<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 Identification
Incorporation or organization) No.)
3414 PEACHTREE ROAD, N.E. 30326
SUITE 1400 (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
(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
January 29, 1999 was 31,777,788.
- --------------------------------------------------------------------------------
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<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 December 31, 1998............................................................ 1
Condensed Consolidated Statements of Operations--
For the Three Months ended December 31, 1997 and 1998............................................... 2
Condensed Consolidated Statements of Cash Flows--
For the Three Months ended December 31, 1997 and 1998............................................... 3
Notes to Condensed Consolidated Financial Statements.................................................. 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................. 17
PART II--OTHER INFORMATION:
Item 6.--Exhibits and Reports on Form 8-K............................................................. 29
Signatures............................................................................................ 30
</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, DECEMBER 31,
1998 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 92,050 $ 49,358
Accounts receivable, net.......................................................... 174,846 172,990
Restricted cash and investments................................................... 89,212 132,099
Refundable income taxes........................................................... 4,939 --
Other current assets.............................................................. 38,677 33,916
------------- ------------
Total Current Assets.......................................................... 399,724 388,363
Assets restricted for settlement of unpaid claims and other liabilities............. 37,910 33,978
Property and equipment, net of accumulated depreciation of $60,100 at September 30,
1998 and $60,231 at December 31, 1998............................................. 177,169 156,436
Deferred income taxes............................................................... 97,386 94,069
Investments in unconsolidated subsidiaries.......................................... 11,066 31,814
Other long-term assets.............................................................. 35,415 18,751
Goodwill, net....................................................................... 992,431 1,067,085
Other intangible assets, net........................................................ 165,189 160,447
------------- ------------
$ 1,916,290 $1,950,943
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 42,873 $ 33,593
Accrued liabilities............................................................... 193,530 242,199
Medical claims payable............................................................ 195,330 191,384
Income taxes payable.............................................................. -- 681
Current maturities of long-term debt and capital lease obligations................ 23,033 29,428
------------- ------------
Total Current Liabilities..................................................... 454,766 497,285
Long-term debt and capital lease obligations........................................ 1,202,613 1,156,020
Reserve for unpaid claims........................................................... 30,280 27,149
Deferred credits and other long-term liabilities.................................... 14,011 74,633
Minority interest................................................................... 26,985 4,683
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 December 31,
1998.......................................................................... 8,476 8,476
Other Stockholders' Equity:
Additional paid-in capital...................................................... 349,651 349,663
Accumulated deficit............................................................. (149,238) (145,057)
Warrants outstanding............................................................ 25,050 25,050
Common stock in treasury, 2,289 shares at September 30, 1998 and December 31,
1998.......................................................................... (44,309) (44,309)
Cumulative foreign currency adjustments included in comprehensive income........ (1,995) (2,650)
------------- ------------
Total Stockholders' Equity.................................................... 187,635 191,173
------------- ------------
$ 1,916,290 $1,950,943
------------- ------------
------------- ------------
</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
ENDED
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Net revenue............................................................. $ 212,371 $ 463,143
--------- ---------
Costs and expenses:
Salaries, cost of care and other operating expenses................... 172,331 413,216
Equity in (earnings) losses of unconsolidated subsidiaries............ 12,122 (4,982)
Depreciation and amortization......................................... 6,969 18,391
Interest, net......................................................... 7,401 24,109
Stock option expense (credit)......................................... (3,959) 12
Managed care integration costs........................................ -- 1,750
Unusual items......................................................... -- 22
--------- ---------
194,864 452,518
--------- ---------
Income before provision for income taxes and minority interest.......... 17,507 10,625
Provision for income taxes.............................................. 7,003 6,037
--------- ---------
Income before minority interest......................................... 10,504 4,588
Minority interest....................................................... 2,876 407
--------- ---------
Net income.............................................................. 7,628 4,181
Unrealized foreign currency adjustment, net of income tax (benefit)
provision of $39 in 1997 and $(436) in 1998........................... 59 (655)
--------- ---------
Comprehensive income.................................................... $ 7,687 $ 3,526
--------- ---------
--------- ---------
Average number of common shares outstanding--basic...................... 28,969 31,613
--------- ---------
--------- ---------
Average number of common shares outstanding--diluted.................... 29,784 31,660
--------- ---------
--------- ---------
Net income per common share--basic...................................... $ 0.26 $ 0.13
--------- ---------
--------- ---------
Net income per common share--diluted.................................... $ 0.26 $ 0.13
--------- ---------
--------- ---------
</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 THREE MONTHS
ENDED
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................. $ 7,628 $ 4,181
--------- ---------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization.......................................................... 6,969 18,391
Equity in (earnings) losses of unconsolidated subsidiaries............................. 12,122 (4,982)
Stock option expense (credit).......................................................... (3,959) 12
Non-cash interest expense.............................................................. 422 954
Gain on sale of assets................................................................. -- (1,062)
Cash flows from changes in assets and liabilities, net of effects from sales and
acquisitions of businesses:
Accounts receivable, net............................................................. (16,304) (6,267)
Restricted cash and investments...................................................... -- (42,887)
Other assets......................................................................... (10,633) 3,289
Accounts payable and other accrued liabilities....................................... (27,776) 34,142
Medical claims payable............................................................... 6,592 (3,946)
Reserve for unpaid claims............................................................ (9,256) (3,131)
Income taxes payable and deferred income taxes....................................... 2,056 9,363
Other liabilities.................................................................... (1,623) (223)
Minority interest, net of dividends paid............................................. 3,199 924
Other................................................................................ (1,162) (1,099)
--------- ---------
Total adjustments.................................................................. (39,353) 3,478
--------- ---------
Net cash provided by (used in) operating activities.............................. (31,725) 7,659
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................................................... (4,578) (14,357)
Acquisitions and investments in businesses, net of cash acquired and return of escrowed
funds.................................................................................... (165,548) 6,444
Conversion of joint ventures from consolidation to equity method........................... -- (21,092)
Distributions received from unconsolidated subsidiaries.................................... -- 9,303
Decrease in assets restricted for settlement of unpaid claims and other liabilities........ 14,364 5,808
Proceeds from sale of assets............................................................... -- 3,619
Cresent Transaction costs.................................................................. (4,253) (7)
--------- ---------
Net cash used in investing activities................................................ (160,015) (10,282)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net of issuance costs...................................... -- (69)
Payments on debt and capital lease obligations............................................. (140) (40,000)
Proceeds from exercise of stock options and warrants....................................... 1,917 --
Purchases of treasury stock................................................................ (12,456) --
--------- ---------
Net cash used in financing activities................................................ (10,679) (40,069)
--------- ---------
Net decrease in cash and cash equivalents.................................................... (202,419) (42,692)
Cash and cash equivalents at beginning of period............................................. 372,878 92,050
--------- ---------
Cash and cash equivalents at end of period................................................... $ 170,459 $ 49,358
--------- ---------
--------- ---------
</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
DECEMBER 31, 1998
(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. 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 three months
ended December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Income taxes paid, net of refunds received.............. $ 4,752 $ (3,570)
Interest paid, net of amounts capitalized............... 21,550 12,601
</TABLE>
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 December 31, 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
------------- ------------
<S> <C> <C>
Credit Agreement:
Revolving Facility due through 2004........................... $ 40,000 $ --
Term Loan Facility (7.3725% to 7.8725% at December 31, 1998)
due through 2006............................................ 550,000 550,000
9.0% Senior Subordinated Notes due 2008....................... 625,000 625,000
6.07% to 11.5% Mortgage and other notes payable through
2005........................................................ 4,198 4,010
4.05% Capital lease obligations due through 2014.............. 6,448 6,438
------------- ------------
1,225,646 1,185,448
Less amounts due within one year.......................... 23,033 29,428
------------- ------------
$ 1,202,613 $1,156,020
------------- ------------
------------- ------------
</TABLE>
4
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE D--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
------------- ------------
<S> <C> <C>
Salaries, wages and other benefits.............................. $ 23,893 $ 12,504
Interest........................................................ 9,271 23,200
CHAMPUS adjustments............................................. 25,484 29,330
Other........................................................... 134,882 177,165
------------- ------------
$ 193,530 $ 242,199
------------- ------------
------------- ------------
</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
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Average number of common shares outstanding--basic... 28,969 31,613
Common stock equivalents--stock options.............. 762 39
Common stock equivalents--warrants................... 53 8
--------- ---------
Average number of common shares
outstanding--diluted............................... 29,784 31,660
--------- ---------
--------- ---------
</TABLE>
Options to purchase approximately 1,649,000 shares of common stock at $14.56
to $31.00 per share were outstanding during the quarter ended December 31, 1998,
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
Approximately 1,315,000 of these options, which expire between fiscal 2001 and
2009, were outstanding at December 31, 1998.
Warrants to purchase approximately 4,713,000 shares of common stock at
$26.15 to $38.70 per share were outstanding during the quarter ended December
31, 1998, but were not included in the computation of diluted EPS because the
warrants' exercise prices were greater than the average market price of the
common shares. The warrants, which expire between fiscal 2000 and 2009, were
outstanding at December 31, 1998.
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 which were held by current directors and full-time employees (the "Stock
Option Repricing"). Each holder of 10,000 or more stock options that was
5
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE E--INCOME PER COMMON SHARE (CONTINUED)
eligible to participate in the Stock Option Repricing was required to forfeit a
percentage of outstanding stock options as follows:
<TABLE>
<S> <C>
- - Current Directors, including the Chief Executive Officer............. 40%
- - Named Executive Officers............................................. 30%
- - Holders of 50,000 or more stock options.............................. 25%
- - Holders of 10,000-49,999 stock options............................... 15%
</TABLE>
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
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC. The Company owned a 50% interest in
Charter Behavioral Health Systems, LLC ("CBHS") as of September 30, 1998 and
December 31, 1998. The Company accounts for its investment in CBHS using the
equity method.
A summary of financial information for CBHS is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
------------- ------------
<S> <C> <C>
Current assets.................................................. $ 147,119 $ 143,545
Property and equipment, net..................................... 21,148 21,460
Other nonconcurrent assets...................................... 8,871 9,211
------------- ------------
Total Assets.............................................. $ 177,138 $ 174,216
------------- ------------
------------- ------------
Current liabilities............................................. $ 141,379 $ 152,888
Long-term debt.................................................. 67,200 67,200
Other nonconcurrent liabilities................................. 35,437 47,661
Members' deficit................................................ (66,878) (93,533)
------------- ------------
Total Liabilities and Members' Deficit.................... $ 177,138 $ 174,216
------------- ------------
------------- ------------
</TABLE>
6
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Net Revenue.......................................... $ 178,058 $ 182,221
--------- ---------
Operating expenses................................... 199,664 206,290
Interest, net........................................ 1,370 1,588
--------- ---------
Net loss before preferred member
distribution................................. $ (22,976) $ (25,657)
--------- ---------
--------- ---------
Cash provided by (used in) operating activities...... $ (2,176) $ 4,904
--------- ---------
--------- ---------
Magellan equity loss (2)............................. $ (11,488) $ --
--------- ---------
--------- ---------
</TABLE>
The Company's transactions with CBHS and related balances are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
1997 1998
--------------- --------------
<S> <C> <C>
Franchise fee revenue (2)................... $ 19,575 $ --
------- --------------
Costs:
Accounts receivable collection fees....... $ 1,054 $ 93
Hospital-based joint venture management
fees.................................... 1,630 1,319
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
--------------- --------------
<S> <C> <C>
Due to CBHS, net (1)....................... $ 1,127 $ 4,244
------- --------------
------- --------------
Prepaid CHARTER call center management
fees (3)................................ $ 2,953 $ 5,314
------- --------------
------- --------------
Net book value of leased property (4)..... $ 2,850 $ 7,250
------- --------------
------- --------------
</TABLE>
- ------------------------
(1) The nature of hospital accounts receivable billing and collection processes
have 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 $58.5
million as of September 30, 1998 and December 31, 1998, respectively. CBHS'
independent public accountants' report on CBHS' financial statements for the
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 three months ended December 31, 1998, due to continuing
uncertainties surrounding their collectibility. Cumulative equity in losses
of CBHS in excess of the
7
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
Company's investment in CBHS of $7.7 million ($5.1 million during the fiscal
year ended September 30, 1998; $2.6 million during the three months ended
Decemer 31, 1998) are not reflected in the Company's financial statements at
and for the three months ended December 31, 1998, 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 under a management agreement (the "Call Center
Management Agreement") which was entered into on December 22, 1997.
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 December 31, 1998, that 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 quarter ended December 31, 1998).
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
December 31, 1998. Crescent Funding is an affiliate of both Crescent
Operating, Inc. ("COI"), the other 50% owner of CBHS, and Crescent Real
Estate Equities, L.P. ("Crescent"), the lessor of the majority of the
properties in which CBHS conducts its business.
CHOICE BEHAVIORAL HEALTH PARTNERSHIP. The Company is a 50% partner with
Value Options, Inc. in Choice Behavioral Health Partnership ("Choice"), a
managed behavioral healthcare company. Choice 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.
8
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Current assets......................................... $ 22,974 $ 20,957
Property and equipment, net............................ 345 310
------- -------
Total Assets..................................... $ 23,319 $ 21,267
------- -------
------- -------
Current liabilities.................................... $ 16,829 $ 16,514
Partners' capital...................................... 6,490 4,753
------- -------
Total Liabilities and Partners' Capital.......... $ 23,319 $ 21,267
------- -------
------- -------
Magellan Investment.................................... $ 3,245 $ 2,207
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Net revenue................................................................ $ 14,580
Operating expenses......................................................... 8,348
-------
Net income........................................................... $ 6,232
-------
-------
Magellan equity income..................................................... $ 3,116
-------
-------
</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
for the three months ended December 31, 1997, is not presented.
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 December 31, 1998 was $5.8
million and $6.5 million, respectively. The Company's equity in earnings
(losses) of Premier for the three months ended December 31, 1997 and 1998 was
$(0.6) million and $0.7 million, respectively.
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 member.
9
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE F--INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
A summary of the Provider JV's is as follows:
<TABLE>
<CAPTION>
OWNERSHIP
MARKET DATE PERCENTAGE MINORITY OWNER/S
- --------------------------------- ----------------- --------------- -----------------------------------------------
<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 of accounting. See "Management's
Discussion and Analysis--Recent Accounting Pronouncements--EITF 96-16".
The Company's ownership interests in the Provider JV's have been managed by
CBHS for a fee equivalent to Magellan's portion of the joint ventures' earnings
since June 17, 1997.
A summary of financial information for the Company's aggregate investment in
the Provider JV's is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Current assets............................................................. $ 21,026
Property and equipment, net................................................ 23,761
Other noncurrent assets.................................................... 2,196
--------
Total Assets......................................................... $ 46,983
--------
--------
Current liabilities........................................................ $ 10,413
Partners' capital.......................................................... 36,570
--------
Total Liabilities and Partners' Capital.............................. $ 46,983
--------
--------
Magellan Investment........................................................ $ 20,455
--------
--------
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Net revenue................................................................ $ 14,845
Operating expenses......................................................... 12,604
--------
Net income........................................................... $ 2,241
--------
--------
Magellan equity income..................................................... $ 1,199
--------
--------
</TABLE>
10
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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
ACQUISITION PRICE
ACQUIRED COMPANY SEGMENT DATE (IN MILLIONS)
- ------------------------------------------------------------ ------------ --------------- -----------------
<S> <C> <C> <C>
Human Affairs International, Incorporated ("HAI") Behavioral 12/4/97 $ 122.1(1)
Allied Health Group, Inc. ("Allied") Specialty 12/5/97 $ 50.0(2)
Merit Behavioral Care Corporation ("Merit") Behavioral 2/12/98 $ 750.0
</TABLE>
- ------------------------
(1) Excluding potential contingent consideration of up to $300.0 million.
(2) Excluding contingent consideration of $4.5 million paid during the quarter
ended December 31,1998.
The Company accounted for the Managed Care Acquisitions using the purchase
method of accounting. The purchase price allocation for the Merit acquisition is
tentative and subject to final valuation allowances on deferred tax assets,
integration plan matters (see Note I), CHAMPUS Adjustments (as defined) and
certain other matters. The Company expects the Merit purchase price allocation
to be finalized during the quarter ended March 31, 1999.
GREEN SPRING MINORITY STOCKHOLDER CONVERSION. In January 1998, the minority
stockholders of 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"). As a result of the Green Spring Minority Stockholder Conversion,
the Company owns 100% of Green Spring. 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 ended December
31, 1997, has been prepared assuming the Managed Care Acquisitions and the Green
Spring Minority Stockholder Conversion were consummated on October 1, 1997. The
unaudited pro forma information does not purport to be
11
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE G--ACQUISITIONS (Continued)
indicative of the results that would have actually been obtained had such
transactions been consummated on October 1, 1997, or which may be attained in
future periods (in thousands, except per share amounts):
<TABLE>
<CAPTION>
PRO FORMA
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
1997
--------------------
<S> <C>
Net revenue............................................................. $ 428,272
--------
--------
Net income (1).......................................................... $ 3,515
--------
--------
Net income per common share -- basic.................................... $ 0.11
--------
--------
Net income per common share -- diluted.................................. $ 0.11
--------
--------
</TABLE>
- ------------------------
(1) Excludes expected unrealized cost savings related to the Integration Plan
(as defined).
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 December 31, 1998, was approximately $34.6
million and $30.3 million, respectively. The carrying amount of accrued medical
malpractice claims was $26.2 million and $23.8 million at September 30, 1998 and
December 31, 1998, respectively. The reserve for unpaid claims is adjusted
periodically as such claims mature, to reflect changes in actuarial estimates
based on actual experience. During the quarter ended December 31, 1997, 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 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
12
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE H--CONTINGENCIES (CONTINUED)
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 (as defined). 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. The plaintiffs have 90 days from the date of
judgment to file a petition for certiorari with the United States Supreme Court.
The plaintiffs have not indicated whether they will file such a petition. If no
petition is filed, or if a filed petition is denied, this matter will have been
concluded. The Company does not believe this matter will have a material adverse
effect on its financial position or results of operations.
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 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
13
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE H--CONTINGENCIES (CONTINUED)
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 have stated that they intend to appeal the Court's transfer order to
the United States District Court for the District of New Jersey. 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 $29.3 million as of December 31, 1998,
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. Management approved and committed the Company to a plan
to combine and integrate the operations of its Behavioral and Specialty segments
(the "Integration Plan") during fiscal 1998. 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 425 employees had
been involuntarily terminated pursuant to the Integration Plan as of December
31, 1998. The Company estimates that approximately 100 additional employees will
be involuntarily terminated as a result of the Integration Plan. 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 the specific identification
of all personnel who will be involuntarily terminated during the quarter ended
March 31, 1999, and will complete its involuntary terminations by the end of
fiscal 1999.
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 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
14
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE I--MANAGED CARE INTEGRATION PLAN AND COSTS (CONTINUED)
recorded in the statement of operations under "Managed Care integration costs"
in fiscal 1998. The Company may record adjustments to such liabilities in fiscal
1999 depending on the Company's 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, DECEMBER 31,
TYPE OF COST 1998 ADDITIONS PAYMENTS 1998
- ------------------------------------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Employee termination benefits............. $ 6,190 $ -- $ 2,824 $ 3,366
Facility closing costs.................... 7,475 -- 140 7,335
Other..................................... 169 -- -- 169
------------- --- ----------- ------------
$ 13,834 $ -- $ 2,964 $ 10,870
------------- --- ----------- ------------
------------- --- ----------- ------------
</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 ended December 31, 1998, the Company incurred
approximately $1.8 million in other integration costs, including outside
consulting costs of approximately $0.8 million and employee and office
relocation costs of approximately $0.4 million.
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.
15
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
NOTE J--BUSINESS SEGMENT INFORMATION (CONTINUED)
The following tables summarize, for the periods indicated, net revenue,
Segment Profit (as defined) and total assets by business segment (in thousands):
<TABLE>
<CAPTION>
BEHAVIORAL SPECIALTY
MANAGED HUMAN MANAGED HEALTHCARE HEALTHCARE CORPORATE
THREE MONTHS ENDED DECEMBER 31, 1997 HEALTHCARE SERVICES HEALTHCARE FRANCHISING PROVIDER OVERHEAD CONSOLIDATED
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................... $ 119,211 $ 26,314 $ 14,107 $ 19,575 $ 33,164 $ -- $ 212,371
Segment Profit (loss)................. 14,659 2,297 (676) 5,845 9,202 (3,409) 27,918
</TABLE>
<TABLE>
<CAPTION>
BEHAVIORAL SPECIALTY
MANAGED HUMAN MANAGED HEALTHCARE HEALTHCARE CORPORATE
THREE MONTHS ENDED DECEMBER 31, 1998 HEALTHCARE SERVICES HEALTHCARE FRANCHISING PROVIDER OVERHEAD CONSOLIDATED
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................... $ 356,551 $ 45,739 $ 41,041 $ 175 $ 19,637 $ -- $ 463,143
Segment Profit (loss)................. 52,620 5,287 416 (1,320) 1,199 (3,293) 54,909
</TABLE>
<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>
Total assets, September 30, 1998...... $1,356,259 $ 119,356 $ 78,062 $ 1,941 $ 178,217 $ 182,455 $1,916,290
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
Total assets, December 31, 1998....... $1,463,516 $ 122,310 $ 75,129 $ 1,854 $ 136,757 $ 151,377 $1,950,943
----------- --------- ----------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ----------- ------------
</TABLE>
The following tables reconcile Segment Profit (as defined) to consolidated
income before provision for income taxes and minority interest (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1997
<S> <C>
Segment Profit..................................................................... $ 27,918
Depreciation and amortization...................................................... (6,969)
Interest, net...................................................................... (7,401)
Stock option credit................................................................ 3,959
---------
Income before provision for income taxes and minority interest............... $ 17,507
---------
---------
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998
<S> <C>
Segment Profit..................................................................... $ 54,909
Depreciation and amortization...................................................... (18,391)
Interest, net...................................................................... (24,109)
Stock option expense............................................................... (12)
Managed care integration costs..................................................... (1,750)
Unusual items...................................................................... (22)
---------
Income before provision for income taxes and minority interest............... $ 10,625
---------
---------
</TABLE>
16
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
DECEMER 31, 1998
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 for
the fiscal year ended September 30, 1998.
OVERVIEW
The Company historically derived the majority of its revenue from providing
behavioral healthcare services in an inpatient setting prior to the consummation
of the Crescent Transactions on June 17, 1997. Payments from third-party payors
are the principal source of revenue for most behavioral healthcare providers. In
the early 1990's, many third party payors sought to control the cost of
providing care to their patients by instituting managed care programs or seeking
the assistance of managed care companies. Providers participating in managed
care programs agree to provide services to patients for a discount from
established rates, which generally results in pricing concessions by the
providers and lower margins. Additionally, managed care programs generally
encourage alternatives to inpatient treatment settings and reduce utilization of
inpatient services. As a result, third-party payors established managed care
programs or engaged managed care companies in many areas of healthcare,
including behavioral healthcare. The Company, which until the consummation of
the Crescent Transactions was the largest operator of psychiatric hospitals in
the United States, was adversely affected by the adoption of managed care
programs by the third-party payors.
Prior to the first quarter of fiscal 1996, the Company was not a provider of
behavioral managed healthcare services. During the first quarter of fiscal 1996,
the Company acquired a 61% ownership interest in Green Spring Health Services,
Inc. ("Green Spring"). At that time, the Company intended to become a fully
integrated behavioral healthcare provider by combining the behavioral managed
healthcare products offered by Green Spring with the direct treatment services
offered by the Company's psychiatric hospitals. The Company believed that an
entity that participated in both the managed care and the provider segments of
the behavioral healthcare industry could more efficiently provide and manage
behavioral healthcare for insured populations than an entity that was solely a
managed care company. The Company also believed that earnings from its
behavioral managed healthcare business would offset, in part, the negative
impact on the financial performance of its psychiatric hospitals caused by
managed care. Green Spring was the Company's first significant involvement in
behavioral managed healthcare. During the first quarter of fiscal 1998, pursuant
to the Green Spring Minority Stockholder Conversion, the minority stockholders
of Green Spring converted their interests in Green Spring into an aggregate of
2,831,516 shares of the Company's Common Stock.
Subsequent to the Company's acquisition of Green Spring, the growth of the
behavioral managed healthcare industry accelerated. Under the Company's majority
ownership, Green Spring increased its base of covered lives from 12.0 million as
of the end of calendar year 1995 to 21.1 million as of the end of calendar year
1997, a compound annual growth rate of over 32%. While growth in the industry
was
17
<PAGE>
accelerating, the behavioral managed healthcare industry also began to
consolidate. The Company concluded that this consolidation presented an
opportunity for the Company to increase its participation in the behavioral
managed healthcare industry, which the Company believed offered growth and
earnings prospects superior to those of the psychiatric hospital industry.
Therefore, the Company decided to sell its domestic psychiatric facilities to
obtain capital for expansion in the behavioral managed healthcare business.
On June 17, 1997, the Company sold substantially all of its domestic acute
care psychiatric hospitals and residential treatment facilities (the
"Psychiatric Hospital Facilities"), to Crescent Real Estate Equities, L.P.
("Crescent") for $417.2 million in cash (before costs of approximately $16.0
million) and certain other consideration (the "Crescent Transactions"). The sale
of the Psychiatric Hospital Facilities provided the Company with approximately
$200 million of net cash proceeds, after debt repayment, for use in implementing
its business strategy to increase its participation in the managed healthcare
industry. The Company used the net cash proceeds of approximately $200 million
to finance the acquisitions of HAI and Allied in December 1997.
The Company further implemented its business strategy through the Merit
acquisition.
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
THREE MONTHS ENDED DECEMBER 31, 1997 HEALTHCARE SERVICES HEALTHCARE FRANCHISING PROVIDER OVERHEAD CONSOLIDATED
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................... $ 119,211 $ 26,314 $ 14,107 $ 19,575 $ 33,164 $ -- $ 212,371
----------- ----------- ----------- ----------- ----------- ----------- ------------
Salaries, cost of care and other
operating expenses.................. 103,918 24,017 14,783 2,242 23,962 3,409 172,331
Equity in losses of unconsolidated
subsidiaries........................ 634 -- -- 11,488 -- -- 12,122
----------- ----------- ----------- ----------- ----------- ----------- ------------
104,552 24,017 14,783 13,730 23,962 3,409 184,453
----------- ----------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss)(1).......... $ 14,659 $ 2,297 $ (676) $ 5,845 $ 9,202 $ (3,409) $ 27,918
----------- ----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
BEHAVIORAL SPECIALTY
MANAGED HUMAN MANAGED HEALTHCARE HEALTHCARE CORPORATE
THREE MONTHS ENDED DECEMBER 31, 1998 HEALTHCARE SERVICES HEALTHCARE FRANCHISING PROVIDER OVERHEAD CONSOLIDATED
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................... $ 356,551 $ 45,739 $ 41,041 $ 175 $ 19,637 $ -- $ 463,143
----------- ----------- ----------- ----------- ----------- ----------- ------------
Salaries, cost of care and other
operating expenses.................. 307,714 40,452 40,625 1,495 19,637 3,293 413,216
Equity in earnings of unconsolidated
subsidiaries........................ (3,783) -- -- -- (1,199) -- (4,982)
----------- ----------- ----------- ----------- ----------- ----------- ------------
303,931 40,452 40,625 1,495 18,438 3,293 408,234
----------- ----------- ----------- ----------- ----------- ----------- ------------
Segment Profit (loss)(1).......... $ 52,620 $ 5,287 $ 416 $ (1,320) $ 1,199 $ (3,293) $ 54,909
----------- ----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
- ------------------------------
(1) The Company evaluates performance of its segments based on profit or loss
from operations before depreciation, amortization, interest, stock option
expense (credit), managed care integration costs, gain or loss on asset
sales, other unusual items, income taxes and minority interest ("Segment
Profit"). See the reconciliation of Segment Profit to consolidated income
before provision for income taxes and minority interest included in Note
J--"Business Segment Information" to the Company's condensed consolidated
financial statements set forth elsewhere herein.
BEHAVIORAL MANAGED CARE. Revenue increased 199.2% or $237.4 million, to
$356.6 million for the quarter ended December 31, 1998, from $119.2 million in
the same period in fiscal 1998. Salaries, cost of care and other operating
expenses increased 196.1%, or $203.8 million, to $307.7 million for the quarter
18
<PAGE>
ended December 31, 1998, from $103.9 million in the same period in fiscal 1998.
Equity in earnings of unconsolidated subsidiaries increased $4.4 million to $3.8
million for the quarter ended December 31, 1998, from a loss of $0.6 million for
the same period in fiscal 1998. The increases resulted primarily from the
acquisitions of HAI and Merit in fiscal 1998 and internal growth at Green
Spring. Behavioral managed care revenues and equity in earnings of
unconsolidated subsidiaries also increased as a result of the award of several
new contracts in fiscal 1998 and significant improvements in negotiated rates
and terms of the TennCare contract in fiscal 1998. The increase in Segment
Profit was also attributable to reductions in administrative costs at Green
Spring and HAI as a result of the Integration Plan.
HUMAN SERVICES. Revenue increased 73.8%, or $19.4 million, to $45.7 million
for the quarter ended December 31, 1998, from $26.3 million in the same period
in fiscal 1998. Salaries, cost of care and other operating expenses increased
68.4%, or $16.5 million, to $40.5 million for the quarter ended December 31,
1998 from $24.0 million in the same period in fiscal 1998. The increases were
attributable to the eight acquisitions consummated in fiscal 1998 and fiscal
1999 and internal growth. Placements in Mentor homes increased 23.8% to 3,640 at
December 31, 1998, compared to 2,940 at December 31, 1997.
SPECIALTY MANAGED CARE. Revenue increased 190.9%, or $26.9 million, to
$41.0 million for the quarter ended December 31, 1998, compared to $14.1 million
in the same period in fiscal 1998. Salaries, cost of care and other operating
expenses increased 174.8%, or $25.8 million, to $40.6 million for the quarter
ended December 31, 1998, compared to $14.8 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 $40.8 million and $39.9
million, respectively, for the quarter ended December 31, 1998, compared to
$14.1 million and $13.3 million for the quarter ended December 31, 1997.
HEALTHCARE FRANCHISING. Revenue decreased to $0.2 million for the quarter
ended December 31, 1998, from $19.6 million in the same period in fiscal 1998.
Salaries, cost of care and other operating expenses decreased 33.3%, or $0.7
million, to $1.5 million for the quarter ended December 31, 1998, from $2.2
million in the same period in fiscal 1998. Equity in loss of CBHS decreased to
$0 for the quarter ended December 31, 1998, from $11.5 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 December 31, 1998,
while $19.6 million of CBHS franchise revenue was recognized and collected 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 December 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 41.0%, or $13.6 million, to $19.6
million for the quarter ended December 31, 1998, from $33.2 million in the same
period in fiscal 1998. Salaries, cost of care and other operating expenses
decreased 18.3%, or $4.4 million, to $19.6 million for the quarter ended
December 31, 1998 from $24.0 million in fiscal 1998. Equity in earnings of
unconsolidated subsidiaries increased to $1.2 million for the quarter ended
December 31, 1998, 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 quarter ended December 31, 1997, 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
19
<PAGE>
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
162.9%, or $11.4 million, to $18.4 million for the quarter ended December 31,
1998, from $7.0 million in the same period in fiscal 1998. The increase was
primarily attributable to depreciation and amortization resulting from the HAI,
Allied and Merit acquisitions of $10.9 million, in the aggregate, for the
quarter ended December 31, 1998 compared to $0.5 million for the same period in
fiscal 1998.
INTEREST, NET. Interest expense, net, increased 225.7%, or $16.7 million,
to $24.1 million for the quarter ended December 31, 1998, from $7.4 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 quarter ended December 31, 1998,
was not material compared to a credit of $4.0 million in fiscal 1998 primarily
due to the exercise of stock options by a certain optionee in fiscal 1998.
The Company recorded Managed Care integration costs of $1.8 million for the
quarter ended December 31, 1998. 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 56.8% for the quarter
ended December 31, 1998, compared to 40% in the same period in fiscal 1998. The
increase was primarily attributable to non-deductible goodwill amortization of
$4.5 million for the quarter ended December 31, 1998, resulting from the Merit
acquisition.
Minority interest decreased 86.2%, or $2.5 million, to $0.4 million,
compared to $2.9 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.
IMPACT OF THE MERIT ACQUISITION ON RESULTS OF OPERATIONS. As of December
31, 1998, the Company had approximately 62.8 million covered lives under
behavioral managed healthcare contracts. The Company believes it 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 ("Open Minds"). 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 $4.7
million during the quarter ended December 31, 1998 and, expects to spend an
additional $5.0 million to $10.0 million during 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 results of operations are subject to
significant fluctuations on a quarterly basis. These
20
<PAGE>
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 and (v) timing of implementation of new contracts and enrollment
changes.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company's net cash provided by (used in)
operating activities was $(31.7) million and $7.7 million for the three months
ended December 31, 1997 and 1998, respectively. The increase in cash provided by
operating activities in fiscal 1999 compared to fiscal 1998 was primarily the
result of (i) reduction in interest paid of $8.9 million, (ii) reduction in
income taxes paid, net of refunds received, of $8.3 million, (iii) reduction in
payments of previously reserved claims of $6.1 million and (iv) increases in
cash flows from operations as a result of the HAI and Merit acquistions, offset
by reductions in franchise fees collected from CBHS of $19.6 million.
INVESTING ACTIVITIES. Capital expenditures increased 213.0%, or $9.8
million, to $14.4 million for the quarter ended December 31, 1998, compared to
$4.6 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 acquired businesses in its managed behavioral healthcare and
human services segments and acquired the assets of a psychiatric hospital (See
Note F--"Investment in Unconsolidated Subsidiaries--Charter Behavioral Health
Systems, LLC" to the Company's condensed consolidated financial statements set
forth elsewhere herein) for an aggregate cost of $7.7 million. Additionally, the
$20.0 million placed in escrow upon consummation of the Allied acquisition was
returned to the Company during the quarter, with $4.5 million then being paid by
the Company to the former owners of Allied as additional consideration for the
Allied acquisition.
The Company's condensed consolidated balance sheet at December 31, 1998,
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 quarter ended December 31, 1998, but does not
represent an actual reduction of cash and cash equivalents at the affected
subsidiaries. Additionally, the Company received $9.3 million in distributions
from unconsolidated subsidiaries, including those referred to above, during the
quarter ended December 31, 1998.
The Company utilized $165.5 million in funds, net of cash acquired, for
acquisitions and investments in businesses, including Allied and HAI, during the
quarter ended December 31, 1997. In addition, the Company paid approximately
$4.3 million for Crescent Transaction costs during the quarter ended December
31, 1997.
FINANCING ACTIVITIES. The Company repaid $40.0 million of debt obligations
outstanding under the Revolving Facility (as defined) during the quarter ended
December 31, 1998. As of December 31, 1998, the Company had $132.5 million of
availability under the Revolving Facility (as defined), excluding $17.5 million
of availability reserved for certain letters of credit. The Company was in
compliance with all debt covenants as of December 31, 1998.
The Company repurchased approximately 545,000 shares of its common stock for
approximately $12.5 million during the quarter ended December 31, 1997.
21
<PAGE>
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 New Credit Agreement include
$550.0 million under a term loan facility (the "Term Loan Facility") and up to
$150.0 million under a revolving facility (the "Revolving Facility"). Commencing
in the second quarter of fiscal 1999, the Company is required to make principal
payments with respect to the Term Loan Facility. The Company is required to
repay the principal amount of borrowings outstanding under the Term Loan
Facility and the principal amount of the Notes in the years and amounts set
forth in the following table (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR PRINCIPAL AMOUNT
- ------------- ----------------
<S> <C>
1999 $ 19.8
2000 32.4
2001 38.9
2002 49.4
2003 92.0
2004 156.5
2005 131.8
2006 29.2
2007 --
2008 625.0
--------
$ 1,175.0
--------
--------
</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 US Healthcare, Inc. ("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 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
22
<PAGE>
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.
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 believes it will be required to make both the full Tranche 1
Payment and the full Tranche 2 Payment for the Contract Year ended December 31,
1998, subject to further discussion with Aetna. Accordingly, the Company
recorded $60.0 million of goodwill and other intangible assets and a
corresponding liability (which is included in "Deferred credits and other long
term liabilities" in the Company's condensed consolidated balance sheet set
forth elsewhere herein) as of December 31, 1998. The Company intends to borrow
under the Revolving Facility to meet this obligation, which is expected to be
paid during the second quarter of fiscal 1999.
23
<PAGE>
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.
CREDIT FACILITIES. 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 December 31, 1998, the Company had
approximately $132.5 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 Credit Agreement, 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 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
24
<PAGE>
transactions; make investments, loans or advances; redeem or repurchase common
stock and make acquisitions.
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 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
25
<PAGE>
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
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 compliance for purchased
software has been the replacement 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, have been implemented over a
longer period of time. The Company's internally-developed software was either
designed to be year 2000 compliant from inception or is in the process of being
modified to be compliant. Approximately 70% of the Company's mid-range IT
hardware has been certified as year 2000 compliant, with the remainder scheduled
to be certified 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 compliance of the surviving systems.
26
<PAGE>
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
compliance 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, or replacing 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 of substantially all of its critical IT
systems by the end of the second quarter of fiscal 1999, the
remediation of its other IT systems by the end of the third quarter of
fiscal 1999 and the 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 $1.0 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
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 compliance for outdated systems.
Year 2000 compliance 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
27
<PAGE>
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 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 compliant by
their manufacturers (primarily personal computers and productivity software)
will remain unaffected by the year 2000 problem.
28
<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) Second Amendment to Asset Purchase Agreement, dated November 18, 1998, among the Company; Allied Health
Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida Specialty Network, LTD; Surgical
Associates of South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russin, M.D.; and Lawrence
Schimmel, M.D., which was filed as Exhibit 2(m) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998, and is incorporated herein by reference.
2(b) Third Amendment to Asset Purchase agreement, dated December 31, 1998, among the Company; Allied Health
Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida Specialty Network, LTD; Surgical
Associates of South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russin, M.D.; and Lawrence
Schimmel, M.D.
*10 Employment Agreement, dated December 9, 1998, between Magellan Behavioral Health, Inc. and John Wider,
President and Chief Operating Officer of Magellan Behavioral Health, Inc.
27 Financial Data Schedule
</TABLE>
- ------------------------
* Constitutes a management contract or compensatory plan arrangement.
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed by the Registrant with
the Securities and Exchange Commission during the quarter ended December 31,
1998.
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
DATE OF REPORT ITEM REPORTED AND DESCRIPTION FILED
- ------------------------------------------------------- -------------------------------------------- -----------
<S> <C> <C>
October 28, 1998(1) Acquisition--Merit acquisition Yes(2)
October 28, 1998 Other--Pro forma financial information Yes(3)
</TABLE>
- ------------------------
(1) The date of the earliest event reported is February 12, 1998. This current
report on Form 8-K amends the Company's previous current reports on Form 8-K
related to the Merit acquisition which were filed on April 3, 1998 and
February 27, 1998.
(2) Audited Consolidated Balance Sheets for each of the two fiscal years in the
period ended September 30, 1997; Audited Consolidated Statements of
Operations, Audited Consolidated Statements of Stockholder's Equity, and
Audited Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended September 30, 1997; Unaudited Consolidated Balance
Sheet as of December 31, 1997; Unaudited Consolidated Statements of
Operations and Unaudited Consolidated Statements of Cash Flows for the
quarters ended December and 1996 for Merit Behavioral Care Corporation.
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1997 and
Unaudited Pro Forma Consolidated Statements of Operations for the fiscal
year ended September 30, 1997, and for the quarter ended December 31, 1997,
for the Company.
(3) Unaudited Pro Forma Consolidated Statements of Operations for the fiscal
year ended September 30, 1997, and for the nine months ended June 30, 1998,
for the Company.
29
<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)
/s/ CRAIG L. MCKNIGHT
-------------------------------------------
Date: February 12, Craig L. McKnight
1999 EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
/s/ JEFFREY T. HUDKINS
-------------------------------------------
Date: February 12, Jeffrey T. Hudkins
1999 VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
30
<PAGE>
Exhibit 2(b)
THIRD AMENDMENT
TO
ASSET PURCHASE AGREEMENT
THIS THIRD AMENDMENT TO ASSET PURCHASE AGREEMENT (this
"Amendment") is made and entered into as of this __ day of December, 1998, by
and among Allied Specialty Care Services, Inc., a Florida corporation formerly
known as CMSF, Inc. (the "Buyer"), Allied Health Group, Inc., a Florida
corporation ("AHG"), Gut Management, Inc., a Florida corporation ("Gut"), Sky
Management Co., a Florida corporation ("Sky"), Florida Specialty Network, Ltd.,
a Florida limited partnership ("FSN"), Surgical Associates of South Florida,
Inc., a Florida corporation ("SASF"), Surginet, Inc., a Florida corporation
("Surginet" and, together with AHG, Gut, Sky, FSN and SASF, the "Sellers" and
individually, a "Seller"), Jacob Nudel, M.D. ("Nudel"), David Russin, M.D.
("Russin"), Lawrence Schimmel, M.D. ("Schimmel" and, together with Nudel and
Russin, the "Executive Shareholders") and Magellan Health Services, Inc., a
Delaware corporation and the ultimate corporate Parent of the Buyer (the
"Parent").
RECITALS
A. The parties entered into that certain Asset Purchase
Agreement dated as of October 16, 1997 (the "Original Agreement"), as amended by
that certain First Amendment to Asset Purchase Agreement dated as of December 5,
1997 (the "First Amendment"), as further amended by that certain Second
Amendment to Asset Purchase Agreement dated as of November 18, 1998 (the "Second
Amendment", the Original Agreement, as amended by the First Amendment and as
further amended by the Second Agreement referred to herein as the "Asset
Purchase Agreement"). Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Asset Purchase Agreement.
B. The parties desire to further amend the Asset Purchase
Agreement, on the terms and subject to the conditions set forth hereinbelow.
NOW, THEREFORE, in consideration of the foregoing and the
mutual promises of the parties, and in consideration of the representations,
warranties and covenants herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. AMENDMENTS.
1.1 BUY-OUT OF REMAINING EARNOUT. In exchange for the
payment by the Buyer to AHG of the aggregate sum of $500,000 (the "Remaining
Buyout Price"), payable in cash upon the execution of this Amendment by wire
transfer of immediately available funds, (a) the Buyer shall be entitled to
receive, and AHG shall release all claims to, the Remaining Clawback (as said
term is defined in the Second Amendment) and any interest or earnings thereon,
and (b) the
<PAGE>
Buyer shall purchase, and AHG shall sell, the Remaining Earnout (as said term is
defined in the Second Amendment). The parties to this Amendment acknowledge and
agree that the Remaining Buyout Price is payable in consideration for the
purchase of the Remaining Earn-Out, and that there is no perceived value of
future claims to the purchase of the Remaining Clawback. The parties to this
Amendment further acknowledge and agree that the Remaining Buyout Price, after
deduction of attorneys fees and expenses of Sellers and of the Executive
Shareholders incurred in connection with the transactions contemplated by this
Amendment, will be paid to GHS, Inc. pursuant to the terms and conditions of the
Letter Agreement (as said term is defined in the Second Amendment).
1.2 AMENDMENT TO AND TERMINATION OF REMAINING EARNOUT
PROVISIONS. The Asset Purchase Agreement is hereby amended by deleting Sections
3.3A and 3.4A (which are set forth in Section 1.2(b) of the Second Amendment) in
their entirety.
2. DISBURSEMENTS OF ESCROW FUND. Buyer and AHG hereby agree to
issue joint instructions to the Escrow Agent (i) to deliver from the Escrow
Funds $500,000.00 by federal funds wire transfer to the Broad and Cassel Trust
Account, in accordance with wire transfer instructions furnished in writing by
AHG, for further credit to AHG (said payment constituting payment of the
Remaining Buyout Price), and (ii) to deliver the balance of the Escrow Funds by
federal funds wire transfer to Buyer, in accordance with wire transfer
instructions furnished in writing by Buyer. Buyer and AHG shall then cause the
Escrow Agreement to be terminated.
3. REPRESENTATIONS AND WARRANTIES.
3.1 REPRESENTATIONS AND WARRANTIES OF BUYER AND PARENT. In
order to induce the Seller and the Executive Shareholders to enter into this
Amendment, and to consummate the transactions contemplated hereby, the Buyer
and the Parent, on a joint and several basis, represent and warrant as
follows:
(a) POWER AND AUTHORITY; BINDING AGREEMENT. The Buyer
and the Parent have the full right, power and authority to enter into, and to
perform their respective obligations under, this Amendment. The execution and
delivery by the Buyer and the Parent of this Amendment and the performance of
their respective obligations hereunder have been duly authorized by all
necessary corporate action and no other proceedings on the part of the Buyer
or the Parent are necessary to authorize the execution of this Amendment and
the performance of transactions contemplated hereby. This Amendment has been
duly and validly executed and delivered by the Buyer and the Parent and
constitutes the legal, valid and binding obligation of the Buyer and of the
Parent enforceable against the Buyer and the Parent in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
moratorium or other laws affecting creditors= rights generally, or equitable
principles, whether applied in a proceeding in equity or law.
3.2 REPRESENTATIONS AND WARRANTIES OF SELLERS AND EXECUTIVE
SHAREHOLDERS. In order to induce the Buyer and the Parent to enter into this
Amendment, and to consummate the transactions contemplated hereby, the Seller
and the Executive Shareholders, on
-2-
<PAGE>
a joint and several basis, represent and warrant as follows; provided, however,
that the representations and the warranties of each Executive Shareholder are
made only as to himself and to each Seller in which such Executive Shareholder
owns any shares or partnership interests, as the case may be:
(a)POWER AND AUTHORITY; BINDING AGREEMENT. Each
Seller has the full right, power and authority to enter into, and to perform its
obligations under, this Amendment and the consent of no other party is necessary
or required in order to permit or allow each such Seller to enter into and
perform its obligations hereunder. The execution and delivery by each Seller of
this Amendment and the performance of its obligations hereunder have been duly
authorized by all necessary corporate or partnership action, as applicable, and
no other proceedings on the part of such Seller is necessary to authorize the
execution of this Amendment and the performance of transactions contemplated
hereby. This Amendment has been duly and validly executed and delivered by each
Seller and constitutes the legal, valid and binding obligation of such Seller
enforceable against such Seller in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium or other laws
affecting creditors= rights generally, or equitable principles, whether applied
in a proceeding in equity or law. This Amendment has been duly and validly
executed and delivered by each Executive Shareholder and constitutes the legal,
valid and binding obligation of such Executive Shareholder enforceable against
such Executive Shareholder in accordance with its terms, except as enforcement
may be limited by bankruptcy, insolvency, moratorium or other laws affecting
creditors= rights generally, or equitable principles, whether applied in a
proceeding in equity or law.
4. RATIFICATION. Except as modified by this Amendment, the
Asset Purchase Amendment is and shall continue to be in full force and effect
and is hereby in all respects confirmed, approved and ratified.
5. MISCELLANEOUS.
5.1 FURTHER ASSURANCES. At any time, and from time to
time, each party will execute such additional instruments and take such
action as may be reasonably requested by the other party to confirm or
perfect title to any property transferred hereunder or otherwise to carry out
the intent and purposes of this Amendment.
5.2 COSTS AND EXPENSES. Each party hereto agrees to pay
its own costs and expenses incurred in negotiating this Amendment and
consummating the transactions described herein.
5.3 TIME. Time is of the essence.
5.4 ENTIRE AMENDMENT. This Amendment and the transactions
contemplated hereby constitute the entire Amendment among the parties hereto
with respect to the
-3-
<PAGE>
subject matter hereof, and supersede all prior negotiations, letters and
understandings relating to the subject matter hereof.
5.5 AMENDMENT. This Amendment may not be amended,
supplemented or modified in whole or in part except by an instrument in
writing signed by the party or parties against whom enforcement of any such
amendment, supplement or modification is sought.
5.6 ASSIGNMENT. Except as otherwise provided in Section
12.1 of the Asset Purchase Agreement, this Amendment may not be assigned by
any party hereto without the prior written consent of the other parties.
5.7 CHOICE OF LAW. This Amendment will be interpreted,
construed and enforced in accordance with the laws of the State of Florida.
5.8 HEADINGS. The section and subsection headings in this
Amendment are inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Amendment.
5.9 PRONOUNS. All pronouns and any variations thereof shall
be deemed to refer to the masculine, feminine, neuter, singular or plural as
the context may require.
5.10 NUMBER AND GENDER. Words used in this Amendment,
regardless of the number and gender specifically used, shall be deemed and
construed to include any other number, singular or plural, and any other
gender, masculine, feminine or neuter, as the context indicates is
appropriate.
5.11 CONSTRUCTION. The parties hereto and their respective
legal counsel participated in the preparation of this Amendment; therefore,
this Amendment shall be construed neither against nor in favor of any of the
parties hereto, but rather in accordance with the fair meaning thereof.
5.12 EFFECT OF WAIVER. The failure of any party at any
time or times to require performance of any provision of this Amendment will
in no manner affect the right to enforce the same. The waiver by any party of
any breach of any provision of this Amendment will not be construed to be a
waiver by any such party of any succeeding breach of that provision or a
waiver by such party of any breach of any other provision.
5.13 SEVERABILITY. The invalidity, illegality or
unenforceability of any provision or provisions of this Amendment will not
affect any other provision of this Amendment, which will remain in full force
and effect, nor will the invalidity, illegality or unenforceability of a
portion of any provision of this Amendment affect the balance of such
provision. In the event that any one or more of the provisions contained in
this Amendment or any portion thereof shall for any reason be held to be
invalid, illegal or unenforceable in any respect, this Amendment shall be
-4-
<PAGE>
reformed, construed and enforced as if such invalid, illegal or unenforceable
provision had never been contained herein.
5.14 BINDING NATURE. This Amendment will be binding upon
and will inure to the benefit of any successor or successors of the parties
hereto.
5.15 NO THIRD-PARTY BENEFICIARIES. Notwithstanding
anything in this Amendment to the contrary, no person (including, without
limitation, GHS, Inc.) shall be deemed to possess any third-party beneficiary
right pursuant to this Amendment. It is the intent of the parties hereto that no
direct benefit to any third party is intended or implied by the execution of
this Amendment.
5.16 COUNTERPARTS. This Amendment may be executed in one
or more counterparts, each of which will be deemed an original and all of
which together will constitute one and the same instrument.
[SIGNATURES BEGIN ON THE FOLLOWING PAGE]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the day and year first above written.
ALLIED SPECIALTY CARE SERVICES, INC.
By:
--------------------------------
Title:
-----------------------------
ALLIED HEALTH GROUP, INC.
By:
--------------------------------
Title:
-----------------------------
GUT MANAGEMENT, INC.
By:
--------------------------------
Title:
-----------------------------
SKY MANAGEMENT CO.
By:
--------------------------------
Title:
-----------------------------
FLORIDA SPECIALTY NETWORK, LTD., BY
ITS GENERAL PARTNER, FLORIDA
SPECIALTY NETWORK, INC.
By:
--------------------------------
Title:
-----------------------------
-6-
<PAGE>
SURGICAL ASSOCIATES OF SOUTH
FLORIDA, INC.
By:
--------------------------------
Title:
-----------------------------
SURGINET, INC.
By:
--------------------------------
Title:
-----------------------------
------------------------------------
Lawrence Schimmel, M.D.,
Individually
------------------------------------
Jacob Nudel, M.D., Individually
------------------------------------
David Russin, M.D., Individually
MAGELLAN HEALTH SERVICES, INC.
By:
--------------------------------
Title:
-----------------------------
-7-
<PAGE>
Exhibit 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and
between John Wider, an individual ("Officer"), and MAGELLAN BEHAVIORAL HEALTH,
INC., a Delaware corporation ("Employer").
WHEREAS, Employer desires to obtain the services of Officer and Officer
desires to render services to Employer; and
WHEREAS, Employer and Officer desire to set forth the terms and conditions
of Officer's employment with Employer under this Agreement;
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 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 November 17, 1998 and, unless terminated earlier in
accordance with the terms of this Agreement, ending on November 16, 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 one hundred
twenty days prior to the next anniversary date.
2. POSITION AND DUTIES OF OFFICER. Officer will serve as President and
Chief Operating Officer of Employer. Officer agrees to serve in such position,
or in such other positions of a similar status or level with substantially
similar duties, and to perform the duties commensurate with such position 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. The parties acknowledge and agree that shifts in reporting
relationships from "straight line" to "dotted line" or vice versa for certain
corporate functions will not be deemed a violation of this Section or Section
6(c)(iv).
3. TIME DEVOTED AND LOCATION OF OFFICER.
(a) Officer will devote his or his full business time and energy to the
business affairs and interests of Employer, and will use his best efforts and
abilities to promote Employer's interests. Officer agrees that he or she will
diligently endeavor to perform services contemplated by this Agreement in a
manner consistent with his position and in accordance with the policies
established by the Employer.
(b) Officer's primary business office will be located in Columbia,
Maryland.
<PAGE>
4. COMPENSATION.
(a) BASE SALARY. Employer will pay Officer a base salary in the amount
of three hundred eighty thousand dollars per year, which amount will be paid in
bi-weekly intervals less appropriate withholdings for federal and state taxes
and other deductions authorized by Officer. Such salary will be subject to
review and potential increase by Employer from time to time. Any reduction in
Officer's base salary will be consistent with and the result of reductions made
regarding other officers or employees at his level including the President and
Chief Executive Officer of Magellan Health Services.
(b) BENEFITS. Officer will be eligible to participate in benefit plans
commensurate with his position. Officer will receive separate information
detailing the terms of such benefits and the terms of such plans 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 executive level
benefits adopted for officers or employees at his level. This Agreement shall
not be construed to modify or limit Officer's right to applicable COBRA benefits
in the event of termination of this Agreement.
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, or (ii) termination for cause at the discretion
of Employer under the following circumstances: (w) Officer's commission of an
act of fraud or dishonesty involving his duties on behalf of Employer; (x)
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;
(y) Officer's willful failure or refusal to abide by Employer's policies, rules,
procedures or directives; or (z) Officer's conviction of a felony or a
misdemeanor involving moral turpitude. If Officer resigns or 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.
For the events described in Sections 6(a)(ii)(x) and (y), 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.
2
<PAGE>
(b) TERMINATION WITHOUT CAUSE AND EXPIRATION. 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
shall continue to pay Officer severance as hereinafter defined for a period of
time equal to the greater of (i) the remaining term of this Agreement or (ii)
two years. For purposes of this Section 6(b), "severance" shall mean the
compensation provided for in Section 4(a) of this Agreement plus a prorated
bonus calculated with reference to any existing bonus plan and the date of
termination of this Agreement. Officer's entitlement to a pro-rated bonus will
be subject to established terms of such bonus plan and the performance of
Officer's relevant business unit. In addition, Employer will continue to pay,
during the severance period, the portion of premiums for life, health and
disability insurance maintained by Employer in which Officer participated at the
date of termination. No other severance benefits or compensation will be paid to
Officer if he is terminated pursuant to this Section 6(b), unless otherwise
provided for in the terms of the applicable benefit plan. In the event of
non-renewal of this Agreement by Employer, Employer shall pay Officer severance
for a period of two years from the date of expiration of this Agreement. As a
precondition to the right to receive any severance, Officer shall be in strict
compliance with Officer's obligations as set forth in Section 7 of this
Agreement.
(c) TERMINATION BY OFFICER FOR GOOD CAUSE. Officer may terminate this
Agreement, and his employment with Employer, for "good cause" upon the
occurrence of any of the following:
(i) a requirement by Employer that Officer relocate his personal
residence in order to fulfill Officer's duties under this Agreement;
(ii) the failure of Employer to comply with Section 4;
(iii) any material breach of this Agreement by Employer; or
(iv) the assignment to Officer of any duties inconsistent with
Officer's status as President and Chief Operating Officer of Employer or a
substantial alteration in the nature or status of his responsibilities.
Prior to terminating this Agreement pursuant to this Section,
Officer shall give to Employer written notice of his "good cause" for
terminating this Agreement and provide Employer with a reasonable period in
which to contest or correct the "good cause", but in no event less than thirty
days. In the event of a termination for "good cause" 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.
3
<PAGE>
(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 his position for a period of 180
consecutive days, or if Officer can reasonably be expected to be unable to
perform the essential functions of his position for such period. The term
"essential duties" is defined as the ability to consistently perform his
assigned duties, including travel requirements. 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 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 Henry Harbin) or any group
of persons or entities (other than Henry Harbin) 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 (except for a sale-leaseback 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
4
<PAGE>
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.
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) During Employer's employment of Officer and for a period of two
years following the term or termination of Officer's employment with Employer
for any reason, Officer will not, within a radius of fifty miles of any existing
operation of Employer or its controlled subsidiaries or affiliates engaged in
the delivery of behavioral managed care services, engage, directly or
indirectly, in any commercial capacity, whether in an executive, operational,
consulting or sales capacity, in the development or delivery of behavioral
managed care services, or have any material ownership interest in any business
owning, operating, developing, contracting or providing such behavioral managed
care services. Employer acknowledges and agrees that this provision shall not be
construed to prohibit the provision by Officer of consulting services not in the
field of behavioral managed care.
5
<PAGE>
(c) During Employer's employment of Officer and for a period of two
years following the term or termination of Officer's employment for any reason,
Officer will not solicit or call upon any current client of Employer or its
controlled subsidiaries or affiliates for the purpose of the delivery of
behavioral managed care services by an entity or person(s) other than Employer
or its controlled subsidiaries or affiliates. For purposes of this Section 7(c),
the term "current client" is defined as any entity or person(s) with whom
Employer, or its controlled subsidiaries or affiliates, has provided, or has
contracted to provide, behavioral managed care services during the year
preceding the final date of Officer's employment with Employer.
(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.
(e) The foregoing terms of this Section 7 shall be modified as follows:
(i) GENERAL LIMITATIONS. The provisions of Section 7(b) shall not
apply with respect to any employment approved in writing by an
authorized officer of Employer, or employment with a health
maintenance organization or insurance company provided Officer's
duties do not come within the scope of the prohibitions set forth in
Section 7(b);
(ii) RESIGNATION. In the event of termination due to resignation
pursuant to Section 6(a) of this Agreement, the prohibitions set
forth in Section 7(b) and Section 7(c) shall apply for one year.
(iii) TERMINATION WITHOUT CAUSE. In the event of termination without
cause pursuant to Section 6(b) or termination for good reason by
Officer pursuant to Section 6(c); after a period of one year from
the date of termination of this Agreement and written notice to
Employer, Officer may undertake employment or provide services in
contravention of Sections 7(b) and (c), provided, however, that
Officer shall be entitled to no further severance subsequent to the
commencement of such employment or undertakings.
(iv) TERMINATION FOR CAUSE. In the event of a termination for cause
pursuant to Section 6(a) of this Agreement, the prohibitions set
forth in Sections 7(b) and (c) shall apply for six months following
the termination of Officer's employment with Employer.
6
<PAGE>
(v) EXPIRATION. In the event this Agreement should expire after its
original term or any extension, after a period of one year from the
date of termination of this Agreement and written notice to
Employer, Officer may undertake employment or provide services in
contravention of Sections 7(b) and (c), provided, however, that
Officer shall be entitled to no further severance subsequent to the
commencement of such employment or undertakings.
(vi) CHANGE IN CONTROL. In the event of termination by Officer due
to a change in control pursuant to Section 6(f), after a period of
one year from the date of termination of this Agreement and written
notice to Employer, Officer may undertake employment or provide
services in contravention of Sections 7(b) and (c), provided,
however, that Officer shall be entitled to no further severance
subsequent to the commencement of such employment or undertakings.
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.
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.
7
<PAGE>
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
13. ATTORNEYS' FEES. In the event of litigation or arbitration between
Officer and Employer arising out of or as a result of this Agreement or the acts
of the parties pursuant to this Agreement, or seeking an interpretation of this
Agreement, the prevailing party in such litigation or arbitration, in addition
to any other judgment or award, shall be entitled to receive such sums as the
court or panel hearing the matter shall find to be reasonable as and for
attorneys' fees.
14. 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: John Wider
3705 Running Springs
Ellicott City, MD 21042
To Employer: Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: Chief Executive Officer
With a copy to: Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
8
<PAGE>
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.
15. 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.
16. 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.
17. 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 subsidiary or
affiliate of Employer or to any successor to or transferee of all, or any part,
of the stock or assets of Employer.
18. 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.
19. 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 controlled
subsidiaries and affiliates are express third party beneficiaries of this
Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
_____ day of ________________, 1998.
MAGELLAN BEHAVIORAL HEALTH, INC.
"Officer" "Employer"
By:
- ------------------------------- --------------------------------
Name:
-------------------------------
Title:
-------------------------------
10
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 49,358,000
<SECURITIES> 0
<RECEIVABLES> 172,990,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 388,363,000
<PP&E> 216,667,000
<DEPRECIATION> 60,231,000
<TOTAL-ASSETS> 1,950,943,000
<CURRENT-LIABILITIES> 497,285,000
<BONDS> 1,156,020,000
0
0
<COMMON> 8,476,000
<OTHER-SE> 191,173,000
<TOTAL-LIABILITY-AND-EQUITY> 1,950,943,000
<SALES> 463,143,000
<TOTAL-REVENUES> 463,143,000
<CGS> 0
<TOTAL-COSTS> 413,216,000
<OTHER-EXPENSES> 15,193,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,109,000
<INCOME-PRETAX> 10,625,000
<INCOME-TAX> 6,037,000
<INCOME-CONTINUING> 4,181,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,181,000
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
