certification of all of its IT systems by
the end of fiscal 1999.
The Company leases most of the office space in which its reliance on
Embedded Systems presents a potential problem and is currently working with the
respective lessors to identify and correct any potential year 2000 problems
related to these Embedded Systems.
The Company believes that its year 2000 projects generally are on schedule.
EXTERNAL RELATIONSHIPS. The Company also faces the risk that one or more of
its critical suppliers or customers ("External Relationships") will not be able
to interact with the Company due to the third party's inability to resolve its
own year 2000 issues, including those associated with its own External
Relationships. The Company has completed its inventory of External Relationships
and risk rated each External Relationship based upon the potential business
impact, available alternatives and cost of substitution. The Company is
attempting to determine the overall year 2000 readiness of its External
Relationships. In the case of significant customers and mission critical
suppliers such as banks, telecommunications providers and other utilities and IT
vendors, the Company is engaged in discussions with the third parties and is
attempting to obtain detailed information as to those parties' year 2000 plans
and state of readiness. The Company, however, does not have sufficient
information at the current time to predict whether its External Relationships
will be year 2000 ready.
YEAR 2000 COSTS. Total costs incurred solely for remediation of potential
year 2000 problems are
currently estimated to be approximately $3.3 million in fiscal 1999. A large
majority of these costs are expected to be incremental expenses that will not
recur in the year 2000 or thereafter. The Company expenses these costs as
incurred and funds these costs through operating cash flows. In addition, the
32
<PAGE>
Company estimates that it will accelerate approximately $5.0 million of capital
expenditures that would have been budgeted for future periods into fiscal 1999
to ensure year 2000 readiness for outdated systems.
Year 2000 readiness is critical to the Company. The Company has redeployed
some resources from non-critical system enhancements to address year 2000
issues. Due to the importance of IT systems to the Company's business,
management has deferred non-critical systems enhancements to become year 2000
ready. The Company does not expect these redeployments and deferrals to have a
material impact on the Company's financial condition or results of operations.
RISKS AND CONTINGENCY/RECOVERY PLANNING. If the Company's year 2000 issues
were unresolved, the most reasonably likely worst case scenario would include,
among other possibilities, the inability to accurately and timely authorize and
process benefits and claims, accurately bill customers, assess claims exposure,
determine liquidity requirements, report accurate data to management,
stockholders, customers, regulators and others, business interruptions or
shutdowns, financial losses, reputational harm, loss of significant customers,
increased scrutiny by regulators and litigation related to year 2000 issues. The
Company is attempting to limit the potential impact of the year 2000 by
monitoring the progress of its own year 2000 project and those of its critical
External Relationships and by developing contingency/recovery plans. The Company
cannot guarantee that it will be able to resolve all of its year 2000 issues.
Any critical unresolved year 2000 issues at the Company or its External
Relationships, however, could have a material adverse effect on the Company's
results of operations, liquidity or financial condition.
The Company has developed, or is developing, contingency/recovery plans
aimed at ensuring the continuity of critical business functions before and after
December 31, 1999. As part of that process, the Company has substantially
completed the development of manual work alternatives to automated processes
which will both ensure business continuity and provide a ready source of input
to affected systems when they are returned to an operational status. These
manual alternatives presume, however, that basic infrastructure such as
electrical power and telephone service, as well as purchased systems which are
advertised to be year 2000 ready by their manufacturers (primarily personal
computers and productivity software) will remain unaffected by the year 2000
problem.
33
<PAGE>
PART II--OTHER INFORMATION
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ----------------------------------------------------------------------------------------------
<C> <S>
2(a) Share Purchase Agreement, dated April 2, 1999, by and among the Company, Charter Medical
International, S.A., Inc. (a wholly owned subsidiary of the Company), Investment AB Bure, and
CMEL Holding Limited (a wholly owned subsidiary of Investment AB Bure), filed with the
Company's current report on Form 8-K, which was filed on April 12, 1999, and is incorporated
herein by reference.
2(b) Stock Purchase Agreement, dated April 2, 1999, by and among the Company, Charter Medical
International, S.A., Inc. (a wholly owned subsidiary of the Company), Investment AB Bure, and
Grogrunden 515 AB (a wholly owned subsidiary of Investment AB Bure), filed with the Company's
current report on Form 8-K, which was filed on April 12, 1999, and is incorporated herein by
reference.
2(c) First Amendment to Share Purchase Agreement, dated April 8, 1999, by and among the Company,
Charter Medical International, S.A., Inc. (a wholly owned subsidiary of the Company),
Investment AB Bure, and CMEL Holding Limited (a wholly owned subsidiary of Investment AB
Bure), filed with the Company's current report on Form 8-K, which was filed on April 12, 1999,
and is incorporated herein by reference.
2(d) First Amendment to Stock Purchase Agreement, dated April 8, 1999, among the Company, Charter
Medical International, S.A., Inc. (a wholly owned subsidiary of the Company), Investment AB
Bure, and CMEL Holding Limited (a wholly owned subsidiary of Investment AB Bure), filed with
the Company's current report on Form 8-K, which was filed on April 12, 1999, and is
incorporated herein by reference.
*10(a) Magellan Corporate Short-Term Incentive Plan for the fiscal year ended September 30, 1999.
*10(b) Magellan Behavioral Health Short-Term Incentive Plan for the fiscal year ended September 30,
1999.
*10(c) Employment Agreement, dated February 11, 1999, between the Company and Clarissa C. Marques,
Ph.D., Executive Vice President of the Company.
*10(d) Amendment to the Company's Directors' Stock Option Plan.
*10(e) Amendment to the Company's 1996 Directors' Stock Option Plan.
*10(f) Amendment to the Company's 1994 Stock Option Plan.
*10(g) Amendment to the Company's 1996 Stock Option Plan.
*10(h) Amendment to the Company's 1997 Stock Option Plan.
*10(i) Amended 1998 Stock Option Plan of the Company.
*10(j) Third Amendment to the Company's 1998 Stock Option Plan.
27 Financial Data Schedule
- ------------------------
* Constitutes a management contract or compensatory plan arrangement.
</TABLE>
(b) Reports on Form 8-K
None.
34
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
MAGELLAN HEALTH SERVICES, INC.
(Registrant)
Date: May 14, 1999 /s/ CLIFFORD W. DONNELLY
------------------------------------
Clifford W. Donnelly
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: May 14, 1999 /s/ JEFFREY T. HUDKINS
------------------------------------
Jeffrey T. Hudkins
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
35
<PAGE>
EXHIBIT 10(a)
MAGELLAN CORPORATE SHORT-TERM INCENTIVE PLAN
(Effective October 1, 1998)
PURPOSE
The purpose of Magellan Corporate Short-Term Incentive Plan (the "Plan") is to
reward employees for attaining key measures of success during the fiscal year
and for contributing to the overall performance of Magellan Health Services,
Inc. ("Magellan" or the "Company").
APPROVAL
The Plan is subject to approval by the Board of Directors of Magellan Health
Services, Inc. for the fiscal year beginning October 1, 1998.
DESCRIPTION OF THE PLAN
The Plan will be driven by the financial measures that are intended to align the
interests of the Company's stockholders, lenders, bondholders and employees. The
Plan is driven by the budgeted financial measures (the "Targets") approved by
the Company's Board of Directors or by the Compensation Committee of such Board
of Directors. Any short-term incentive available, in whole or in part, will be
based upon the following additive factors.
33 1/3% - Consolidated cash flows from operations excluding taxes,
interest paid (net of interest income), Charter franchise
revenues and Medicare cost report settlements, including
distributions from unconsolidated subsidiaries and changes in
assets restricted for claims (offshore) and insurance
settlements, less capital expenditures ("Consolidated Cash
Flows").
66 2/3% - Consolidated diluted EPS, excluding Charter franchise revenues,
cost report settlements, managed care integration costs and
unusual items.
A significant, unexpected change in the operations and cash flows of the Company
(e.g. acquisitions and/or divestitures) may result in an adjustment to the
Targets. The Compensation Committee of the Board of Directors and CEO will
determine which events, if any, should result in adjustments to the Targets.
DEFINITIONS
- - UNUSUAL ITEMS - charges to earnings or non-recurring gains or losses that
the Company has historically presented as non-operating charges in its
consolidated statement of operations. Examples include gains or losses on
asset sales, insurance or legal settlements, office closure costs and
related severance and asset impairments.
- - MANAGED CARE INTEGRATION COSTS - charges to earnings related to Magellan
Behavioral Health and Magellan Specialty Health mergers and acquisitions as
historically presented in the Company's consolidated statement of
operations.
1
<PAGE>
Examples of costs include severance, lease termination costs and outside
consulting costs.
- - CAPITAL EXPENDITURES - payments to acquire property, plant and equipment or
the costs of developing internal-use software.
PLAN FUNDING
The Plan will be funded based on the level of actual results achieved compared
to key financial targets. Magellan Health Services, Inc. must achieve 85% of the
target established for consolidated diluted EPS or 90% of the target established
for Consolidated Cash Flows before any Plan funding occurs.
ALLOCATION OF SHORT-TERM INCENTIVE POOL
Each operating unit and the corporate office will recommend allocation of their
respective portion of the pool to their employees for approval by the CEO with
the exception of Section 16 officers (Harbin, McKnight, Wider, Marques, Hudkins)
that must be separately approved by the Compensation Committee of the Board,
regardless of their participation in this Corporate plan or their operating unit
plan.
The following tables detail the amount of the Pool payable based on budgeted
Consolidated Cash Flows and Consolidated Diluted EPS as described above:
CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
LEVEL OF ACHIEVEMENT (% OF TARGET) INCENTIVE POOL FUNDING (WEIGHTED 33 1/3%)
- ---------------------------------- ------------------------------------------
<S> <C> <C>
- ---------------------------------- ---- ------------------------------------------
less than 90% = 0% FUNDED
- ---------------------------------- ---- ------------------------------------------
90% TO 94%% = FUND AT -6% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ---- ------------------------------------------
greater than 94% TO 97% = FUND AT -4% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ---- ------------------------------------------
greater than 97% TO less than 100% = FUND AT -2% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ---- ------------------------------------------
100% = 100% FUNDED
- ---------------------------------- ---- ------------------------------------------
greater than 100% TO 125% = 100% PLUS 1% FOR EVERY 1% IN THIS RANGE,
PROVIDED EPS ACHIEVEMENT IS 95% OR BETTER
- ---------------------------------- ---- ------------------------------------------
</TABLE>
CONSOLIDATED DILUTED EPS
<TABLE>
<CAPTION>
LEVEL OF ACHIEVEMENT (% OF TARGET) INCENTIVE POOL FUNDING (WEIGHTED 66 2/3 %)
- ---------------------------------- ------------------------------------------
<S> <C> <C>
- ---------------------------------- ----- ------------------------------------------
less than 85% = 0% FUNDED
- ---------------------------------- ----- ------------------------------------------
85% TO 95% = FUND AT -2% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ----- ------------------------------------------
greater than 95% TO less than 100% = FUND AT -1% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ----- ------------------------------------------
100% = 100% FUNDED
- ---------------------------------- ----- ------------------------------------------
greater than 100% TO 125% = 100% PLUS 2% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ----- ------------------------------------------
</TABLE>
ELIGIBLE PARTICIPANTS
Eligibility for participation in the Plan shall be determined by management from
among those key employees who are in a position to materially contribute to the
success of the Company. Employees must be hired prior to April 1, 1999 to be
eligible to participate in
2
<PAGE>
the Plan. Employees hired between October 1 and April 1, 1999 will receive a
pro-rata portion of their award for partial year participation (number of
semi-monthly pay periods of employment divided by twenty-four). Any person who
becomes eligible through promotion for participation in the Plan after the start
of the fiscal year shall also be eligible to receive a prorated portion of the
annual bonus.
CONDITION OF PAYMENT
No incentive compensation will be paid to any employee if employment is
terminated, whether voluntary or involuntary, prior to the actual payment date.
However, the CEO retains authority to make exceptions to the foregoing policy in
unusual cases including, but not limited to, the death of an employee during the
fiscal year or termination of employment due to total or partial disability or
retirement with the consent of the Company.
Short-term incentive awards are payable to employees no later than two (2)
business days after the Company files its Annual Report of Form 10-K with the
Securities and Exchange Commission for the fiscal year ended September 30th and
in no case later than December 31st unless an executed deferral election is made
prior to the end of the plan year, in which case payment will be deferred to
January 15th.
METHOD OF CALCULATION
Each eligible participant must meet the goals established by management. In
order to receive a bonus, each participant must be recommended for all, part,
none, or an amount greater than the bonus (up to 150% of target) by his or her
direct supervisor, with the approval of the CEO and subject to pool
availability. The various bonus target percentages are described in the chart
below:
TARGET BONUS PERCENTAGE
<TABLE>
<CAPTION>
----------------------- ------------------
TARGET BONUS
LEVEL IN ORGANIZATION % OF BASE SALARY
----------------------- ------------------
<S> <C>
----------------------- ------------------
President & CEO 50%
----------------------- ------------------
CFO and CCO (EVP's) 20 to 35%
----------------------- ------------------
SVP's 20 to 35%
----------------------- ------------------
VP's 20 to 35%
----------------------- ------------------
Director 15 to 20%
----------------------- ------------------
Manager 8 to 10%
----------------------- ------------------
Other Corporate 3 to 5%
----------------------- ------------------
</TABLE>
Actual payments under the Plan are at the sole discretion of the CEO of Magellan
depending on the financial condition and future prospects of the Company at the
time payment is due.
INTERPRETATION, ADMINISTRATION AND DURATION
Any areas of question, interpretation, dispute, etc. concerning any area of this
plan shall be governed by a Committee of Company officers. The Committee is
defined as the
3
<PAGE>
CEO, the Executive Vice President/CFO, and the SVP of Human
Resources. This plan shall be effective for the 1999 fiscal year beginning
October 1, 1998. The Committee and the Board of Directors each retain the
authority to modify, repeal or discontinue the plan on a prospective or
retrospective basis, for any reason.
4
<PAGE>
EXHIBIT 10(b)
MAGELLAN BEHAVIORAL HEALTH SHORT-TERM INCENTIVE PLAN
(Effective October 1, 1998)
PURPOSE
The purpose of Magellan Behavioral Health Short-Term Incentive Plan ("STIP"
and/or the "Plan") is to reward employees for attaining key measures of success
during the fiscal year and for contributing to the overall performance of
Magellan Health Services, Inc. (the "Company").
Magellan Behavioral Health's STIP is funded in part by the financial performance
of Magellan Behavioral Health relative to its targets for the fiscal year, and
in part by the financial performance of the Company relative to its earnings per
share target.
Any cash distribution to Magellan Behavioral Health employees under the STIP is
contingent upon the attainment of performance measures by both the Company and
Magellan Behavioral Health as outlined below.
DESCRIPTION OF THE PLAN
The Plan is designed to measure the success of Magellan Behavioral Health in
achieving its financial targets as measured by cash flow. The STIP pool is
funded by a combination of (1) Magellan Behavior Health's performance against
its cash flow target, and (2) a measure of corporate earnings per share (EPS).
Distribution of STIP awards to employees is determined by a combination of
performance against corporate targets, business unit performance as applicable
for non-corporate areas, the target bonus percentage assigned to the position,
and individual performance for the plan year. The Plan is driven by the budgeted
financial measures (the "Targets") approved by the Company's Board of Directors
or by the Compensation Committee of such Board of Directors. Any short-term
incentive available, in whole or in part, will be based upon the following
additive factors:
33 1/3 % - Cash flows from operations including distributions from
joint ventures, excluding interest income, less capital
expenditures.
66 2/3 % - Consolidated diluted EPS, excluding Charter franchise
revenues, cost report settlements, managed care integration
costs and unusual items.
A significant, unexpected change in the operations and cash flows of Magellan
Behavioral Health (e.g. acquisitions and/or divestitures) may result in an
adjustment to the Targets. The Compensation Committee of the Board of Directors
and CEO will determine which events, if any, should result in adjustments to the
Targets.
DEFINITIONS
- - UNUSUAL ITEMS - charges to earnings or non-recurring gains or losses that
the Company has historically presented as non-operating charges in its
consolidated
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<PAGE>
statement of operations. Examples include gains or losses on asset sales,
insurance or legal settlements, office closure costs and related severance
and asset impairments.
- - MANAGED CARE INTEGRATION COSTS - charges to earnings related to Magellan
Behavioral Health and Magellan Specialty Health mergers and acquisitions as
historically presented in the Company's consolidated statement of
operations. Examples of costs include severance, lease termination costs
and outside consulting costs.
- - CAPITAL EXPENDITURES - payments to acquire property, plant and equipment or
the costs of developing internal-use software.
PLAN FUNDING
The Plan will be funded based on the level of actual results achieved compared
to key financial targets. The Company must achieve 85% of the target established
for consolidated diluted EPS, and Magellan Behavioral Health must achieve 90% of
the target established for Cash Flows before any Plan funding occurs.
The following tables detail the amount of the STIP pool payable based on
Consolidated Cash Flows and Consolidated Diluted EPS as described above:
CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
LEVEL OF ACHIEVEMENT (% OF TARGET) INCENTIVE POOL FUNDING (WEIGHTED 33 1/3%)
- ---------------------------------- ------------------------------------------
<S> <C> <C>
- ---------------------------------- ---- ------------------------------------------
less than 90% = 0% FUNDED
- ---------------------------------- ---- ------------------------------------------
90% TO 94% = FUND AT -6% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ---- ------------------------------------------
greater than 94% TO 97% = FUND AT -4% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ---- ------------------------------------------
greater than 97% TO less than 100% = FUND AT -2% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ---- ------------------------------------------
100% = 100% FUNDED
- ---------------------------------- ---- ------------------------------------------
greater than 100% TO 125% = 100% PLUS 1% FOR EVERY 1% IN THIS RANGE,
PROVIDED EPS ACHIEVEMENT IS 95% OR BETTER
- ---------------------------------- ---- ------------------------------------------
</TABLE>
CONSOLIDATED DILUTED EPS
<TABLE>
<CAPTION>
LEVEL OF ACHIEVEMENT (% OF TARGET) INCENTIVE POOL FUNDING (WEIGHTED 66 2/3%)
- ---------------------------------- ------------------------------------------
<S> <C> <C>
- ---------------------------------- ----- ------------------------------------------
less than 85% = 0% FUNDED
- ---------------------------------- ----- ------------------------------------------
85% TO 95% = FUND AT -2% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ----- ------------------------------------------
greater than 95% TO less than 100% = FUND AT -1% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ----- ------------------------------------------
100% = 100% FUNDED
- ---------------------------------- ----- ------------------------------------------
greater than 100% TO 125% = 100% PLUS 2% FOR EVERY 1% IN THIS RANGE
- ---------------------------------- ----- ------------------------------------------
</TABLE>
ALLOCATION OF SHORT-TERM INCENTIVE POOL
Magellan Behavioral Health corporate and staff departments will be allocated
their respective portion of the STIP pool based on the factors and criteria
noted above.
ELIGIBLE PARTICIPANTS
GENERAL:
- - Eligibility for participation in the Plan is limited to regular full-time
employees.
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<PAGE>
- - Individual target bonus percentages are based on position level within
Magellan Behavioral Health.
- - Each participant's individual target STIP award is based on a percentage of
his/her salary as of September 30, 1999.
MANAGEMENT EMPLOYEES:
- - Only full-time active employees in a STIP eligible position hired by
Magellan Behavioral Health prior to April 1, 1999 are eligible to
participate in the fiscal year 1999 plan. Employees hired between October 1
and April 1, 1999 will receive a pro-rata portion of their award for
partial year participation (number of semi-monthly pay periods of
employment divided by twenty-four).
- - Any person who becomes eligible through promotion for participation in the
Plan after the start of the fiscal year shall also be eligible to receive a
prorated portion of the annual bonus.
EXEMPT PROFESSIONAL, SUPERVISORY, AND NONEXEMPT EMPLOYEES:
- - Employees in an exempt professional, supervisory, or nonexempt position
will be eligible to participate based on their length of service per the
following schedule:
<TABLE>
<S> <C>
2 ore more years of service 100%
1 to less than 2 years of service 50%
less than 1 year of service not eligible to participate
</TABLE>
CONDITION OF PAYMENT
No incentive compensation will be paid to any employee if employment is
terminated, whether voluntary or involuntary, prior to the actual payment date.
However, the President and COO of Magellan Behavioral Health retains authority
to make exceptions to the foregoing policy in unusual cases including, but not
limited to, the death of an employee during the fiscal year or termination of
employment due to total or partial disability or retirement with the consent of
the Company.
Short-term incentive awards are payable to employees no later than two (2)
business days after the Company files its Annual Report of Form 10-K with the
Securities and Exchange Commission for the fiscal year ended September 30th and
in no case later than December 31st unless an executed deferral election is made
prior to the end of the plan year, in which case payment will be deferred to
January 15th.
METHOD OF CALCULATION
Each eligible participant must meet the goals established by management. In
order to receive a bonus, each participant must be recommended for all, part,
none, or an amount greater than the bonus (up to 150% of target) by his or her
direct supervisor, with the approval of the President and COO and subject to
pool availability. Each participant's assigned bonus percentage of base pay
corresponds to established targets set by management.
The various bonus target percentages are:
TARGET BONUS PERCENTAGE
--------------------- ----------------
TARGET BONUS
--------------------- ----------------
3
<PAGE>
<TABLE>
<CAPTION>
Target Bonus
Level in Organization % of Base Salary
--------------------- ----------------
<S> <C>
EVP & Above 20 to 35%
SVP 20 to 35%
RVP/LOU President 20 to 35%
VP 20 to 35%
Director 10 to 20%
Manager 8 to 10%
Supervisor 0 to 3%
Nonexempt 0 to 2%
</TABLE>
Management may substitute stock options for a portion of the targeted cash
payout.
Actual payments under the Plan are at the sole discretion of the President and
COO of Magellan Behavioral Health depending on the financial condition and
future prospects of the Company at the time payment is due.
INTERPRETATION, ADMINISTRATION AND DURATION
Any areas of question, interpretation, dispute, etc. concerning any area of this
plan shall be governed by a Committee of Magellan Behavioral Health officers.
The Committee is defined as the President and Chief Operating Officer, the
Executive Vice President/CFO, the Executive Vice President of Corporate
Resources, and the SVP of Human Resources. This plan shall be effective for the
1999 fiscal year beginning October 1, 1998. The Committee retains the authority
to modify, repeal or discontinue the plan on a prospective or retrospective
basis, for any reason.
4
<PAGE>
EXHIBIT 10(c)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and
between Clarissa C. Marques, Ph. D. an individual ("Officer"), and MAGELLAN
HEALTH SERVICES, INC., a Delaware corporation ("Employer").
WHEREAS, Employer desires to continue to obtain the services of Officer and
Officer desires to continue to render services to Employer; and
WHEREAS, Employer and Officer desire to set forth the terms and conditions
of Officer's continued employment with Employer under this Agreement and
terminate certain prior written agreements with Officer dated March 12, 1997 and
May 2, 1995;
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and agreements contained in this Agreement, the parties agree
as follows:
STATEMENT OF AGREEMENT
1. EMPLOYMENT. Employer and Officer agree that the earlier written
agreements dated March 12, 1997 and May 2, 1995 with Officer are terminated and
of no further force and effect as of the effective date of this Agreement.
Employer agrees to employ Officer, and Officer accepts such employment in
accordance with the terms of this Agreement, for an initial term of three years
commencing on January 1, 1999 and, unless terminated earlier in accordance with
the terms of this Agreement, ending on December 31, 2001. After the initial
three year term has expired, this Agreement will renew automatically on the
anniversary date of each year for a one year term. If either party desires not
to renew the Agreement, they must provide the other party with written notice of
their intent not to renew the Agreement at least sixty days prior to the next
anniversary date.
2. POSITION AND DUTIES OF OFFICER. Officer will serve as Executive Vice
President of Employer. Officer agrees to serve in such position, or in such
other positions of a similar status or level as Employer determines from time to
time, and to perform the commensurate duties that Employer may assign from time
to time to Officer until the expiration of the term or such time as Officer's
employment with Employer is terminated pursuant to this Agreement.
3. TIME DEVOTED AND LOCATION OF OFFICER.
(a) Officer will devote her full business time and energy to the
business affairs and interests of Employer, and will use her best efforts and
abilities to promote Employer's interests. Officer agrees that she will
diligently endeavor to perform services contemplated by this Agreement in a
manner consistent with her position and in accordance with the policies
established by the Employer and provided to Officer from time to time.
<PAGE>
(b) Officer's primary business office and normal place of work will
be located in Columbia, Maryland.
4. COMPENSATION.
(a) BASE SALARY. Employer will pay Officer a base salary in the
amount of two hundred seventy thousand dollars per year, which amount will be
paid in semi-monthly intervals less appropriate withholdings for federal and
state taxes and other deductions authorized by Officer. Such salary will be
subject to review and adjustment by Employer from time to time. Any reduction in
Officer's base salary will be consistent with and the result of reductions made
generally regarding other officers or employees at her level including the
President and Chief Executive Officer of Employer.
(b) BENEFITS. Officer will continue to participate in Magellan's
Benefit Plans commensurate with her position. Officer will receive separate
information detailing the terms of the Benefit Plans and the terms of that plan
will control. Officer also will be eligible to participate in any annual
incentive plan and stock option plan applicable to Officer by its terms. Officer
will be entitled during the term of this Agreement to such other benefits of
employment with Employer as are now or may later be in effect for salaried
officers or employees of Employer, and also will be eligible to participate in
other benefits adopted for officers or employees at her level.
5. EXPENSES. During the term of this Agreement, Employer will reimburse
Officer promptly for all reasonable travel, entertainment, parking, business
meetings and similar expenditures in pursuance and furtherance of Employer's
business upon receipt of reasonably supporting documentation as required by
Employer's policies applicable to its officers and employees generally.
6. TERMINATION.
(a) TERMINATION DUE TO RESIGNATION AND TERMINATION WITH CAUSE. Except
as otherwise set forth in this Agreement, this Agreement, Officer's employment,
and Officer's rights to receive compensation and benefits from Employer, will
terminate upon the occurrence of any of the following events: (i) the effective
date of Officer's resignation without good reason, or (ii) termination for cause
at the discretion of Employer under the following circumstances: (a) Officer's
commission of an act of fraud or dishonesty involving her duties on behalf of
Employer; (b) Officer's willful failure or refusal to faithfully and diligently
perform duties assigned to Officer or other breach of any material term under
this Agreement; (c) Officer's willful failure or refusal to abide by Employer's
policies, rules, procedures or directives; or (d) Officer's conviction of a
felony or a misdemeanor involving moral turpitude. If Officer is terminated
pursuant to this Section 6(a), Employer's only remaining financial obligation to
Officer under this Agreement will be to pay any earned but unpaid base salary
through the date of Officer's termination.
2
<PAGE>
For the events described in Sections 6(a)(ii)(b) and (c), Employer will
give Officer written notice of such event and a reasonable opportunity to cure
such situation, but in no event less than thirty days.
(b) TERMINATION WITHOUT CAUSE. Officer may terminate her employment
without cause at any time by giving thirty days written notice of resignation to
Employer. Employer may terminate this Agreement without cause at any time by
giving thirty days prior written notice to Officer. If Employer terminates this
Agreement without cause, Employer may direct Officer to immediately cease
providing services. If Employer terminates this Agreement without cause,
Employer shall continue to pay Officer the compensation provided for in Section
4(a) of this Agreement for a period of time equal to the greater of (i) the
remaining term of this Agreement or (ii) two years. In addition, Employer will
pay Officer, as additional severance, a prorated amount of the Annual Bonus
provided for in Section 4(b) based on the number of months from the anniversary
date of this Agreement and the date of termination. No other benefits or
compensation will be paid to Officer if she is terminated pursuant to this
Section 6(b), unless otherwise provided for in the terms of the applicable plan
or benefit. Non-renewal of this Agreement by Employer will constitute a
termination without cause pursuant to this Section.
(c) TERMINATION BY OFFICER FOR GOOD REASON. Officer may terminate
this Agreement, and her employment with Employer, for "good reason" upon the
occurrence of any of the following:
(i) a requirement by Employer that Officer relocate her primary
business office in order to fulfill Officer's duties under this Agreement;
(ii) the failure of Employer to comply with Section 4; or
(iii) any material breach of this Agreement by Employer; or
(iv) the assignment to Officer of any duties inconsistent with
Officer's status as an Executive Vice President.
Prior to terminating this Agreement pursuant to this Section,
Officer shall give to Employer written notice of her "good reason" for
terminating this Agreement and provide Employer with a reasonable period in
which to contest or correct the "good reason", but in no event less than thirty
days. In the event of a termination for "good reason" pursuant to this Section,
Officer will be entitled to receive all compensation and benefits provided for
in this Agreement for a termination by Employer without cause.
(d) AUTOMATIC TERMINATION. This Agreement will terminate
automatically upon the death or permanent disability of Officer. Officer will be
deemed to be "Disabled" or to suffer from a "Disability" within the meaning of
this Agreement if, because of a physical or mental impairment, Officer has been
unable to perform the essential functions of her position for a period of 180
consecutive days, or if Officer can reasonably be expected to be unable to
perform the essential functions of her position for such period. The term
"essential duties" is defined as the ability to consistently perform her
assigned duties, including travel requirements.
3
<PAGE>
Subject to continuing coverage under applicable benefit plans, if Officer is
terminated pursuant to this Section 6(d), Employer's only remaining financial
obligation to Officer under this Agreement will be to pay any earned but unpaid
base salary through the date of Officer's termination.
(e) EFFECT OF TERMINATION. Except as otherwise provided for in this
Section 6, upon termination of this Agreement, all rights and obligations under
this Agreement will cease except for the rights and obligations under Sections 4
and 5 to the extent Officer has not been compensated or reimbursed for services
performed prior to termination (the amount of compensation to be prorated for
the portion of the pay period prior to termination); the rights and obligations
under Sections 7, 8 and 9; and all procedural and remedial provisions of this
Agreement. A termination of this Agreement will constitute a termination of
Officer's employment with Employer.
(f) TERMINATION UPON A CHANGE OF CONTROL. Officer will be entitled to
terminate this Agreement upon a change of control and will be entitled to all of
the salary, benefits and other rights provided in this Agreement as though the
termination had been initiated by Employer without cause. For purposes of this
Agreement, a change of control will take place upon the occurrence of any of the
following events: (a) the acquisition after the beginning of the term in one or
more transactions of beneficial ownership (within the meaning of Rule
13d-3(a)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) by any person or entity (other than Officer or the Chief Executive
Officer) or any group of persons or entities (other than Officer or Chief
Executive Officer) who constitute a group (within the meaning of Rule 13d-5 of
the Exchange Act) of any securities of Employer such that as a result of such
acquisition such person or entity or group beneficially owns (within the meaning
of Rule 13d-3(a)(1) under the Exchange Act) more than 50% of Employer's then
outstanding voting securities entitled to vote on a regular basis for a majority
of the Board of Directors of Employer; or (b) the sale of all or substantially
all of the assets of Employer (including, without limitation, by way of merger,
consolidation, lease or transfer) in a transaction where Employer or the holders
of common stock of Employer do not receive (i) voting securities representing a
majority of the voting power entitled to vote on a regular basis for the Board
of Directors of the acquiring entity or of an affiliate which controls the
acquiring entity, or (ii) securities representing a majority of the equity
interest in the acquiring entity or of an affiliate that controls the acquiring
entity, if other than a corporation; PROVIDED, that if Officer becomes entitled
to any payments (whether hereunder or otherwise) by reason of an event described
in Internal Revenue Code Section 280G (a "Parachute Event") that would
constitute "excess parachute payments" (as defined in Internal Revenue Code
Section 280G) if paid, then Officer's entitlement to such payments will be
reduced by such amount as will cause none of such payments to constitute excess
parachute payments, if, and only if, the net amount received by Officer by
reason of the Parachute Event, after imposition of all applicable taxes
(including taxes under Internal Revenue Code Section 4099), would be greater
after such reduction than if such reduction were not made.
4
<PAGE>
7. PROTECTION OF CONFIDENTIAL INFORMATION/NON-COMPETITION/NON-
SOLICITATION.
Officer covenants and agrees as follows:
(a) During Employer's employment of Officer and for a period of two
years following the termination of Officer's employment for any reason, Officer
will not use or disclose, directly or indirectly, for any reason whatsoever or
in any way, other than at the direction of Employer during the course of
Officer's employment or after receipt of the prior written consent of Employer,
any confidential information or trade secrets of Employer or its controlled
subsidiaries or affiliates, including, but not limited to, the following: lists
of past, current or potential customers of Employer and its controlled
subsidiaries and affiliates; all systems, manuals, materials, processes and
other intellectual property of any type used by Employer or its controlled
subsidiaries and affiliates in connection with their respective business
operations; financial statements, cost reports and other financial information;
contract proposals and bidding information; rate and fee structures; policies
and procedures developed as part of a confidential business plan; and management
systems and procedures, including manuals and supplements (collectively, the
"Confidential Information"). The obligation not to use or disclose any
Confidential Information will not apply to: (i) any Confidential Information
known by Officer before commencing employment with Employer, (ii) Confidential
Information which Officer obtains from a third party, provided Officer has no
actual or constructive knowledge that the third party obtained the Confidential
Information by wrongful or inappropriate means, (iii) following the termination
of the employment of Officer with Employer, to any information that is or
becomes public knowledge through no fault of Officer, and that may be utilized
by the public without any direct or indirect obligation to Employer, but the
termination of the obligation for non-use or nondisclosure by reason of such
information becoming public will extend only from the date such information
becomes public knowledge, or (iv) disclosure compelled by legal process. The
above will be without prejudice to any rights or remedies of Employer under any
state or federal law protecting trade secrets or other information.
(b) Officer covenants and agrees that during the term of her
employment with Employer and for a period of two years immediately following the
termination of said employment for any reason, she will not, directly or
indirectly, seek, obtain or accept a "Competitive Position" in the "Restricted
Territory" with a "Competitor" of Employer. Provided, however, in the event of
Officer's resignation, this Section 7(b) shall only apply for a period of one
year.
The following definitions shall apply to this Section:
- - "Competitor" means any business, individual, partnership, joint venture,
association, firm, corporation or other entity engaged, wholly or in part, in
the provision or sale of behavioral or other specialty managed care services.
5
<PAGE>
- - "Competitive Position" means any position or employment with a "Competitor"
of Employer in which Officer is engaged in a position of providing or overseeing
clinical and operational services.
- - "Restricted Territory" is the geographic area set forth in Exhibit A to
this Agreement. The parties agree to review the geographic area included within
the Restricted Territory from time to time at either party's request and the
Restricted Territory will thereafter be modified so that its coverage extends
to, but only to, the geographic area necessary to protect the interest of the
Employer and its controlled subsidiaries and affiliates engaged in the provision
or sale of behavioral or other specialty managed care services. No such
reformation will be valid unless it is evidenced by written amendment to this
Agreement and signed by both parties.
(c) To protect the goodwill of Employer and its controlled
subsidiaries and affiliates, or the customers of Employer and its controlled
subsidiaries and affiliates, Officer agrees that, for a period of one year
immediately following the termination of her employment with Employer, she will
not, without the prior written permission of Employer, directly or indirectly,
for himself or herself or on behalf of any other person or entity, solicit,
divert away, take away or attempt to solicit or take away any Customer of
Employer for purposes of providing or selling or providing behavioral or other
specialty managed care services if Employer, or the particular controlled
subsidiary or affiliate of Employer, is then still engaged in the sale or
provision of such services at the time of the solicitation. For purposes of this
Section 7(c), "Customer" means any individual or entity to whom Employer or its
controlled subsidiaries or affiliates has provided, or contracted to provide,
behavioral or other specialty managed care services, and with whom Officer had,
alone or in conjunction with others, Material Contact during the twelve months
prior to the termination of her employment. For purposes of this Section 7(c),
Officer had "Material Contact" with a customer if (i) Officer had business
dealings with the customer on behalf of Employer or its controlled subsidiaries
or affiliates; (ii) Officer was responsible for supervising or coordinating the
dealings between the customer and Employer or its controlled subsidiaries or
affiliates; or (iii) Officer obtained trade secrets or confidential information
about the customer as a result of Officer's association with Employer or its
controlled subsidiaries or affiliates.
(d) During Employer's employment of Officer and for a period of one
year following the termination of Officer's employment with Employer for any
reason, Officer will not solicit for employment, directly or indirectly, any
employee of Employer or any of its controlled subsidiaries or affiliates who was
employed with Employer or its controlled subsidiaries or affiliates within the
one year period immediately prior to Officer's termination.
6
<PAGE>
8. WORK MADE FOR HIRE. Officer agrees that any written program materials,
protocols, research papers and all other writings (the "Work"), which Officer
develops for Employer's use, or for use by Employer's controlled subsidiaries or
affiliates, during the term of this Agreement, will be considered "work made for
hire" within the meaning of the United States Copyright Act, Title 17, United
States Code, which vests all copyright interest in and to the Work in the
Employer. In the event, however, that any court of competent jurisdiction
finally declares that the Work is not or was not a work made for hire as agreed,
Officer agrees to assign, convey, and transfer to the Employer all right, title
and interest Officer may presently have or may have or be deemed to have in and
to any such Work and in the copyright of such work, including but not limited
to, all rights of reproduction, distribution, publication, public performance,
public display and preparation of derivative works, and all rights of ownership
and possession of the original fixation of the Work and any and all copies.
Additionally, Officer agrees to execute any documents necessary for Employer to
record and/or perfect its ownership of the Work and the applicable copyright.
The foregoing will not apply to any writings Officer develops which are not for
Employer's use or are in each instance specifically excluded in advance of
publication from the coverage of the foregoing by Employer's Board of Directors.
9. PROPERTY OF EMPLOYER. Officer agrees that, upon the termination
of Officer's employment with Employer, Officer will immediately surrender to
Employer all property, equipment, funds, lists, books, records and other
materials of Employer or its controlled subsidiaries or affiliates in the
possession of or provided to Officer. Provided, however, Officer shall be
entitled to retain individualized bound volumes of transaction documents in
which Officer provided services.
10. GOVERNING LAW. This Agreement and all issues relating to the
validity, interpretation and performance will be governed by and interpreted
under the laws of the State of Maryland.
11. REMEDIES. Employer and Officer agree that an actual or threatened
violation by Officer of the covenants and obligations set forth in Sections 7, 8
and 9 will cause irreparable harm to Employer or its controlled subsidiaries or
affiliates and that the remedy at law for any such violation will be inadequate.
Officer agrees, therefore, that Employer or its controlled subsidiaries or
affiliates will be entitled to appropriate equitable relief, including, but not
limited to, a temporary restraining order and a preliminary injunction, without
the necessity of posting a bond. The provisions of Sections 7, 8 and 9 will
survive the termination of this Agreement in accordance with the terms set forth
in each Section.
12. ARBITRATION. Except for an action for injunctive relief as
described in Section 11, any disputes or controversies arising under this
Agreement will be settled by arbitration in Columbia, Maryland in accordance
with the rules of the American Arbitration Association relating to the
arbitration of employment disputes. The determination and findings of such
arbitrators will be final and binding on all parties and may be enforced, if
necessary, in any court of competent jurisdiction.
- ------
Officer's
Initials
7
<PAGE>
13. NOTICES. Any notice or request required or permitted to be given
to any party will be given in writing and, excepting personal delivery, will be
given at the address set forth below or at such other address as such party may
designate by written notice to the other party to this Agreement:
To Officer: Clarissa C. Marques, Ph. D.
13785 Lakeside Drive
Clarksville, MD 21029
To Employer: Magellan Health Services, Inc.
6950 Columbia Gateway Drive
Columbia, Maryland 21046
Attention: President and Chief Executive Officer
Facsimile: 410-953-5213
With a copy to: Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
Facsimile: 404-814-5795
Each notice given in accordance with this Section will be deemed to have been
given, if personally delivered, on the date personally delivered; if delivered
by facsimile transmission, when sent and confirmation of receipt is received;
or, if mailed, on the third day following the day on which it is deposited in
the United States mail, certified or registered mail, return receipt requested,
with postage prepaid, to the address last given in accordance with this Section.
14. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and should not be construed or
interpreted to restrict or modify any of the terms or provisions of this
Agreement.
15. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provision will be fully severable and this
Agreement and each separate provision will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of this
Agreement, and the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement. In addition, in
lieu of such illegal, invalid or unenforceable provision, there will be added
automatically, as a part of this Agreement, a provision as similar in terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable, if such reformation is allowable under applicable
law.
8
<PAGE>
16. BINDING EFFECT. This Agreement will be binding upon and shall
inure to the benefit of each party and each party's respective successors, heirs
and legal representatives. This Agreement may not be assigned by Officer to any
other person or entity but may be assigned by Employer to any wholly-owned
subsidiary or affiliate of Employer or to any successor to or transferee of all,
or any part, of the stock or assets of Employer.
17. EMPLOYER POLICIES, REGULATIONS AND GUIDELINES FOR OFFICERS.
Employer may issue policies, rules, regulations, guidelines, procedures or other
material, whether in the form of handbooks, memoranda, or otherwise, relating to
its officers. These materials are general guidelines for Officer's information
and will not be construed to alter, modify or amend this Agreement for any
purpose whatsoever.
18. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding between the parties with respect to its subject matter and
supersedes all prior agreements and understandings, whether written or oral,
relating to its subject matter, unless expressly provided otherwise within this
Agreement. No amendment or modification of this Agreement, will be valid unless
made in writing and signed by each of the parties. No representations,
inducements or agreements have been made to induce either Officer or Employer to
enter into this Agreement which are not expressly set forth within this
Agreement. Officer and Employer acknowledge and agree that Employer's
wholly-owned subsidiaries and affiliates are express third party beneficiaries
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the _____ day of ________________, 1998.
MAGELLAN HEALTH SERVICES, INC.
"Officer" "Employer"
Clarissa C. Marques, Ph. D.
_______________________________ By: ________________________________
Name: ______________________________
Title: _______________________________
9
<PAGE>
EXHIBIT A
RESTRICTED TERRITORY
The Restricted Territory is any location within a radius of fifty miles of any
existing operation of Employer, or its affiliates or controlled subsidiaries,
engaged in the delivery of behavioral managed care services. For purposes of
this Section "existing operation" shall not include staff model provider clinics
of Employer.
10
<PAGE>
EXHIBIT 10(d)
AMENDMENT TO THE
CHARTER MEDICAL CORPORATION DIRECTORS'
STOCK OPTION PLAN
Pursuant to the power reserved to the Board of Directors of Magellan
Health Services, Inc. (the "Company") under Section 14 of the Charter Medical
Corporation Directors' Stock Option Plan, as amended, (the "Plan"), the Plan is
hereby amended as follows:
1.
Section 6(b) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 6(b) in its place:
"(b) EXERCISE PRICE. The exercise price per share shall be the
arithmetic average of the Fair Market Value per share of the Common
Stock on the ten trading days that precede the date of grant,
including the date of grant as the tenth trading day, on which shares
of the Common Stock are traded; provided, that the Committee shall
have the power to adjust the exercise price of Options previously
granted to one or more Directors, either by amendment or cancellation
and reissuance, in its sole discretion and provided that such adjusted
exercise price shall not be below Fair Market Value as of the
effective date of the adjustment. Notwithstanding the foregoing, in
the event that an Option is repriced pursuant to this Section 6(b),
the exercise price of such Option may not be adjusted again, whether
by amendment or cancellation and reissuance, for a period of at least
one year following the date of such adjustment."
2.
This Amendment shall be effective as of November 17, 1998.
<PAGE>
EXHIBIT 10(e)
AMENDMENT TO THE
MAGELLAN HEALTH SERVICES, INC. 1996 DIRECTORS'
STOCK OPTION PLAN
Pursuant to the power reserved to the Board of Directors of Magellan
Health Services, Inc. (the "Company") under Section 14 of the Magellan Health
Services, Inc. Directors' Stock Option Plan, as amended, (the "Plan"), the Plan
is hereby amended as follows:
1.
Section 6(b) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 6(b) in its place:
"(b) EXERCISE PRICE. The exercise price per share shall be the Fair
Market Value per share of the Common Stock on the date of grant;
provided, that the Committee shall have the power to (1) grant Options
with an exercise price per share below the Fair Market Value of the
Stock on the date of grant, and (2) adjust the exercise price of
Options previously granted to one or more Directors, either by
amendment or cancellation and reissuance, in its sole discretion and
provided that such adjusted exercise price shall not be below Fair
Market Value as of the effective date of the adjustment.
Notwithstanding the foregoing, in the event that an Option is repriced
pursuant to this Section 6(b), the exercise price of such Option may
not be adjusted again, whether by amendment or cancellation and
reissuance, for a period of at least one year following the date of
such adjustment."
2.
This Amendment shall be effective as of November 17, 1998.
<PAGE>
EXHIBIT 10(f)
AMENDMENT TO THE
CHARTER MEDICAL CORPORATION
1994 STOCK OPTION PLAN
Pursuant to the power reserved to the Board of Directors of Magellan
Health Services Inc. (the "Company") under Section 18 of the Charter Medical
Corporation 1994 Stock Option Plan, as amended, (the "Plan"), the Plan hereby is
amended as follows:
1.
Section 7(c) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 7(c) in its place:
"(c)EXERCISE PRICE. The exercise price per share for Options shall be
the Fair Market Value of the Stock on the date of grant, subject to
adjustment as contemplated by Section 9. The Board shall have the
power to adjust the exercise price of any outstanding Option of one or
more Participants under such terms and conditions as it may determine,
provided that (i) such adjusted exercise price shall not be below fair
market value as of the effective date of the adjustment, and (ii) no
adjustment, if applicable to a Participant, shall eliminate any
existing right of such Participant under the Option without his or her
written consent. Notwithstanding the foregoing, in the event that the
exercise price of an Option is adjusted pursuant to this Section 7(c),
the exercise price of such Option may not be adjusted again, whether
by amendment or cancellation and reissuance, for a period of at least
one year following the date of such adjustment."
2.
Section 7(g) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 7(g) in its place:
"(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 months following the date of such termination, or (2) for such
longer period of time as the Committee or the chief executive officer
(pursuant to a delegation under Section 3) may determine, in its or
<PAGE>
his discretion (but in either case not 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 twelve months following the
date of such event, or (2) for such longer period of time as the
Committee or the chief executive officer (pursuant to a delegation
under Section 3) may determine in its or his discretion (but in either
case not 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."
3.
Amendment 1 shall be effective as of November 17, 1998. Amendment 2
shall be effective as of November 17, 1998, but only with respect to
Participants whose full-time employment with the Corporation or a Subsidiary was
not terminated prior to such date.
2
<PAGE>
EXHIBIT 10(g)
AMENDMENT TO THE
MAGELLAN HEALTH SERVICES, INC.
1996 STOCK OPTION PLAN
Pursuant to the power reserved to the Board of Directors of Magellan
Health Services, Inc. (the "Company") under Section 19 of the Magellan Health
Services, Inc. 1996 Stock Option Plan, as amended, (the "Plan"), the Plan hereby
is amended as follows:
1.
Section 6 of the Plan shall be amended by deleting that Section in its
entirety and by substituting the following new Section 6 in its place:
"6. GRANT OF OPTIONS. The Committee, acting in its sole
discretion, shall have the right to grant Options to Participants
under this Plan from time to time; provided, that the maximum number
of shares of Stock issuable upon exercise of Options shall not exceed
1,750,000, subject to adjustment as provided in Section 9. No Option
shall be granted after December 31, 2000. The maximum number of shares
of Stock that may be covered by Options granted to any Participant
(including shares of Stock covered by Options subsequently canceled)
shall not exceed 500,000, subject to adjustment as provided in
Section 9.
2.
Section 7(c) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 7(c) in its place:
"(c) EXERCISE PRICE. The exercise price per share for Options shall be
the 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. The Board shall
have the power to adjust the exercise price of any outstanding
Option of one or more Participants, whether by amendment or
cancellation and reissuance, under such terms and conditions as it
may determine, provided that (i) such adjusted exercise price shall
not be below fair market value as of the effective date of the
adjustment, and (ii) no adjustment, if applicable to a Participant,
shall eliminate any existing right of such Participant under the
Option without his or her written consent. Notwithstanding the
foregoing, in the event that the exercise price of an Option is
adjusted pursuant to this Section 7(c), the exercise price of such
Option may not be
<PAGE>
adjusted again, whether by amendment or cancellation and reissuance,
for a period of at least one year following the date of such
adjustment."
3.
Amendments 1 and 2 shall be effective as of November 17, 1998.
<PAGE>
EXHIBIT 10(h)
AMENDMENT TO THE
MAGELLAN HEALTH SERVICES, INC.
1997 STOCK OPTION PLAN
Pursuant to the power reserved to the Board of Directors of Magellan
Health Services, Inc. (the "Company") under Section 19 of the Magellan Health
Services, Inc. 1997 Stock Option Plan, as amended, (the "Plan"), the Plan is
hereby amended as follows:
1.
Section 2 of the Plan shall be amended by adding the following
thereto:
"`Full Time Employee' means an employee of the Corporation or any
of its Subsidiaries who is employed on the basis of a 40-hour work
week or the substantial equivalent thereof. The Committee shall have
full discretion hereunder in determining a Participant's status as a
Full Time Employee of the Corporation or any of its Subsidiaries, and
any such determination by the Committee shall be final and binding."
2.
Section 6 of the Plan shall be amended by deleting that Section in its
entirety and by substituting the following new Section 6 in its place:
"6. GRANT OF OPTIONS. The Committee, acting in its absolute
discretion, shall have the right to grant Options to Full Time
Employees (as hereinafter defined) under this Plan from time to time;
provided, that the maximum number of shares of Stock issuable upon
exercise of Options shall not exceed 1,500,000, subject to adjustment
as provided in Section 9. No Option shall be granted after December
31, 2000. The maximum number of shares of Stock that may be covered by
Options granted to any Participant under the Plan shall not exceed
1,000,000, subject to adjustment as provided in Section 9."
3.
Section 7(c) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 7(c) in its place:
"(c) EXERCISE PRICE. The exercise price per share for Options shall be
the 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
<PAGE>
with an exercise price per share below the Fair Market Value of the
Stock on the date of grant. The Board shall have the power to adjust
the exercise price of any outstanding Option of one or more
Participants, whether by amendment or cancellation and reissuance,
under such terms and conditions as it may determine, provided that (i)
such adjusted exercise price shall not be below fair market value as
of the effective date of the adjustment, and (ii) no adjustment, if
applicable to a Participant, shall eliminate any existing right of
such Participant under the Option without his or her written consent.
Notwithstanding the foregoing, in the event that the exercise price of
an Option is adjusted pursuant to this Section 7(c), the exercise
price of such Option may not be adjusted again, whether by amendment
or cancellation and reissuance, for a period of at least one year
following the date of such adjustment."
4.
Section 7(g) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 7(g) in its place:
"(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 the Company or a Subsidiary. If a
Participant's employment 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 months
following the date of such termination, or (2) for such longer
period of time as the Committee or the chief executive officer
(pursuant to a delegation under Section 3) may determine, in its
or his discretion (but in either case not 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
twelve months following the date of such event, or (2) for such
longer period of time as the Committee or the chief executive
officer (pursuant to a delegation under Section 3) may determine
in its or his discretion (but in either case not 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."
5.
Section 8 of the Plan shall be amended by deleting that Section in its
entirety and by
2
<PAGE>
substituting the following new Section 8 in its place:
"8. VESTING. Options granted under this Plan shall be exercisable only
to the extent such Options have become vested pursuant to this
Section 8. An Option shall vest (1) over such period as specified
in the Stock Option Agreement if the Participant is an employee of
the Company or a Subsidiary on the vesting dates occurring during
such period, and/or (2) on such other terms and conditions as may
be set forth in the Stock Option Agreement. The Committee or the
chief executive officer (pursuant to a delegation under Section 3
hereof) shall determine the vesting conditions. Notwithstanding the
above, vesting of an Option hereunder shall cease at such point in
time as a Participant shall cease to be a Full Time Employee and
any unvested portion of such Option shall expire and be forfeited
as of such point in time, but any portion of such Option that has
previously vested prior to the Participants ceasing to be a Full
Time Employee shall remain exercisable for so long as the
Participant remains an employee of the Corporation or any of its
Subsidiaries and for such additional period of time as is set forth
in Section 7(g) hereof, but in no event longer than the term of the
Option."
6.
Amendments 2 and 3 shall be effective as of November 17, 1998.
Amendments 1 and 5 shall be effective as of March 18, 1998. Amendment 4 shall be
effective as of November 17, 1998, but only with respect to Participants whose
employment with the Corporation or a Subsidiary was not terminated prior to such
date.
3
<PAGE>
EXHIBIT 10(i)
MAGELLAN HEALTH SERVICES, INC.
1998 STOCK OPTION PLAN
(as Amended on February 6, 1998 and April 9, 1998)
1. PURPOSE. The purpose of the Magellan Health Services, Inc. 1998
Stock Option Plan is to motivate and retain officers and other key employees and
designated consultants of Magellan Health Services, Inc. and its Subsidiaries
who have major responsibility for the attainment of the primary long-term
performance goals of Magellan Health Services, Inc.
2. DEFINITIONS. The following terms shall have the following meanings:
"Board" means the Board of Directors of the Corporation.
"Change in Control" means the effective date of the occurrence of one
or more of the following events: (i) the sale, lease, transfer or other
disposition, in one or more related transactions, of all or substantially all of
the Corporation's assets to any person or related group of persons, including a
"group" as such term is used in Section 13(d)(3) of the Exchange Act, (ii) the
merger or consolidation of the Corporation with or into another corporation, the
merger of another corporation into the Corporation or any other transaction, to
the extent that the stockholders of the Corporation immediately prior to any
such transaction hold less than 50 percent of the total voting power or of the
voting stock of the surviving corporation resulting from any such transaction,
(iii) any person or related group of persons, including a "group" as such term
is used in Section 13(d)(3) of the Exchange Act, whether such person or group of
persons is a stockholder of the Corporation, holds 30 percent or more of the
voting power or of the voting stock of the Corporation, or (iv) the liquidation
or dissolution of the Corporation. Notwithstanding any provisions hereof to the
contrary, the term Change in Control shall not be construed to apply to any
transaction involving the Corporation's ownership interest in Charter Behavioral
Health Services, LLC or to any transaction occurring on or after December 1,
1997 that involves either the sale of all or substantially all of the assets
used by the Corporation or by one or more of its affiliates in the hospital
franchise business or the sale of the stock of one or more of the Corporation's
affiliates in such business.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules promulgated thereunder.
"Committee" means a committee of two or more members of the Board
constituted and empowered by the Board to administer the Plan in accordance with
its terms.
<PAGE>
"Corporation" means Magellan Health Services, Inc., a Delaware
corporation.
"Director" means a member of the Board.
"Disability" means a physical or mental condition under which the
Participant qualifies for (or will qualify for after expiration of a waiting
period) disability benefits under the long-term disability plan of the
Corporation or a Subsidiary that employs such Participant (or would have so
qualified if the Participant had been an employee of the Corporation or a
Subsidiary) .
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means: (1) if the Stock is listed on a national
securities exchange (as such term is defined by the Exchange Act) or is traded
on the Nasdaq National Market System on the date of award or other
determination, the price equal to the mean between the high and low sales prices
of a share of Stock on said national securities exchange or on said Nasdaq
National Market System on that date (or if no shares of the Stock are traded on
that date but there were shares traded on dates within a reasonable period both
before and after such date, the Fair Market Value shall be the weighted average
of the means between the high and low sales prices of the Stock on the nearest
date before and the nearest date after that date on which shares of the Stock
are traded); (2) if the Stock is traded both on a national securities exchange
and in the over-the-counter market, the Fair Market Value shall be determined by
the prices on the national securities exchange; and (3) if the Stock is not
listed for trading on a national securities exchange and is not traded on the
Nasdaq National Market System or otherwise in the over-the-counter market, then
the Committee shall determine the Fair Market Value of the Stock from time to
time in its sole discretion.
"Option" means an Option granted pursuant to Section 6.
"Participant" means an employee of or a consultant to the Corporation
or any of its Subsidiaries who is selected to participate in the Plan in
accordance with Section 4.
"Performance Vesting Period" means that period of time over which
vesting can occur if certain financial, operating or other designated targets
are met.
"Plan" means the Magellan Health Services, Inc. 1998 Stock Option Plan,
as amended.
"Stock" means the common stock, par value $0.25 per share, of the
Corporation.
"Stock Option Agreement" means the written agreement or instrument that
sets forth the terms of an Option granted to a Participant under this Plan.
"Subsidiary" means any corporation, as defined in Section 7701 of the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder, of which the Corporation, at the time, directly or indirectly, owns
50% or more of the outstanding securities having ordinary voting power to elect
directors (other than securities having voting power only by reason of a
contingency).
3. ADMINISTRATION. The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee, acting in its sole
discretion, shall exercise such powers and take such action as expressly called
for under this Plan and, further, shall have the power to interpret the Plan, to
determine the terms of each Stock Option Agreement (subject to the provisions of
the Plan) and (subject to Section 19 and Rule 16b-3 under the Exchange Act, if
applicable) to take such other action in the administration and operation of
this Plan as the
<PAGE>
Committee deems equitable under the circumstances. All actions of the Committee
shall be binding on the Corporation, on each affected Participant and on each
other person directly or indirectly affected by such action. No member of the
Board shall serve as a member of the Committee unless such member is a
"non-employee director" within the meaning of Rule 16b-3 under the Exchange Act
and is an "outside director" as such term is defined in Treasury Regulation
Section 1.162-27(e)(3). The Committee shall have the right to delegate to the
chief executive officer of the Corporation the authority to select Participants,
to grant Options and to set the terms of Stock Option Agreements (except with
respect to any person who, with respect to the last completed fiscal year of the
Corporation, has been designated by the Corporation as a named executive officer
of the Corporation, as that term is defined in Item 402(a)(3) of Regulation S-K,
issued by the Securities and Exchange Commission), subject to any review,
approval or notification required by the Committee or as otherwise may be
required by law.
4. PARTICIPATION. Participants in the Plan shall be limited to those
officers (other than E. Mac Crawford) and employees of or consultants to the
Corporation or any of its Subsidiaries who have been selected to participate in
the Plan.
5. MAXIMUM NUMBER OF SHARES SUBJECT TO OPTIONS. Subject to the
provisions of Section 9, there shall be 1,000,000 shares of Stock reserved for
use under this Plan, and such shares of Stock shall be reserved to the extent
that the Committee and the Board deems appropriate from authorized but unissued
shares of Stock or from shares of Stock which have been reacquired by the
Corporation. Any shares of Stock subject to any Option which remain unpurchased
upon the cancellation, expiration, exchange or forfeiture of such Option shall
again become available for use under this Plan. All authorized and unissued
shares issued upon exercise of Options under the Plan shall be fully paid and
nonassessable shares.
6. GRANT OF OPTIONS. The Committee, acting in its sole discretion,
shall have the right to grant Options to Participants under this Plan from time
to time; provided, that the maximum number of shares of Stock issuable upon
exercise of Options shall not exceed 1,000,000, subject to adjustment as
provided in Section 9. No Option shall be granted after December 31, 2001. The
maximum number of shares of Stock that may be covered by Options granted to any
Participant under the Plan shall not exceed 500,000, subject to adjustment as
provided in Section 9.
7. TERMS AND CONDITIONS OF OPTIONS. Options granted pursuant to the
Plan shall be evidenced by Stock Option Agreements in such form as the Committee
from time to time shall approve, including any such terms and conditions not
inconsistent with the provisions set forth in the Plan as the Committee may
determine; provided, that such Stock Option Agreements and the Options granted
shall comply with and be subject to the following terms and conditions:
(a) EMPLOYMENT. Each Participant shall agree to remain in the
employ of or to serve as a consultant to and, in either such capacity, to render
services to the Corporation or a Subsidiary thereof for such period as the may
be required in the Stock Option Agreement; provided, that such agreement shall
not impose upon the Corporation or any Subsidiary thereof any obligation to
retain the Participant in its employ or as a consultant for any period.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall state
the total number of shares of Stock to which it pertains.
(c) EXERCISE PRICE. The exercise price per share for Options
shall be Fair Market Value of the Stock on the date of grant, subject to
adjustment as contemplated by Section 9; provided, that the Committee or the
chief executive officer (pursuant to a delegation under Section 3 hereof),
acting in its or his sole discretion, may elect to grant Options with an
exercise price per share below the Fair Market Value of the Stock on the date of
grant.
<PAGE>
(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.
(f) TERM OF OPTIONS. Except as otherwise specifically provided
in the Plan, the terms of all Options shall commence on the date of grant and
shall expire not later than December 31, 2008.
(g) EXERCISE OF OPTIONS. Options are exercisable only to the
extent they are vested as provided in the Stock Option Agreement. After Options
have vested in accordance with the terms of the Stock Option Agreement, such
Options are exercisable at any time, in whole or in part during their terms if
the Participant is at the time of exercise employed by or a consultant to the
Company or a Subsidiary. If a Participant's employment or consulting
relationship with the Corporation or any Subsidiary is terminated for any reason
other than death or disability, the vested portion of each Option held by such
Participant on the date of such termination may be exercised (1) for six (6)
months following the date of such termination, or (2) for such longer period of
time as may be set forth in the Stock Option Agreement (but not in either case
after expiration of the term of the Option). In the event of the death or
Disability of a Participant, the vested portion of each Option held by such
Participant on the date of such event may be exercised (1) for 12 months of the
date of such event, or (2) if longer, for such period of time as may be set
forth in the Stock Option Agreement (but not in either case after the expiration
of the term of the Option).
In the event of the death of a Participant, the vested portion of each
Option previously held by such Participant may be exercised within the time set
forth above by the executor, other legal representative or, if none, by the heir
or legatee of such Participant.
(h) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Upon a change
in capitalization pursuant to Section 9, the number of shares covered by an
Option and the per share option exercise price shall be adjusted in accordance
with the provisions of Section 9.
(i) TRANSFERABILITY. Except to the extent specifically
permitted herein, 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.
<PAGE>
The Company, in its discretion, may permit the Participant to transfer his
Options, or some portion thereof, without consideration to members of such
Participant's immediate family or to a trust established for the benefit of such
family members; provided, that in the event of such a transfer, the transferred
Options may be exercised by the transferee only to the extent that such Options
could have been exercised by the participant if the transfer had not occurred
and any such exercise shall be made under the same procedures applicable
generally to exercises hereunder. The Company, in its discretion, shall from
time to time determine the procedures to effect and record such a transfer.
(j) RIGHTS AS A STOCKHOLDER. A Participant shall have no
rights as a stockholder with respect to shares covered by his Option until the
date of the issuance of the shares to him and only after such shares are fully
paid. Unless specified in Section 9, no adjustment will be made for dividends or
other rights for which the record date is prior to the date of such issuance.
(k) MISCELLANEOUS PROVISIONS. The Stock Option Agreements
authorized under the Plan may contain such other provisions not inconsistent
with the terms of thi s Plan as the Committee shall deem advisable.
8. VESTING. Options granted under this Plan shall be exercisable only
to the extent such Options have become vested pursuant to this Section 8. An
Option shall vest (1) over such period as specified in the Stock Option
Agreement, including provisions for accelerated vesting during a Performance
Vesting Period, if the Participant is an employee of or a consultant to the
Company or a Subsidiary on the vesting dates occurring such period, and/or (2)
on such other terms and conditions as may be set forth in the Stock Option
Agreement. The Committee or the chief executive officer (pursuant to a
delegation under Section 3 hereof) shall determine the Performance Vesting
Period and all other vesting conditions, and also shall determine the designated
targets relevant to the Performance Vesting Period.
9. CHANGE IN CAPITALIZATION. If the Stock should, as a result of a
stock split or stock dividend, combination of shares, recapitalization or other
change in the capital structure of the Corporation or exchange of Stock for
other securities by reclassification or otherwise, be increased or decreased or
changed into, or exchanged for, a different number or kind of shares or other
securities of the Corporation, or any other corporation, then the number of
shares covered by Options, the number and kind of shares which thereafter may be
distributed or issued under the Plan and the per share option price of Options
shall be appropriately adjusted consistent with such change in such manner as
the Committee may deem equitable to prevent dilution of or increase in the
rights granted to, or available for, Participants.
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.
<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. Nothing in this Section 13 shall prevent a Participant's rights
and interests under the Plan from being transferred without consideration to
members of such Participant's immediate family or to a trust established for the
benefit of such family members in accordance with the provisions of Section
7(i).
14. LISTING AND QUALIFICATION OF SHARES. The Corporation, in its sole
discretion, may postpone the issuance or delivery of shares of Stock until
completion of any stock exchange listing, or other qualification or registration
of such shares under any state or federal law, rule or regulation, as the
Corporation may consider appropriate, and may require any Participant to make
such representations, including, but not limited to, a written representation
that the shares are to be acquired for investment and not for resale or with a
view to the distribution thereof, and to furnish such information as it may
consider appropriate in connection with the issuance or delivery of the shares
in compliance with applicable law, rules and regulations. The Corporation may
cause a legend or legends to be placed on such certificates to make appropriate
reference to such representation and to restrict transfer in the absence of
compliance with applicable federal or state securities laws.
15. NO CLAIM OR RIGHT UNDER THE PLAN. No employee of the Corporation or
any Subsidiary shall at any time have the right to be selected as a Participant
in the Plan nor, having been selected as a Participant and granted an Option, to
be granted any additional Option. Neither the action of the Corporation in
establishing the Plan, nor any action taken by it or by the Board or the
Committee thereunder, nor any provision of the Plan, nor participation in the
Plan, shall be construed to give, and does not give, to any person the right to
be retained in the employ of the Corporation or any Subsidiary, or interfere in
any way with the right of the Corporation or any Subsidiary to discharge or
terminate any person at any time without regard to the effect such discharge or
termination may have upon such person's rights, if any, under the Plan.
16. TAXES. The Corporation may make such provisions and take such steps
as it may deem necessary or appropriate for the withholding of all federal,
state, local and other taxes required by law to be withheld with respect to
Options under the Plan, including, but not limited to, (i) deducting the amount
required to be withheld from salary or any other amount then or thereafter
payable to a Participant, beneficiary or legal representative, (ii) requiring a
Participant, beneficiary or legal representative to pay to the Corporation the
amount required to be withheld as a condition of releasing the Stock, or (iii)
complying with applicable provisions of any broker-directed cashless
exercise/resale procedure adopted by the Corporation pursuant to Section 7(e).
17. NO LIABILITY OF DIRECTORS. No member of the Board or the Committee
shall be personally liable by reason of any contract or other instrument
executed by such member on his behalf in his capacity as a member of the Board
or Committee, nor for any mistake of judgment made in good faith, and the
Corporation shall indemnify and hold harmless each employee, officer and
Director, to whom any duty or power relating to the administration or
interpretation of the Plan may be allocated or delegated, against any cost or
expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of the Board) arising out of any act or
omission to act in connection with the Plan to the fullest extent permitted or
required by the Corporation's governing
<PAGE>
instruments and, in addition, to the fullest extent of any applicable insurance
policy purchased by the Corporation.
18. OTHER PLANS. Nothing contained in the Plan is intended to amend,
modify or rescind any previously approved compensation plans or programs entered
into by the Corporation or its Subsidiaries. The Plan shall be construed to be
in addition to any and all such plans or programs. No award of Options under the
Plan shall be construed as compensation under any other executive compensation
or employee benefit plan of the Corporation or any of its Subsidiaries, except
as specifically provided in any such plan or as otherwise provided by the
Committee. The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power or authority of the Board to adopt such
additional compensation or incentive arrangements as the Board may deem
necessary or desirable.
19. AMENDMENT OR TERMINATION. This Plan may be amended by the Board
from time to time to the extent that the Board deems necessary or appropriate;
provided, no such amendment shall be made absent the approval of the
stockholders of the Corporation: (1) if stockholder approval of such amendment
is required for continued compliance with Rule 16b-3 of the Exchange Act, or (2)
if stockholder approval of such amendment is required by any other applicable
laws or regulations or by the rules of any stock exchange as long as the Stock
is listed for trading on such exchange. The Committee also may suspend the
granting of Options under this Plan at any time and may terminate this Plan at
any time; provided, the Corporation shall not have the right to modify, amend or
cancel any Option granted before such suspension or termination unless (1) the
Participant consents in writing to such modification, amendment or cancellation
or (2) there is a dissolution or liquidation of the Corporation or a transaction
described in Section 11 of this Plan.
20. CAPTIONS. The captions preceding the sections of the Plan have been
inserted solely as a matter of convenience and shall not, in any manner, define
or limit the scope or intent of any provisions of the Plan.
21. GOVERNING LAW. The Plan and all rights thereunder shall be governed
by, and construed in accordance with, the laws of the State of Georgia, without
reference to the principles of conflicts of law thereof.
22. EXPENSES. All expenses of administering the Plan shall be borne by
the Corporation.
23. EFFECTIVE DATE. The Plan shall be effective as of the date of its
adoption by the Board, subject to approval of this Plan by the stockholders of
the Corporation after the date of its adoption.
<PAGE>
EXHIBIT 10(j)
THIRD AMENDMENT TO THE
MAGELLAN HEALTH SERVICES, INC.
1998 STOCK OPTION PLAN
Pursuant to the power reserved to the Board of Directors of Magellan
Health Services, Inc. (the "Company") under Section 19 of the Magellan Health
Services, Inc. 1998 Stock Option Plan, as amended, (the "Plan"), the Plan hereby
is amended as follows:
1.
Section 7(c) of the Plan shall be amended by deleting that Section in
its entirety and by substituting the following new Section 7(c) in its place:
"(c) EXERCISE PRICE. The exercise price per share for Options shall be
the 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. The Board shall have the power to
adjust the exercise price of any outstanding Option of one or more
Participants, whether by amendment or cancellation and reissuance,
under such terms and conditions as it may determine, provided that (i)
such adjusted exercise price shall not be below fair market value as
of the effective date of the adjustment, and (ii) no adjustment, if
applicable to a Participant, shall eliminate any existing right of
such Participant under the Option without his or her written consent.
Notwithstanding the foregoing, in the event that the exercise price of
an Option is adjusted pursuant to this Section 7(c), the exercise
price of such Option may not be adjusted again, whether by amendment
or cancellation and reissuance, for a period of at least one year
following the date of such adjustment."
2.
Amendment 1 shall be effective as of November 17, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE
YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 54,824,000
<SECURITIES> 0
<RECEIVABLES> 169,679,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 367,045,000
<PP&E> 222,323,000
<DEPRECIATION> 66,163,000
<TOTAL-ASSETS> 1,931,111,000
<CURRENT-LIABILITIES> 494,796,000
<BONDS> 1,196,472,000
0
0
<COMMON> 8,516,000
<OTHER-SE> 187,342,000
<TOTAL-LIABILITY-AND-EQUITY> 1,931,111,000
<SALES> 960,458,000
<TOTAL-REVENUES> 960,458,000
<CGS> 0
<TOTAL-COSTS> 860,859,000
<OTHER-EXPENSES> 31,106,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,318,000
<INCOME-PRETAX> 20,175,000
<INCOME-TAX> 11,664,000
<INCOME-CONTINUING> 8,138,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,138,000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
